International Asset allocation: Australian vs International

Not easy to cut out rubbish internationally, easier in Australia. Here we do so for fractions of a % somewhat with LICs. To do so internationally costs a full % plus performance fees and then you don't have franking - worth about 1% pa according to one of the links above, negative 2%+ pa as a start

Once again brings me back to why I mainly picked ETFs for international.

 

I lived overseas in a developing country for around 6 years. The stock market there was entirely propped ip by speculation. A friend reprenting Hunter Hall was in town deciding whether to invest the fund's money. I remember discussng it with him and he said the fundamentals aren't there but it just keeps going up. I don't know if he invested but the market tanked and lots of people including my wife lost almost everything they had in the market. She bought at 37 units per share, it dropped to 4 units, today it is 11 units. In terms of all share investing she is now the cat that sat on the hot stove - she will never sit on a hot stove again; but she won't ever sit on a cold one either.

My point, some of these emerging markets have the best growth potential but investing there with confidence requires a safe, liquid, arbitrage free environment. That is not always the case. Corruption is a big problem so the risk is higher.

I am wary of emerging markets for this reason. If you can trust that the fund investing there is doing its proper due diligence and the emerging market is relatively safe / mature then it is a worthwhile investment.

Not advice.

 

......but I just sold my entire portfolio of Australian equities including those domiciled here.

Moral of the story: read and learn from these forums and the very smart and experienced posters; however, do not base your decision making entirely on the contents of an internet forum post. Do your own research, analysis, triangulation of evidence from credible sources.

Arbitrary example (may not be true):
Knowledgeable @shareinvestingdude says that BKI is a good LIC - owned and run by some "Millner" bloke. Time to sell my entire portfolio and buy BKI? Not yet, I go and look at BKI website: it is indeed run by this "Rob Millner". Time to mortgage my PPOR and leverage 80% to buy BKI? Not yet: I research this Millner character. Seems like a big player. Then another @shareinvestingguy says that it has a good yield. Time to buy options on BKI moving up 1 cent? Not quite, I can use Commsec, it tells me their dividend yield, 4.5% fully franked. Nice. Then I look at BKI's financials: their dividends have been covered by their earnings per share for the past 9 out of 10 years. That is good, because another @shareinvestingperson also said that looking at long term financials including earnings per share is a good way of evaluating LICs. OK, must be time to go all in on BKI: actually, @shareinvestingchick mentioned that NTA is important. So, I go and use ETFwatch.com.au to verify their NTA, as well as the BKI website, and the morningstar LIC report. Seems like it is at a discount to NTA, which is good, and it is near its 52 week low. Time to buy some, because @shareinvestinghuman said I need to diversify.

Not advice....particularly on BKI, which I own.

 

From what I have read, it appears better to get exposure to S&P500 using an ETF (VTS/VGS/...) than buy managed funds / LICs because there is less crap in that index. That is, Bogleheads works well for Yanks because they can:
1. Invest in their own market without currency risk
2. Invest in an index that has a large and well balanced set of safer and larger blue chip-type companies.
3. Said companies are often large global corporations that invest overseas to provide the required diversification to cover most of the globe.

Not advice.

 

Funny thing is I regularly like to challenge my own beliefs more so as I age. It keeps the little grey cells on their toes. Rarely however does this result in me changing anything I do.

Our overall allocation is roughly:
1. OZ Large cap focused shares (55%)
2. OZ Mid / Small cap focused shares (15%)
3. International shares (15 - 20%)
4. Cash 10%.

Although far from perfect I think our current International allocation spread across the following covers most bases using a core and satellite approach:

CORE (passive):
VGS - Developed world markets (50%)

SATELLITE (active Index unaware):
PMC - Dividend focus, some asian exposure, hedged, value, absolute bias (20%)
FGG - Broad range of Mgrs including long / absolute bias / quant (30%)

We've held PMC a long time but FGG could probably cover everything active in a single package. And with a fee equivalent of 1% this is dirt cheap compared to investing directly in many of the underlying funds. Plus hopefully over time there will be a reasonable fully franked dividend which is a potential benefit over the index.

Do some research on the fund Mgrs in FGG doc linked below. There is a lot of quality in the portfolio:
http://www.futuregeninvest.com.au/Global/170315-FGG-NTA_Feb_2017.pdf

Also note that a number of these funds aren't available to retail investors.

That said there's no guarantee it will outperform the index. But due to their active nature PMC and hopefully FGG will give me the income a retiree needs that VGS doesn't. Just hope that Total Return doesn't suffer as a consequence. But I'm very comfortable with what we're doing and the SANF is great.

Not advice.

 

Did you have a headache after all that? I would have passed out half way through that process and after waking up be crying out in desperation for some home brew.

 

You can look at several different ways to answer that question..

For fruit tress to reach the maximum height and x-maximum yield they have to be regularly pruned once you eliminate the unessential..

And then you have Trump who is still positioning himself as the leader of a rebellion against transnational company elites ,just don't get caught in the middle..

Avoid These 7 Retirement Investing Mistakes | Bankrate.com

 

Yes that makes perfect sense for an "american" investor.

So yet again I've challenged my little grey cells only to be convinced that given what we don't know in the future the safest and simplest option for the passive core of our International exposure is still VGS.

 

I think I will just sit on the fence for a little while before I pull the trigger, but if I do I think it will be the USA market.

 

I left off the implicit drinking part. Even though I ignore the part where @austing says not advice.... I do always confirm with other evidence and that it makes sense in my mind.

 

I'm pleased to hear that as nothing I say ever makes any sense in my mind.

 

for those with exposure to international shares/assets, how do you deal with FX risk? Or do you just assume that as part of the risk profile of going offshore?

 

I always buy unhedged - it's all swings and roundabouts. An ETF with hedging will cost extra. It just more volatility that you can take advantage of by buying when AUD is high for example.

 

Even as a retiree I prefer "unhedged". Yes it adds to the volatility but it's our "insurance" incase Australia turns to crap. So investing overseas has less to do with better growth prospects etc for us but adds another layer of risk management and provides better SANF. Also hedging can result in erratic and missed distributions.

 

No hedging for me either @austing I don't think it pays over the long term

To Hedge or Not to Hedge?

Currency-Hedged S&P500 Funds: The Unsuspected Challenges

 

One thing I have been thinking about recently is the foreign currency inputs in AUD denominated household/personal expenses. A most obvious example is say a new flat screen TV. Although we are purchasing locally in AUD, a large component of the selling price is USD denominated, being the wholesale sales price FOB China.

I've never seen anything on this as far as actually breaking down a typical household budget to get an understanding of the foreign currency exposures. Would love to see any papers on this if anyone is aware?

 

A large part of our household budget is home brew supplies. All locally produced so local currency dominates:

 

What about the French yeast???

 

Now you're talking. The secret behind my wife's latest sensational Rasberry Saison.

Oops just tripped myself up there.

 

Assumptions at base