Asset Allocation

Hi @Redwing

Aussie Three-Fund Porfolio - Very Solid.

What proportions do you have in each.

Are your reasonings for going this way similar to/influenced by Boglehead/Taylor Larimore 3 Fund portfoio? ​

 

Currently in an Industry Super Fund (dont judge!) MER is 0.1%
Super 50% VGS Equivalent / 50% VAS Equivalent

Outside super 100% AUS
ARG AMH MIL MIR WHF

(AMH was bought trying to get some ex20 exposure without the MIR premium)

Looking to possibly add VGS/VAE in the next few purchases but really need to nail down a written plan to implement and follow rather then a vague idea in my head.

 

Well you’ve had near a decade more of watching and learning than me. That has proved valuable to me many times over the years and not just in regard to investing but life in general.

 

No need to rub it in. LOL

 

I read that post and thought that you were trying to say that your wife often looks at you and wants to give you a KISS.


(Keep It Simple Stupid)

 

He he. Yes, and if I keep rambling on to her about investing after her eyes glaze over (usually well under 5 minutes) KISS turns to HISSy fit from one cranky wife.

 

Reading a post of yours in another thread, where from starting capital of $200k 20 yrs ago you now receive dividend income over $100k.

You said you retired 20 yrs ago with $200k to be a full time stock picker/trader. So I assume you weren't adding additional savings from employment or business over the years, just organically compounding your account.

With that I assume you have been very successful at outperforming the index over that time, would that be true?

And if so I'm wondering why you wouldn't continue with such approach to be a direct stock picker/trader?

 

I am a few decades off retirement, so my focus for now is on growth. My allocation is based on ~60:40 domestic vs global unhedged.

Domestic is between VAS and 4 LICs (ARG, AFI, MLT, AUI)

International is equal weightings of US (IVV), EU/JP (IVE), ASIA (VAE), and Emerging Markets(VGE). I prefer holding multiple global ETFs rather than just VGS for example as I feel it offers improved diversification and allows me a greater Asia/EM tilt.

Not sure about anyone else on the forum but I do hold some residential property assets too, crazy right!…

 

This could get interesting so I'm really going for succinct:

As a mathematician I couldn't deviate from 50/50 international / Australia . There was never a strong enough reason why one over the other even though we had some fantastic discussions. Always open for more contemplation. If I said 65/35 it would require me to have a logical argument why that weighting was optimal.

I had my super in a high fee fund managed by a "friend" until I had to say "wait a second, this is going sideways". So I moved to ING direct who then unceremoniously completey changed the playing field, my diatribes of unhappiness can be found if you look hard enough and I moved to Sunsuper instead of taking the SMSF path as I wanted to minimise fees and any thought process.

In super I have the index funds set and forget whilst I buy into a range of LICs and ETFS both local and international outside super. I try to buy what I consider value at the time which gets me into a wide range of LICs and more recently "smart' ETFs.

I am restructuring to prepare for Labor's upcoming decision. I dont hedge with VGAD as I don't understand currency well enough and I have dipping my toes in REITS (DJRE) but havent found the conviction for value (VVLU) .

I have kept to the never sell mantra so I just avoid my "mistakes" of the past, never knowing if it's really a mistake or a statistical anomaly.

If Labor's policy comes to fruition I will be going for more ETF and REITs instead of LICs. Then I will see how it plays out.

I have a chunk in almost every option available which I treat as my learning experience. Some LICs won't achieve a maximum return but they won't go to zero either.

As laws change and I leant more I will adapt and hopefully rationalise. 50/50 for me with REITs and a cash buffer.

 

Hi @willy1111
I’m going to indulge myself with a long explanation for my benefit as to some extent I’m still working this issue through. Hopefully somewhere in the waffle to myself you find an answer to your question.

I am continuing to pick stocks. You will note my allocation for direct shares drops from current 76% to 25% over next 10-15 years. The objective is to keep exposure to direct shares in purchasing power terms about where it is today. But instead of compounding returns into growing direct exposure, I will instead compound the returns into passive assets.

I don’t wish to keep compounding all returns, back into active direct stock management or manage the direct portfolio as aggressively as I have in the past for a few reasons:

1) I don’t need above market returns.

2) I have lost the desire to chase above market returns. You might recall in the post you referenced I said I quit work, but I also said I still worked long and hard researching and managing the risks – I’m getting a bit tired to keep that up and my ego can finally give up having to win the game. For me it was never really the money that motivated me (not that I knew it at the time) but winning the game seems to have been a deeper motivation and return was how I scored the game. I’ve had a few psychological crunch points around understanding my true motivation on the journey such as thinking money was the motivation but being unable to stop taking unnecessary risks when I had enough money. Then pretending to myself that I could find justification for risk taking if I did it in the name of a higher cause so set up a charitable private ancillary fund. Truth be known I probably only wanted the zero-tax rate to juice the after-tax return figure. Giving the mandatory 5% away each year in a meaningful way was harder than it looks and not our thing so the PAF has been rolled into a Public Ancillary Fund who do a far better job. In the process of all the prior activity I finally found myself at a place of contentment where I no longer felt the need to maximise return and that has allowed me to think clearer about the risks I take. Having all my risk in direct shares is an unnecessary extravagance that effects not only me but my family and now that we have alienated a fair bit of our wealth through the PAF exercise its risk I can’t really afford to indulging in.

3) I cannot truly distinguished if I’m skilled or lucky. I don’t want to push my luck. I’m vain enough to think I had some edge or alpha that enables me to beat the market – but I’m possibly wrong. And besides even if I’m right, if there was 10,000 of me or I lived 10,000 lives my ability to beat the market would on average be at best 15% return if the market makes 10%. But the distribution of those returns with how I went about things is really wide with the tails of the distribution ranging from amazing wins to devastating losses. There is no doubt I got lucky with a past result that is undoubtably in the positive tail. I don’t want to push my luck a get a future return that is in the negative tail.

4) I don’t like losing large amounts of money quickly. Yes the spreadsheet says the loss % is well within tolerance and it’s not unexpected given the approach, but I can tell you the first time I lost each milestone figure in a day (a car, a years wage, a house, a million bucks). Its one thing to understand something intellectually but its another to deal with the stress of how your body and mind instinctively work. The stress adds up over time. Maybe that’s how its meant to work to stop you taking these risks as you get older.


If I wasn’t indulging my humanness, I would sell everything today and re-allocate it all to passive. But for now, I’ll keep the direct shares exposure to indulge my interests whilst de-risking how I go about it and build the passive portfolio from the proceeds.


Do you wish you didn’t ask now?

 

Not in the least bit crazy I reckon. Quite the opposite.

What others do or how they approach it is completely irrelevant. Your circumstances (attitude, funds, household structure) are unique to you. You've verified that in your third paragraph. So I'd have no hesitation in giving the bird to others who think otherwise.

Wonder if I can work myself to being in a real cranky today? I'll give it a shot.

 

Not at all.

Thank you for indulging I very much enjoyed reading your response.

 

Hi @Blueskies

What % of financial assets do you hold in property? What sort of leverage do you hold against it? do you want to keep a fixed % allocation to it over time? how much active management does it take? what impact does holding it have on your decisions regarding other assets?

I only didn't include investment property in the original post because I don't have any. I'm not sure anybody has said property be it residential, commercial or reit's are crazy. Hopefully lots of other people with those assets will share their asset allocations and reasoning.

I didn't include personal use property in the original post because I personally don’t think of it in financial terms, but there has already been some good discussion as to whether it should be included in allocation decisions, same goes for employment income, business income, whether you have a mortgage or not........Hopefully there is a lot more discussion. We all do things differently, we can all learn from different people's perspectives. I really hope I haven’t unwittingly given the impression that I think property investment is crazy.

 

@dunno oh how I can relate to much of what you said.

Trading / investing might appear to start out as wanting to earn a living or get wealthier quicker etc but it can become all consuming feeding the need of numerous human desires. The intellectual stimulation alone is addictive.

As I said it can be all consuming where the great majority of your time and energy goes into further education, improving systems, dealing with behavioural issues etc.

Fortunately my wife was working when I embarked on that journey otherwise I shudder to think what the stress level would have been like. But even so it can be stressful like you would’t believe at times.

Once you start putting serious money on the line especially with highly leveraged assets such as Futures the wins can be huge but so can the losses. Despite strict money management rules in the case of stop losses if there’s a violent price move it may spike beyond your stop loss triggering it at a noticeably higher / lower price. What might have been a say a loss of tens of thousands of dollars can turn into something much worse. Even though the loss as a percentage of the portfolio might be still acceptable the actual dollar amount loss can still be stomach churning. It’s how most of us humans are wired despite our best efforts to improve behaviourally through training.

I could go on for hours about the trials and tribulations of trading but now move on from quitting trading to my return to less stressful longer term dividend investing which is what I initially started out with in my 20’s (now 59). Although I held LICs the main focus was on direct stocks because of the juicy yields available. When purchasing beaten down high yielders such as the banks and well known income stocks including mid / small caps it was possible to create an income stream significantly higher than say from a LIC. This not only required selecting stocks and monitoring them but also lead to unexpected nasty surprises at times. A number of the pet income stocks I held and widely recommended by analysts turned out to be dogs when the GFC hit. It can also result in a lop sided concentrated portfolio hence carries higher risk.

With age, wanting simplicity, reduced risk (but still equity focused) and due in part to our increased wealth I no longer want to be managing direct stocks. The older, low fee LICs can handle the active side for me at a ridiculously low fee. Most importantly being an income focused investor their philosophy fits nicely with mine.

But education overtime has highlighted how difficult in can be for active to beat passive. More importantly I like that passive auto adjusts without human intervention to what’s happening in the real world. That is, the self cleansing nature of indexing contributes to my SANF. Index funds are not hamstrung by tax considerations and / or bad decisions by humans.

That said beating or matching a particular benchmark is not what I’m all about. LICs give me some of what I need as an investor (at a number of levels) but so does indexing. One of these alone would not meet my overall requirements financially or behaviourally. Given it’s all about me (and wife) I need both! Optimal performance is irrelevant in this regard.

My indulgement over. Can’t let @dunno have all the fun.

 

I must admit to regularly revisiting the atttaction of global REITs as part of the portfolio. Ignoring current valuations for the moment given the potential loss of franking credit refunds in the SMSF, higher income distributions, correlation although not as important, currency diversification (or not but no listed hedged product available), economic footprint reasoning etc there’s still this niggling interest that won’t seem to go away.

But the NO verdict to date mostly comes back to the fee. DJRE is the only product suitable but it’s fee is 0.50%. This is very high for Passive indexing (0.14% in US) but I understand why given the relatively small FUM in Australia. Is this high fee compensated enough by other benefits brought to the portfolio by including unhedged Global REITs?

So yes I look forward to others giving their reasoning for including this asset class (or not) in the portfolio despite the higher fee.

@The Falcon, time permitting as I know how busy you are, would you be kind enough to expand on your reasoning given the issues I raised. I know most of your original reasoning but given you’ve been invested in DJRE for awhile your thoughts now further along would be appreciated.

 

Great thoughts, your ability to distill things into something easily read really is beneficial.

 

My asset allocation - is not something I would recommend to anyone. I have only really been investing for 18mths now and haven't put a lot into it (1 income, 2 kids - I am doing the best I can).




Long term I will be adding VGS for international (not for a while though). Focus at the moment - is trying to cut down expenses and live more frugally - so as to increase the amount I can put into investments. Oh - and to pay down the mortgage. My struggle - put extra money into the mortgage - or into investments? I am still debating the merits of dividend recycling given how small the dividends are at the moment.

 

Awesome! I'm serious @sharon.

Was out at a game of rugby last Saturday evening surrounded by some 8,500 people. Given the cross section of the fans I started to wonder how many did take action on investing/finances/whatever. I suspect not many so you are likely to be one of the few.

I knew I shouldn't have had that can of beer during the game.

 

Haha, not at all, my comment was firmly tounge in cheek! Mind you sometimes with low yields, hostile government incoming, falling prices, winging tennants, maintenance issues - I do question my own sanity!

In regards to your other questions:

What % of financial assets do you hold in property? >90%, see quick chart below, not exactly a balanced portfolio, in-fact kind of scaring myself to look at it that way!
What sort of leverage do you hold against it? ~70% LVR. And really this is the key driver for propery investment for me, the ready access to finance on good terms.
Do you want to keep a fixed % allocation to it over time? No, want to gradually transition to equities over time until closer to 50:50 balance.
how much active management does it take? I don't find it too much to handle at the moment, but definately more than the shareholdings and definately keen to reduce in later years.
what impact does holding it have on your decisions regarding other assets? A lot, I think all investment decisions need to be made in the context of the total portfolio.

 

You know I never used to invest - was scared of the stock market etc. No-one ever talked to me about investing and I had no idea. But since reading here and learning and wanting to invest - I love it. So much that just these last two months I haven't been able to put as much into it (school fees, sports fees for kids, air con needed replacing, etc) and I just want to scream I am so angry and frustrated. I have a plan and I haven't quite managed to stick to it for Jan and Feb (have done so all last year). I think maybe I am a bit crazy - who would have thought that I would get upset about not being able to follow the investment plan 100%. Who am I these days????