Best strategy for investing $3mil + into shares?

Thanks for explaining. I will read up about unpaid present entitlements and ask my FP about them.

 

Recently my FP changed their previous recommendations (all Vanguard ETFs) for my non-super shares and recommended a Praemium SMA instead.

I’ve done some digging, and it appears that they’re now proposing to gear my non-super shares more toward growth. Previously they suggested a 50/50 asset allocation and now they’re suggesting a 30/70 (defensive/growth).

They’ve done this because previously they did not want me to switch my super to pension phase (they essentially wanted my super left untouched), but now they want to switch my super to pension phase, which means they can gear my non-super shares more toward growth.

From my understanding, they’ve recommended a Praemium SMA which is basically iShares Growth Model Portfolio:

https://www.blackrock.com/au/interm...ackrock-esmp-march-2021-performance-en-au.pdf

Relevant info is on pages 4-5 of the above document.

Could someone please tell me if what they’ve recommended is basically the “equivalent” to Vanguard’s Growth Index Fund?

I have no idea why they have switched from Vanguard to iShares, but for the moment, I’m trying to review/understand what they’ve recommended.

 

Ah, ok. So it's not an option for me, at least not for the next decade.

Thanks for clarifying.

 

My FP has only provided me with a 10-year projection, even though I asked for a 40-year projection ie. across my entire lifetime. Am I being unreasonable/unrealistic asking for a 40-year projection?

 

40 year protections are pretty meaningless because the assumptions wont be accurate.

 

Do you mean assumptions relating to my circumstances or those relating to the economy?

 

Both. You cant predict the need for long term care, retirement home etc though you can estimate costs.

The difference in returns between 7 and 8% return on shares over 40 years for example would be so massive it’s meaningless. It would make more sense to do rolling 10 year projections, for example.

 

Ok, that makes sense. Thank you.

 

The most important assumption that is missed is continued growth.

Some investments will face risk of market losses one in ten years. Others one in five years. Depending on whether you are growth / defensive etc and which market (eg property / shares) When a loss occurs it is negative. But then you must overperform just to recover. In the GFC the ASX 300 dropped 40%. It took 11 years to get back to that level (2019). Many projections will use a straight line projection which is misleading and not reflective of markets.

 

Yep, but while the index i.e. price was hammered, dividends received during that period (and after) should also be considered when crunching numbers. Otherwise it would be akin to property investors not bothering to include rent and associated tax deductions in the equation. Or maybe they don't care about those aspects?

 

@The Falcon

When you suggested an industry super fund, were you referring to a pre-mixed option (eg. Balanced, High Growth etc.) or a direct investment?

I found a thread in this forum that discussed industry fund pre-mixed vs direct investments. My understanding is that pooled super funds provision for unrealised capital gains, which results in missed compounding of those gains over time.

Is this the same tax inefficiency shared by Vanguard’s diversified index funds, which you mentioned was not a big issue?

 

I think the reality is that it’s swings and roundabouts when you get to that level of analysis on tax analysis inefficiency. There will always be pitfalls and benefits with one structure compared with the other, broadly speaking. It’s a little bit like the ETF vs LIC debate - what is the better structure tax and performance wise? I guess the answer is ‘it depends’. What I had noted was that after comparing VDGR and VDBA with AustralianSuper Balanced and Conservative Balanced, the Vanguard products compared favourably, all other things considered equal.

 

I would suggest why not consider limiting vanguard products to VDBA/VDGR outside of super and keeping that portion of cash as you have mentioned, maybe even slightly more? Or just replicate the underlying holdings if you don’t want their diversified fund.

As an aside, have you thought about investing a portion into an old style LIC that has the funds to cover a good number of years of dividend payments, to gain the benefit of dividend smoothening and the other benefits of the LIC structure? That might be worthwhile. How ETFs and LICs have handled the dividend freeze of last year might be worth reading up on. I am a believer in holding both ETFs and LICs.

There’s a bit of research on this topic to suggest that on the evidence you should invest the lump sum once your investment strategy is settled and get on with your life!

https://static.twentyoverten.com/59...ing-Just-Means-Taking-Risk-Later-Vanguard.pdf

The dollar-cost averaging myth: why lump sum investing usually wins

 

I compared the fees for Australian Super balanced with those of Vanguard's balanced fund on the BT Panorama platform, and they work out to be very similar (assuming a $600K balance):

While in accumulation phase, Australian Super charge:
$2.25 per week + 0.04%pa
Plus management fee of 0.5%pa
This would work out to $3357pa to start with.

When switched to pension mode, they charge:
$2.25 per week + 0.11% capped at $750
Plus management fee of 0.5%pa
This would work out to $3777pa to start with.

In comparison, the Vanguard balanced index fund in the BT panorama super platform would cost:
Platform fees $540 + $1500 = $2040 (fixed fees) -I have excluded expense recoveries and transaction costs.
Vngd fund management fee of 0.29% which = $1740
Total fee $3780pa to start with.
BT Panorama does not charge extra fees for switching from accumulation to pension phase.

The costs are similar, with Australian super likely costing more over time due to a higher management fee.

The good thing about Australian super is that they invest in some property, which further diversifies our portfolio as our non-super shares have no property allocation. I'm not sure if this is a good enough reason to go with them though.

My FP also thinks that VDBA (or the fund equivalent) is the better option (when compared to an industry fund).

 

Yes, that's something we need to keep in mind. I know there will be downturns -as long as I'm still getting my required income during them, then it's all good. I will keep a sufficient cash buffer, just in case.

 

Thanks for your suggestion.

We're at the point where we're trying to decide exactly that -whether we want to invest non-super shares into VDBA/VDGR (or the equivalent funds) or to replicate the underlying holdings ourselves (or some other combination of ETFs).

I read this article (Vanguard Diversified Index ETFs - Aussie Firebug) which highlights that the diversified fund management costs really add up over time. I don't know if the simplicity of the diversified funds (auto rebalancing etc.) are worth the extra cost.

No, I haven't. Mostly because I just don't want to think about investing anymore My FP has not mentioned LICs at all, although I did ask for passive index investing, so perhaps that's why. I know nothing about the benefits of LICs in terms of structure or dividend smoothening. I will do some reading this evening -thank you for highlighting it to me.

Thanks, I'll have a look at those links. My FP plans to DCA slowly and then to lump sum invest if/when the market corrects.

 

This article ignores the tax drag in VEU so whilst there is an extra cost from the all in one funds, it is less than stated.

Roll your own also requires the discipline of rebalancing. Not rebalancing has a much greater drag on a portfolio than the cost of the all in one funds

The Larry Swedroe 5/25 Rule