Financial planners and index funds

Vanguard are a good choice. Also with their managed funds while they have fees compared to brokerage costs with ETFS, you can buy smaller allotments automatically on a monthly basis. This means you can dollar cost average into the market systematically.

 

Imagine you have a non deductible home loan. $50,000 in shares (for starters if you didn't borrow to buy these shares that means you are paying $2000 more in deductible interest than you could have been - losing $1000 pa possibly).

If they paid $5,000 in dividends (example) you could either
- receive the money and pay $5000 off your home loan and reborrow $5000 to buy more of the same dividends, or

- receive more dividends instead of cash.

The first option is debt recycling. You still have the same amount of debt, but you are shifting the debt from not being tax deductible to being tax deduction.. Each year this would mean a $200 extra tax deduction approx.

The second option saves you brokerage fees, but you don't get the benefits of debt recycling.

 

Terry, some of those US chapters i skipped but I'm quite impressed with rest of the content...especially assets allocation, rebalancing and general concept of index funding and how it has performed in long term...

 

Yeah I skipped a few chapters too but its a good book to get.

 

For those who enjoyed reading "The Boglehead Guide to Investing" this thread by one of its co-authors might be of interest. I read the thread quite some time ago and found Taylor to be a remarkable man in many ways. He is 92 and still going strong on the Boglehead forum in promoting the benefits of the 3 fund portfolio.

The Three-Fund Portfolio - Bogleheads.org

 

Thanks Austing

 

Seems to hold a slight amount of more risk, you would have to insure your investment is (over long term) generating more % then the interest on the debt is (especially as both of these are subject to market changes). I'd imagine the main benefit would be the tax deduction from changing the debt to deductible debt, how difficult it this for an accountant to work out (ie one loan with both deductible and non-deductible debt components)?

 

I don't see how it would be more risky as your overall debt position would be the same.

I have written many tax and legal tips on the problems of mixing loans and how to avoid it. You would basically split you loan so that there is no mixing.

 

I do recall reading some of those, will have to revisit
and I think risk was possibly the wrong word, all I meant was that in order to make a profit, you would be fighting potential interest rate rises etc.

 

92! thats awesome, shows how much passion he has for the strategy. I'm in agreement with the 3 fund portfolio, the simplicity works, after speaking with alot of high income earners (who do not invest) recently, I find that complexity, lack of understanding of risk (and general economics) stops them from investing or "analyses paralyses".

 

Given the title of this thread here is a article from a professional financial advisor showing what an index portfolio might comprise and likely performance:

How did your SMSF perform in FY16?

Given the tiny size of our bond and listed property markets here in Australia some advisers like to include International exposure to these as well as Shares. Adds to the number of holdings but it reduces home bias and Country Risk and increases diversification.

Or of course you can get it all in a single package such as this:

https://static.vgcontent.info/crp/intl/auw/docs/funds/factsheets/ret/vlsgf.pdf?201600801|121600

Setup a monthly BPay deposit (dollar cost averaging) into the fund then forget about it. Rebalancing across asset classes automatically done for you. ETFs appear cheaper but if buying regularly and rebalancing etc brokerage cost needs to be factored in. And with ETFs the ease of buying and selling increases the urge to fiddle, do stupid things like selling at the worst possible time and / or not rebalancing regularly etc.

Fees are a little expensive for retail but I have heard in the past Vanguard would let you into their much cheaper wholesale version of the above fund if you had $100k to invest (not $500K as advertised).

Not liscenced to give advice.

 

Not to segway too much as this is non-property thread, but many in the forums have used BAs for their purchases, myself included. BAs work for you and with a good BA, you get their years of experience and local knowledge working for you. So, don't overlook them especiallly for interstate purchases.

 

For managed funds, InvestSmart is a pretty handy tool to search for managed funds by past performance (insert usual disclaimer here). Used this to help make a shortlist, from which I picked 10 to invest in (current overall growth is 14.3% p.a.)

I was originally referred to a financial planner who recommended a multi-manager fund, i.e. collection of managed funds (similar to my DIY setup) but with a large fee attached. Decided not to go that route but that's a personal choice.

I originally thought setting all my funds to pay out would result in faster debt recycling, however I assume you would have to pay income tax (minus franking credits) on the distributions, as opposed to not paying any tax if distributions were reinvested (apart from CGT when you sell obviously)?

If these assumptions are correct, my calculations said the best choice for networth growth was to set all funds to DRP. It was by quite a slim margin though and maybe it would be worthwhile for funds with a high proportion of franking credits.

 

You still have to pay tax on the dividends you receive as part of the DRP. They are treated as income by the ATO, I believe.

If they were tax free, would be a bit of a no-brainer

 

You're right, managed fund distributions contain a taxable income component, which must be paid regardless of whether or not the distribution is automatically reinvested.

Hmm.

 

Same with direct shares

 

Ah yes, but not if using a LIC's bonus share plan (AFI and WHF have them from memory). For a "never sell" investment they are interesting for high tax individuals as they are allow compounding with no top up tax (using the franking credit received) much like using a company as an investment vehicle. When the time comes to turn on the income stream you just notify the LIC and collect the divs

 

Lots of non discounted capital gains typically churn baby churn.

 

interesting stuff @The Falcon
I like the idea of only paying tax on the divs received not the ones re-invested!

 

Thinking out loud... does that mean the same income tax is paid whether a fund is set to DRP or to pay out?

Are there any CGT differences between the two?