Hypothetical situation: $200k cash to invest

Would like to put this one to the forum to both get views on everyone's current thinking.

Hypothetical situation:
- $200k saved in cash
- You're 35, and just creep into the highest tax bracket, no dependents
- No other material assets or debts
- Emergency fund sorted
- On top of your living/travel expenses you can have $3k cashflow free to invest per month
- Live and rent in Sydney

Where would you invest you money for the next 5-7 years given the current economic climate to try maximise returns (combination of CG and yield)?

Some ideas:
- Buy IP in Hobart/Perth/Brisbane
- Buy LIC or ETFs (perhaps Internationally focused)
- Buy shares with fully franked dividends
- Peer to Peer lending

The essence of the question I guess is, taking as many considerations as I can off the table, whats going to the best way to deploy capital right for the next 5-7 years (ie general length of a cycle).

 

5-7 year period too short. What do you intend to do with the money after 5-7 years?

 

Brisbane property is a good option at the moment. Blue chip bank stock is also a good option.

 

Agree something could happen to any of those options over that time.

If it was just kept in online saver earning 1.5% after tax and adding 36k per year it would be around 500k in 7 yrs anyway. Pretty good risk free option.

 

I'm in similar situation, so interested in this topic too but am not in the highest income bracket

I would think the general consensus on this forum would be to leverage as much as you can (within your servicaiblity) on your income/savings and accumulate properties so they have more time in the market. But unless you plan to be active in flipping/developing - you will probably need more then 5-7 yrs to see enough CG. Esp if you are looking at cheaper IP places - Perth, Brisbane - I can't see them 'booming' in that time

With direct shares, I would really educate yourself on industries, companies that has a good story for the near future and consider margin loaning to leverage your cash. Like property, its about looking at fundamentals then just the share price. Diversifying is overrated, someone smart (Buffet?) once said it was hedging on ignorance/incompetence. I would pick just a handful of companies and focus on them. Reinvest dividends.
Might be better for next 5-7 yrs ?

On side note - if at max tax bracket, I would max out the $30k cap in super contribution. But this is a long term thing

 

I was in your position a few years ago. I invested some of it on two Brisbane properties which have done very well for me (so far).

However, knowing what I know now, I would just recycle the debt on my PPOR and buy income producing shares and not have to worry about the 1000 headaches that properties have caused me, continue to cause me and will do so into the future.

Also, know that leverage is a dangerous tool if not exercised with caution. Unless you have pretty good buffers, once you leverage up to your eye balls, you are hoping that not much goes wrong with your personal and investing life. Like @Il Falco said recently, not going silly on leverage is probably the cheapest and most effective risk management tool available.

But it boils down to figuring out what you want to achieve over the next 30 years. And why. How you want to get there comes after that.

Not advice.

 

If I was in your position, I'd buy an IP in a suburb that I'd like to live in and concentrate on paying excess funds into an offset account. This would then open up further choices including being able to move into the property in the future, or leverage off this into further property, shares etc.

 

5-7 years is "generally" considered enough time to invest in equities. However it's a risk and your risk profile will determine your decision. Are you going to buy a house? Have a family? These questions are important.

However, I would consider a diversified portfolio. A simple way would be getting the Vanguard wholesale fund for $100k. That can provide a good deal of diversification across, Australia, International and bonds. There is no brokerage to put every $3k parcel you get into that. For the remaining $100k, depending on your risk profile you might consider small/mid cap exposure via a LIC such as QVE to which Vanguard may not offer exposure, other LICs both Australian and/or International, cash, bonds, buying an IP (not for 7 years as the timeframe could be too short and the market is very hot but I am putting it out there) , or even investing in your own business. Try to keep your pre-strategised allocation of shares to Australia / International and small / mid / large constant.

There are so many variables. There is no way to guarantee your $200k. In 5 years the spending power of $200k will be less than today. Diversification is the key.

Where possible you don't really want to sell these types of assets but you can if you like and pay transaction fees / capital gains tax.

I personally would (trying to keep it as simple as possible):

1. Invest to create an income stream and never touch the money again.
2. Invest in the following Australian exposed equities: VAS, MLT, ARG, FGX. Try to find a small/mid cap lic that is decent value, I've had trouble.
3. Invest in the following International exposed equities: VGS, FGG.
4. Keep an allocation of 50/50 for your equities.
5. Save your $3k parcels until they get to $10k and invest it in one of the equities above. Alternate between Australian and International to keep the allocation. Choose a LIC if they are good value to NTA, otherwise the index ETF.
6. Invest $50k in high interest at call in cash and if the market tanks go all in (including any of your monthly uninvested savings) leveraging conservatively keeping your allocation constant.

To be honest, you should not follow that advice but try to understand why I made any of those decisions. Then make your own decisions.

Also read Peter Thornhill's ideas.

Not licensed to give advice.

 

I'd put it all on black black red black black black red red black red red. Works 60% of the time all the time.

 

@djyella You will get a wide range of answers on here, really depends on the hypothetical goal/expectation of return over the 5-7 years and if the hypothetical person involved wants much personal involvement in a strategy based approach or something easy that is essentially no brainer. The answer that is in the person's best interests is that they should seek professional advice to align their strategy with what they are wanting to achieve and for many other reasons.

General comment: I am not anti-property (hold around 2M in direct property) but personally I would not be buying one right now that's for sure.

A portfolio approach is a good option but again largely depends on your goals.

Low maintenance - Use high quality portfolio construction approach with Australian and International multi-asset class and multi sector exposure using your preferred blue chip stock vehicles (SMA's, MF's, Multi-Manager Funds, ETF's, LIC's, Index funds) to remain safe and concentrated in to growth assets. Core-satellite portfolio approach with Index and Multi managers as core and SMA as satellite would be ideal. Overall exposure will be many hundreds of stocks worldwide.

Low maintenance with leverage - Core-satellite again but consider internally geared funds for core .

Medium maintenance - Core exposure again will be as for low maintenance with many hundreds of stocks worldwide. Satellite exposure through individual stocks - more concentrated holdings (usually 15 - 30 domestic stocks).

Medium maintenance with leverage - Core using internally geared funds, structured index products or margin lending if you understand the risks and how to manage buffers. Satellite using individual stocks and margin lending assuming investor is a good risk manager and understands how to maintain buffers.

High maintenance - Core satellite again with smaller core (20 - 50%) using SMA's & ETF's. Satellite using Individual stock portfolio. Far less diversification and MUCH more decision making and skill needed to succeed with this approach.

High maintenance with leverage - Small core of internally geared funds, structured index products and then margin lending and warrants using individual stocks again assuming a good risk manager.

You might also consider using an small piece of the funds to write an index option for some insurance on the portfolio over the period you will hold it.

DCA surplus savings in to same holdings using sector rotations to get advantaged pricing on strong outperformers.

General info only, not advice. Again my view is that it's in the hypothetical person's best interest to seek advice.

 

@austing

How would someone go investing a lump sum of $200k into LIC's (looking long term); would it need to be a staged approach into LIC's due to being closed end funds/available units?

 

Purely psychological. $200k is nothing relative to most LICs liquidity wise. I prefer staged approach. If one lump sum invests and the market tanks it can be psychologically devastating for many investors.

Here's a strategy from the LIC Beginner's guide (there are many others):

 

Just having a quick look at online savings accounts and saw these rates

• ME Online Savings Account- 3.05%. ...
• ING DIRECT Savings Maximiser - 2.80%. ...
• Bankwest Hero Saver- 2.65%. ...
• ANZ Online Saver- 2.55%.

Though if someone also has a loan and cash savings they may also be able to set up an offset account saving them the prevailing interest rate (this way the interest earned is tax free ) and they can keep adding to it as per @Snowball

No idea how to work out what the effective rate you would be getting depending on Australian tax rates though, maybe @Rolf Latham can help out here

 

I don't tolerate low returns eg cash saver accounts.

Sounds like you don't have a Ppr and you live in sydney? Buy there. Best tax free money you'll ever make - I skyways tell my friends to borrow anything you're offered and always put down 20% so you're looking at about 1.5mil cool apartment for yourself ... you'll score a generous loan with your income...and rent out the extra bedrooms to good looking people for extra income I'd go for new places in Barangaroo/milsons point/Potts

 

Where are your properties?

 

Maitland and Brisbane.

 

Thanks for the input so far. FYI the hypothetical situation is not me exactly. I have an IP already (cashflow neutral) and also dependents. But I do have $200k cash and some monthly cashflow availability.

I'm staying away from property for now as I don't want the headaches. I like @ErYan's suggestion best so far.

Current short-term plan:
- $150k into Vanguard High Growth Wholesale fund (36% Aus/42.5% International (mixed hedged/unhedged)/10% International small companies and emerging markets/10%cash) at 0.29% MER.
- $50k cash in savings plus adding each $3k month and will either (a) buy LICs/ETFs if the sharemarket tanks or (b) use as a cash buffer and refinance first IP to buy another IP if the property market tanks.

My thinking is:
- the Vanguard wholesale fund gives me instant diversification and no need to rebalance if I add funds later, for low fee.
- I've picked ETF vs LIC for now as the safer LICs such as ARG, AFI appear to be heavily exposed to the Australian property market.With the Vanguard fund, there's still some exposure so that if there is no bust, I can benefit from gains but have international + small cap/emerging market diversification. Also not being close to retirement, I'm not as concerned with dividends
- I also want to be sitting a fair amount of cash to be able to take advantage of any market downturn (either equities or property).

Any thoughts or criticism welcome! I am a novice and just looking to learn!

 

Sounds like a plan.

My only question is whether you decrease the Vanguard fees by choosing your own allocation? The Australian and International share funds are only 0.18% individually.

 

The main concern I have is your choice of words:
"Current short-term plan???"

 

Good point eryan, I also thought about the fee difference. Is there a reason one would might be better off paying the higher fee off 0.29% and keeping it all in the high growth option?
Any benefits over the seperate allocation?