Introducing: my brand new “idiot grandson” share portfolio

there comes a time when a man need to make the money and for financial educator, advisor or book writer or whoever he or she maybe, he/she need to start generating actions.

without actions there is no income as simple as that, come up with an idea every year or few year, generates some action charge some $$$ for it, rise and repeat.

people making money or not is irrelevant what relevant is he/she ability to generate some sort of action and get people to follow, when people takes that actions the cash comes with it and into the action generator pocket.

 

The B has a bigger task ahead than schools judging by this statement made by a 27 yo given the plethora of information which currently exists about investing in shares.

https://www.theage.com.au/business/...te-cuts-make-him-worried-20190702-p523gr.html

While I do make some effort when any discussion of investing or property is raised in a social context I know it's a token one. Maybe it's due to my poor method of delivery as I don't do the song and dance act well or I recognise it's futile as the mind set it what it is.

Akin to trying to encourage a student to focus on history when their enthusiasm is for chemistry.

Best of Mr B because I think you're going to need it in spades.

 

I have only met maybe one other person (in their 20s) who has heard of ETFs... People just have their mind/focus elsewhere like you say.

 

I gave my child money to buy shares for part of his 18th. Apart from the tax advantages, heheheh, it was to teach good saving and investment habits. I explained about diversification and why he shouldn't sell.

In hindsight, the missing ingredient is his understanding of why those diversified investments really make the most sense. I've been through the entire cycle since I joined this forum. I'm fairly risk averse so I only paid off PPOR for a long time. Then I checked my super and it was stagnating. Although Finance and money never interested me I'm the type of person that likes learning new things and it seemed important to wake up to my finances so I investigated and it appeared to be the fees. Call that lesson 1. Subsequently I needed to work out what to do with my super. A fair amount of research got me into the passive index hugging ETF boglehead world. It seemed sensible but I wasn't certain why. That's when I started reading here about LICs and Thornhill and dividends and franking etc. Call that lesson 2. I invested in what I thought was the lowest fee super that gave me the flexibility to buy LICs and ETFs whilst also investing outside super. Everything was going well until the super fund decided to gouge on its fees. Completely morally corrupt decision that cost me a lot of money. Call that lesson 3. Moved my super into the lowest fee super I could find where I could choose my allocations to index ETFs. Kept putting into Super whilst investing in a multitude of LICs and ETFs outside. I'm the type of person who has decision paralysis choosing a meal at a restaurant - there are just so many factors going through my head that it impedes decision making. The same applied to me when buying LICs and ETFs. I thought what I was doing made sense, I was buying at good prices, trying to balance the allocations, giving myself options to buy LICs at cheap prices, looking for factors that make sense etc. Then I realised I should probably simplify. Call that lesson 4. Now one of my fundamental rules was never sell, so I was not clear on how to simplify without selling. The obvious one was just buying VAS, VGS, VGE, DJRE in the right proportions. But what about all the other stuff that I had accrued. It was earning a decent income but was it optimal? Then the franking debacle came along and I took a deep dive. Thanks to some insightful posts around here I realised that income isn't necessarily better. I could sell off instead of reaping dividends. Call that lesson 5 and my current status.

My whole point, I know now exactly why I can buy index ETFs and be comfortable that they will perform somewhere around market performance. I know that if the market tanks so will my portfolio. I have prepared myself for this like a Zen master prepares for death.

My point, how do you teach your kids / family all this without them experiencing it themselves. This could become a discussion on epistemology but I think this type of knowledge is best constructed. Like kicking a football. You can't learn from watching TV.

 

Great post summarising your investing journey, thank you for sharing.
I believe a lot of people, myself included have learnt a great deal from this forum.
As with your journey, I too have modified my portfolio as I continue on my investing journey.
I do feel investing has become a lot easier and clearer with the great insights that many people on here contribute.

 

Great post @Zenith Chaos! Reminds me of my own investment journey via different asset classes at different stages with various lessons learned along the route. The more I think about it the more I tend to agree with your conclusion that it’s hard to teach this to someone who’s never experienced all this in the first place.

 

Come on guys, this was a pretty predictable read i.e. it is limited to barefoot-bashing.

Since we are all so financially literate, how would we go about investing in such a way that the idiot grandson is less likely to blow it?

If your answer is "you can't", I am a little depressed as it means you are only investing for yourself. Gosh, I don't think I could keep up the enthusiasm if it was just for me. It doesn't have to be about kids or family members, there is so much worthwhile that can be done with philanthropy.

Strategies I am thinking include...
- Bonus share plan / DSSP to reduce tax in accumulation and create a large CGT bill i.e. disincentive to sell. Doesn't make it immune but will make the kid stop and think whether slaying the goose is really the right move
- FDT to keep the distributions in charge of the more conservative generation. You can write into the trust deed that Thou Shalt Not Liquidate Capital.
- Make distributions into the kids super. They can see the benefits of compounding but can't touch it. Might ignite "the spark".
- Read BAREFOOTs family book, it deals mainly with trying to make your kids financially literate ie mitigating a lot of the problems proposed in this thread
- I'd guessin Barefoots case he might want to set up a NFP for cheap financial advice ie nothing for the grandkid anyway =p
- If all else fails, pay someone else eg Perpetual to leave an endowment

 

You can only make sure a grandchild doesn't blow it by making sure they don't inherit.

2 ways to do this
A. Leave it to someone else
B. Trusts in will or before death.

Trusts need control mechanisms

 

Like you mentioned some lessons are best when they are experienced first hand and these financial ones are difficult for most to get a sufficient understanding of without direct experience (and pain). Perhaps it is best to get the young ones to experience them early, I think the barefoot way is about educating as young as possible that's the impression I got from what I've seen on his new book and with minimal long term damage, picking a few spec stocks that blow up with some saved cash isn't too bad (just don't work out the compound losses) vs wasting an entire windfall from inheritance/lotto/similar through miss management.

Although this maybe difficult as the brain doesn't fully develop reasoning skills until around 25 years of age so the willingness to take unreasonable risks is potentially difficult to dampen until then; along with that there are enough pitfalls to trip you up Zenith and you are older with life experience, self confessed risk adverse, have a solid understanding of numbers, have an interest in such things and not a complete Muppet.

Lesson one (Bogle or PT approach) and an industry super fund realistically would be sufficient IMO as long as one can stay the course.

 

Looks like he's starting the new portfolio with about $182,000.

 

The idiot portfolio is:

- 75% VAS
- 10% VTS
- 15% VEU

 

Barefoot states the reasons for that particular allocation as follows:

- A large stream of income to support his foundation
- VTS and VEU will grow faster overtime therefore the allocation will tend to become closer to 65% Australia and 35% rest of the world, which is his very long term ideal allocation

Other reasons for picking these particular funds:
- portfolio with low fees <0.09% MER overall
- Barefoot seems to think that Vanguard Australia is not for profit (even though we know it's Vanguard USA not for profit)
- Barefoot thinks A200 is more likely to increase fees, whereas VAS is more likely to decrease

 

Actually the more I think about it there’s merit to this approach not just for the idiot grandson but for the retired young (eg FIRE) and not so young if there’s potential for another couple of decades on this earth.

The initial large allocation to VAS with it’s high dividends here and now is comforting financially and psychologically. The higher dividends and associated franking credits may allow one to retire earlier. However the initial lower dividend, higher growth VTS / VEU deliver higher dividend growth down the track. In addition being unhedged they provide insurance against Home country risk.

Any short to medium term risk would be due to so call “shallow” risk as in a recession / bear market etc. A recovery will follow. VAS will likely see the investor through these periods.

The most dangerous situation is a result of “deep” risk that can occur in the longer term. This can result from negative structural changes to the economy which unlike a recession are much more severe and long lasting. This is where the increasing exposure over time to unhedged VTS / VEU could be a life saver in this scenario. The AUD would tank in a deep risk scenario significantly increasing the value of unhedged VTS / VEU allocation.

So in summary large initial exposure to VAS can get one retired early thanks to it’s juicy dividends and franking credits in the here and now. VTS / VEU rewards the investor further down the track through stronger dividend growth and protects the investor from any negative long term structural changes in the Australian economy.

 

Kind of doing this myself as mentioned before. Not out of any great master plan or deep thought! Just feels right for our situation.

Personal is 100% Oz and will likely contain some International shares down the track.

Super is 100% International compounding in the background and is essentially for backup/diversification purposes.

 

I also have a similar equity allocation between VAS and international, although I use VGS, VVLU and VISM.

I guess I saved $397.

 

Does he mention the tax implications of the US-domiciled ETFs at all? It's designed to be a long term intergenerational portfolio. Is there a risk that one day it could could grow above $5.45M and attract the estate tax (and what percentage is that)?

 

As someone in my early 20's thinking about FIRE, this strategy has been on my mind recently.

Ideally I would have a portfolio akin to US Total World ETF, which can be replicated with VTS/VEU (55/45 split currently).

But being in Australia it's a bit more risky due to currency issues (US investors have it easier I think ). I think a larger exposure to franking credits and AUD currency simultaneously via A200/VAS could help with some early sequence of return risk.

 

The fool in on the $100k portfolio action

How I would build a $100,000 ASX ETF portfolio

Here’s how I would build a highly diversified $100,000 ASX portfolio using only ETFs.

Vanguard Australian Shares Index ETF (ASX: VAS) – $40,000
Vanguard MSCI Index International Shares ETF (ASX: VGS) – $20,000
iShares MSCI Emerging Markets ETF (ASX: IEM) – $20,000
iShares Global Consumer Staples ETF (ASX: IXI) – $20,000

 

He does :
That’s bad news for Australian investors like
you and me — since every time the fund pays a
dividend we’d effectively have to pay tax twice:
first to the IRS (the US tax department), and
then again to the ATO in Australia!
To prevent this ‘double taxation’, Australia has
a tax treaty in place with the US which allows
you to effectively only be taxed once on your
investment.
To be eligible, you’ll have to fill out a form called
a ‘W-8BEN’ for each ETF you buy.
If you invest in a Vanguard fund, you’ll generally
get it in the mail.

 

Thanks. Does he mention the possible estate tax?

US Australia estate tax treaty