WHICH STRATEGY WOULD YOU CHOOSE AND WHY?

I am researching a variety of different investment strategies based on a 12 year plan with the aim to be in a position to retire if I choose and thought I would share the 3 strategies I thought would work best and try to narrow it down to one. Thoughts and the strategy you would choose and why would be very interesting to read.

Strategy 1.

Invest $50k P.A into LIC'S and VAS

After 12 years total holding would be around $800k.

Income would be $36k Divs plus $15k Franking Credits = $51k P.A income. Or $36k if FC are abolised.

Annual fees = $1k

Strategy 2.

Invest $40k P.A into LIC'S and $10K into Vanguard HGF

After 12 years LIC holdings $645k with Divs $29k plus $12K Franking Credits = $41k income P.A
After 12 years HGF holdings $180k with Divs $9K PLUS $1K Franking Credits = $10k income P.A
Total income: $51k P.A $38K Income if FC abolished.

Annual Fees: $1,400

Strategy 3.

Invest $50k P.A into Vanguard HGF

After 12 years holdings would be $820k with Divs $41k P.A plus $6k Franking Credits. Total income $47k P.A unless FC abolished then $41k

Annual fees: $2,300

All holding will be held in a Family Discretionary Trust with no intentions of ever selling.

These are the 3 best strategies I have been able to devise. Obviously strategy 3 offers the most diversity using the Vanguard Diversified HGF, but there are the complications with international currencies being converted and tax implications. But a simple plan, just set and forget and a total income of $47k P.A.

Strategy 2 is fairly concentrated to Aus LIC'S and a small allocation to HGF for a little diversification with a total income of $51k P.A.

Strategy 3 is totally concentrated to AUS Lic's and Vas keeping it quite simple and local, offering less diversification, but I figure if the LIC'S and vas implode then the World is probably ending, so International diversification doesn't help me sleep easier. Offering $51k P.A with Franking Credits.

These figures are based on the past 12-15 year returns and the current MER fees. This obviously doesn't mean the next 12 years will be the same. But I imagine it should be similar.

Would love to hear other's thoughts and reasoning as to the strategy they would choose or a different strategy that they currently use.

Thanks

 

You are doing it backwards. You are choosing funds first and letting them decide on your allocation of home country to international. You should decide on an allocation first, and then find the funds to implement them.

That will make you face the real question you need to answer, which is how much do you want in home country and how much in international.
Home country has franking credits, lowers upside currency risk. International helps with downside currency risk and diversification. Weigh these up, get your allocation, then implementing it is trivial.

 

I tend to agree. The strategy, albeit possibly effective and with some thought, is a bit random. You need to know your asset allocation to international before knowing how to invest.

You should use vdhg etf instead of the retail fund.

Why did you state the fees? They come out automatically.

I'd tend to just go 100% vdhg and be done with it given you want to retire soonish.

 

Thanks for the reply. After reading motivated money and numerous blogs about investing in LIC’s I tend to want to focus on income investing in AUS shares etc. but there is always this part of my psyche saying you need to be more diversified globally even though logically I know it doesn’t make a difference and probably makes it more simple sticking to Australian vehicles. I want to have home country bias and a lot of it is due to the favourable tax environment with franking credits. Without franking credits I tend to think well I should be globally diversified as that will produce the best long term returns and growth. But franking credits are just so damn hard to ignore even though I know you should not base your investments around tax advantages as the Government can take it away as they might do. But having a portfolio producing $36k income then an extra $15k in franking credits is so more enticing for someone who wants to retire early and live on income.

 

I have a wholesale fund already setup so I was planning on using the wholesale fund with an automatic debit system. This way I avoid brokerage and as soon as money comes in my account it goes straight out knot the wholesale fund. Otherwise I would use VDHG

 

What Anthony Brew said makes so much sense. Figure this out first, get this right and it almost doesn't matter how you implement (active/passive/unlisted/listed/lic/etf/investing in own name/investing in discretionary trust). Compared to just having a basic plan around your long term asset allocation and sticking to your plan even when markets turn south.

If its too much, if you feel indecisive at all, get advice. Just ask a financial adviser to give you asset allocation advice only with no investment products to be recommended. That way you can be comfortable your asset allocation probably has some proper research behind it and don't have to worry about a planner putting you in a product you may not like. There are very cheap options these days aswell if you need help down this path like stockspot etc.

 

That makes perfect sense, but don't worry about fees in your calculations. Just work out the allocation and balance the LICs and wholesale VDHG each time you buy (with cashflows).

 

There is currency downside risk and concentration risk, so it does make a difference.

Yes that's why I said you have to weigh up franking credits and downside currency risk vs diversification and upside currency risk. There is no verifiable correct answer until it is in hindsight.

And by the way, someone on here (SatayKing maybe?) pointed out that in the past franking credits have been added, removed, added, amount changed, so you are best to treat it as icing on the cake and not actually plan to rely on it.

 

There is currency downside risk and concentration risk, so it does make a difference.

Yep technically it makes a difference but practically probably not. The end results will be pretty similar as in whichever path you choose you will get to the same point. Early retirement

 

An eclectic mix there @John Ferguson. Once you've decided what is the best approach for you and your family then go fr it. I really cannot comment on what is the best approach for others as it's what is comfortable for them and each has a different attitude.

As @Anthony Brew has pointed out franking credits can be considered the icing on the cake. Matters of this nature are never static. The only certainty is Governments will tax you. The introduction of GST and CGT for example. Things will change in the future. I'm pretty sure about that.

My attitude is rather simple but not everyone - probably no one actually - thinks the way I do.

I approach it with the view any tax refund is a windfall no matter how it's achieved and windfalls are never certain. So when I have received one I figured I lived quite well without it in the previous year. Didn't starve, paid the bills and enjoyed whatever I was doing.

So I didn't spend them but invested them. I believe it has worked for me but others will have a different view as is their right. Then again, I don't have to agree with them nor them with me.

 

@John Ferguson I tend agree with @SatayKing - investment/product mix is a personal choice and depends on attitude to risk, personal skills and view of how best to grow/manage these assets and how fast you are aiming to kick goals vs how much 'portfolio safety' suits your personality.

You use the word 'strategy' in relation to choosing a portfolio mix but what you have outlined above is really just a choice between 3 'investment product mixes'. The investment/product is not the strategy just a means to an end, there are hundreds of diversified blue chip share arrangements that would work similarly for the purpose and would produce the kind of outcome you are looking for.

Given 3 fairly similar portfolios, when and how you buy in to the portfolio, how you manage it, whether you continue contributions, how you use the income, etc will make a far bigger difference to your strategy than exactly what products/holdings are in them.

Also agree with @Anthony Brew that it is best to have a benchmark portfolio allocation in mind before looking at construction.

It's important to look at many more details of your current situation & goals to build a real strategy, for example do you have a home loan? What is your savings capacity?.....and so forth.

Although having a safe and well managed portfolio that performs is of course very important to achieve success, it has far less importance than the real elements that build a strategy - the actual product mix will matter a lot less than the skills (and/or common sense & tactics) you have in timing when and how you buy in to the market for example. Other critical elements of a strategy include your own cash flow & savings habits, debt structure & use of leverage, risk protection you have in in place, ongoing investment accumulation, efficiency of holding structure of these assets for minimising ongoing future admin and accounting costs (as well as making life easy for you to manage them and get tax done!), how you use the dividend income and tax benefits to suit your structure, managing behavioural elements and decision making ongoing, etc. 'Playing With FIRE thread' has some great info on this stuff!!

 

I have no idea about your choice of portfolio - but I have also been considering the Aus v Int. allocation of late.

So far I am 100% Aus. I am happy with that for now. In fact I love that for now.
I want to build up that part before I start to balance (with incoming funds only) into Int.
I am also sticking with Aus only while paying off the home loan. Once that is done it will
free up more funds - and that is when I plan to diversify.

Best of luck to you.

 

My International is currently less than desired as I see better value in ASX. But it will reach it’s allocation when the time’s right.

 

put all your money in WAM
i did

 

Franking credit refunds are dead. Does that change your view ? I think your “psyche” is right FWIW.

 

There has been talk about franking credits for a long time ,only now Labor and those afraid of their future reputations have it on the election radar..
Is the end in sight for negative gearing ?