Asset Allocation

Not as exciting as futures trading which I did for awhile when younger and even stupider.

 

Would you consider a tax return a 5th dividend payment due to franking credits?

 

Good point, Yes for personal and smsf.

 

Looked at my tax assessment for last FY. I see the franking credit offset but the end result is DR not CR. There was a payment but not a 5th dividend.

 

Well that was a lie.

 

Reading a few of your posts it seems that some opportunistic possibilities are under consideration.

So, my opportunistic friend, let me introduce to you a framework that may be of some interest for harvesting opportunism.

It's called total return investing

I'll just throw up the spreadsheet because I reckon you can follow it.



In the example the dividend stream from company is held steady but yield is changing. ie the market discount rate is changing or in other words the amount the market is willing to pay for a dollar of dividend is changing. in the example the change in yield increase/decrease is logarithmically equivalent.

First box is taking dividends.
Second Box is 4% total return where prices cycle low then high.
Third Box is 4% total return where prices cycle high then low.

The real work is done by accepting a more variable income stream with total return vs dividend stream. But hey if you are in the position to accept it, all that total return withdrawal dictates is to buy toys, do reno's, travel and live luxurious when the market is up and use common sense when its down.

I suspect you probably think and act at least in a discretionary way like the above anyway but recoil from your thinking being labelled total return for some reason. Maybe this is the chance I have for you to see what I mean when I say total return withdrawal strategy. Lots of smoothing options can be added to a total return withdrawal strategy if straight % on capital is too volatile.

Dividends are an important source of liquidity, but consumption shouldn't be driven by liquidity alone if you ultimately wish to maximize spending and wealth collection. Well, that's my conclusion anyway.

 

There's a few other considerations.
With dividends the money is in the account available to spend and enjoy it while I can.
Non franked dividends are available now. Gov is not holding 30% of my income for 12 mths.

Just as important the phsycological.
Will a person sell in a bear market or be horrified at selling a 10 or 20% drop?
Will a person sell at 50% gain or be spooked by the thought of paying tax?
LIFO, FIFO?
Will they end up just making excuses and not enjoy the wealth they have accumulated?
I would probly be susceptible to all of the above.

I do agree with the principle of "total return" from a mix of diversified assets, though I think it's very hard to achieve effciency with just a few index funds or under >2mil to invest and of course personal temperament.
Life is a little easier though with 7.7mil as the above eg.

I noticed in your OP 25% direct Au shares, which is what I've doing after the income equities.
Do you still have 25% allocated?

 

Target of 25% was at preservation age which is 6.5 years away. Current directs are 40.5%

Need to add a few more mil to that figure, market and particularly directs have been good recently and nothing is being drawn yet. But size doesn’t matter, everything scales on percentages, difficulty comes when you don’t have enough capital to sustain what you want to live on and the solution to that is more efficient/effective accumulation or allocate more to savings so that you get to an adequately sized capital base.

As for the psychological. I feel completely at ease and that is because of the thought behind the strategy. Dividend liquidity goes into the cash allocation, total return calculation spits out withdrawal amount which will be direct debited from cash allocation into spending account each month. Then just rebalance to Strategic Asset Allocation if necessary. I have a bit of leeway built into asset allocations so that I can indulge my valuation bias when transactions needed, not enough leeway to hang myself though.

 

Thanks @dunno. I’ve always well understood the total return approach and withdrawal strategies to suit. But just found the dividend focus more comfortable.

Some would probably be surprised how much I do sell stocks to realise capital at times usually when there’s a large expense. And the reverse being I like to take advantage of tax loss harvesting when albeit infrequent opportunities present. Hence why I prefer ARG / AFI over AUI etc because the liquidity is dramatically better.

Fortunately we’re at that stage where it doesn’t really matter what we do going forward. However it’s time to add further diversity when opportunities present. And what interests me is certainly less dividend focused. Opportunity wise because I only buy listed funds nowadays as opposed to individual stocks more patience is required.

So whether it’s receiving dividends or realising capital especially from high growth listed funds I’ll take it with a smile on my face. My experience has been that unexpected large expenses sometimes arise good and bad. Hence I now take the view that when buying an asset there is always the possibility some or all of it may be realised in the future.

 

I just did some quick calcs.

RIP 25.%
CIP 56%
ASX 7.5% = income 90%(MOT 41%, PL8 29%,QRI 21% ,MXT 5%, GCI 5%) BTFD direct shares 10%
FX 6%
CSH 7.5%

The basic premise of buying equities for income was to move my cash holding to a higher income earning asset. With some more risk/volatility that comes with it.

Being an unemployed bum, like the power grid, my money grid needs base load income to adequately cover normal monthly usage and quick discharge storage for peak usage and events. Or storms and blackouts.

It's nice to earn 5% on cash and i think there's no need for FOMO and plenty time allocate.

 

@dunno, have you been tinkering again:


Bloody raining all the time so entertaining myself inside with a bit of investing research.

Very recently I’ve been giving concentration risk here and abroad some thought and how equities would behave in a major downturn accordingly?

Cap weighted midcap index holdings are less concentrated in AU and US than large caps and less risky than small caps so perhaps in a nasty correction / crash they might be less impacted but I don’t have historical correlation data?

However then there’s Vanguard’s active Value ETF VVLU whose sector allocation differs greatly from the Global cap weighted indexes (albeit heavy on fin services currently) and includes a noticeably higher percentage allocation to mid and small caps. Plus the value factor is potentially likely to shine during bear markets / crashes. Hence it has me wondering if Global value may offer greater protection than say US mid caps against concentration risk and bear market / crashes?

@dunno, @The Falcon and others care to comment.

 

Cash for a crash if you are interested in stabilizing your 'mark to market' wealth. If you can't handle major movements in your wealth balance, then don't look to solve the problem via with-in equity diversification - you need cash. That said movements in wealth balance because of panics don't necessarily affect lifetime purchasing power because they are transitory events and as such your consumption over these small-time frames is not large. But panic and change allocations beyond consumption needs in these bad times and you can inflict great harm upon yourself. Crashes are a behavioral challenge - you need to look within to see how much cash to hold to avoid reaching a behavioral breaking point.

Diversification with-in equities work on a slow time frame capturing different fundamental and flow characteristics over time to maximise spending potential. (this statement might be hard to interpret, so let me expand)

The more concentrated your holdings are the wider the distribution of potential outcomes will be. Long run the expected return will be the same as more diversified.




So for example in the above chart, sample C distribution of returns would represent a widely diversified portfolio, whilst sample A would represent a less diversified portfolio, sample B something in-between. All have the same expected equity premium on average but the less diversified can have much better or worse outcomes then diversified average in any 'unique' outcome. Each of us is living a unique investing outcome - we don't live long enough to rely on getting average. Diversification is about controlling how broad the potential distribution for that unique outcome can be.

(Note the above is for explanatory only, Market returns are skewed, not normally distributed but the principle remains the same.)

You can get the same narrowing of distributions with cash but it also reduces the average return. The beauty of narrowing with-in equity distribution is that you don't shift the average return expectation. High returns with narrower distributions are the ingredients to maximise lifetime purchasing outcomes because you are dealing with a smaller range of potential negative outcomes in the distribution which means you need to leave less on the table for potential bad outcomes which means you can spend more/with more confidence.

Summarizing: Diversification to protect yourself against behavioral response to 'short term' mark to market wealth changes and diversification to narrow 'long term' distribution of outcomes whilst maintaining expected return are two entirely different things. The first needs cash the second requires broad equity diversification.

If you want to diversify with-in equities for the slow long-term benefits of reducing range of distributions. I like adding anything that increases geographic, size, industry, currency diversification I also like cheap funds that have different methods of regenerating their holdings than straight MCW closed at the top funds. For example Small caps, mid caps, EX20 etc are open at the top to allow high valuation to migrate out. Equal weight regenerate via weightings and factors regenerates via voodoo (I mean sytematic analysis).

I hold VEU, IJH and VVLU (VAE is legacy which will one day be eliminated) to diversify my equity. My direct domestics are also an actively managed equity diversification, eventually I may fire current manager and completely roll that local active diversification into MIR and SOL.

 

Thanks @dunno. Was posting under the influence last night so didn’t quite get my thoughts in writing as clearly as I should have.

It’s a given that we will always have sufficient cash to get through any major market crashes and I know I won’t panic and sell under such circumstances. So I confused the issue by mentioning market crashes. It was this post of yours awhile back that is more in line with what continues to be at the back of my mind:

Being older and retired our time frame is less again and although our lifestyle is unlikely to be impacted by a major negative market event I feel any further investment in equities be aimed at further broadening our diversification to achieve the goal you stated in the following:

My issue is that given past bad habits particularly tinkering I’ve become probably a bit too obsessed with simplicity. Anything further I add nowadays I want to ensure it’s for keeps hence the effort that is going into the decision making process.

Our only global equity holding is VGS whereas we have three to four local equity holdings. Both IJH and VVLU to me look to be excellent global diversifiers but here’s me trying to limit any additional global equities diversification to a single ETF due to the desire for simplicity.

Oh the little battles that get played out in one’s mind. I blame the damn wet weather hence too much time on the IPad.

 

Terrible idea. Really did you have to bring that up again.

 

Without going on too long of a ramble as I've covered most of it before, here's some of my thoughts on it:

- By overweighting Oz shares you (and I) are already under weighting USA shares. So picking VVLU over IJH to diversify your global shares would further underweight USA shares. I personally believe that USA, despite its issues, will be the global powerhouse of capitalism for the remainder of my lifetime. I don't trust European governments as much as American ones to support capitalism - simple as that.
- IJH already has a value screen based on its S&P400 index. If you compare it to the Russell midcap index it's noticeably lower PER:

And here's USA small cap value vs IJH (USA version). Yes VVLU also includes other countries, but less than 1/3rd of it is. So it's still USA dominated.

- IJH has a much lower fee than VVLU, but in the grand scheme neither is that high. But it may still matter if you are on the fence.

So it seems with VVLU you might not be getting much more diversification than IJH, but at a higher fee. So you're paying that higher fee for some non-USA exposure. But do you want that?

This is not to say that VVLU is bad, I think if you're into global small cap value then it seems a great option. But don't agonise over the decision.

 

Thanks @Ross36. The household Chief Investment Officer could see the sense in US Mid Caps as discussed with her a week ago but upon presenting the option of adding VVLU earlier today well without going into detail it was a resounding NO. Currently sipping on an overproof rum and Coke Zero to recover from the scolding I received after recommending VVLU. I obviously wouldn’t make a good salesperson for Vanguard Value product.

 

Without getting into the merits of a particular fund, if you're investing only for yourself, I'd say do what you want. However, in the light of statistics regarding gender longevity, I'd say the CIO of the Nodrog family fortune fund has provided reasoned opinion.

 

He he. I get buried in detail whereas she is a big picture person. Plus she’s no stranger to the world of equity and bond funds having been the Risk Officer boss in charge of banking, Super and general insurance for a major listed insurer prior to retiring. Way smarter than I’ll ever be but since quitting work she hates anything to do with investing.

Even in regard to my suggestion of US mid caps I think she reluctantly agreed to the idea to shut me up but reminding me of my own previous words that index funds are self cleansing so current US concentration just like in the past will sort itself out as it has always done.

Just like my views there are potential flaws in hers but such is the way it is when one is not just investing for himself. Fortunately I’m still in one piece after forcing another investing discussion upon her. Will be some time before I dare try again.