Wednesday, 7 April 2021

Took up DS2's Computershare Renounceable Entitlement Offer

I had bought some CPU (Computershare) stock for DS2 when he was a child, so he currently has 250 CPU shares in his stock 'portfolio'. Computershare recently did an institutional fund raising round at $13.55 per share, and offered renounceable rights to current (as at 31 March) retail shareholders at a rate of one new share for every 8.8 shares held as at the record date. Any fractional entitlement is rounded up, so DS2 was entitled to purchase 29 shares for $13.55 each.

While this $13.55 offer price is not a huge discount to the current trading price (which is around $14.70), there isn't any brokerage cost, and if he didn't take up his entitlement the rights would be sold off and he would receive a small cash distribution (and his existing share value would be slightly diluted). Anyhow, as the stock portfolio of DS2 isn't worth as much as that of DS1 (due to me buying the shares for DS1 a few years earlier, so he benefited from a period of strong growth in the value of the shares I had bought him), I need to add a bit more to DS2's share portfolio to make it 'fair'. So I paid the $392.95 for these additional shares as a gift for DS2. His CPU share holding will now be 279 shares.

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Friday, 2 April 2021

Progress with completing Master of Financial Planning, and a delay

I managed to scrape in a 'high distinction' grade for the 'financial planning research project' course I did this past semester (Q1), with a mark of exactly 85% (the bare minimum mark required for an HD). Fortunately this means that my overall grade average is now 6.0 ('distinction') so I will only need to average a 'distinction' grade on the final two subjects to be able to graduate 'with distinction' ( or 'cum laude' if you want to sound posh). I expect I might only get a credit for the 'contemporary issues in taxation' course (the other tax course I did for this degree was a law-based course requiring legal arguments based on precedents, which I didn't find hugely interesting). so I'd better aim for getting an HD on the other course that I still have to do - the 'statement of advice research project'.

Unfortunately they've cancelled the running both of these courses in Q2, so I'll now have to do one in Q3 and the other in Q4, so I won't get to finish off this masters degree until the end of the year. At which time I'll be able to apply to enrol as a PhD candidate - providing they accept my previous bit and pieces of research coursework done previously (and one paper I co-authored thirty years ago!) as sufficient prior 'research training'. Otherwise I would have to enrol in an MRes degree first, which would take another four years to complete part-time (and cost buckets of money), so I probably wouldn't bother.

As I'll have no other courses to do in Q2, I'll focus on finishing off the two specialist courses in 'self-managed superannuation funds' and 'margin lending' that I've nearly completed with IIT. And also work through the four subjects required for the Advance Diploma in Financial Planning that I enrolled in a while ago, but so far haven't got around to doing much of.

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Thursday, 1 April 2021

Net Worth: MAR 2021

My monthly NW estimate has been updated in NetWorthShare for the end of March. 

Stocks and fund investments gained a bit overall this month, although it was quite a choppy month with concerns about the inflationary impacts of all the stimulus measures vying with the economic stimulus impacts of all the stimulus measures. I used $20K from my 'portfolio loan' line-of-credit to invest in Microequities Asset Management's Value Income Fund, which had no net impact on my NW. Overall my 'stock portfolio' increased by $6,859 (2.09%) to $334,956.

Our estimated house price for March (my half) increased by $10,365 (1.23%) to $852,476. The strength in the housing market continues to increase, but is concentrated in certain suburbs/regions and more in free-standing homes than units/apartments. Not sure how things will be looking by the time my 'off the plan' apartment  construction is completed and I have to 'settle' the purchase in Q2 2023. 

The value of my retirement savings rose significantly during March, to $1,348,789 (up $41,118 or 3.14%). Hopefully I will be able to reach the TBC (currently $1.6m but increasing to $1.7m from 1 July this year) by the time I turn 65 and can transfer up to the TBC out of accumulation phase (where the tax rate is 15%) to retirement phase (where the tax rate is 0%) without having to 'retire'. Any amounts above the TBC will remain in accumulation phase. Part of the TBC might be used to fund the purchase of a deferred annuity to insure against longevity risk.

Overall, my NW reached $2,834,372 by the end of March - up by a healthy $58,617 (2.11%).

Months where my NW increases by almost my annual take-home pay seem quite surreal. But it isn't so much fun when the movement is in the other direction (like in 2008). Looking at the long term chart helps keep the ups and downs in perspective.

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End of MAR 2021 "12% solution" portfolio changes

For the end of March the emailed trading signal was to invest 60% in MDY (SPDR S&P MidCap 400 Index Fund) and 40% in JNK. This is a change in asset allocation from last month so I will need to close out my QQQ position and buy MDY when US trading opens (late tonight in my time zone).

My current account balance is $11,927.81 which represents a cumulative return of 13.94% since AUG 2020 when I commenced this portfolio.

Due to timing differences and fees (and the inclusion of a small holding in ASIA ETF that I had in my IG trading account before adding the "12% portfolio" investments) my portfolio performance won't track exactly against the standard "12% solution" portfolio. According to the monthly newsletter, the 2020 performance for this model was +40.6% and for 2021 YTD performance is now +7.9%.

As I funded this portfolio using my St George Portfolio Loan, my target performance over the long term (10+ years) is for the returns (after admin fees and trading costs) to exceed the interest paid (after factoring tax credit) on the Portfolio Loan.

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Wednesday, 31 March 2021

Thinking about bullion

I've been watching a few youtube videos with interviews of the likes of Ray Dalio, Harry Dent etc. predicting inflation/hyperinflation and/or stock market crashes/lost decades (no real return) as a result of the monetization of the vast amounts of stimulus spending that has occurred around the globe. If stocks and bonds do poorly as interest rates start to move upwards, and returns on cash remain less than inflation, alternatives such as gold (or silver) might be worth including in one's portfolio as a hedge against inflation.

The problem I have with 'investing' in bullion is that it provides no income or dividends (it actually costs money due to buy/sell spread, fabrication costs, and possibly holding costs and insurance) and while it should provide a hedge against inflation in the long run (as the cost of production sets some sort of floor price, and production costs increase with inflation), the short and intermediate price movements are prone to investor sentiment pushing prices too and high or too low over periods lasting decades. I still remember the remarkable silver bubble that occurred when the Hunt brothers tried to corner the market in 1980.

That said, putting a small fraction of my entire NW into gold or silver may provide some diversification benefit. I thought I already had some gold 1/10th bullion coins lying around that I'd bought from the Perth Mint several years ago. I remember I bought about ten of them and gave a couple away as presents. So I should still have 8 or so -- but I only found one of these tiny, encapsulated gold coins sitting in the box where I keep my silver bullion coins (4 one-ounce coins and one 2-ounce coin). I had already looked in other likely storage places, but so far haven't found them. One of the big problems with keeping physical gold!

So I'm wondering what form of investment in gold bullion (as opposed to gold mining stocks, which are generally correlated with the gold price) I might make. I could order gold coins or bars from Perth Mint and store them, but the production costs mean you pay considerably more than the 'spot price'. For example, 1-ounce gold coins cost 5.0% above spot price, 1-ounce minted bars cost 2.1% premium to the spot price, and cast 1-ounce gold bars cost 1.8% above the spot price. Silver is even worse, with physical coins and bars of 1 to 10 ounces costing around 20-30% above the spot price per ounce!

As an alternative to physical bullion, I could buy a gold CFD. One benefit of that would be leverage, but then again I'd be paying a buy/sell spread and also a daily margin interest cost. Not a great idea for an asset that doesn't produce any income stream.

So, I've decided to open a depository account with Perth Mint. I'll be able to transfer a small amount of money into the account on a regular basis, and then go online to buy either gold or silver at the spot price plus a small fee. I'll probably choose to hold any bullion in the 'unallocated pool' which is backed by physical metal, but in the form of gold or silver sitting in the mint vaults as part of their production process. That way the purchase fee will be 0.5% and there won't be any holding/storage costs. If I ever want to take physical delivery, I'd have to transfer my holding into the 'allocated pool' and then order fabricated bars or bullion coins. I've yet to decide how much money I might regular put into the depository account to make gold purchases with. At the moment the gold price (around $2,200/oz in AUD) has been dropping a bit from its recent peak 9 months or so ago, and is back down to where it started 2020. It could continue to fall back to the $1,600 level it was sitting at during 2017-2019. This is still a lot higher than it was back in 2000, when the price was only $500 an ounce or thereabouts. With inflation around 2.5% during the past twenty years, the price only needed to increase to around $820 to have kept pace with inflation. Then again, the gold price had sat around $500/oz during the 1990s, so it is hard to pick a year that represents a 'reasonable' price for gold. Looking at the inflation adjusted gold price for the past 100 years, it doesn't look particularly 'cheap' at the moment though:

While gold was a good store of wealth during 1929-1935, it was an extremely poor investment between 1935-1970, and between 1980-2000.

Investing a tiny amount in gold is hardly going to have any material effect on the overall performance of my portfolio, and investing a larger amount would be a move from investing towards speculation.

I'll probably just transfer $250/mo into the depository account and buy a regular small quantity to dollar cost average a small bullion holding over several years.

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Sunday, 28 March 2021

Australian Green's Party will make theft their official party policy to take to the next election

Apparently the existing top marginal income tax rate of 45%, plus a 2% medicare levy, plus a 1.5% medicare levy surcharge (if taxpayer does not have private medical insurance) i.e. a total of up to 48.5% tax on high level of income isn't enough taxation for the Australia Greens Party. Plus, of course, GST (10%) on most purchases when you spend the after-tax money you have left after paying income taxes. Plus, miscellaneous other taxes and charges out of the same 'after-tax' income...

So, the Greens Party has announced a new policy of a wealth tax of 6% of the wealth (each year? - the details have not been published yet, just a 'thought bubble') on Australia's wealthiest 122 individuals (not sure how they will work out who has exactly what wealth, as the ATO does not collect wealth data, only income - perhaps they will rely on the 'rich list' published by a magazine? That will be a fun court case for the ATO).

If applied, a 6% annual 'wealth tax' would effectively confiscate 100% of the average after-tax return generated on these assets. Some years the after-income-tax ROI would be more than 6%, but many years it would be less than 6%. Effectively transferring ALL the benefit of having these assets from the individual to the state. Which is effectively theft. Just imagine if financial planners or funds managers were charging 6% annual fee on AUM!

The NZ Greens Party has a more 'reasonable' wealth tax policy - they only propose a 1% wealth tax on anyone with a net worth above $1 million, and 2% wealth tax on those with more than $2 million net worth, so would 'only' be about 1/3 of real returns, but apply at a much lower threshold. Indeed 305,000 of New Zealand's 4.9 million adults have a NW over $1MM - which is around 6.2% of the adult population of NZ.

IMHO any wealth tax, inheritance tax, or other form of government confiscation of wealth is unfair, for the simple reason that the income used to accumulate wealth has already been taxed (at up to ~50% for high incomes when the medicare levy and MLS are included). Having already taken about half of a high income earning individual's income via income tax (or 30% if they make use of trusts to reduce the tax rate to that of company tax), to then take ~100% of the after tax ROI on whatever the individual invests is completely unfair. The fact that this will only apply to a small fraction of the population is beside the point - discrimination against minorities is never OK, be it migrants, LBGTQIA, women, children, the elderly, the rich, the poor, or whoever.

Of course the Greens have no chance of winning government in their own right (they only have one lower house seat at the moment - their best result ever), but are free to propose whatever loony ultra-left policies that will appeal to the neo-communist 7%-11% of voters that consistently give them a couple of Senate seats in most States. They currently have 1/151 house of representative seats (as you have to end up with >50% of the vote after preferences to win an electorates seat), but have 9/76 Senate seats (12% of Senate seats will only around 10% of the vote), so can hold the 'balance of power' in the Senate when Labor wins the lower house, so can have a disproportionate impact on government policy. One way to reduce the influence of the Greens would be for the major parties to be more co-operative in the Senate, regardless of which party happens to have won the last general election and have formed government. Unfortunately, the job of opposition is not to seen to be to challenge and improve government legislation, but simply to score political points and improve their own prospects of winning the next election.

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Wednesday, 24 March 2021

Looking into purchasing a deferred lifetime annuity to compliment superannuation account-based pension

I'm fortunate that both my parents are still alive (aged 89 and 85) and reasonably healthy, I also have one great-grand Aunt who is still alive at age 105 (but suffering dementia in recent years), and my paternal grandparents both lived to 94 years of age. So, although the life expectancy of an Australian male my age is currently 85.56, there is a reasonable chance I could still be around in my nineties (especially if I lose my excess weight and exercise more), or possibly even make it to 100. There might even be some novel medical treatments that become available during the next four decades that extend healthy lifespan more than the 0.2% annual increase that occurred in recent years (2018-2020).

Therefore, although I'm currently on track to reach the superannuation transfer balance cap by the time I 'retire' (transition from my current full-time employment to working part-time as a financial planner), which should provide sufficient retirement income to maintain my present lifestyle indefinitely, there is always 'longevity risk' that I may exhaust my retirement savings before I die, especially if sequencing risk has an adverse impact (a few 'bad' years at the start of your retirement have a much greater impact that similar 'bad' years occurring towards the end of your draw-down period, even if the average ROI is identical).

One can however 'insure' against longevity risk by purchasing a lifetime annuity, that will provide a fixed income stream until your death. Of course the net amounts expected to be paid out have to match the premiums paid in, plus investment returns, minus the providers costs and a profit margin. Therefore, purchasing an immediate annuity (that starts making payments straight away) provides quite a low ROI (around 4% pa, which is quite poor considering part of that is simply the return of your principal). But it is also possible to purchase a deferred annuity using superannuation money (once you reach retirement) that doesn't start to provide an income stream (hence is 'deferred') for a chosen number of years.

If the deferral period is quite low (so you are almost certain to receive income for a number of years) or the annuity has a 'death benefit' (life insurance component), or can be withdrawn early (get your money back), or will continue to make payments to a surviving spouse, then the income stream is also reasonably modest. However, if you choose the option to have no death benefit, no option to withdraw, and no reversionary beneficiary, then the amount of income you may receive (especially if it is deferred beyond the average life expectancy period) can be quite high.

For example, at age 60 I could purchase (if I was retired) a $10,000 deferred annuity with a 35 year deferral period (i.e. start paying out at age 95) and no death benefit, withdrawal option, or surviving spouse benefit that would pay $8,225 pa indefinitely. Similarly if I retire at age 65 I could then purchase a $10,000 deferred annuity with 30 year deferral period (still commencing payments only if I live to 95) of about $8,775 pa. So, as long as I don't receive any income unless I live past 95, it makes little difference whether I purchase the deferred annuity now, or in 5 years time.

So, although there is a risk that you might die too soon to receive ANY payment from a deferred annuity (if it doesn't have a death benefit), it does provide a mechanism to ensure you have a reliable income stream in the event that you live a lot longer than you expect.

For example, if I rollover $100K of my TBC into a deferred annuity that doesn't start paying until I reach 95, I would then receive about $85,000 of tax free income from the annuity each year until I die. If I happen to live as long as my great-grand Aunt the total return could be up to $850K on a $100K 'investment'. The annuity payments are increased in line with inflation (cpi), so those figures are all in current $ terms. This isn't quite as much as you *might* end up with by simply leaving the $100K in retirement-phase superannuation *if* you achieved a consistent average 5-6% real ROI, but the difference is basically the cost of insuring against sequencing risk.

Of course if I die before reaching 95 then my $100K will have gone towards funding the income streams of other annuants that live long enough to collect. But I won't be around to be upset by this!

Overall, using $100K (about 6%) of my $1.7m or $1.8m TBC to purchase a deferred annuity looks quite a good option to ensure I have a guaranteed (as long as the insurance company stays in business) income stream if I live to 95+, especially if investment returns during the next 40 years are worse than average.

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Wednesday, 10 March 2021

Looks like I stopped shorting Tesla too soon ;(

It looks that my theory about Tesla being way overpriced was correct, but my decision to stop trading (shorting) Tesla may have been premature. Oh well, at least I made a little bit of money while I was trading.

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Thursday, 4 March 2021

Invested in Microequities Value Income Fund

I've been receiving regular promotional emails from Microequities Asset Management since 2017 when I first responded to an ad about this fund manager via Morningstar. I decided to take another look at their fund offerings, as I was willing to put $10-$20K into one of their funds as small, value equities can often perform well compared to the overall market index, but it is a lot of work to research and select potential winners (so I wouldn't try to pick individual stocks myself).

I found out (again) that their funds are 'wholesale' and normally only available to 'professional' investors with a minimum investment of $100K. Probably why I didn't invest back in 2017!

However, after abandoning my online application when I came to the minimum investment requirement, I was contacted by one of their relationship managers who advised that they had recently started up a new retail fund with a $20K minimum initial investment. So I decided to invest the minimum amount into their retail 'Value Income Fund' via my portfolio loan.

Being a small, boutique fund manager they charge a quite hefty fee of 1.3% PLUS a 'performance fee' of 20.5% of any return above the benchmark S&P/ASX Emerging Company Accumulation Index. There is also a potential liquidity issue, as the PDS notes that redemptions may be suspended or delayed if market conditions result in redemption requests of more than 5%-10% of the fund in one day.

Overall this is a fairly costly and high risk investment, so I wouldn't risk a large fraction of my portfolio on this investment. But $20K is only 0.72% of my NW, so I can afford to make a modest allocation to this investment. The retail fund has only been operating since Feb 2019, so it doesn't have much historic performance data, but it is expected to follow a similar strategy to their wholesale high income value fund, which has averaged a compound rate of return of 11.41% since 2012. As long as the average return is above the interest rate charged on my portfolio loan (currently 4.98% pa) I will do OK. We'll see how things turn out over the next 5-10 years.

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Tuesday, 2 March 2021

Stopped shorting Tesla and switched from buying Alphabet to ASX200 CFDs

My recent brief foray into day trading was profitable overall, making some net gains by shorting Tesla (TSLA) while losing a little bit buying alphabet (GOOGL) just before it dipped in price. I'm not sure if Tesla will continue to weaken towards a more realistic p/e ratio or if the previous enthusiasm for this car-maker-priced-as-if-it-were-a-tech-company returns for a while. Google may well continue to rise (at least until there is an overall market correction), but it has also seen incredible gains over the past last March, so could just as easily drop back to 1700 than continue to rise beyond 2000. I also only started buying alphabet because it has a tiny fraction of its value tied up in SpaceX - which is a pretty stupid reason to buy into a stock when you think about it.

Overall I've decided to stop playing roulette day trading for a while, and instead have just bought a small long position in the ASX200 via the purchase of 50 iShares MSCI Australia Index Fund CFDs at $25.780 on 26 Feb. I'm currently down -20.50 USD on this trade (-0.4 per CFD) due to the market sell-off at the end of last week, but as I have large trailing stop loss set at -4 points (currently set at $21.78), the market would have to drop 15% for the position to be closed out. I'll just leave the long position in place and hope to gain from any long term increase in the ASX200 index over the next few years.

The 50 CFDs had a position value of $1289 USD, but I think the required margin is only 7.5% (A$118.63), so the minimum trade commission of $15USD was a quite hefty impost (the commission rate is only 1c per CFD, but the minimum commission makes small trades uneconomical). So this sort of trade only makes sense if done as a buy-and-hold highly geared strategy, unless you are trading a large dollar amount. Daily interest charged on this small open position appears to be around A$0.11 per day.

So if the Australian share market rose 10% over 12 months, I would make a gain of around A$160 and have been charged around $40 in interest charges. Given the large minimum commission for this trade and the low ratio of required margin to my CityIndex account balance (currently around A$1,600) I probably should have traded 200 or 250 CFDs rather than 50. I'll probably use the 'spare' capital sitting in this account for some further day trading if and when an obvious opportunity arises.

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