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Tuesday, 22 September 2020

2/3 through my Masters in Financial Planning degree

Last Friday I got my result for the subject I did in Q3 (Portfolio Management) - I got another Distinction grade, which was actually a bit disappointing as I need to pick up another HD this year to get on the Dean's List again in 2020 (I recently got the notification that I made it onto the 2019 Dean's List), and keep on track to graduate "with Distinction" next year. Unfortunately I only got a Credit for the subject I did in Q1, so I'll need to get another HD during 2020 to offset that result.

I'd gotten about 88% for the assignments and mid-term quiz (collectively worth about 55% of the course mark), so I must have only received a 'credit' grade on the final exam. Not entirely surprising as one of the six questions was about a theory we'd covered at the start of the course and I'd forgotten one particular definition (which was basically the question, worth about 20% of the exam!). There's nothing more annoying than sitting in an exam knowing that you've read about a particular piece of terminology, but not being able to recall exactly what the definition was. I was actually a bit surprised to find that question was even in the exam, as the final was supposed to only be on material covered in modules 5-9 of the course (as modules 1-4 were covered in the mid-term exam, and that definition was covered in module 2). I also probably didn't get full marks on a calculation question as I didn't have a calculator available during the online exam. Although the uni subject and exam guides had both said that any "non-programmable" calculator could be used in the exam, when I logged in with ProctorU to sit the online exam they told me that according to their exam instructions only a "financial" calculator was allowed, so I couldn't use my standard scientific calculator! I emailed and tried phoning the lecturer to clarify this, but couldn't get hold of him before the exam was due to start, so I had to sit the exam sans calculator. After I logged out of the exam session I was able to check my emails, and the lecturer had meanwhile responded that it would be fine to use by scientific calculator - D'Oh!

I was going to lodge a 'misadventure' form, but they all required supporting letters for broken legs, illness etc. and there was no form that seemed to cover "total stuff-up by the university and ProctorU" as an option ;)

Anyhow, I've decided to revert to only doing one subject in Q4 (I've been doing the normal one subject workload as a part-time student so far, but had initially enrolled in two subject for Q4 with the idea of finishing the degree by the middle of next year) as that will make it more likely that I can get an HD in Q4. The Q4 subject is 'Insurance' so I already know most of the material from my DFP and CPD studies, but the trick will be to put enough effort in to actually get an HD.

My main goals for the next few months are to: complete the Q4 subject with an HD grade (so I get onto the Dean's List for 2020 and get my GPA back up to the 6.0 minimum required to graduate "with Distinction" next year), finish off the two 'specialist' financial planning courses I'm doing (in Margin Lending and SMSF), and get one of the four ADFP modules completed by the end of this year. It would also be nice to get a paying financial planning client by the end of this year.

Next year's goals will be to: finish the MFP degree, finish the ADFP qualification, do the required TPB course to be registered as a financial (tax) advisor, and do the course required for CFP (I'll get a credit for three of the four required CFP courses for completing the MFP degree). I'll also apply to enrol as a part-time PhD student at WSU when I've completed the Masters degree. Looks like 2021 will be quite a busy year (aside from my full-time job).

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$50 bonus available to new accounts with peer-to-peer lender Plenti

I've invested a few thousand dollars with the Australian online peer-to-peer lender Plenti (previously known as RateSetter), mostly just to see for myself how peer-to-peer lending works. They currently are offering a $50 bonus to new investors that invest $1000 in the five year lending market and setup their account using this offer link. Their five year lending is currently offering investors around 6.3% pa interest rate.

Disclosure: I will also get a $50 bonus if anyone joins up using that link and invests $1000 in the five year lending market. Make sure you read the PDS. I'm not providing any advice about this product - I've invested a relatively small amount myself, but I can afford to loose it.

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Tuesday, 1 September 2020

Net Worth: AUG 2020

My monthly Net Worth calculation has been updated in NetWorthShare as at the end of August. I've included a couple of miscellaneous accounts that I hadn't previously bothered including in the monthly calculations - a couple of savings accounts, the value of the IG and CityIndex share and CFD trading accounts, and my foreign share holding - to make the NW calculation more complete. However I am still recording the value of the Lake House 'at book cost' and the off-the-plan investment unit at 'cost' (deposit and stamp duty paid to date). My net worth figure increased by $51,254 (1.97%) overall, to reach $2,653,320.

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September "12% solution" portfolio changes

No trades required for the start of September, as the emailed recommendation is the same as last month: 60% QQQ and 40% JNK.

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Thursday, 27 August 2020

Covid has apparently caused pet inflation

I'd read about a surge in interest in having a pet due to Covid-19 impacts on human behaviour (lots of lockdowns, and increased WFH (work from home) even where lockdowns were not in place) creating more 'at home' time and boredom - which combined to make the thought of having a pet more appealing, and prices to start to increase for dogs and other pets.

So I wasn't surprised to find that when I searched online for a free female guinea pig there were none available, with prices now in the range of A$30-$50+.

Last time I had looked at guinea pig prices several years ago there were lots being given away (some even came with a free hutch). We had picked up a couple of female guinea pigs (a 'middle aged' one aged around 4 years old and her daughter aged 4-6 months old) for free, and we had slowly transitioned from keeping them in a hutch (with daily outings to an enclosed grass area) to letting them go 'free range' around our grassed play area and front garden. They had plenty of hedge plants to hide amongst when they weren't grazing on the front garden lawn.

The 'mother' guinea pig had been enjoying her 'golden years' in our front garden, having long naps in the winter sunshine while sheltered under some succulents this year. She had gotten a lot slower moving than her daughter but would still come out for a piece of carrot or celery 'treat' on most days. Then she stopped appearing for the morning feed for the past two days and we couldn't find her despite looking in all the usual hiding places. This morning DW found her peacefully 'at rest' in the front rockery, where I'd looked yesterday. So she must have passed away last night or perhaps this morning while having a final sun bake.

It was a bit of a relief to find the remains, as DW was worried that the guinea pig might had been snatched by a cat and met a grisly end. The 'piggy' is now buried in the front rockery with a pebble marking the resting place (and to hopefully avoid it being dug up by a passing scavenger). I'll keep an eye out for a young free female guinea pig to keep the 'daughter' company - there are still a few free male ones available, but its best not to keep a mixed pair (unless you want to end up with lots of surplus guinea pigs to give away).

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Tuesday, 25 August 2020

"12% solution" portfolio update

I didn't get around to checking my "12% solution" portfolio on Saturday mornings for the past two weeks, so here's a current snapshot of how things are going so far compared to my last review.

Portfolio as at Mon 24 AUG 2020:                   Value       Profit/Loss

50 Betashares Asia Technology Tigers ETF A$   488.50   + A$    63.00

34 Proshares UltraPro QQQ (All Sessions)       US$ 4,920.48   +US$   702.78

27 SPDR Barclays High Yield Bond ETF           US$ 2,853.90   +US$     7.02

Total positions                                 A$11,351.94    +A$ 1,058.47

Cash                                            A$  - 26.73

Portfolio                                       A$11,323.85

So far it has been an amazing initial performance, but that is obviously just a fluke of timing. It will mean that my 3, 5 and 10 year performance figures for this portfolio will be much higher than if I'd  started trading just a few weeks later. The negative cash balance is due to a quarterly A$50 account keeping fee having been debited (I forgot about that fee when I was deciding to trade the "12% solution" portfolio using my IG account!).

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Tuesday, 18 August 2020

Every cloud has a silver lining

Apparently the Covid-19 pandemic has boosted the wealth of the top 12 billionaires in the US by 40% to a total of more than US$1 trillion. As might be expected, this is mostly due to them having large stakes in online services and retail channels that have received a major boost during the pandemic. The 'top 12' list is:

1. Amazon founder Jeff Bezos $189.4 B USD

2. Microsoft founder Bill Gates $114 B USD

3. Facebook founder Mark Zuckerberg $95.5 B USD

4. Berkshire Hathaway CEO Warren Buffett $80 B USD

5. Tesla founder Elon Musk $73 B USD

6. Former microsoft CEO Steve Ballmer $71 B USD

7. Businessman and investor Larry Ellison $70.9 B  USD

8. Google co-founder Larry Page $67.4 B USD

9. Google co-founder Sergey Brin $65.6 B USD

10. Walmart heiress Alice Walton $62.5 B USD

11. Walmart heir Jim Walton $62.3 B USD

12. Walmart heir Rob Walton $62 B USD

Unfortunately this vast boost to wealth at the top end has occurred while thousands of people are dying and millions of people losing their jobs due to Covid-19.

Of course Covid-19 hasn't helped all the rich get richer - those with fortunes tied up in airlines, travel agents, hotels, and restaurant chains have probably taken a huge hit due to the pandemic.

And even if you are 'working class' the impact of the pandemic on your finances has depended on who you work for - I've been lucky in that my job seems reasonably secure, I haven't had a pay cut or a reduction in hours, and I've actually enjoyed the transition to working from home for the past several months.

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Saturday, 8 August 2020

Weekly "12% solution" portfolio performance update

Saturday morning and the AU and US markets are closed, so I can do a weekly post on how my implementation of the "12% solution" portfolio is performing in my IG trading account. As mentioned previously, I already had a few hundred dollars in the IG trading account I opened to get some 'free' Qantas Frequent Flyer points last year, and that money is invested in the ASIA Technology Tigers ETF as a long position (ie. I'll just let it sit there for 5+ years and see how it goes). The other $10,000 I recently added to my IG account using funds from my portfolio (home equity) loan to trade each month per the recommendations given in the end-of-month email updates from David Alan Carter per his "12% solution" trading methodology.

Portfolio as at Sat 08 AUG 2020:                   Value       Profit/Loss

50 Betashares Asia Technology Tigers ETF A$   475.00   + A$    49.50

34 Proshares UltraPro QQQ (All Sessions)       US$ 4,319.02   +US$   101.32

27 SPDR Barclays High Yield Bond ETF           US$ 2,858.76   +US$    11.88

Total positions                                 A$10,503.76    +A$   207.66

Cash                                            A$    23.37

Portfolio                                       A$10,527.03

This week was all sunshine and puppies, but I won't be making >1% gain every week ;)

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Wednesday, 5 August 2020

August 12% solution portfolio trades and status

The A$10k I transferred from my portfolio loan into my IG trading account on the weekend arrived in my IG account today. The markets required for the "12% solution" trades opened at 11:30pm Sydney time and I bought approximately A$6,000 (60%) QQQ and A$4,000 (40%) JNK per the August asset allocation provided in the monthly email I received.

Each month I'll make any required trade(s) to adjust my holdings to the recommended position, although it won't be exactly per the model due to timing of the trades, and the fact that I can only buy a whole number of shares (so there will be a small cash residual balance).

Trades executed for August:

04 Aug 2020 23:35:45 BUY 34 QQQ A$5961.31

04 Aug 2020 23:37:56 BUY 27 JNK A$4024.27

Residual Cash balance: A23.27

Current IG Portfolio:

34 QQQ ProShares UltraPro QQQ (All Sessions)

27 JNK SPDR Barclays High Yield Bond ETF

50 ASIA Betashares Capital Ltd - Asia Technology Tigers Etf

Having this trading portfolio in place will give me something to play with once a month while my major investments in Index Funds within my superannuation sit on 'autopilot' and slowly compound. And the IG 'workspace' display looks quite cool with all the charts and flashing price changes on every 'tick' ;)

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Tuesday, 4 August 2020

Net Worth: JUL 2020

Surprisingly the estimated valuation for our home, based on sales data for our suburb, increased during the month. This is contrary to the general trend in residential real estate prices across Sydney, so I wouldn't be surprised to see a decrease next month.

My retirement savings (SMSF account balance estimate and company super account balance) also increased substantially during the past month - mostly due to a generally positive share market during July, plus the usual monthly salary sacrifice and SGL contributions.

The stocks figure is the usual net amount of my margin loan portfolio assets minus the margin loan balances and my portfolio loan balance, but I started including the balances of a couple of minor share trading accounts (as I will be putting $10K into the IG account to trade the '12% solution' portfolio model) and a few cash accounts that I previously hadn't bothered including in my monthly NW spreadsheet calculations. Overall this added around $11,000 to the net 'Stocks' figure. On the other hand, I am funding the $1,500 monthly 'running costs' for my financial planning business from the portfolio loan, and also paying my quarterly uni fees for the MFinPlan degree out of that account, so the 'Stocks' figure isn't a pure reflection of the movements in my stock portfolio.

Overall my NW increased by $35,993 (1.40%) to $2.602m which I think is probably another 'record high' for me.

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Monday, 3 August 2020

Apology to the Walking Dead (and all disaster movie) writers - people really do act more stupidly during disasters than I believed possible

As a closet 'Prepper-lite' (I have an ultraviolet water purifier, some GM detectors and a few packets of iodine tablets sitting in a box - 'just in case'. If you thought it was hard to find toilet paper during a pandemic, just wait and try to get hold of a dosimeter after a nuclear accident or when WWIII looks likely!) I've always enjoyed watching disaster movies and series such as The Walking Dead and imaged how I'd deal with such life-or-death situations. (Of course the reality is I'd probably be the first one to come to a grisly end, but that doesn't stop me being an arm-chair critic and scoffing at how unbelievably stupid the behavior of people is portrayed in these movies and TV series.)

I've watched in disbelief when characters are portrayed as behaving as if everything is fine the minute an immediate threat is no longer apparent - examples that come to mind are the young lady in The Day After who insisted in running out of the relative safety of the basement shelter and into fields contaminated with lethal fallout just because she'd been cooped up for a few days and the weather outside looked fine (just ignore all the dead livestock lying on the ground), or the myriad examples in The Walking Dead series where the group has heroically hacked and slashed their way through legions of zombies to get to a place of relative safety - only to then chillax as if everything was back to normal if there is no longer an immediate threat.

I had put this all down to screen writers taking artistic licence with the stupidity of the average human being - surely no-one could act with such self-destructive nonchalance is a real disaster situation?

But, having watching people in the US and Australia rub shoulders at concerts or when queuing up to get into a pub in the midst of an out-of-control pandemic - when there is active community spread of a virus that kills about 1% of the infected (and more if you're over 50), and to which no-one (that hasn't already survived it) has any immunity - I now believe that, yes, people really can act that idiotic during a bona fide disaster.

So, my apologies to all disaster movie and TV series writers - your scripts aren't as woefully unrealistic as I had assumed them to be. Some people are just plain dumb, inconsiderate, live in denial, or use 'magical thinking' as the basis for their decision making. Go figure.

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Sunday, 2 August 2020

Implementing the "12% solution" trading system on a small ($10K) portfolio as an experiment

A few years ago I bought an eBook by David Alan Carter called "The 12% solution" (the Kindle edition only costs about five bucks, so its good value) and was interested in his method of tilting a simple asset allocation each month according to his calculated trading signals. Having bought the book I get a free monthly email at the end of each month telling me what asset allocation the method has decided is 'best'. The assumption being that you trade asap (the next trading day) to move your portfolio allocation to the new recommended mix.

I was going to start trading a test portfolio using these monthly trading recommendations a few years ago on my CitiIndex CFD tradining account, but discovered that not all the assets used in the 12% portfolio were available to trade. So I put the idea on the back burner.

When I received this month's email, showing that the '12% solution" portfolio 2020YTD performance is +18.1% and for 2019 was +12.4%, I decided I might try to test this methodology on a small scale using $10,000 of borrowed funds (from my St George 'portfolio loan' account, currently charging 4.98% pa interest, which is tax deductible as I use it for income producing investments) and trading on my newly opened IG share trading account. The IG account currently only has a balance of $468.85 and is invested in the Asian Tigers technology fund (code: ASIA). I'll use the $10,000 I've added to the IG account to make the recommended investments: 60% QQQ + 40% JNK.

Trading using the IG account costs $8 per Australian share trade (if 0-2 trades were made the previous month), and I saw a mention that US share trades on the IG platform cost $0 (not sure if that is correct - there are probably some other costs involved). With only $10,000 invested, an annual return of 12%, minus the 5% loan interest costs, would yield an expected net 7% return ($700 pa). Making an average of two trades per month (assuming I have to sell one holding and buy another most months), would cost up to $16 per month, or $192 pa. This would mean that I would mostly be making money for St George (interest) and IG (trade fees), and I might end up with a taxable profit of only $508 pa, which is hardly worth the effort and extra work when filing my annual tax returns.

So I might reduce trading frequency to every second month, which would halve the trading costs (Carter apparently tested different trading periods, such as bi-monthly or quarterly, and decided that the monthly trading cycle provided the best returns, but with a small account balance, frequent trades will have a larger drag on performance). What impact trading every second month will have on the portfolio performance is unknown. Trading every second month will obviously produce somewhat different results, but, as the trading signals are a 'point in time' calculation of the 'best' allocation to make, there is no reason why it should be much worse to hold that allocation for two months rather than just one month before rebalancing to the current recommendation.

We'll see how it goes. I might increase the amount invested (which will reduce the relative impact of the trading fees) if actual results go according to 'theory' for the next year or two.

In terms of how I've mapped the recommended ETFs in the "12% solution" portfolio to what is available to trade in the IG platform, I decided to use the following:

"12% solution" ETF list <> [ IG share trading platform ]

IWM - iShares Russell 2000 Index Fund <> [iShares Russell 2000 ETF]

MDY - SPDR S&P MidCap 400 Index Fund <> [SPDR S&P 200 Mid Cap Growth ETF]

QQQ - PowerShares Nasdaq-100 Index Fund <> [ProShares Ultra QQQ]

SPY - SPDR S&P 500 Index Fund <> [SPDR S&P 500 ETF Trust (All Sessions)]

JNK - SPDR Barclays High-Yield Corporate Bond Fund <> [SPDR Barclays High Yield Bond ETF]

TLT - iShares 20+ Year Long-Term Treasury Bond Fund <> [iShares 20+ Year Treasury Bond ETF]

CASH - cash or the SHY 1-3 Year Treasury Bond ETF <> Cash or [iShares 2-3 Year Treasury Bond ETF]

For many of the codes provided for the "12% solution" there were multiple similar investments listed for trading in the IG platform, so I've picked whichever one seems closest to the correct description and put that on a watch list in the IG platform so I can buy and sell the chosen units each month.

There will probably be some additional complications when I try to implement this portfolio within my IG account - for example the buy costs may not allow the exact percentage allocation recommended by purchased, so I may have a small residue sitting in 'cash' each month (earning 0% but costing me 5%pa in interest!)

The current unit buy prices are:

IWM  $ 147.61
MDY  $   57.08
QQQ  $ 169.68
SPY  $ 327.03
JNK  $ 106.10
TLT  $ 171.00
SHY  $   86.63

As soon as the $10,000 I've transferred from my St George Portfolio Loan account is available in my IG account I'll try placing buy orders for 35.36 units ($6,000) of 'QQQ' and 37.70 units ($4,000) of JNK.

As a benchmark I'll track my actual IG account balance each month vs. how an equal-value allocation to the seven listed securities performs. I'll also compare how my actual implementation performs compared to the performance reported for the 'ideal' implementation of the "12% solution" that is reported in the monthly email notifications.

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Friday, 31 July 2020

What really makes FI/RE work?

FIRE (Financial Independence - Retire Early) is a 'popular movement' of people (often Millennials) who are sick of the 'rat race' and consumerism, and wish to achieve financial independence (not relying on a pay check, but instead having a sufficient income stream from investments to either work as they choose, or even do a traditional 'retirement' (stop working) at a much younger age than usual (eg. age 65)). The key to FIRE is often seen as cutting out spending on mere 'wants' and instead using the resultant surplus income to invest.

To give an example of how effective cutting expenses and increasing savings rate can be at reducing how long one has to work until able to achieve financial independence and 'retirement', I did a simple excel model of how long it would take for invested savings to build up to a level sufficient to provide enough passive income to replace the income previously spent while working.

To keep it simple I made the following assumptions:

After tax income (available to spend/save): $100,000 pa for all years

Investment ROI is constant and is 7% pa after tax

Inflation is 2% pa, so the real ROI is 5% pa

In reality, returns will vary from year to year, and even if the average return works out to be 7%, actual results will depend on the size of variations and order (ie. return volatility and sequencing). And while DS1 is starting out in his first job straight out of uni at age 20 with a salary of around $100K (similar to my current salary, and also to the inflation adjusted amount I got in my first job after graduation), many people start out at a relatively low salary level and see their wage increase until their 50s. The actual after tax income level however doesn't affect how the model performs, as the required retirement income is calculated as a percentage of wage - so as long as your earn sufficient to be able to save part of your wage, the income level won't change how long it will take to achieve FIRE.

So, what does the model predict?

If you start at age 21 with zero savings/debt and save 10% of your after tax income, you would achieve the $1.88m investment balance to enable you to retire with a passive income of 90% of your after tax working income at age 68. This would mean you would have the exact same amount of disposable income in retirement as you had (after deducting the 10% being saved) while working.

If you instead saved 20% of your after tax income, you would only require $1.7m to retire, and would achieve that by age 54. The reason you require a lower final investment balance is because you have been living on 80% of after tax income, rather than 90%. This is one of the 'secrets' of FIRE - by adjusting to living on a smaller percentage of your income while working, you can reach that level of investment income much sooner. (If you had instead saved 20% of income, but wanted to still retire on 90% of income, the investment balance required to fund retirement would have remained at $1.88m, but you would have achieved it by age 58 by saving 20%, rather than age 68 by saving 10%.

If you cut spending to boost the saving rate to 30%, the investment balance required to fund retirement reduces to $1.53m, and you'd get there by age 46.

And by saving 40% of after tax income you could retire by age 40 with an investment balance of $1.3m.

By saving 50% you could retire by age 36 (with $1.18m), and by saving 60% you could retire by age 32 (with under $1m).

By now it should be obvious that using FIRE to achieve early retirement is partly a trade-off between retirement age and the level of spending possible both while working and during retirement. Some people who have tried FIRE have found it too hard to cut current expenditure significantly. While how much one can take from current spending and divert towards saving for 'financial independence' will depend on personality (FIRE isn't for everyone), I suspect that some people who find it hard to reduce spending while they are working are in for a very unsatisfactory retirement when they suddenly find their income slashed involuntarily.

The sequencing risk is also not to be underestimated - I always saved around 30% of my after tax income, and was on track to be able to afford 'early retirement' by age 50, but that was before the GFC. So its probably worth building in a couple of extra years as a buffer when planning for FIRE.

Another aspect that I've come to realize is that once you have achieved your 'FI' target you may not want to 'RE'. I actually passed the minimum amount of superannuation savings required to replace my rate of expenditure (current wage income - taxes and savings), and am now working towards hitting the $1.6m transfer balance cap), and hope to transition from working for a salary to working for myself in  my own financial planning business. Achieving financial independence means that you are actually choosing to work (even if it is still in the same old job), rather than having to work.

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Saturday, 18 July 2020

Expenses for past two years

I did my annual budget review, getting most of my expense data from my monthly credit card statements for the past two years, plus some adjustments for expenses paid via EFT from my bank account, and some uni fees I paid using my portfolio loan (ie. I effectively accumulated some 'student loan' liability doing my masters degree). Some of the figures may be a bit rubbery (for example I estimated my tax based on gross salary - tax home pay- SGL/SS deductions. In reality I will probably pay less tax than that, as I have deductions for margin loan interest that is usually a bit more than the dividend income I receive, so I get a small tax refund that I haven't adjusted for).

One striking thing was how similar the expenditure break-down was for the past two years. I don't deliberately spend according to a budget, as my savings are on auto-pilot, and everything else tends to stay fairly constant. I've projected my notional budget for this financial year - which is pretty similar to the past two years. The transportation costs might be slightly lower as I'm currently working from home, and I got rid of the S-type Jaguar that cost me quite a bit in servicing, rego etc. last calendar year. I haven't allocated that savings into any other budget category, so (hopefully) that should mean I accumulate some surplus cash in my savings account over time, and might be able to pay my uni fees from savings rather than increasing my portfolio loan balance.

I'd like to reduce our expenditure on groceries, as it seems quite high compared to some other budgets I've seen on PF blogs, but with two teenage boys that might be hard to achieve, so I haven't budgeted for any savings there. I'd also like to get some clients for my financial planning business (GFP) this FY, so hopefully there might be some revenue to offset the fixed costs of running my business.

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Friday, 17 July 2020

Covid-19 will be one of the leading causes of death in the USA this year

Despite what the US leader (!?) thinks, Covid-19 is not comparable to the seasonal flu. A quick reality check of what he said in March:

"So last year 37,000 Americans died from the common Flu. It averages between 27,000 and 70,000 per year. Nothing is shut down, life & the economy go on. At this moment there are 546 confirmed cases of CoronaVirus, with 22 deaths. Think about that!"

versus reality (as of now): approximately 138,000 deaths (and another 1,500 or so each day).

But how bad is Covid-19 compared to the 'normal' leading causes of death in the USA?

Number of deaths for leading causes of death in the US: []

Heart disease: 647,457

Cancer: 599,108

Accidents (unintentional injuries): 169,936

Chronic lower respiratory diseases: 160,201

Stroke (cerebrovascular diseases): 146,383

Alzheimer’s disease: 121,404

Diabetes: 83,564

Influenza and Pneumonia: 55,672

Nephritis, nephrotic syndrome and nephrosis: 50,633

Intentional self-harm (suicide): 47,173

So, Covid-19 is already destined to be at least the 6th leading cause of death in the USA for 2020, and could end up being the 3rd highest cause of death in the USA this year (trailing only heart disease and cancer).

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Thursday, 16 July 2020

Tracking my Net Worth Performance against an iconic benchmark

Once you have an investment strategy in place, it is a good idea to measure performance - both in absolute terms and relative to a benchmark. Absolute performance measurements will let you know if you are 'on track' to meet your financial goals, and performance relative to an appropriate benchmark will let you know if you are implementing your chosen strategy effectively (eg. if your plan is to achieve a return of 1% more than the ASX200 index by investing in what you deem to be the 20 'best' shares in that index, you need to compare the performance of your portfolio to that benchmark - the ASX200 index).

I tend to not worry about benchmarking individual components of my investment portfolio, as my superannuation is invested in a mix of index funds, each of which already has appropriate benchmarks in place, and reporting of fund performance against those benchmarks. And my home valuation 'is what it is', as I'm not going to sell up and move to another suburb on the basis of how prices in our suburb move relative to the overall Sydney house price index.

Instead I benchmark my overall net worth against what I've decided is an appropriate 'stretch' benchmark - the minimum NW cut-off required to make it onto the Australian "Rich 200" list. That list was was originally prepared and reported annually by BRW magazine, and is now published by the Australian Financial Review. It takes a few months to produce, and normally comes out around May-June, based on valuations calculated in late March. This year the 'rich list' has been delayed until '4th Quarter' due to the market volatility that was occurring in March.

The reason that I've chosen to benchmark against the cut-off for the 'rich list' is that I assume that these richest Australians have reasonable expertise at building wealth. By taking the cut-off (net worth of the 200th richest Australian, whoever that happens to be) I eliminate much of the random variation that occurs at the top of the list (which often depends on how a particular investment/company is performing). And because Australia's population is increasing over time, the 'rich list' is getting more exclusive (a smaller percentile of the population) over time, so the cut-off will increase relative to the 99th percentile for example.

As the cut-off net worth for the rich list is still vastly higher than my net worth will ever be (I'll never be on the 'rich list'!), I've chosen to benchmark my net worth against 1% of the rich list annual cut-off. Plotting my monthly net worth (excluding the lake house I 'inherited' a few years ago) against this benchmark shows that I've generally been tracking quite closely to that benchmark, with the exception that my net worth did relatively poorly during the GFC due to my gearing having to be unwound at the market bottom to avoid margin calls - and then not having the confidence to gear up again to my previous level when the stock markets improved during the following decade.

When the annual rich list is published later this year it will be interesting to see when I've made up any ground against the benchmark - hopefully the market timing I attempted with the asset reallocation during the first half of 2020 will have boosted my relative performance.

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Sunday, 12 July 2020

Did DS2s tax returns for the past six years

I bought some shares (Cochlear, CSL and Computershare) for DS2 about ten years ago, as I'd made a similar gift to DS1 around that age. DS2 had his tax file number issued, and the shares were purchased in his name (but with DW and myself as trustees on the trading account, as I couldn't get a share trading account setup in only his name as he is under 18) and the dividends were paid directly into his St George student savings account. The idea was that having actual investments of their own would make the kids' lessons about investing, compound interest, budgeting and saving, and tax a lot more 'real'.

I'd previously done DS2s tax returns for the years up until 2012 and for 2014 (fortunately he didn't get enough annual income to be subject to the 66% child tax rate that applies to minors if they get more than $416 of 'unearned' income, so it was worth doing his annual tax returns so that he got the franking credits on his dividend payments refunded). But I hadn't yet lodged DS2s tax returns since 2014 when the old eTax software was replaced with having to lodge tax returns electronically online via a link of a myGov account to the ATO, which was rather complicated to do for another person (so I didn't get around to it). As DS2 had made undeducted contributions into his superannuation account in each of the past two financial years, I decided was high time that I made the effort to get his myGov account setup (easy) and linked to his ATO TFN (not so easy - for some reason it wouldn't validate using the bank account details, even though once it was setup it turned out that the interest for those account was autopopulated in his tax return!). I had to call the ATO and have DS2 on speaker phone with me (luckily I'm working from home, and DS2 is on school holidays) so we could both identify ourselves and get a linking code issued by the ATO to connect DS2's myGov account to his ATO TFN.

Once that was all done I started working through DS2's electronic tax returns from 2014 onwards. I got DS2 to 'help' do his tax returns, although I must admit that even I find doing tax returns less than exciting (and DS2 certainly was keen to get back to playing Fortnite!) For the first few annual returns DS2 will be due a small tax refund (due to the franking credits), but in each of the past two years his total income was over the $416 child tax rate threshold, so he has a tax liability (that was mostly offset by the franking credits) for those years. Over the entire six years of past tax returns that have now been lodged he'll end up owing about $33 of income tax. It was still worth lodging his tax returns, as he had made $1000 contributions into his superannuation in each of the past two financial years (from money he had earned doing some busking (hobby income, hence not taxable), and various amounts he'd received for birthday and xmas gifts etc.). Once his tax returns have been processed he should get a $500 government co-contribution into his superannuation account for each $1000 annual contribution.

With the covid-19 recession impacting dividend payments, and DS2 having spent some of his bank savings on a gaming desktop computer, its likely that he'll have low enough income from now until he turns 18 to avoid any child tax liability for future income years. I'll encourage him to continue making a $1,000 contribution into his super each year, so that he gets the immediate 50% benefit of the government contribution into his super each year, and the investment will enjoy about 50 years of compounding in a low tax environment (if the current superannuation system doesn't get changed completely over that time) until he retires.

DS2s taxes:

FY    taxable income    franking credits    net tax refund (liability)

2014    424                    34                        34

2016    503                    66                        7

2017    492                    62                        10

2018    541                    60                        (22)

2019    656                    96                        (62)

overall                                                        (33) tax liability

The way child tax works is a bit weird - if they have less than the threshold amount ($416) of 'unearned' income, there is no tax liability, but as soon as they exceed $416 the entire amount is subject to the 66% tax rate. So, if child A had $415 unearned income their tax liability is $0, but if child B had $420 of unearned income their tax liability is $135.20 + 66% of the amount over $416. So it is definitely worth trying to keep his unearned income below $416 - perhaps by not having his savings in an interest earning bank account.

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Sunday, 5 July 2020

Victoria outbreak shows how fragile our control of the Covid-19 pandemic really is

After suffering from outbreaks in nursing homes and returning cruise ships in March-May, Australia seemed to almost have the pandemic 'under control' in May, with States easing the 'lockdown' and allowing many business and social activities to resume, subject to social distancing.

However, there seems to be a combination of lockdown fatigue, conspiracy theory weirdness, wishful thinking, and "she'll be right" attitude making any move to ease restrictions a recipe for another outbreak - especially in Victoria.

Hopefully the current lockdown of some specific suburbs with 'hot spots' of community infection (and six public housing unit blocks, holding 3,000 residents, were around 1% of residents have already been confirmed to be infected) might bring this outbreak under control. Unfortunately it will be a couple of weeks before we'll known if community spread has been suppressed again, and by then the numbers of patients in ICU beds, and the number of fatalities will have risen in line with the current surge in cases.

A plot of reported cases per capita for Australia, the UK, USA, Canada and Germany shows just how well Australia had been doing, and just how badly the current Victorian outbreak has been. Rather than getting a "v-shaped' economic recovery post-lockdown, we have instead had a "v-shaped" rebound in Covid-19 contagion.

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Wednesday, 1 July 2020

Net Worth: JUN 2020

My NW rose about 0.5% during June, reaching a new 'all time high', which is quite pleasing during the middle of a pandemic (although anyone highly invested in tech stocks or a tech index fund during the past 6 months will have made about 35% gain!). Our reallocation of SMSF investments from bond index fund into growth index fund helped boost the performance of my estimated SMSF account balance during June. And my stock portfolio* also showed a small gain for the month. Our estimated house valuation hasn't changed even though new average monthly sales price data was available - apparently the average sale price for houses in our postcode has been constant for the past four months. My share of our home mortgage continued to slowly reduce, as we move past the 2/3 mark of our 25-year mortgage.

The 'other real estate' value remains constant (i.e. left at the cost price) for the off-the-plan $1m investment unit I bought last year and the lake house I 'inherited' a few years ago. And the 'other mortgage' value is being left as the notional cost price of the investment unit (I borrowed the money for the 10% deposit and stamp duty using part of my portfolio loan line of credit, and the remaining $900K is the amount I'll need to borrow to settle when the unit is completed in 2023). For fun I've been tracking one-bedroom unit sales data for the postcode area of my investment unit, and the calculated approximate monthly valuation has been in a modest up trend since I paid the deposit last year. But I won't start tracking the estimated value of the investment unit for my NW calculation until after it is completed and I get a proper valuation done.

But if the current trend in unit prices is accurate and continues until construction is completed in 2023, the unit *may* be worth around $1.5m by that time. Which should make it easy to get a $900K mortgage, and would also mean that my $140K investment (deposit and stamp duty) will have grown to around $600K equity in the property. After deducting the loan for the deposit and stamp duty, and the capitalised interest on the loan, that would result in a net profit of around $412K (subject to CGT). Can't really calculate a ROI for that as the investment was 100% funded using borrowed funds. Of course there is no guarantee that the unit will be worth more than I paid for it, so I could end up losing money.

* the 'Stocks' amount is net value of my geared stock/fund investments outside of super, minus the various margin loan balances and also the balance of my 'portfolio loan' that wasn't used for the unit deposit and stamp duty payment. As the 'portfolio loan' balance is increasing each month by both the capitalised interest, and the transfer of $1,500/mo to fund my financial planning business fixed costs, the 'Stocks' figure isn't really an accurate guide to how my stock/fund investments are performing.

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Tuesday, 30 June 2020

Last chance (for most people) to maximise concessional superannuation contributions for this FY

As today is the last day of the FY, I checked my CFS (employer selected) superannuation funds online transactions for 1 June 2019- today to see what the total of 'employer' (SGL and Salary Sacrifice) contributions added up to for the current FY. I had intended to 'top up' any remaining gap to reach the $25K annual cap on concessionally taxed contributions. It turned out that because of a late payment for June 2019 (hit the account on 1 July), and an unusually large employer contribution for March 2020 (still not sure why that was - I suspect it relates to SGL being higher that month as the annual 'bonus' was paid out, but the increase doesn't correlate with the size of the bonus compared to normally monthly wage, so perhaps the monthly pay/SGL gets annualised and capped as if I was earning that monthly rate all year?) I had already exceeded the $25K annual cap on concessional contributions. So, I didn't make any extra contribution (which I would have been able to claim a tax deduction for if I lodged the relevant form with the super fund by the end  of next FY).

So, anyone that hasn't hit the annual $25K cap on concessionally taxed contributions (for example, if you don't have salary sacrifice arrangements in place), has today to make the payment (although you'd have to check that the funds transfer hits the super account with today's date or it might end up in next FY as far as the ATO is concerned).

There is also a small 'loop-hole' that allows people with super balances below $500K to 'carry forward' unused concessional cap amounts for five years (from 1 July 2018), so if you didn't make the maximum $25K concessional contributions last FY you may be able to make a larger contribution this year (or else if you don't max out your concessionally taxed contributions this FY and have a low enough super balance next FY, you can 'carry forward' the unused cap and make a larger 'catch up' contribution next year.

Of course this all requires you to a) have enough spare cash flow to make additional superannuation contributions, and b) want to put more money into super (its tax effective, but on the down-side it means the funds are inaccessible until 'preservation age' in most cases).

DW and DS haven't maxed out their concessional contributions this FY, so if they are working next year they may be able to take advantage of the 'carry forward' rule to make additional contributions next year.

There is a good source of information summarizing the various contribution rules here.

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Friday, 26 June 2020

Past the half-way mark in my Master of Financial Planning studies

The uni results for the course I studied in Q2 (Planning for Retirement) came out this morning. I got a Distinction (77%) for the subject, which was quite surprising given that a) the weekly course modules online were very brief (30 minute read each) and simply provided guidance as to which chapters of the prescribed textbook were supposed to be read (I never got around to reading the textbook at all), and b) although I got 80% for the first assignment and around 85% in the exam, I only got 11/20 for the second assignment (a two page essay that I thought was quite good - but although I got high marks for style, grammar, structure and referencing, I got practically no marks for 'content' (worth half the marks) simply because the lecturer decided I didn't answer the question in the rigid essay structure she wanted). Having written lots of uni essays during the past 40 years of doing undergraduate and post grad courses (and always getting pretty decent marks) I felt this was a total rip-off. Fortunately it turned out that because the essay was only worth 20% of the overall course mark, I would have needed to get 19/20 or full marks to get 85%+ and a High Distinction for the subject. So essentially it didn't matter that I only got 55% for the essay.

Due to courses being completely online (including the online final exams, invigilated using ProctorU) the uni has offered students the choice of replacing their graded result this semester with a simple Pass/Fail result that won't be included in their overall GPA calculation. Since I managed to get a Distinction (6.0) for this subject I don't need to exclude the result from my GPA calculation (I need to get a GPA of 6.0 or more to graduate 'with distinction'), but I would have liked to be able to replace the Credit (5.0) I got last semester (Q1). I'm not sure why they haven't offered the Pass/Fail option for Q1 results as the final exam for Q1 was in March, just when the Covid-19 changes were being introduced and causing maximum disruption. I've emailed student services to double check if Q1 result can be replaced with the simple Pass/Fail outcome, but I don't hold out much hope.

If my Q1 result stands, my current GPA is just under 6.0, so I'll need to average Distinction for the remaining five subjects and get at least one High Distinction to bring my GPA back up to 6.0. This coming semester I'm doing 'Funds Management and Portfolio Selection' which should be interesting and quite easy to get an HD. And the final two subjects are 'research' projects, so should be able to get HDs if I put in enough work. We'll see how it goes.

I also have to finish off a couple of 'specialist' courses (in Margin Lending and Self-Managed Superannuation Funds) I'm enrolled in at an RTO and have nearly completed, plus do the four courses for the Advanced Diploma of Financial Planning I'm also enrolled in at that RTO. So it will be quite busy for the rest of 2020.

Once I finish off the MFP degree in mid-2021 I want to enroll in a PhD in Financial Planning (should be a lot easier than the astrophysics PhD I was enrolled in a few years ago). I'm slowly browsing through PhD theses in Financial Planning to try to get an idea of what research topic I might want to pursue. I'll have to start sounding out prospective supervisors at the uni early next year, and be ready to put in my application by the start of my final semester. 

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Sunday, 21 June 2020

Bought some Betashares Asia Technology Tigers ETF (ASIA)

I noticed that I had set up an IG trading account with $500 to get some bonus Qantas Frequent Flyer points last year, and it still had a cash balance of $436.55 sitting in the account (yes, I managed to lose some money while doing the required number of trades to qualify for the Frequent Flyer points, but the value of the QFF points I got was still significantly greater than the amount of money I lost). I probably should have just closed the account and transferred the balance back out, but I decided instead to purchase some ETF shares with the available balance. I've placed an order for 50 of the Betashares Asia Technology Tigers ETF (ASX code ASIA). At a limit price of $8.57 and $8 in brokerage that order will just about use up all the cash balance on the account. Assuming that the order gets filled when the markets reopen on Monday, I'll just let the investment sit for a decade or so and see what happens. No matter how this investment performs it will be hardly worth the trouble of including any distributions in my annual tax return, and to calculate capital gain/loss when I eventually sell the investment, so I might set up a monthly automatic contribution from my savings account into the IG account, and then add to this holding every six months or so to 'dollar cost average' into a larger position over time.

The top 10 holdings of this fund are:

NameWeight (%)
By country the ETF allocation is about 55% China, 20% Taiwan, 20% South Korea and 5% India.
And by sector it is about 30% internet and direct marketing, 20% interactive media and services, 20% semiconductors, and the balance other 'tech' sectors. The relevant index has a five year average return of 14.25% pa and the ETFs management costs are around 0.67% pa.

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Diet (bad) and Exercise (none) week whatever

After progressing well with my weight loss and exercise program until the gyms closed down and I started working from home (and eating too much junk food), I've now put back on about ten kilos since Feb. Time to stop snacking and start ramping up my daily step count again! While I was taking the bus and train to work (and walking around the office) I used to regularly do about 10,000 steps/day, which helped burn off the calories. But since being stuck at home all day I've averaged only 1,500 - 2,500 steps/day.

I noticed today in my Qantas Wellbeing phone app that until the end of June I can earn a 'bonus' 10 Qantas Frequent Flyer points every day that I walk at least 7,500 steps. Time to put the gym shoes on and start going for evening walks again...

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Fun investing app - Spaceship

I opened an account with 'Spaceship' in August 2018 and invest $100/mo in their 'Universe' fund. So far the performance has been quite 'stellar', with gains of 35.54% in the past year. I've no idea how this fund will perform in future, so don't take this as a recommendation to invest! But I'll keep adding $100/mo automatically and see how this account performs over the next 10 or 20 years (assuming it stays around that long).

The 'universe' fund invests in a range of companies, including global tech companies such as Adobe, Alibaba, Alphabet, Amazon and Apple (funny how a lot of 'tech' companies all start with "A"). With No brokerage fees, no buy-sell spreads, no entry or exit fees, and no admin fee for balances below $5,000 (and only 0.10% in total fees for balances over $5,000) it seems a pretty easy, cheap and fun way to get into 'investing'. I also like the colour scheme, which happens to be my favourite colour ;)

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Saturday, 20 June 2020

DS1 has his first job already lined up for when he finishes uni

DS1 is currently in his third and final year at UNSW studying computer science, and recently finished doing 'final round' interviews with two local IT companies. It turned out he was offered a position by both companies! He initially accepted the offer made by the first company (a stock trading investment company), as he didn't get an answer/offer from the second company (that he was more interested in) until after the acceptance deadline. A week later the second company also sent him an offer, so he then had to let the first company know that he'd changed his mind. His starting salary will be about the same as mine (!) and he'll also get about $20K pa worth* of stock 'options' each year for the first four years. The value of the stock options is a bit of an unknown as the company isn't yet publicly listed, but the company has been growing very rapidly (it started up in 2012 and has apparently been profitable since 2017 - although its hard to know for sure with private companies).

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My financial planning 'start up' is 18 months old and still no clients

As readers may recall, I completed my Diploma of Financial Planning in late 2018 in order to get 'registered' as an 'existing' Financial Planner (aka Financial Adviser) in Australia before the rules changed on 1 Jan 2019 (which required all 'new' Financial Advisers do a year of supervised training/experience). I'd been studying for my DFP qualification on and off for several years (just out of interest), and the rule change prompted me to get my butt into gear and get 'registered'. As I still have a full time 'day job' that has nothing to do with financial planning, having to quit a relatively well-paid job in order to get an entry-level Financial Planner position just to meet the 'training' requirement would not have been feasible. Since getting 'registered' in late 2018 I've been doing a bit of local advertising (dropping free booklets into local letter boxes) and set up my 'business' website with an online appointment booking tool.

The result? So far, only two 'serious' enquiries (made a booking for a complimentary introductory meeting) that resulted in one meeting (that didn't work out as they had minimal income, no significant savings, and the person I met with wasn't really interested - their partner had booked the meeting but didn't attend) and a last minute cancellation.

I'm currently paying around $1,500 per month fee to my 'dealer group' (I have to be an authorised representative of an AFSL holder to be a Financial Planner here in Australia, or have my own AFSL which would cost a lot more) just to stay 'in business'. I had hoped to get a couple of clients in my first year (2019) and to get enough clients by the end of this year to at least cover the fixed costs of remaining registered (and a member of the FPA and AFA, which each charge around $500pa). Now I'm just hanging out to get my first client...

Oh well, I plan on staying in my full-time paid work for several more years (unless I get laid off), and in the meantime will complete my Master of Financial Planning degree next year and (hopefully) then enrol in a PhD. The Masters degree is costing me $3,500 per subject (there are 12 subjects in total for the degree), but fortunately if/when I enrol in the PhD course next year I shouldn't need to pay any more uni fees as this is generally covered by the Commonwealth-funded RTS (Research Training Scheme).

Once the Covid-19 restrictions are lifted I might start offering free lunchtime seminars for the staff of local business. And I'll start doing some 'cold calling' of locals.

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Thursday, 18 June 2020

Revisiting "the chart I wish I'd seen a year ago"

Way back in 2008 I posted about a chart I made of the All Ords Index vs the Australian GDP price index series, which appeared to be a good warning sign of when the market was 'irrationally exuberant' and when it was 'oversold'. ie. When you might think about 'taking profits' and getting out of the stock market, and when the market was 'on sale' and a good buying opportunity. Of course, as Moom pointed out at the time, there are reasons why the stock market may increase relative to GDP, such as the decades long decline in interest rates (which made higher stock p/e multiples sensible - from 8-12x in the 80s and 90s to 15x-20x today). However, in the 'long term' it seems rational for the stock market as a whole to increase in line with GDP. So when the 'irrationality of crowds' makes the market oversold or overbought, one has better than normal chance of actually benefiting from trying to 'time the market' (I generally buy and hold, as timing attempts generally increase transaction costs more than performance, and I tend to buy index funds or ETFs rather than trying to 'pick' individual stocks or sector funds).

So, with the recent market drop and recovery during the first half of 2020, I thought I'd get some updated data on the AllOrds Index (the ASX200 Index follows the same basic pattern) and the Australian GDP Price index series, and see how the plot looks today. As you can see below, this plot is still pretty good at showing when the market is relatively 'expensive' (too high) and when it is probably 'cheap' (too low). But, as DS1 pointed out, if you sold out of the market when it goes 5% or 10% above the 'expected' level, and bough back in once it dropped 5% or 10% below the expected level, you would have missed the large market gains of 1986-87 and 2005-2007.  So, you'd probably want to take these levels as warning bells, rather than simplistic buy/sell signals. Possible it would be useful to combine tracking 30 vs 90 day moving averages with this simple 'too high'/'too low' market indicator to decide when a long-term investor should consider reducing and increasing their exposure to the stock market. That would help with making the decision to buy into the market when it is oversold, as it is usually quite hard to 'pull the trigger' and invest/reinvest when the market has dropped a lot - like in Mar 2008 or March 2020. Seeing that the market may have 'turned around' (rather than just a 'relief rally' during a bear market run), helps identify if the 'bottom' has passed.

If anyone is interested in tracking this relationship for themselves, quarterly GDP Price Index data and Monthly adjusted close All Ords Index data was obtained from the following free resources:

ABS website

Yahoo Finance

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Wednesday, 17 June 2020

Time for the Aussie government to borrow and invest big

Ross Gittins has a good article in today's SMH outlining the reasons why the right wing Morrison government should be not looking to 'cut the deficit' (usual Liberal mantra) as the post Covid-19 economic recovery starts to tentatively materialize later this year. With the government able to effectively borrow at 0% real interest rate, they should restart the old 'government bonds' program (that issued 10 or 20 year bonds) with an interest rate of, say, 1.0%. A lot of super funds and pensioners would probably take these up, given the bank interest rates on savings being around 0%. That wouldn't raise a lot of money, but the government could also set up a few government-back statutory infrastructure bodies that could borrow globally at close to 1% for the long term, and then invest all this borrowed money in major projects that are a) sensible and add to long-term national productivity and/or development, b) relatively labor intensive, and c) have a decent 'multiplier effect'. There a experts that could (and probably already have) provide the government with a list of projects, but a few that spring to mind and such as - constructing defense assets such as destroyers, submarines, and possibly even an aircraft carrier (we used to have one) - building a large-scale solar electricity 'farm' (or farms) in outback regional Australia, with associated storage battery farms and connection to existing transmission lines - building adequate amounts of social housing, preferably with a bias towards regional towns to aid with decentralization - upgrading Woomera to support satellite launches using the commercial launch vehicles becoming available, and to add some 'bricks and mortar' to the recently created Australian Space Agency (with a budget allocation last year of just $9.8 million it could probably fund one episode of 'The Orville' - hardly a serious initiate for the 'clever country'). Anyhow, there are probably a lot of better ideas on how the government could spend a few billion dollars of cheaply borrowed money to help grow the Australian economy, address our contribution to global warming, develop local technology business, and provide skilled jobs. Hopefully the delayed budget later this year might actually include some large public spending initiatives. We'll see.

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Tuesday, 2 June 2020

Net Worth: May 2020

The markets recovered somewhat during April/May, so my NW is close to the previous all-time high already. The house price and estimate off-the-plan unit valuation are less accurate than usual, as some of the sales price data I use for my estimates had not been updated in May. In any case, it appears that real estate is only down slightly so far, and may not fall as much as some pundits were predicting. We'll see.

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Sunday, 31 May 2020

DW decided to 'retire'

Well, DW's employer decided against letting her work from home as they want to apply one rule for everyone (the decision doesn't make much sense, as while warehouse staff and those serving customers in the sales room had to work on site while the accounts payable work could be done just as efficiently from home, as it mostly involves accounts departments of other companies, and logging into the accounting server running at head office. But I think a few of the staff were already resentful that DW had been working from home four days a week during the 'lock down' period).

So DW has given in her resignation and will stop work in a couple of weeks. She will notify our SMSF admin that she has 'retired' at the start of the new FY in July, so her account will be transferred into 'pension mode' where the tax rate will be 0% rather than the normal 15% tax rate for superannuation in accumulation mode. She will withdraw $50K to pay off some debts she had accumulated, and we'll setup a regular $1,200/mo 'pension' payment from the SMSF to her bank account.

DW might start working again (part-time or casual) later in the year (if she can find a local job that she wants to do), in which case she will continue to draw her 'pension' payment but will also resume accumulating some superannuation via SGL - which would go into a new 'accumulation' account in the SMSF in her name. We'll see how things pan out.

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Sunday, 24 May 2020

Things slowly moving towards a 'new normal'

The NSW version of  'lock down' is starting to be wound back. At its most restrictive, our family was spending most of our time at home, with DS1 doing his uni course 'virtually', DS2 doing the same for high school, and then attending school one day each week. I've been working from home since March, and will continue to do so until I *have* to go back to the office - commuting is a great time-waster, and I prefer working from home as long as possible. DW was having to go into the office one day and was hoping to be able to continue working from home, but now is considering whether she might quite her job (and 'retire') as her employer may insist on everyone going back into the office full time. DS2 will be going back to attending physical high school full-time from next week - but rather than catch the school bus I'll drop him off close to school each morning and collect him in the afternoon. Fortunately I can make the 'round trip' from home office to his selective high school in around 30 mins.

Beaches and parks are available again for outdoor activities, although social distancing is still supposed to be applied. Yesterday DS2 had his first Kendo session since the club shut down - but it was in small groups of 6 in an outdoor park, rather than being held indoors. Restaurants are being re-opened for dining in, but with limitations on numbers that comply with social distancing requirements. Hopefully infection rates will remain low and the inevitable 'clusters' of infection that spring up can be quickly brought under control, so businesses don't need to be totally shut-down again.

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Decided to rebalance our SMSF after all

Despite expecting the economic impacts of the Global Covid-19 crises to be severe, we've decided that since we'll have to head back towards our long-term asset allocation (the Vanguard High Growth Index Fund) eventually, we may as well start shifting a portion of our SMSF investments out of the Bond and Conservative Funds and back into the High Growth Fund.
I had initially been considering shifting to 50% High Growth Fund, 35% Conservative Fund and 15% Bond Fund, but as the management fees are higher for the first $100K in each fund, we'll pay slightly lower fees having only two fund investments rather than three. So after a quick 'trustee meeting' of myself, DW and DS1 (the three SMSF members), we decided to just switch to 50% High Growth Fund and 50% Conservative Fund.
This means that overall our asset allocation has changed from:
up to 20 Feb:    100% High Growth Fund    = 90% Growth/10% Income
Feb-May:          70% Conservative Fund/30% Bond Fund = 21% Growth/79% Income
25 May:            50% High Growth Fund/50% Conservative Fund = 60% Growth/40% Income
By being only 20% invested in growth assets from Feb-May we avoided much of the investor angst experienced in late March, but don't want to sit 'on the sidelines' until the stock markets have fully recovered. Putting some of our SMSF investments back into growth assets while the markets are still down ~15%-20% looks reasonable from a long term perspective (the market may well suffer futher declines, but as we'll be invested for many decades such 'blips' have to be tolerated).
The US S&P and Australian AllOrds Indices dropped about 35% from 20 Feb to the lows around 23 Mar, and since then the US S&P has recovered to be 'only' 13% below the 20 Feb level, while the Australian market is still roughly 23% below the Feb level. Looking at past recessions the stock markets often continue to produce reasonable returns even when the 'real' economy is doing poorly, so waiting until the recession is over would probably not provide the best outcome overall.
Recent Australian and US stock market performance shows the deep Covid-19 dip and the rapid partial recovery:
While stock market performance over the past century shows that such sudden dips are generally a 'buying opportunity' in the long term:
Should we have moved back into growth assets earlier? Or sat for another 6-12 months in income assets? Only time will tell, but you can only take your best guess and live with the result. Deciding to do nothing at all is still a decision...

ps. I got a call from Vanguard a few days after I mailed in the switch form, asking for clarification as I'd only filled in the % I wanted after the switch (I had assumed they would work out the most efficient way to shift my current asset allocation to the new ratios, but no, they need explicit details of what to sell and what to buy.) I explained that to minimize transaction costs (the buy/sell unit price differential) I didn't want to sell all the Conservative Fund units and then rebuy half of them! So we worked out that I could sell all the Bond Fund units and 25% of the Conservative Fund units and invest the proceeds 100% into the High Growth Fund. After checking with the processing department, the rep said they I would have to fill in a new switch request form, with those details filled in, so I had to quickly complete a new form, get DW to sign it, and scan and email it back via the 'secure email' service I had to register to use. Unfortunately I filled the form in too quickly and accidentally ticked 100% into the Growth Fund rather than the High Growth Fund! D'Oh!

Ah well, we'll be switching back to our long term allocation of 100% High Growth once the current volatility has settled down, so for the time being I'll just leave us allocated 50:50 in the Conservative:Growth Funds as it won't have too much impact on this year's performance (and it might turn out to be good to remain a bit conservative).
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Friday, 22 May 2020

$50 bonus available to RateSetter Investors until 30 June

I've been investing a small amount each month via the peer-to-peer lender RateSetter, and so far haven't had any issues. I've invested in the five-year term lending (as it offers the higher interest rates), which has been offering an interest rate of around 7%pa. I get monthly interest payments from each micro loan, which I get automatically re-invested into new five-year loans. Sometimes various loan amounts will be repaid early, in which case the money just gets reinvested in the new loans at the prevailing rate. Of course the interest rate varies (supply and demand) and the principal and interest isn't guaranteed, although a small proportion of the funds invested gets taken and held in a pooled trust fund which may be used to make principal and interest payments in the case of bad debts. I haven't made any withdrawals as yet, but I'm assuming RateSetter will remain solvent and process any withdrawal requests (I've only got $2,953 invested, so I don't have a significant portion of my net wealth invested in peer-to-peer lending as it's quite high risk).

If anyone is interested in investing in peer-to-peer lending via RateSetter, you can use this link to register for an account and you'll be eligible for a $50 bonus payment if you invest $1000 before 30 June 2020 in either the five-year market or one month rolling deposit.

Full disclosure: I'll get a matching $50 bonus payment if any reader uses this link and qualifies for their $50 bonus, hence this post ;)

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Thursday, 21 May 2020

Fighting investment FOMA as the market continues to climb the 'wall of worry'

Life as a personal investor is a constant battle of the internal demons of fear and greed. We'd all like to make buckets of money during a bull market, at which time strategies such a gearing (or even double or triple gearing) are attractive and making use of OPM ('other people's money') to invest with makes perfect sense. Would wouldn't like to borrow at x% and get a total return of x+y% (with the added benefit of the interest being tax deductible, effectively 'converting' some of your current income (taxed at your marginal income tax rate) into long term capital gains (taxed at half your marginal tax rate))?

Then, of course, the market inevitable goes from 'bull' to 'bear' market, often with a few minor corrections' thrown in during the 'bull run'  just to tempt investors to move into cash too soon, often with the net effect of paying transaction costs, unnecessary capital gains tax, and missing out on some of the bull market gains while they sat overweight in cash until, eventually, getting tempted back into the market as the bull run continues.

When the market turns 'bear', the investor is either regretting staying 'fully invested' and wondering whether it is now too late to move into cash (or other asset allocations), or whether this is just the start of a down-trend and it should be 'everyone into the life boats' asap?

The current situation is that the US and Australian markets ignored the start of the Covid-19 pandemic during January and February, hoping that the spread could be restricted to China and any economic impacts would be mitigated via central bank action. Then, when the severity of the health crises became all too apparent in March the stock markets tumbled, hitting a deep low around 23 March.

Since then US and Australian markets have made surprising (to me at least) gains - recovering a large proportion of the value loss during Jan-Mar. Small amounts of potentially good news (such as early positive signs for a potential vaccine development) boost the stock markets, and even if such speculation proves to be premature (a vaccine will take many, many months to develop, test, manufacture and distribute to a significant proportion of the population, assuming a vaccine that provides enduring immunity to Covid-19 is ever developed), the markets remain in a generally positive trend since the March low-point.

So I'm sitting at home (where else during a pandemic?) wondering whether we should have (or should) shift some of our SMSF investments back into 'High Growth' rather than sitting 70% in 'Conservative' and 30% in 'Bonds' (and just having a trickle of $2k/mo of our Cash (bank account) funds being invested in 'High Growth' each month). I raised this question with DW and DS1 (the other two member/trustees in our SMSF) about a month ago, and we decided the risk of a further market decline was much higher than the (negligible) chance of a rampant bull market returning, given the rate of Covid-19 spread (new cases) and deaths (heading towards 5% of the number of civilians killed during WWI already, and still rising!). Since then, the US and Australian stock markets have continued to rise, so it is increasingly looking like switching to 20% Bonds, 40% Conservative, 40% High Growth last month might have been prudent after all.

However, the worse economic impacts of Covid-19 are yet to show up in employment and GDP statistics, company results, dividend payments, and enduring changes to company prospects. But there are enough signs that suggest that those economic impacts will most likely be a lot worse than the current market sentiment suggests.

For example, the reality that many jobs have simply evaporated due to 'lock-downs' has meant that the official unemployment rate (in Australia) is understated (as many people have left the 'work force' as they know that there is Buckley's chance of getting a job in the current market), and the figures will continue to get worse as many companies that were placed into 'hibernation' realize that they are no longer profitiable in the 'new normal' that takes hold as social distancing rules are relaxed, but not removed entirely.

In the longer term (6-24 months) a lot of other negative economic impacts will start to become apparent, which should be reflected in current stock market pricing, but apparently isn't. For example, immigration into Australia has practically stopped, and won't get back to pre-Covid levels for several years (if nothing else, boosting immigration when there is high domestic unemployment is hard to sell politically, even if, in the longer term, immigration boosts economic activity and generates new jobs). The lower immigration levels, coupled with higher unemployment and no wage growth, will reduce housing demand and construction for the next several years, which in turn will impact demand for white goods etc. So the Covid-recession of 2020/21 is likely to be quite severe.

Based on the likely impact on the housing industry I would expect the 20/21 recession to be at least as bad as the 1991 recession in Australia. But that doesn't automatically mean the stock market will perform badly. At some time we're going to have to reallocate back towards our long-term asset allocation target ('High Growth' Index Fund), given the historic long term performance of equity investments. But for the moment, our FOMA is still being outweighed by uncertainty regarding the magnitude of the recession that will result from Covid-19.

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