Created new QSuper account with the intention to setup a Lifetime Pension when I retire

An article in yesterday's 'Money' column in the SMH about a new retirement income product from QSuper they call a 'lifetime pension'. It is quite similar to a standard lifetime annuity product (such as is available from Challenger) but with a few attractive features for me:

* it will pay a fortnightly pension for life (although the income amount isn't guaranteed like in a standard lifetime annuity).

* the underlying investment is a 'balanced' growth option, rather than the usual mix of fixed interest investments normally underlying a lifetime annuity. Theoretically you are exchanging the certainty of a fixed income rate (that can be indexed to CPI) for a variable income rate that is affected by the performance of the underlying 'balanced growth' investment pool. The old risk-return trade off.

* the income rate is adjusted annually based on how the investment pool has performed compared to a 5% benchmark net return. So if the return is more than 5% the pension rate will increase, but if the pool returns less than 5% net return the pension rate would decrease slightly (to prevent to pool being exhausted).

* while there is no fixed lump sum death benefit (life insurance), there is a guaranteed death benefit that corresponds to your initial investment minus the sum of income payments received - so you (or your estate) would be guaranteed to get you initial investment back even if you die a few years after taking out the lifetime pension

Currently for a 60 year old investing $30,000 (the minimum amount) into a lifetime pension the first year income stream would be $1,849. You can't invest in a lifetime pension until you reach a superannuation condition of release, such as being over 60 and stopping work. And the lifetime pension is purchased using superannuation money (such as in a QSuper accumulation account).

I decided to open a QSuper account (it took literally two minutes to enter my details, address and TFN to open the account online) and I'll initially make a $100 monthly after-tax contribution (I already make the maximum before tax contributions via SGL and salary sacrifce of $25K pa, but I can also contribute up to $100K pa of after-tax contributions, at least until I hit the $1.6m total super balance cap).

I've selected to invest the QSuper accumulation account in a 50:50 mix of the Australian shares and International shares investment options, as this corresponds to my normal 'aggressive' asset allocation, and these options have a low total fee of around 0.24%, which is similar to the fees our SMSF pays for the Vanguard High Growth Fund. As there appears to be no minimum fee (or fixed weekly admin fee) for QSuper, it should make any difference to my total superannuation fees whether I am invested 100% in our SMSF or have a small amount invested in QSuper as well.

I'll probably end up accumulating around $100K in the QSuper account, so that when I retire (possibly at age 70) I can put that amount into a lifetime pension paying around $7,529 pa in the first year (the initial income payments increases slightly for each year older you are when you take out the lifetime pension). If I waited to take out the lifetime pension until I turned 80, for example, the initial income rate would be $10,834.

This is a lot lower than the initial payments (from age 95) would be if I took out a $100K deferred lifetime annuity from Challenger when I am 60 (with a 35 year deferral period), if I chose the option of not having any death benefit (which risk getting no repayment at all if I died before the deferral date). So I might end up taking out a combination of a $100K lifetime pension from QSuper and a $100K deferred lifetime annuity (with no death benefit, and deferred until age 95) from Challenger. The remaining amount of super (below the transfer balance cap) would stay in our SMSF and transfer into retirement phase, so I could adjust the annual pension payments (subject to the mandatory age-based minimum percentage) and take out lump sums as needed.

Given my great-Aunt is currently still alive at age 105, and two of my grandparents lived to 94, having some component of my retirement income stream guaranteed against longevity risk seems prudent.

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All Ords expressed as ounces of gold (in AUD) price, and compared to DJI

I found some monthly data for the Australian All Ordinaries index since 2000, and for the average monthly spot gold price expresses in AUD. A plot of the All Ordinaries index expressed in ounces of gold shows when the Australian stock market is overpriced compared to gold (eg. the index costs more than 6 ounces of gold) and vice versa (eg. the index costs less than 4 ounces of gold). Assuming one had a portfolio consisting mostly of the All Ords Index and Gold bullion (eg. 95% stocks, 5% gold), this plot could suggest when it might be prudent to go 'overweight' in stocks (eg. early 2008 and 2019 during market 'crashes') and when it might be prudent to shift to being 'overweight' in gold (eg. during 2004-2007).

Assuming one's long term asset allocation was, for example, 90% stocks and 10% gold, this might mean increasing gold to 15% allocation, or decreasing to 5% allocation, to slightly boost long term returns and reduce volality.

I also plotted how the All Ordinaries index performed compared to the US Dow Jones index since 2000. It shows that the Australian stock market was expensive compared to the DJI in 2007, but has not seen the massive increase that the US market has experienced since 2015. This explains why the US market seems 'fully priced' at current levels compared to gold, whereas the Australian market still seems to be reasonable value (at least in comparison to the price of gold).

Of course comparing the stock market indices to bullion prices doesn't preclude the possibility that BOTH stocks and gold could be simultaneously in a bubble - for example if the world was awash with capital looking for somewhere to invest at a time of no/low returns on cash and fixed interest investments. 

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Stock market and gold bubbles - is comparing stock indices to the gold price a useful dynamic asset allocation tool?

Aside from determining your risk tolerance, investment time frame, and hence a suitable asset allocation to invest in (preferably via low cost options such as ETFs and index funds), one of the few well proven methods to reduce risk (volatility) and improve performance (slightly) in your investment portfolio is to rebalance to your chosen asset allocation on a regular basis. Due to transaction costs (and CGT implications) this is often done annually.

Rebalancing will automatically sell off those assets (or asset class) that have done well, and buy more of those assets (or asset class) that have underperformed. While this is counter-intuitive (human nature, such as recency bias, prompts us to want to stick with 'winners' and sell 'losers'), it is usually a good strategy due to the 'bubbles' that regularly occur in various assets, and the tendency for those assets to subsequently suffer 'reversion to the mean'.

An extension of this might be to actually go 'underweight' assets (or asset classes) that have recently outperformed and go 'overweight' those assets (or asset classes) that have underperformed when you do your annual rebalancing. This isn't guaranteed to work, as your rebalancing period (one year) may not coincide with the duration of the various 'boom and bust' cycles experienced by various assets. That is, you may sell off outperforming assets and switch into underperforming assets too early in the cycle.

Therefore, it may be better to slowly adjust your asset allocations above or below your target (standard) allocation over several rebalancing periods - every year that an asset class is underperforming you would slightly increase its weighting, and every year that an asset class is outperforming you would slightly decrease its weighting. I don't personally do any rebalancing, as I mostly invest in diversified multi-index funds that are automatically rebalanced.

However, it might be interesting to see how such a strategy might perform over time. As an example, I came across a chart of the US Dow Jones index expressed as a multiple of ounces of gold. As gold is (theoretically) a hedge against inflation in the long term, such a chart should essentially show the real (inflation adjusted) returns of the stock market. The chart will also highlight when stocks are overpriced (a 'bubble') or when gold is overpriced. Hence if one had a portfolio consisting of the Dow Jones Index and an investment in gold bullion, it would be possible to reduce one's target asset allocation for stocks down when the stock index 'gold price' is well above the 'normal' range, and reduce one's target asset allocation to gold when the stock market is 'cheap' in terms of gold. It can be seen from this chart that seems quite clear when the stock market (DJI) was 'expensive' in terms of ounces of gold, and when it was 'cheap' (and hence either gold was in a bubble or the stock market was excellent value).

I'll look up some historic data for the Australia All Ords Index and the gold spot price in AUD and do a similar plot, then try out some weighting adjustment methods back-tested on the historic data. Hopefully adjusting the target asset allocation this way might boost returns and reduce volatility compared to using a fixed asset allocation (eg. 80% stock index and 20% gold) over the long term. From the above chart it looks like the typical cycles extend over decades, so this probably isn't something I can benefit from, but it might be useful to a young investor such as DS1. I'll see how the modelling results turn out. 

Incidentally, despite there being a lot of youtube videos about gold (and silver) being a great investment at the moment (due to the prospects for higher inflation resulting from the recent massive amounts of stimulus and effectively 'printing money'), and other videos (such as those by Harry Dent) stating that the stock market (especially the US) being in a 'bubble' and about to crash (40% by April, Dent was claiming back in Feb), the above chart doesn't show the Dow Jones Index being exceptionally expensive compared to gold,

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Found my gold coins

As mentioned previously, I've set up an online depository account with Perth Mint and will be purchasing $100 (-$0.50 transaction fee) of gold bullion each month which will be stored in their 'unallocated' holding. This will slowly add some 'precious metals' to my overall asset allocation and have no storage or insurance costs.

I thought I already had some gold coins that I purchased many years ago (I used to also have some gold and silver cast bars, but I had sold them off last time the bullion prices spiked up), so today I went on a 'treasure hunt' (actually I just looked around for the key to my electronic floor safe, as the battery for the electronic keypad was flat) to locate my gold coin 'collection'. Once I had the safe open I did a quick inventory of the various gold 'proof' and 'uncirculated' coins and put them into a spreadsheet to calculate their gold content (either .9999 or .916/22-carat) and gold value based on the current 'spot' price. Turns out I have about 9.9 troy ounces of gold (worth about A$22,800). A few of the proof coins are quite limited mintages, so might be worth more than their gold content alone.

The problem with having gold coins as an investment includes:

1. Insurance - my home contents insurance has a cap on the amount of miscellaneous 'collectibles' that are covered (eg. $5,000), and some insurance policies also only count currency "no longer in circulation" as a 'collectible'. Not sure where that leaves a 1980 uncirculated gold coin that has a 'face value' of $200 and is, technically, legal tender. Getting itemized cover for the coin collection would be expensive and difficult - aside from having to pay a higher annual premium for my home contents insurance policy, if a 'valuation' is required this can also cost quite a lot. For an 'investment' that often only appreciates in line with inflation, any holding costs can make them a poor investment over time.

2. Liquidity/trading costs - while it is fun to look up approximate valuations for specific coins by year and estimated quality, getting a professional appraisal can be expensive (for example Jaggards in Sydney charges $110 per hour, with a one hour minimum fee. And when it comes time to sell, a dealer will often pay significantly below the appraised value (they have to make a profit as a retailer). Selling at auction can be a bit of a 'lucky dip' in terms of what price may be realized, and there are associated costs which may be in the order of 20%-30%.

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Extrapolating Peter Zeihan's geopolitical thesis regarding the USA-Mexico synergy to Australia-Indonesia

I recently came across several youtube videos of Peter Zeihan presenting his view regarding the future of global trade if/when the USA stops enforcing global free trade, and various countries attempt to transition from domestic consumption to export as their demographics age. All his presentations are quite similar (whether to an Indian economic Conclave or to the Association of Ohio dairy farmers), so you only need to watch one presentation to get the gist of his data and conclusions.

Anyhow, I thought it would be interesting to compare the USA demographics with that of Australia, and found that they are quite similar (despite Peter frequently mentioning New Zealand, because he went to uni there, he tends to ignore Australia). He also paints a rosy picture of the economic prospects for the USA due to the neighbouring consumer market and cheap labour manufacturing resource that is Mexico. So I thought I'd also look into the demographics of Australia's close neighbour - Indonesia.

The comparison shows that the Australia-Indonesia situation is very similar to that of the USA-Mexico, with the proviso that Australia is only 1/12th the population of the USA, while Indonesia has roughly 2x the population of Mexico. Not sure if this makes Australia's future economic situation better or worse than that of the USA.

But in any case, we should do relatively well, compared to the EU, and especially Russia or China.

Whether the details of Peter's prognostications are correct will likely depend on whether or not the USA does or does not continue to act as the 'world policeman' when push comes to shove. The current tensions regarding China-Taiwan and Russia-Ukraine may answer the question one way or the other in the next few years.

At the moment the USA is making all the right noises about supporting Ukraine/Taiwan against any military action by Russia/China, but that could turn out to be all talk if the USA doesn't want to expend any more 'blood and gold' on other people's wars. We'll see,

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DS1 will need to think about getting some private health insurance soon

DS1 turns 21 next month, and since he graduated last year he will no longer be covered by my private hospital insurance plan (that my employer subsidizes). As he will have only been working for 6 months out of this financial year, he won't have to worry about the Medicare Levy Surcharge this FY, but next FY his income will probably put him in Tier 2 (or possibly Tier 3), meaning that unless he has private hospital insurance he will have to pay 1.25% (or 1.5% for Tier 3) MLS on his taxable income. For a taxable income of $120,000 that would mean an MLS impost of $1,500 if he doesn't have basic private hospital cover.

Since a 21 year old can obtain basic private hospital cover for around $104.63 per month ($1,255 pa), it is actually cheaper to have basic private hospital cover (including a basic dental option) than to pay the MLS, especially since he will probably also save a few hundred dollars each year from claiming on basic dental check-ups.

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Decided to buy an Amazon CFD

Watching a video about the recent progress in AI, robotics, the Armenian-Azerbaijan war (that lasted six weeks last year and I hadn't even heard about - apparently it was won largely using armed drones to take out radar units, and then wipe out lots of tanks, armoured personnel carriers and troops sitting in trenchs etc.), I looked up how Amazon had performed (I knew it was insanely successful and the share price very high, but I hadn't realized that I could have bought shares for $50 back in the GFC that are now worth around $3,300! And the p/e of Amazon is not insane, just very high, at 80.

So having not made any money of the internet/online business boom, despite being around when the internet was first starting up (I was a system administrator back in the 80s) and losing money investing on a pre-IPO internet company (GEN) pre-2000, I decided I should at least have some explicit exposure to one of the FAANG companies. So I used my CityIndex CFD account to put in an order to buy one ( 1) Amazon stock CFD at US$3,330. If the order gets filled the trade cost is USD$15.00, and the margin is 20%, so it will use up a large fraction of the A$1,263 I currently have available to trade in that account.

I won't get rich owning the equivalent of one share of Amazon stock, but at least I'll get some satisfaction if it continues grow rapidly in future (provided my CFD position doesn't get closed out if there is a market correction).

update: The price gaped up at the market open, so I had to change my order price to be filled at a price of $3,377.00. In total my ASX200 and Amazon CFDs have market value of $6,049.55, so the 20% margin requirement is $1,209.91. I currently have $400.09 available credit, so if the overall value of these holdings dropped more than 6.6% I would have to either sell one (or both) holdings, or else transfer some more cash into the account.

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Started my monthly bullion investment

A week after submitting my application to open an online depository account with Perth Mint/Gold Corporation (where I had to provide snapshots of my passport ID page and a statement from the bank account I wanted to link to the account) I received an email requesting additional proof of my residential address (the bank statement goes to my PO Box). I sent in a snapshot of my local council rates notice and the next day it was confirmed that my depository account was now 'live'.

I setup an automatic savings plan that will purchase $99.50 worth of gold each month (there is a $0.50 or 0.5% transaction fee) that will happen on the first business day of each month, based on the spot price at market close. To fund this I've also setup an ongoing $100 per month transfer from my bank account into the depository account. I decided on only $100/mo instead of $250 as I don't have much spare cashflow each month due to my existing savings plans.

This will only add $1,200 pa of gold into my overall asset allocation each year, so it will take a very long time to become a noticeable fraction of my overall asset allocation.

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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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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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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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