Trading accounts - end Dec '23 update

Summary of my 12% solution 'superhero' portfolio and 'moomoo' day trading account (and whatever miscellaneous trading I might do in future).

The "12% solution"" recommendation email from David Alan Carter for the end of December remained at 60% QQQ + 40% TLT. I hadn't needed to do any trades the previous few months, so I actually forgot about doing the 1 Dec trades to 'track' the "12% solution" portfolio as part of my 'superhero' app portfolio, only getting around to investing the USD$600 cash I had sitting in the app in QQQ units on 20 Dec. As I have other small investments in my superhero app, I've decided to not bother tracking the 12% solution trades in this account. I'll still monitor what the official "12% solution" asset allocation is meant to be each month, and compare how my total 'superhero' account balance in going using the "12% solution" performance as a 'benchmark'

Since the superhero app is the only account I currently use for trading in US shares, I want to add some more funds into the account at the start of Jan '24 and buy some BRKB, GOOG and AMZN shares are see how this portfolio goes during 2024. I'll probably add A$3K and buy A$1K worth of each. I'll do an overall portfolio holdings summary at the end of Jan and report the monthly valuations/movements and compare it to how the "12% solution" model portfolio does during 2024 and beyond. 

My Moomoo trading account ended the month at $5,577.16 Total number of trades to date is 17 with a 53% Win:loss ratio. Overall my average gain on winning trades so far has been $87.95 (vs. target of $100 gain on winning trades), and the average loss of losing trades has been -$67.04 (vs/ target of -$50 loss limit on losing trades). As the market has been trending strongly upwards for the past few weeks, I did not close out the winning positions  when the trade hit the target +$100 gain, but instead did a 'virtual trade' booking the trade as closed and recording a 'paper profit' and then recording a new open position with this new 'purchase price'. Basically as long as the up trend still seemed to be active, I just reset the stop-loss and take-profit alert levels to new values when the previous take-profit level was reached and booked this as a "win".

The position open at the end of the month was for 57 units of VAS 'bought' at a notional $93.13 with stops at $94.99 (gain) and $92.20 (loss). The closing price on Friday was $94.41 so is currently 'in the black'. I'll have to watch carefully at the open on Tuesday to see if the price suddenly gaps down after the holiday long weekend. The price had dipped a bit and the strong up trend appeared to have ended on Friday, after hitting a high of $94.74 on Thursday, so I am tempted to close out the position if it drops below $93.79 (the stop-loss price that would have been set according to my trading 'rules' if I had opened the position at $94.74 - sort of a manual trailing stop-loss tweak to my normal fixed price stops for each new trade.

Looking at my overall trading account value vs the US S&P500 'benchmark' I realized that comparing the account value in A$ to the USS&P index most of the deviation was due to simply AUD:USD exchange rate fluctuations. So this month I have used the chart expressed in USD to compare my trading account value to the S&P500 'benchmark'. My 'outperformance' looks a lot less impressive when the exchange rate gains are stripped out of the comparison!

Update: I transferred A$4K to my trading account, then FX'd it (and A$0,12 cash I had sitting in the app) into USD resulting in USD$2,669.12 available to trade. The FX fee was $41.53, which offsets most of the benefit of getting 'free' trades for US shares using the app. I've placed orders to purchase equal $ amounts of GOOG, AMZN and BRK.B -- I'll find out when trading opens on Tuesday at what price the trades were executed.

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Retirement Savings Rates, Returns and Results - a rough guide

For anyone in the early stages of retirement savings, it might be of interest to see a rough projection of how savings rate (how much of your after tax salary you save towards retirement) and expected average real, after tax returns would affect your 'likely' amount available to fund retirement after 45 years of working. Of course sequencing risk can alter the final amount even for identical savings rates and average return, but this simple projection will at least provide a 'ball park' indication of where you could end up.

I expressed the final result as a multiple of average annual after-tax salary, and for simplicity I held the salary constant throughout the 45 years period (assuming someone starts full-time work at age 20 and retuires at age 65).

I used real (after deducting inflation adjustment), after tax rates of return. While we don't know how tax rates and inflation will vary over a 45 year period, this will provide a rough guide to the impact of average rate of real return over the investment timeframe. For illustrative purposes I listed some such returns over the past 20 year period after allowing 15% for tax (eg. holding the retirement savings within superannuation in accumulation phase) and 2.68% for inflation (the average over the past 20 years in Australia).

The results indicate that if you saved 10% of your salary and your investment earned an after tax real return of 7% your retirement savings after 45 years might end up at about 28.57x your after tax salary. Using the 'rule of thumb' 4% initial retirement savings withdrawal rate this would provide a retirement income of 114% of your after tax salary.

However, a 7% real after tax rate of return seems very unlikely, so a more realistic expectation if invested in a 'high growth' portfolio (say 80%+ in the stock market) might be something like 4%. If you invested 15% of your after tax salary (probably close to the value 12% SGL contribution if their average income tax rate is above 15%). this average rate of return would result in a retirement savings final multiple of 18.15x after tax salary. Which would provide a retirement income stream of 75% of your average after tax salary. This is probably quite sufficient for many people, as it is more than the full Age Pension which is currently worth 29.83% of AWOTE for a single pensioner. Hence the intention of successive Australian governments to eventually have most workers end up as 'self funded' retirees, rather than relying on the Age Pension.

If you want your retirement income (assuming a 4% initial withdrawal rate) to be roughly 100% of your after tax salary, and expect to achieve an average real after tax rate of return around 4% on your retirement portfolio, then you would have to save closer to 20% of your after tax salary.

If you were a less risk tolerant investor and invested in a balanced asset allocation within your superannuation fund, then the real after tax ROR would be closer to 3% and you would need to save around 25% of your after tax salary for retirement (eg. add to SGL contributions with salary sacrifice of deductible or undeducted contributions).

It is impossible to make accurate 'projections', but at least these rough figures should indicate the 'ball park' of retirement savings rate required to achieve a particular retirement income stream, expressed as a percentage of your average after tax salary.

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NW significant events

Looking at my NW chart there are several significant 'jumps' (up or down) that have occurred during the past 20+ years, so I thought I do a quick recap of the ones that leap out on the chart -- in case anyone is wondering what caused these changes (and can't be bothered trawling through a decade or more of my blog posts).

Events of note:

[1] Stock market was booming, I was using margin loans to gear using 'other people's money' (OPM) and I was dreaming of early retirement. It did seem 'too good to last' so I contemplated reducing my risk by either a) selling off some of my shares and paying off the margin loans - decided against this as I would have faced a hefty capital gains tax bill, or b) withdrawing some cash from the unpreserved, unrestricted part of my retirement savings (superannuation) to pay off the margin loans - decided against this as I didn't really want to reduce my retirement savings, or c) be 'sophisticated' and buy some index put options with a 6+ month expiration date costing about 1%-2% of my portfolio value, that would provide an offsetting gain if there was a significant market correction that reduced my share portfolio value and I need cash to meet any margin calls - I decided to implement this strategy in mid 2007. When the put options expired in late 2007 the market was showing increased volatility and I couldn't (easily) find suitable new put options at a reasonable cost. So I let the options expire and was left holding a $700K+ share portfolio with about $400K of margin loans. Then the GFC started out as a 'normal' dip of 10% in early 2008 caused by the US housing market slump -- 'experts' were on TV assuring everyone that this was just a US problem that wouldn't have global implications. I decided I had already lost quite a bit (due to gearing), so would just 'hold on' for the long term.

[2] I was on holiday in Europe during Q2 2008 when the markets decided the GFC was 'global' and we learned that CDOs had spread the US property market risk through the world -- repackaging really bad mortgage debt into 'A+' rated CDOs. Eventually the market 'crash' got so bad that I was about to receive margin calls so had to start selling off share holdings (at low prices) to clear my margin loans. Ended up selling off most of what was now a $400K share portfolio to clear $400K of margin loans.

[3] No impact on my NW, but we decided to sell our investment residential rental property and use the proceeds to pay off most of our home mortgage. So NW stayed about the same while total assets and total debts both dropped significantly. Gearing dropped to almost zero.

[4] My parents decided to 'sell' their rural farmlet (vacation home/hobby farm) to me, instead of leaving it to me in their will. The 'price' (used for stamp duty calculations) was the market value, which they gifted me (so no money actually changed hands). The benefit to them was that after five years this gift no longed counted as a deprived asset for the Age Pension asset test, so they were able to start receiving the Age Pension. I initially tracked the 'cost price' in my NW calculation, as I intend to leave this asset to my sons, so it didn't seem to make sense counting it as part of my overall NW. Hence the one off $350K jump in NW.

[5] I decided to purchase a $1MM one bedroom luxury apartment 'off the plan' as an investment. Initally only paid the 10% deposit but added the $1MM 'cost price' and a notional $900K debt to my NW tracking. The apartment building took three years to complete. At the time interest rates were very low and it seemed possible that I would be able to get a fixed (for 5 or 7 years) rate loan at 3%-4% at 'settlement'. So the negative gearing would be modest.

[6] Covid happened. From a NW perspective the biggest factor that affected my personal NW vs. the markets in general was that I decided to switch our SMSF investment from 100% 'high growth' to about 50% growth and 50% balanced (ie. went a bit 'risk off' in Feb, when the Covid epidemic was still mostly restricted to China but there was considerable risk it might spread worldwide and impact the global economy. We reverted to our long term 'high risk' asset allocation in Aug/Sep -- so didn't quite get the timing right as we were a bit cautious and didn't go "risk on" again until after the market bottom had passed and we were reasonably certain that the gains were not just a 'dead cat bounce' (there was still talk of a 'great depression' style of market crash).

[7] Construction of my investment apartment completed and I 'settled' the purchase with a $1MM mortgage. I only needed the $900K for settlement but took out a loan for the entire purchase price (using our home as collateral). I left the 'spare' cash sitting in the offset account, so I'm not paying interest on that amount, but can access the funds if needed. I decided to start including the estimated market value of the apartment and my 'holiday home' in my NW calculations, hence the jump in NW due to the adjustment from 'cost' to 'market value' for these real estate assets. Unfortunately inflation and interest rates started to hike about 6 months before 'settlement' was due, so I ended up having to take out a variable rate 'interest only' loan. Paying 6%+ interest made the $1MM investment seem a lot less of a 'good idea' than it had when I bought 'off the plan' and interest rates were around 3%.

I don't expect any events having massive one off impacts to my NW in future -- I will just start paying down the investment property mortgage when it switches from 'interest only' to 'principle and interest' in about 3 years time. By then I should either be covering the running costs of my financial planning business from client revenue, or have switched to 'wealth coaching' and no longer have to pay the $20Kpa or so that it costs to remained registered as a financial advisor (without any clients). That $20K pa will help cover the principle payments on the investment property mortgage. Hopefully rent income will have increased enough by then for the property to no longer be 'negatively geared'. The plan is to fully pay off the mortgage by the time I fully retire at age 80.

My part-time PhD (for the next 7-8 years) shouldn't have any impact on my NW, as the uni fees are covered by the federal government's 'research training scheme' (RTS), so it will only cost me time, not money.

I plan to continue working FT at my 'day job' until about 70, then transition to working PT in my financial planning business until I lose interest (or have health issues). There might be some 'windfall profit' if my financial planning business has sufficient clientele to be sold for around 3x 'ongoing revenue' (which seems to be how such businesses are currently valued). But I'm not counting on the business having any value, so it isn't part of my retirement financial planning.

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Net Worth - NOV 2023

Chart updated to end of November in sidebar.

Stocks/cash increased $10,971 (+5.05%) to $228,135. This was mostly due to markets performing well during the past month.

Retirement savings (SMSF etc) increased by $72,720 (4.84%) to $1,576,439 in line with the market trend and our asset allocation. Having reallocated some surplus cash in out SMSF into an Australian Shares Index Fund during the recent market dip seems to have been a good move.

Est. valuation of our home (my half) increased by $62,601 (5.98%) to $1,109,410. Realestate.com had their monthly 'suburb snapshot' information available again, so I reverted to my usual method of estimating our house price. The 'Other real estate' (my 'lake house' and the investment apartment) decreased considerably over the past month, down by -$89,628 (-4.15%) to $2,071,844 reversing the artificial spike caused last month by the change in data source used for the estimation. This month's estimated values are probably a more accurate estimate of the actual market values - or at least are comparable to my other monthly figures.

The outstanding balance of the investment property mortgage remains at $999,993 during the 'interest only' period of the mortgage. I have about $142K sitting in the loan offset account (which is included in the stocks/cash figure), which helps reduce the monthly interest charged.

Other assets (my online depository bullion account at  Perth Mint, and the bullion value of my gold and silver proof coin collection) decreased by -$443 (-1.16%) to $37,874. Having a small allocation to bullion continues to help reduce my overall  portfolio volatility without too much drag on the overall portfolio performance.

Overall, NW increased by $56,221 (1.41%) to $4,031,682 during November. Finally broke through the $4MM barrier.

New tenants moved into my rental apartment at the end of November. The agent was unable to quickly lease out the apartment for $890.week, so I agreed to maintain the rent at the previous $850/wk rate. The lease is for 12 months and they appear to have arranged to pay their rent monthly around the 15th of each month. They are another couple of Chinese students, again with a cute pet 'lap' dog. Must be the latest fashion for affluent Chinese students studying in Australia?

My AFSL has changed the way PI (professional indemnity) insurance premiums are split amongst their ARs (Authorised Representatives), so my monthly PI fee has leapt up from around $400/mo to $750/mo. Which seems absurd since I have no clients yet (so no possible liability). Overall my fixed cost of remaining a registered Financial Adviser is about $18,000 pa. Definitely time to get serious about prospecting for new (some) clients! I figure I will need to 'onboard' at least one client every month to get to 'break even' point by the end of next year. If I don't have many clients by then I think I'll give up my registration and switch to just being a 'wealth coach' for a small hourly rate. As long as I don't recommend specific financial 'products' I won't have to be registered as a financial advisor - so could eliminate the $18,000 AFSL fee, the $3,500 ASIC levy etc. Particularly when doing financial planning as a part-time 'side gig' it isn't worth the overhead costs to be a financial advisor in Australia. And the government wonders why there is a shortage of registered financial advisors, or why personal financial advice in Australia is "unaffordable".

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