Monday 5 February 2024

Fiddling around with my Investment Bond Asset Allocation

I started my Generation Life Investment Bond ('LifeBuilder') investment at the end of 2020, with an initial deposit of only $1,000. The initial investment was processed on 6 Jan 2021, so that is the 'anniversary date' for calculating the '10 year rule' basis for any withdrawals being 'tax free' (although the internal tax rate is around 30%, so this isn't really much of a boon unless your marginal tax rate is over 30%). If you withdraw prior to year 8 the capital gain is taxable (but you will get a 30% tax credit, so it might be worth making an early withdrawal if you tax rate is less than 30%).

Anyhow, my initial investment was allocated equally between the Dimensional World 70/30 Fund and the Vanguard High Growth Portfolio Fund. I made four additional $500 contributions into the account during the first year, so the 'base' investment amount was $3,000. Therefor the maximum investment (without resetting the '10 year' counter) was 125%x$3K = $3,750 for the second year. I made one $500 investment and three lots of $1,080 in the second year to come in just under that limit.

In year three I made one contribution of $1,080 and three contributions of $1,198 to come in just under the max allowed limit. I also decided in June 2023 to switch the investment allocation to include some Perpetual Geared Australian Share Fund, as I wanted to reduce the overall allocation to cash and bonds, and include some internal gearing (although from the performance of the Geared Fund to the benchmark, the fees and interest on borrowed capital makes this a rather dubious proposition). At this point my Asset Allocation within the Investment Bond was 20% Geared Australian Fund, 40% DFA World 70/30 Fund, and 40% Vanguard High Growth Fund.

This year I have setup automatic quarterly contributions of $1,460.62 to exactly hit the maximum contribution target ($5,842.50) for year four. I also did a review of the overall historic performance for my current asset allocation over the past one, three and five years. My actual overall performance to date is currently 5.08% pa, but as I still in the early stages of making contributions, the performance isn't of great concern at this stage. The historic performance of my current asset allocation was 9.16% for the past 12 months, 6.16% for the past three years, and 7.21% for the past five years. All performance figures are after fees and taxes.

As I want to use the Investment Bond to slowly build up a portfolio to form the basis for a long term Family Trust, I am not too concerned about volatility, but more interested in the potential long term average performance. For that reason I decided to tweak the asset allocation once more (hopefully the last time!) and have now changed the allocation to 20% Perpetual Geared Australian Share Fund, 20% Dimensional World 70/30 Portfolio, 25% Vanguard High Growth Portfolio and 35% iShares Wholesale International Equity Index Fund.

The historic return data for this new asset allocation is 11.64% for the past year, 7.71% for past three years, and 8.49% for past five years. Historic performance is not a reliable indicator of future performance, and chasing high returns is always fraught with recency bias, but overall I am happy to have reduced the Cash allocation from 0.47% to 0.30%, the Australian and Global bond allocation from 15.66% to 8.33%, and Australian and Global property exposure from 0.95% to 0.47%. The overall gearing level has remained at 10.3%, and the allocation to Australian and Global Shares has shifted from 43.94% Australian/38.99% International to now be 33.73% Australian/57.17% International.

I'll probably let this allocation remain unchanged for the next 10 or 20 years and see how things are going when I'm retired and using the Investment Bond as a sink to store any excess retirement income. If the asset allocation can average 7% or more after fees and taxes I'll be delighted.

Subscribe to Enough Wealth. Copyright 2006-2024

No comments: