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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: [https://www.cdc.gov/nchs/fastats/deaths.htm]

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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