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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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Saturday, 2 May 2020

Net Worth: April 2020

The rebound in stock markets during April pushed up the value of both my geared share portfolio and SMSF investments, gaining 3.27% and 2.71% respectively during April. We're still invested 70% in the Conservative Index Fund and 30% in the Bond Index Fund in our SMSF, with only a small ($2K/mo) ongoing investment of cash into the High Growth Index Fund. We thought about shifting part of our SMSF investment back into the High Growth Fund in mid April, but decided the market is likely to remain volatile until the scope of the economic impacts of Covid-19 become more predictable, so stayed invested relatively conservatively for the time being. By the end of April this strategy was looking costly as the markets continued to rise, but the large single-day drop on 1 May suggests that we may be right after all. In the current situation I'd rather suffer from modest returns by being invested conservatively, than suffer from large capital losses by being too aggressive too soon.

Our estimated house price remained unchanged in April, with real estate sales subdued due to social distancing rules, and prices likely to be weak as unemployment (and underemployment/wage cuts) impacts both consumer confidence and enthusiasm to take on large mortgages. If the unemployment and economic impacts of Covid-19 aren't too severe in Australia, and the economy starts to pick up again later this year, then property prices may be supported by a move of investments out of equities and into real estate (it happened after the '87 crash made a lot of 'mum and dad' investers wary of the stock market).

I haven't revalued my 'off-the-plan' $1m unit investment or my holiday home/hobby farm (as usual). Valuation of the off-the-plan unit based on recent unit sales data in the suburb is likely to be imprecise, as the new unit development will put a lot more stock into the market when constuction ends in 2023, and the new units are relatively 'high end' compared to existing, older units in the area. I'll only start tracking the valuation of my apartment after get a valuation done for a mortgage when settlement is due upon completion of construction. Best guess is that it *might* be worth about 10% more now than when I entered the contract last year, which would cover the stamp duty I've paid and selling costs. So I don't appear to have lost money on that investment at the moment.

The rural property is just being left at the valuation used when it was transferred into my name. I intend to leave it to the boys and never sell it, so it seems rather pointless to include any notional gains in my personal net worth tracking. In theory it's probably worth about $600K now, compared to $325K when I took title.

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