Saturday 30 January 2021

Getting DS1 used to the costs of running a household

Now that DS1 has completed his uni studies and commenced his full time job as a software developer for an up-and-coming IT company, his salary is quite similar to mine. I'm not going to charge him any rent (or board/food) while he continues to live at home, but I've decided that from now on he will put 1/4 of the amount of each bill for local council rates, electricity and water bills into a bank account he no longer uses (but I can see the balance and transactions when I log into online banking). He intends saving up a deposit to be able to buy a house in a few years, so he'll be able to use that bank account as additional evidence of a good savings record (and he'll also be able to use the money in that account to help pay the deposit - so he isn't really paying us anything for room & board).

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End of JAN 2021 "12% solution" portfolio changes

For the end of January the emailed trading signal was to invest 60% in IWM (iShares Russell 200 ETF (All Sessions)) and 40% in JNK. As this was the same asset allocation as last month I don't need to do any trades again this month, which will help reduce trading costs. This month my cash balance appears to have reduced by $50 due to an admin fee (quarterly?).

My current account balance is $11,352.16 which represents a cumulative return of 8.44% 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 +2.7%.

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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Thursday 28 January 2021

Jordan Peterson and my 'Big Five' personality traits

I recently came across some Youtube videos of various Jordan Peterson interviews. I had somehow remained unaware of this Canadian Academic (probably because I'm not very au fait regarding political science - I even had to think a while before working out what the acronym SJW stood for!), despite him apparently being in the news a few years ago (for a legal case about Canada's C-16 Bill that potentially makes refusing to use someone's preferred personal pronoun an act of discrimination in some situations in Canada, which Peterson argues equates to compelled speech legislation and an infringement on freedom of speech). While his views are considered anathema by many (especially militant feminists and neo-communists apparently), I thought that he had some valid points in the few interviews I watched. (But he also seems to have an exaggerated view regarding some of possible impacts of PC etc. on society, probably because university political science faculties seem to have moved towards a relatively high percentage of left-wing academics and curriculum during the past few decades).

I was especially intrigued by his explanation how the unequal outcomes in workforce participation in certain jobs (such as Nursing and Engineering) may remain persistent despite equal opportunity, simply because any small (but non-zero) difference in the average (median) gender preference/interest in "things" vs. "people" will result in significant disparities in the number of people choosing to enter (or thrive in) those fields (because those fields require a very high interest level in "things" (engineering) or "people" (nursing)).

For example, if the normal distribution of interest in "things" means that only the top 5% of the entire population has sufficient interest in engineering to want to study engineering as a career, that translates to a VERY small percentage of women being in that 5% of the general population if the average (median) level has a very slight difference and the distribution curve is the same for each gender.

Therefore, although equal opportunity is a great (and necessary) thing, equal outcomes do not always automatically result. And attempts to "force" equal outcomes may ultimately be unsuccessful (and cause undesirable side-effects in the attempt).

Peterson also has written a popular book about 12 "rules" to live by, which mirror his view that people should take more personal responsibility and aim at self improvement rather than focus on external causes for personal/societal problems. A lot of the rules seem to be fairly common-sense (eg. decide what you want to achieve, and then start taking concrete actions to make progress towards that goal), although he does get a bit more metaphysical ("meaning of life") than is to my taste. In one interview he mentioned the "Big Five" personality traits, which appear to be fairly intrinsic to an individual and are apparently fairly reliable predictors of academic and professional success etc. I had previously done a few Myers-Briggs Personality Type tests, and I think the "Big Five" traits provide similar but slightly difference measurement of the same personality factors.

I did a online "Big Five" personality trait test (cost $10 USD at and found the result quite interesting (though not unexpected):

Agreeableness: 1st percentile (i.e. very unagreeable) - compassion 1%, Politeness 7%.

Conscientiousness: 52nd percentile (pretty average) - Industriousness 44%, Orderliness 60% (my uni lecturer once called me a 'lazy perfectionist').

Extraversion: 14th percentile (very introverted) - Enthusiasm 3%, Assertiveness 47% (so I hate public speaking, but can do it if I need to).

Neuroticism:53rd percentile (pretty average) - Withdrawal 57%, Volatility 48%.

Openess to experience: 37th percentile - Intellect 72%, Openess 13%. Hmmm - explains why I like the technical/theoretical side of financial planning but not meeting/interviewing prospects/clients.

Overall, the results seem pretty accurate, and it seems that the jobs I've had (science/engineering, QA/audit/process improvement, and financial planning) were pretty suitable for my personality type. I probably would have been more successful if I was more extraverted, more open to change, and slightly more agreeable (and had a better memory!). Having average conscientiousness and pretty good IQ (somewhere around 1st or 2nd percentile according to my old Mensa test results - which means over 132 on the Stanford-Binet IQ scale and over 148 on the Cattell IQ scale) seems to have made up for my other short-comings. Unfortunately IQ isn't particularly highly correlated with great business success or wealth (it does correlate with above-average lifelong income though).

Fortunately both DS1 and DS2 are at least as smart as me, and seem to be a lot more well socialized/outgoing ;)

Peterson also says that one of the most important tasks for a parent is to ensure that their children can make (and have) lots of friends by the age of four. The fact that I was living in Hong Kong around the age of 3-4, moved to Australia from the UK at age 4, and didn't attend any pre-school probably didn't help overcome my naturally introverted nature!

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Our SMSF after tax returns

As previously mentioned, my target ROR for our SMSF is around 8.5% - 10.0% pa, based on the historic returns achieved by the Vanguard High Growth Fund (which we generally have all of our SMSF allocated to, except for a small cash 'float' due to receipt of contributions and provision for payments (SMSF tax payments, eSuperfund annual admin payments, and, more recently, DWs annual pension payments).

The actual annual after tax returns achieved by our SMSF are pretty much in line with that expectation:

Year    ROR (after tax)

2020    6.96% (estimated - the FY2020 tax return isn't due for lodgment for a few more months)

2019    9.17%

2018    11.59%

2017    10.42%

2016    4.03%

2015    12.15%

2014    14.92%

2013    21.54%

2012    -4.54%

2011    9.65%

The average annual return has therefore been approximately 9.59%, and the compound annual rate of return is 9.39%. So we've been doing quite well compared to our target ROR.

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Super caps increasing from 1 July 2021

The general transfer (into pension mode) balance cap (TBC) for Australia Superannuation accounts will be increasing from A$1.6 MM to A$1.7 MM from 1 July 2021 due to the CPI index reaching 117.2 in the December 2020 quarter. The associated total superannuation balance (TSB) will also be increasing to $1.7 million. The TSB controls the non-concessional contributions cap for an individual - if you have exceeded the TSB in the previous annual tax reporting for your SMSF you will no longer be able to make non-concessional contributions into your superannuation (i.e. that annual cap drops from $100K to $0 when the TSB has been reached).

For individuals that have already made some transfer of superannuation from accumulation into retirement phase, their individual TBC will lie somewhere between $1.6 MM and $1.7 MM. If you have never previously transferred super into retirement phase, the new cap of $1.7 MM will apply from 1 July 2021. If you had (at any time) previously had a TSB reach $1.6 MM, then you currently have a TSB of $1.6 and that will remain (i.e. you will never be able to transfer additional super from accumulation into retirement phase.

For anyone who has previously used up part of the TSB the calculation of the remaining TSB, and how it will increase with future increases in the general TSB,  are fairly complex. The ATO will provide an individual's personal TSB via ATO online - but it will only be updated after your SMSF's annual tax return has been processed by the ATO (so there will be a period each year after 1 July when an individual will be unable to find out their TSB from the ATO!?).

Anyhow, now that I know the new TSB that will apply from 1 July this year, I can update my super tracking spreadsheet to show the new TSB target against my SMSF projections.

It may seem that because the TSB will increase with CPI you might be better off to wait with making transfers from accumulation to retirement phase as long as possible. But, assuming your SMSF returns are sufficient to make your balance continue to grow while in pension phase by more than the CPI plus the minimum pension withdrawal rate (currently 2% for those under 65, but increasing back to 4% from 1 July 2021) you would be better off to transfer the TSB maximum into pension phase as soon as possible.

Between ages 65-74 the minimum pension amount increases to 5% (currently 2.5% until 1 July 2021 due to Covid-19), so it would be more difficult to be certain that your SMSF returns will exceed the CPI (and hence the TSB uplift) after the minimum pension has been paid out each year. That will depend on your SMSF asset allocation and resulting performance (which in turn will depend on you risk tolerance).

In my case I expect our SMSF to achieve investment returns of around 8.5% - 10% pa, to it will be best to transfer the TBC amount of my SMSF balance into pension phase as soon as I reach 65 (if I'm still working and  not 'retired') - that is assuming my super exceeds the relevant TBC by that time. If I 'retire' before I hit 65 I will be able to transfer up to the TBC amount into pension phase (and hence pay 0% rather than 15% tax on the relevant SMSF pension account's income) - but I am unlikely to reach the TBC much before I reach 65 (but of course that will depend on the investment performance of our SMSF, and if I make any undeducted contributions to 'top up' my superannuation before I hit the TSB.

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Thursday 21 January 2021

Australian Superannuation Caps and Limits

Superannuation provides a tax effective means of saving for your retirement in Australia, but the system is meant to reduce pressure on the Age Pension, so the tax concessions come with caps and limits - super is meant for retirement funding, not for estate planning or general tax minimisation (prior to the introduction of the caps and limits some wealthy individuals had managed to transfer a large amount of wealth into superannuation. For example, in 2019 it was reported that there were around 60 SMSFs with balances over $50 million, and around 750 more SMSFs will balances between $20 million and $50 million. And in 2016 it was reported that nearly 2,000 people had over $10 million in their superannuation accounts).

This was due to previous rules regarding contribution caps not taking into account how much had already been put into superannuation.

Under the current rules such large balances are very unlikely to accrue in future (unless an SMSF makes exceptional investments - for example investing 100% in a start-up company that does really well. But that would probably attract the scrutiny of the regulators regarding whether or not the SMSF trustees had paid appropriate regard to the risks of their asset allocation). The current rules regarding caps and limits are:

* Concessional (paid from before-tax income e.g. SGL and salary sacrifice) contributions are capped at $25,000 pa. These contributions are taxed at 15% for individuals with less than $250,000 pa taxable income, or at 30% for individuals with taxable income above $250,000 pa. You can still make concessional contributions (SGL and salary sacrifice) of up to $25,000 pa when you Total Super Balance exceeds $1.6 million - provided you are under 75 years of age.  Once you are 75 or older, only SGL (mandated employer) contributions can be made.

* Non-concessional (paid from after-tax income) contributions capped at $100,000 pa. These contributions are not taxed further unless they exceed the cap (and under the bring-forward rules up to $300,000 can be contributed over three years for those under 65 years of age) provided the existing super balance (as at last tax return) was under Total Super Balance Cap (currently $1.6 million).

As I will be approaching the Total Super Balance Cap in the next few years, I will have to decide whether I want to make any after tax contributions into my super while I still can.

While in an accumulation account, superannuation is taxed at 15% on income, and 10% on long term capital gains. Due to franking credits the effective tax rate for super assets is actually around 7%.

Once you satisfy conditions (such as preservation age and employment status) to be able to transfer superannuation from 'accumulation phase' into 'retirement  phase' you can shift up to $1.6 million into an allocated pension account (where there will be 0% tax rate applied to earnings and capital gains). Pension payments will be tax free to those aged 60 or more, but those aged between preservation age and 60 would have pension payments taxed at their marginal tax rate - 15%.

There are a whole raft of other caps and limits that apply in specific cases (for example inclusion of LRBA outstanding balances in calculating total super balances for SMSFs, treatments of defined benefit super balances, rules regarding government co-contribution eligibility, spouse contributions etc.), so this is not a comprehensive list of superannuation caps and limits.

Exceeding caps and limits can have significant consequences, such as additional tax liabilities.

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Wednesday 20 January 2021

How much did Vanguard's new admin system cost our retirement savings?

As I have previously mentioned, I am underwhelmed by the 'benefits' provided by Vanguard's change of admin system and the new client online access system. Aside from no longer being able to access my Vanguard account linked to my St George Margin Lending account, the new administration system no longer allows 'switching' between the old retail funds.

Before the changed admin system, you would fax in a 'switching request' and the units would be sold from one fund and bought in the new fund using the same day's closing buy/sell prices. So the only cost would be the normal buy/sell spread in the unit prices.

But under the new system we had to sell our existing Funds, wait for four business days for the cleared funds to arrive in our bank account, and then start doing daily $100,000 BPay contributions into the new Fund...

Now that all the transfers have been processed and I know the relevant daily unit prices used for the transactions, I was able to calculate exactly what happened under the new process:

11 Dec; sold our existing Conservative Fund and Growth Fund investments: $1,598,995.36

The High Growth unit buy price on 11 Dec was $1.9507, so if we had been able to do a 'switch' we would have received 819,703.37 units of High Growth Fund

17 Dec - 1 Jan: bought into the High Growth Fund via daily BPay tranches

Total number of units allocated was 813,049.65 over a two week period

Therefore, we received 6,653.72 less units than we would have if we had been able to do a same day 'switch' between Vanguard Funds. At the unit price that applied on 11 Dec (when we would have done the switch) those extra units would have been worth $12,979.41.

Overall, being unable to process a 'switch' cost us 0.81%

Of course we might have got lucky and benefitted from changes in unit pricing during the two weeks it took to move the investment from one Vanguard Fund into the other, but it didn't work out that way. And I don't appreciate being forced to gamble on how unit prices might move during the time it now takes to 'switch' between Vanguard Funds. In fact I'm relieved that the markets didn't rise continually during the two weeks (which could have cost us even more missed gains).

If Vanguard works out how to painlessly (and at no cost) shift existing investors from the old retail Funds into the equivalent ETFs (without having to setup a whole new online Vanguard account) things will improve slightly -- but you would still need to sell one ETF investment and wait for the trade to become available in the cash account (taking the using ASX T+2 Settlement period) before being able to buy the new ETF.

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Tuesday 19 January 2021

Updated NW performance vs my 'stretch' benchmark

After being delayed due to Covid-19, the annual Aussie "Rich 200" list was published at the end of November. I've done an updated plot of my net worth vs. 1% of the "cut off" amount required to make it onto the "Rich 200" list, as shown below.

I haven't made up any ground against this bench mark, but at least I am doing a reasonable job of keeping pace with the most successful of the Australian 'rich'. The cut-off net worth required to make it onto the 'Rich 200' list is quite a challenging benchmark, as the rich list automatically drops off any underperformers and replaces them with whomever is doing the best in the current economic climate. For example, this year several people that had made their fortune in the travel industry were dropped off the list, and three entrepreneurs involved in the creation of the successful start-up company Canva have made it onto the list.

Having been fixed at only 200 people for many years, the rich list is also getting more exclusive compared to the Australia population.

I doubt I'll ever grow my net worth to 1% of the rich list cut-off, but if I increase the growth rate (slope) of my net worth plot to match that of the rich list I'll be very happy.

My NW figure used in this plot is slightly different from that in Networthshare and my monthly NW estimates as I've deducted the value of the lake house property I 'inherited' from my parents as that would artificially inflate my NW growth.

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Bought some Vanguard High Growth Diversified Index Fund ETFs on my Comsec Margin Loan account

I've had no net debt owing on two of my three margin loan accounts for several years, but yesterday I decided to purchase $20,000 of VDHG (Vanguard High Growth) ETF using my Comsec Margin Loan account. I had previous had a small positive cash balance sitting in that margin loan account, so overall I'll now have a CSML loan balance of $11,685. The interest rate is currently 5.50%, so I'll be paying about $643 in interest pa, which will be tax deductible (in reality it will offset some of the dividend income produced by my investments).

Over the past three years the average annual total return on VDHG has been 8.42%. Longer performance data isn't available for the ETF, but it should perform in a similar manner to the Vanguard High Growth Index Fund that had an average return of 8.40% over the past three years (to 31 Dec 2020), and has averaged 9.84% pa over the past ten years.

As all distributions that are taxable as income will be offset by tax deductible margin loan interest payments, most of the net return (total return - interest cost) will be in the form of long term capital gains, which would be taxable at half my marginal tax rate due to the CGT discount. And if I don't sell the investment until I 'retire' and have little taxable income (any SMSF pension income will not be taxable income under current tax law when it is in 'pension mode' and I'm over 65) there may be no CGT liability at all.

While I can't know what returns over the coming decade will be (see my previous post regarding why it could be a decade of mediocre returns), there is a reasonable probability that the average total return over the next ten years will be higher than the average interest rate charged on the margin loan. So I have a reasonable chance of making a profit on OPM (Other People's Money).

To put this trade into perspective, I now have total margin loans (and portfolio loan - secured against our home equity) debts of $115,000, while the investments held in those accounts have a current market value of around $235,000. So, even after this latest purchase on margin, the overall LVR across all three margin loan accounts and my portfolio loan account is still under 50% (and most of that debt is on the portfolio loan, which isn't subject to margin calls).

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Friday 15 January 2021

Will the 2020s be a 'lost' decade for equities like the 1970s?

Having recently switched our superannuation asset allocation back to our long term strategy of being 100% in 'growth' assets (via the Vanguard High Growth fund), I am of course now worried about the prospect of poor market returns, and the lack of a viable asset to 'rotate' into as a viable alternative. An article in the SMH described how any increases in interest rates by the US Federal Reserve in 2021 and beyond to combat possible inflation could pop the US equity bubble. Our Vanguard investment is about 60% International (mostly US) : 40% Australian equity exposure, so a bear market in US equities would impact our retirement savings considerably. And while there seems little immediate prospect of high inflation or increasing rates by the Australia Reserve Bank for next few years, the Australian share market tends to reflect movements in the US market most of the time.

The strength of the share markets during 2021 was a bit of a surprise in light of the economic impact of Covid-19, but can be explained by the higher p/e ratios being justified in comparison to drops in the 'risk free rate'. But as economies start to recover in 2021 and beyond, central banks will look to move back towards more 'normal' interest rates. Increasing interest rates would induce equity market 'corrections' to more normal p/e ratios even while company profitability may be on the rise. And increasing interest rates would drive up bond yields, which in turn will reduce bond values. So both equity and bond markets could experience poor capital growth over the coming decade.

And while cash rates are close to zero, shifting asset allocation back into cash isn't particularly attractive (our V2 'high interest' savings account is only paying 0.42% interest). An increase in the central bank rates from 0.25% to 1.5% might be a six-fold increase in interest rates, but that is still a poor rate of return (especially if inflation moves back towards the desired 1.5-2.0% target band).

So investors could see poor total returns from stocks, bonds and fixed interest during the 2020s. I can't see any obvious asset reallocation, so perhaps we'll just stick with the High Growth fund and see how things pan out.

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Sunday 10 January 2021

A few blog layout changes

I'm supposed to be sorting and filing away a backlog of financial paperwork this weekend, so instead I'm fiddling with my blog layout ;) 

I decided to put a blog roll back into my layout, but most of the PF blogs I used to follow seem to have gone inactive or have turned into generic cash-generating machines with lots of cookie-cutter content and monetization, so I've only added two links to the blog roll so far. I'll add more if and when I find something worth following...

I've also removed most of the monetization ads from this blog (Amazon books and google ads in the sidebar), as no-one ever buys anything via the Amazon links and my google Adsense has not been working properly for many years (even though my site traffic is reported to hover around 100-200 people per day according to the google blogger stats, google Analytics (and hence Adsense) reports that the site traffic is only 1/10th of that). So my google AdSense revenue has been averaging only 5 cents per month, and at that rate it would take forever for my current accumulated Adsense revenue (around $88) to grow enough to receive another cash payout (I think that would be at A$100). 

I still have Adsense turned on for automatic insertion between posts, but I don't think that actually works (at least I never see any ads between posts when I have a look at this site). Overall, its not worth worrying about monetization of a low traffic blog, so I decided to just clean up my layout a bit instead. It's a bit like the interest received on bank savings accounts - such a tiny amount that its not worth worrying about.

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Tuesday 5 January 2021

Net Worth: DEC 2020

My monthly Net Worth calculation has been updated in NetWorthShare for end of December. The stock markets were volatile during December but ended the month fairly flat, so my stock portfolio ended the month at $309,781 (down $1,894 or -0.61%) and my estimated super balance was $1,284,074 (up $5,595 or 0.44%). We've nearly finished the transfers back into Vanguard High Growth Fund from the ANZ V2 cash account, after liquidating the Growth and Conservative investments in mid-December and then having to BPay the cleared funds back into the Vanguard High Growth retail fund (closed to new investors) via $100K/day BPays. The final BPay was done on 1 Jan, and there is also a Vanguard distribution for 31 Dec that is in the process of being credited, so those adjustments won't affect the SMSF calculations until end of Jan.

Our estimated house price was slightly down (-$1,884 or -0.22%) for the month, but the Sydney residential real estate market is showing signs of strength, and a few forecasters have started predicting rises over 2021 and 2022. Hopefully the valuation of my investment unit will be higher than the 'off the plan' price by the time construction is completed in Q2 2023 (when I'll need to get a mortgage to pay the balance of the purchase price).

My net worth figure increased very slightly (by $2,152 or 0.08%) overall, to $2,728,126. 

During 2021 my NW increased from $2,442,188 to $2,728,126, which was a gain of $285,938 or 11.70%. Considering 2020 was a global pandemic and my salary package is only around $110K before taxes (and my financial planning business had no customers and cost me around $18,000 to run, plus I paid uni fees for my masters degree of around $12,000) I was very happy with my financial progress for 2020.

In 2021 I will finish off the final three subjects for my Master of Financial Planning degree (so the uni fees I pay will reduce to about $9,000 for 2021) as well as a couple of specialist financial planning subjects and the Advanced Diploma of Financial Planning from IIT (that I've already paid the fees for). Hopefully I will also get a few paying financial planning clients during 2021, so the net loss of my financial planning business should reduce (I'd like it to cover the running costs, but that may not happen in 2021). House prices in Sydney are expected to rise slightly during 2021, and our home loan will continue to slowly reduce. Depending on how the markets perform during 2021, I might hit $3m NW by the end of 2021... 

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Friday 1 January 2021

End of December "12% solution" portfolio changes

For the end of December the emailed trading signal was still to be invested 60% in IWM (iShares Russell 200 ETF (All Sessions)) and 40% in JNK. This was the same as last month, so I don't need to do any trades again this month, which will help reduce trading costs. It will be interesting to see how this portfolio performs during 2021.

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