Wednesday 31 March 2021

Thinking about bullion

I've been watching a few youtube videos with interviews of the likes of Ray Dalio, Harry Dent etc. predicting inflation/hyperinflation and/or stock market crashes/lost decades (no real return) as a result of the monetization of the vast amounts of stimulus spending that has occurred around the globe. If stocks and bonds do poorly as interest rates start to move upwards, and returns on cash remain less than inflation, alternatives such as gold (or silver) might be worth including in one's portfolio as a hedge against inflation.

The problem I have with 'investing' in bullion is that it provides no income or dividends (it actually costs money due to buy/sell spread, fabrication costs, and possibly holding costs and insurance) and while it should provide a hedge against inflation in the long run (as the cost of production sets some sort of floor price, and production costs increase with inflation), the short and intermediate price movements are prone to investor sentiment pushing prices too and high or too low over periods lasting decades. I still remember the remarkable silver bubble that occurred when the Hunt brothers tried to corner the market in 1980.

That said, putting a small fraction of my entire NW into gold or silver may provide some diversification benefit. I thought I already had some gold 1/10th bullion coins lying around that I'd bought from the Perth Mint several years ago. I remember I bought about ten of them and gave a couple away as presents. So I should still have 8 or so -- but I only found one of these tiny, encapsulated gold coins sitting in the box where I keep my silver bullion coins (4 one-ounce coins and one 2-ounce coin). I had already looked in other likely storage places, but so far haven't found them. One of the big problems with keeping physical gold!

So I'm wondering what form of investment in gold bullion (as opposed to gold mining stocks, which are generally correlated with the gold price) I might make. I could order gold coins or bars from Perth Mint and store them, but the production costs mean you pay considerably more than the 'spot price'. For example, 1-ounce gold coins cost 5.0% above spot price, 1-ounce minted bars cost 2.1% premium to the spot price, and cast 1-ounce gold bars cost 1.8% above the spot price. Silver is even worse, with physical coins and bars of 1 to 10 ounces costing around 20-30% above the spot price per ounce!

As an alternative to physical bullion, I could buy a gold CFD. One benefit of that would be leverage, but then again I'd be paying a buy/sell spread and also a daily margin interest cost. Not a great idea for an asset that doesn't produce any income stream.

So, I've decided to open a depository account with Perth Mint. I'll be able to transfer a small amount of money into the account on a regular basis, and then go online to buy either gold or silver at the spot price plus a small fee. I'll probably choose to hold any bullion in the 'unallocated pool' which is backed by physical metal, but in the form of gold or silver sitting in the mint vaults as part of their production process. That way the purchase fee will be 0.5% and there won't be any holding/storage costs. If I ever want to take physical delivery, I'd have to transfer my holding into the 'allocated pool' and then order fabricated bars or bullion coins. I've yet to decide how much money I might regular put into the depository account to make gold purchases with. At the moment the gold price (around $2,200/oz in AUD) has been dropping a bit from its recent peak 9 months or so ago, and is back down to where it started 2020. It could continue to fall back to the $1,600 level it was sitting at during 2017-2019. This is still a lot higher than it was back in 2000, when the price was only $500 an ounce or thereabouts. With inflation around 2.5% during the past twenty years, the price only needed to increase to around $820 to have kept pace with inflation. Then again, the gold price had sat around $500/oz during the 1990s, so it is hard to pick a year that represents a 'reasonable' price for gold. Looking at the inflation adjusted gold price for the past 100 years, it doesn't look particularly 'cheap' at the moment though:

While gold was a good store of wealth during 1929-1935, it was an extremely poor investment between 1935-1970, and between 1980-2000.

Investing a tiny amount in gold is hardly going to have any material effect on the overall performance of my portfolio, and investing a larger amount would be a move from investing towards speculation.

I'll probably just transfer $250/mo into the depository account and buy a regular small quantity to dollar cost average a small bullion holding over several years.

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Sunday 28 March 2021

Australian Green's Party will make theft their official party policy to take to the next election

Apparently the existing top marginal income tax rate of 45%, plus a 2% medicare levy, plus a 1.5% medicare levy surcharge (if taxpayer does not have private medical insurance) i.e. a total of up to 48.5% tax on high level of income isn't enough taxation for the Australia Greens Party. Plus, of course, GST (10%) on most purchases when you spend the after-tax money you have left after paying income taxes. Plus, miscellaneous other taxes and charges out of the same 'after-tax' income...

So, the Greens Party has announced a new policy of a wealth tax of 6% of the wealth (each year? - the details have not been published yet, just a 'thought bubble') on Australia's wealthiest 122 individuals (not sure how they will work out who has exactly what wealth, as the ATO does not collect wealth data, only income - perhaps they will rely on the 'rich list' published by a magazine? That will be a fun court case for the ATO).

If applied, a 6% annual 'wealth tax' would effectively confiscate 100% of the average after-tax return generated on these assets. Some years the after-income-tax ROI would be more than 6%, but many years it would be less than 6%. Effectively transferring ALL the benefit of having these assets from the individual to the state. Which is effectively theft. Just imagine if financial planners or funds managers were charging 6% annual fee on AUM!

The NZ Greens Party has a more 'reasonable' wealth tax policy - they only propose a 1% wealth tax on anyone with a net worth above $1 million, and 2% wealth tax on those with more than $2 million net worth, so would 'only' be about 1/3 of real returns, but apply at a much lower threshold. Indeed 305,000 of New Zealand's 4.9 million adults have a NW over $1MM - which is around 6.2% of the adult population of NZ.

IMHO any wealth tax, inheritance tax, or other form of government confiscation of wealth is unfair, for the simple reason that the income used to accumulate wealth has already been taxed (at up to ~50% for high incomes when the medicare levy and MLS are included). Having already taken about half of a high income earning individual's income via income tax (or 30% if they make use of trusts to reduce the tax rate to that of company tax), to then take ~100% of the after tax ROI on whatever the individual invests is completely unfair. The fact that this will only apply to a small fraction of the population is beside the point - discrimination against minorities is never OK, be it migrants, LBGTQIA, women, children, the elderly, the rich, the poor, or whoever.

Of course the Greens have no chance of winning government in their own right (they only have one lower house seat at the moment - their best result ever), but are free to propose whatever loony ultra-left policies that will appeal to the neo-communist 7%-11% of voters that consistently give them a couple of Senate seats in most States. They currently have 1/151 house of representative seats (as you have to end up with >50% of the vote after preferences to win an electorates seat), but have 9/76 Senate seats (12% of Senate seats will only around 10% of the vote), so can hold the 'balance of power' in the Senate when Labor wins the lower house, so can have a disproportionate impact on government policy. One way to reduce the influence of the Greens would be for the major parties to be more co-operative in the Senate, regardless of which party happens to have won the last general election and have formed government. Unfortunately, the job of opposition is not to seen to be to challenge and improve government legislation, but simply to score political points and improve their own prospects of winning the next election.

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Wednesday 24 March 2021

Looking into purchasing a deferred lifetime annuity to compliment superannuation account-based pension

I'm fortunate that both my parents are still alive (aged 89 and 85) and reasonably healthy, I also have one great-grand Aunt who is still alive at age 105 (but suffering dementia in recent years), and my paternal grandparents both lived to 94 years of age. So, although the life expectancy of an Australian male my age is currently 85.56, there is a reasonable chance I could still be around in my nineties (especially if I lose my excess weight and exercise more), or possibly even make it to 100. There might even be some novel medical treatments that become available during the next four decades that extend healthy lifespan more than the 0.2% annual increase that occurred in recent years (2018-2020).

Therefore, although I'm currently on track to reach the superannuation transfer balance cap by the time I 'retire' (transition from my current full-time employment to working part-time as a financial planner), which should provide sufficient retirement income to maintain my present lifestyle indefinitely, there is always 'longevity risk' that I may exhaust my retirement savings before I die, especially if sequencing risk has an adverse impact (a few 'bad' years at the start of your retirement have a much greater impact that similar 'bad' years occurring towards the end of your draw-down period, even if the average ROI is identical).

One can however 'insure' against longevity risk by purchasing a lifetime annuity, that will provide a fixed income stream until your death. Of course the net amounts expected to be paid out have to match the premiums paid in, plus investment returns, minus the providers costs and a profit margin. Therefore, purchasing an immediate annuity (that starts making payments straight away) provides quite a low ROI (around 4% pa, which is quite poor considering part of that is simply the return of your principal). But it is also possible to purchase a deferred annuity using superannuation money (once you reach retirement) that doesn't start to provide an income stream (hence is 'deferred') for a chosen number of years.

If the deferral period is quite low (so you are almost certain to receive income for a number of years) or the annuity has a 'death benefit' (life insurance component), or can be withdrawn early (get your money back), or will continue to make payments to a surviving spouse, then the income stream is also reasonably modest. However, if you choose the option to have no death benefit, no option to withdraw, and no reversionary beneficiary, then the amount of income you may receive (especially if it is deferred beyond the average life expectancy period) can be quite high.

For example, at age 60 I could purchase (if I was retired) a $10,000 deferred annuity with a 35 year deferral period (i.e. start paying out at age 95) and no death benefit, withdrawal option, or surviving spouse benefit that would pay $8,225 pa indefinitely. Similarly if I retire at age 65 I could then purchase a $10,000 deferred annuity with 30 year deferral period (still commencing payments only if I live to 95) of about $8,775 pa. So, as long as I don't receive any income unless I live past 95, it makes little difference whether I purchase the deferred annuity now, or in 5 years time.

So, although there is a risk that you might die too soon to receive ANY payment from a deferred annuity (if it doesn't have a death benefit), it does provide a mechanism to ensure you have a reliable income stream in the event that you live a lot longer than you expect.

For example, if I rollover $100K of my TBC into a deferred annuity that doesn't start paying until I reach 95, I would then receive about $85,000 of tax free income from the annuity each year until I die. If I happen to live as long as my great-grand Aunt the total return could be up to $850K on a $100K 'investment'. The annuity payments are increased in line with inflation (cpi), so those figures are all in current $ terms. This isn't quite as much as you *might* end up with by simply leaving the $100K in retirement-phase superannuation *if* you achieved a consistent average 5-6% real ROI, but the difference is basically the cost of insuring against sequencing risk.

Of course if I die before reaching 95 then my $100K will have gone towards funding the income streams of other annuants that live long enough to collect. But I won't be around to be upset by this!

Overall, using $100K (about 6%) of my $1.7m or $1.8m TBC to purchase a deferred annuity looks quite a good option to ensure I have a guaranteed (as long as the insurance company stays in business) income stream if I live to 95+, especially if investment returns during the next 40 years are worse than average.

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Wednesday 10 March 2021

Looks like I stopped shorting Tesla too soon ;(

It looks that my theory about Tesla being way overpriced was correct, but my decision to stop trading (shorting) Tesla may have been premature. Oh well, at least I made a little bit of money while I was trading.

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Thursday 4 March 2021

Invested in Microequities Value Income Fund

I've been receiving regular promotional emails from Microequities Asset Management since 2017 when I first responded to an ad about this fund manager via Morningstar. I decided to take another look at their fund offerings, as I was willing to put $10-$20K into one of their funds as small, value equities can often perform well compared to the overall market index, but it is a lot of work to research and select potential winners (so I wouldn't try to pick individual stocks myself).

I found out (again) that their funds are 'wholesale' and normally only available to 'professional' investors with a minimum investment of $100K. Probably why I didn't invest back in 2017!

However, after abandoning my online application when I came to the minimum investment requirement, I was contacted by one of their relationship managers who advised that they had recently started up a new retail fund with a $20K minimum initial investment. So I decided to invest the minimum amount into their retail 'Value Income Fund' via my portfolio loan.

Being a small, boutique fund manager they charge a quite hefty fee of 1.3% PLUS a 'performance fee' of 20.5% of any return above the benchmark S&P/ASX Emerging Company Accumulation Index. There is also a potential liquidity issue, as the PDS notes that redemptions may be suspended or delayed if market conditions result in redemption requests of more than 5%-10% of the fund in one day.

Overall this is a fairly costly and high risk investment, so I wouldn't risk a large fraction of my portfolio on this investment. But $20K is only 0.72% of my NW, so I can afford to make a modest allocation to this investment. The retail fund has only been operating since Feb 2019, so it doesn't have much historic performance data, but it is expected to follow a similar strategy to their wholesale high income value fund, which has averaged a compound rate of return of 11.41% since 2012. As long as the average return is above the interest rate charged on my portfolio loan (currently 4.98% pa) I will do OK. We'll see how things turn out over the next 5-10 years.

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Tuesday 2 March 2021

Stopped shorting Tesla and switched from buying Alphabet to ASX200 CFDs

My recent brief foray into day trading was profitable overall, making some net gains by shorting Tesla (TSLA) while losing a little bit buying alphabet (GOOGL) just before it dipped in price. I'm not sure if Tesla will continue to weaken towards a more realistic p/e ratio or if the previous enthusiasm for this car-maker-priced-as-if-it-were-a-tech-company returns for a while. Google may well continue to rise (at least until there is an overall market correction), but it has also seen incredible gains over the past last March, so could just as easily drop back to 1700 than continue to rise beyond 2000. I also only started buying alphabet because it has a tiny fraction of its value tied up in SpaceX - which is a pretty stupid reason to buy into a stock when you think about it.

Overall I've decided to stop playing roulette day trading for a while, and instead have just bought a small long position in the ASX200 via the purchase of 50 iShares MSCI Australia Index Fund CFDs at $25.780 on 26 Feb. I'm currently down -20.50 USD on this trade (-0.4 per CFD) due to the market sell-off at the end of last week, but as I have large trailing stop loss set at -4 points (currently set at $21.78), the market would have to drop 15% for the position to be closed out. I'll just leave the long position in place and hope to gain from any long term increase in the ASX200 index over the next few years.

The 50 CFDs had a position value of $1289 USD, but I think the required margin is only 7.5% (A$118.63), so the minimum trade commission of $15USD was a quite hefty impost (the commission rate is only 1c per CFD, but the minimum commission makes small trades uneconomical). So this sort of trade only makes sense if done as a buy-and-hold highly geared strategy, unless you are trading a large dollar amount. Daily interest charged on this small open position appears to be around A$0.11 per day.

So if the Australian share market rose 10% over 12 months, I would make a gain of around A$160 and have been charged around $40 in interest charges. Given the large minimum commission for this trade and the low ratio of required margin to my CityIndex account balance (currently around A$1,600) I probably should have traded 200 or 250 CFDs rather than 50. I'll probably use the 'spare' capital sitting in this account for some further day trading if and when an obvious opportunity arises.

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Monday 1 March 2021

Net Worth: FEB 2021

My monthly NW estimate has been updated in NetWorthShare for the end of February. The stock markets performed well for most of the month, but then suffered a sell off in the last few days of the month but still ended up slightly overall for the month. I've added my recent Investment Bond investment to my 'stocks' total, and also included my investment in the 'Spaceship' online investment fund (I started that last year but seem to have not been including it in my NW calculations). Overall my 'stocks' figure was up $20,134 (6.54%), but the monthly movement has been exaggerated by the sudden inclusion of the Spaceship fund value (about $6,122).

Our estimated house price for February (my half) increased by $5,182 (0.62%) to $842,111. Due to low interest rates and government stimulus measures relating to first home owner grants and subsidies, the residential housing market in Australia is currently quite buoyant. Around this time last year the 'experts' were predicting falls of up to 30% in house prices, now those same 'experts' are predicting a rise of 10%-20% in Sydney prices over the next two years. Unit (apartment) prices are not a strong as free-standing houses due to the impact of Covid-19 border closures on migration to Australia. So my 'off the plan' unit probably won't increase much in value before construction is completed and I need to get a mortgage to fund settlement in Q2 2023. 

The value of my retirement savings rose significantly during February, to $1,307,671 (up $20,175 or 1.57%). Hopefully I will be able to reach the TBC ($1.7m from 1 July this year) by age 65 when I can transfer that amount from accumulation phase (where the tax rate is 15%) to retirement phase (where the tax rate is 0%). Any amounts above the TBC will remain in accumulation phase.

Overall, my NW reached $2,775,755 by the end of February - up by a healthy $45,758 (1.68%).

Accumulating wealth starts out like someone learning to swim by madly kicking their legs while holding onto a kick-board for grim life - lots of effort for little visible progress. But eventually you reach the stage where the portfolio growth exceeds the amount you are adding each month, so the situation is more like sitting in a kayak gliding along and only having to make the occasional course adjustment and put in a few strokes to keep things moving along. I suppose when I'm retired it will be a bit like sitting on a deck chair of a cruise liner - mostly just relaxing and watching the ship steam ahead, but sometimes still getting a bit anxious when there is a storm and the seas get rough.

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