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An artist's quest for financial independence

Discussion in 'Introductions' started by investfreq, 13th Nov, 2007.

  1. investfreq

    investfreq Member

    Joined:
    11th Nov, 2007
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    Location:
    Sydney, NSW
    Hello, I'm so glad I found this forum! Looks like there are many clever and helpful people here. I just wish I'd found it sooner.

    Here's my situation: I'm an artist, about to turn 35. I've lived the starving artist lifestyle and am over it. Fortunately a few years ago I got a permanent part time academic position, which pays about $40k p.a., and this year I've finally managed to pay off all of my debts (except HECS) and started saving money for the first time.

    While I'm very lucky to have the day job, it does distract me from my calling of making art. The art is unlikely to ever be lucrative, so I've been thinking of a solution. I call it 'Freedom 45'. :)

    I'd like to be financially independent by 45. To me that would mean owning a modest property and having an income from investments of over $20k pa and rising steadily. That way I could cut back on the teaching, make the art that I want and any income from it would be a bonus, and I could still eventually retire comfortably.

    Am I dreaming? A year ago I didn't know anything about investing, but I did a lot of research, made some spreadsheets and came up with some ideas. I'm still a complete beginner though, so am keen to get your feedback.

    I'm currently saving at a rate of over $500 per fortnight and expect that to continue for the foreseeable future. I've opened a CFS First Choice account with a margin loan and am putting most of the savings into it (the rest into an iSaver). The balance is currently approx $20k (incl $10k margin loan).

    The allocation is 40% CFS Global Resources, 40% CFS Geared Share, 10% First Choice Small Companies, 10% Acadian Aust Equity Long Short. I'm hoping for 20% p.a. returns over at least 5 years, although I'd be happy with 15%. I realise that this is risky but figure that I don't have much to lose at this stage and can go more conservative later on. At around the 5 year mark, I'd start thinking about property.

    One consideration is my mother. She has a house worth $450k, with a $250k mortgage. Her small business is struggling and her health isn't great. If I could pay out the mortgage she would retire, sign the house over to me and I could potentially unlock some of that equity. Is it worth saving until I can pay it in one go, or should I borrow to do it sooner? Or is this generally a bad idea as I wouldn't get any rent, and I'd like to get a place of my own to live in, and hopefully will be in a position to help her out financially later on?

    I should probably get a financial adviser - I visited one at NAB but he was useless, which made me think I could maybe do it myself. But although I'm pretty happy with the convenience and simplicity of managed funds, property (esp IP) is still a complete mystery to me. Anyway thanks for reading this far. I'd really appreciate any thoughts or advice.

    cheers
    Shannon
     
  2. crc_error

    crc_error The Rule of 72

    Joined:
    1st May, 2007
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    Hi Shannon, your on the right track.. just stick to a regular savings plan along with gearing like your doing.. in 5-10 years you will have a significant amount of assets.

    Having 40% in resources is a large allocation into such sector.. but if you believe global reasources have a way to go, then thats cool! Prehaps also add Asia exposure into your mix as well.. I have recently opened up global resources myself and chucked in a large sum..

    I wouldnt borrow against your mothers house until you gain some more experiance in investing.. if you did use the house equity.. stick to something more conservative like straight australian shares fund.. ie 452 capital.

    Tom
     
  3. coopranos

    coopranos Well-Known Member

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    I just spoke to a financial planner and they told me off for running future calcs on 13-14% average growth, so perhaps 20% is pushing things. When it comes to actually planning exit strategies etc, I think it is always better to be as conservative as possible, this way you have a good idea about what to expect, and if it goes better than expected then that is icing!
    The income you want is pretty conservative so it shouldnt be too hard to achieve without stretching a great deal.
    As a completely theoretical exercise, lets assume growth over the next 10 years is 14% on average (obviously if the market goes south in the near future, as some are expecting, it will make a big difference on the numbers, but lets just assume 14% on average over 10. Also assume an average margin loan rate of 9.5%.
    If all you do is keep plugging away on your 500 a month, and keep your margin loan always geared to 55% (every month if there is room to go to 55% then you just up your margin loan and buy more units), by mid 2015 you will have about $250k in equity, a portfolio of about $560k, and an outstanding margin loan of about $310k, and at our 14% you would have growth of around $5,000 per month.
    Just for fun, because everyone loves this idea, at this stage, you stop your monthly contribution, stop increasing your margin loan, and grab $2,500 a month out of your margin loan to cover your living expenses (increase this by 4% pa for inflation). You are effectively eating half of your monthly growth, so your portfolio will still keep growing forever on the other half. This is $30,000 per annum, indexed for inflation, to cover living expenses, and because it is borrowings, it is tax free - effectively about a $40k income.
    By mid 2015, you would be doing it under age 40, without doing anything fancy, and without touching property.
    Want more? Take your $30k income to Bali or Thailand or somewhere with low cost of living and live like a king for the rest of your days, arting as much as you want.
    Obviously all this is based on averages, if the market drops early it will put things back a few years. If the returns are higher, you can bail out earlier. That is to say nothing of the risk (such as a 5 year + dry patch with no or negative growth).
    At least doing something like this keeps something growing for you because you always keep an ever increasing amount of capital growing for you.
     
  4. investfreq

    investfreq Member

    Joined:
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    Location:
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    Thanks for the great replies, Tom and coopranos!

    Tom, I'm planning to reduce exposure to global resources and geared shares over time, but their recent performances have sucked me in. However the other day I had dinner with a friend who is now a corporate lawyer and he advised conservative investing over the next year as he thinks there's likely to be a downturn. At least I don't have much to lose at this stage.

    I agree that I should stay away from property until I've learnt a lot more about it. Reading this forum from now on will help, I'm sure.

    coopranos, those numbers are inspirational! What was the program or spreadsheet you used? My spreadsheets are too basic to do things such as automatically update margin loans against growth. I'd love to get hold of whatever you used, and play with the variables, eg investing at least $1000 per month, and a gearing of 50% (CFS maximum) instead of 55, and see how different growth rates would affect things.

    Thanks for the encouragement that my dream looks possible! :)
     
  5. coopranos

    coopranos Well-Known Member

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    Please dont get too excited about it just yet - unfortunately markets dont follow my spreadsheets!
    I am in the process of doing a fairly comprehensive (for me!) spreadsheet that will allow me to do a lot of what-if analysis - what if I sold some shares and used as a deposit on a property, or increased/decreased LVRs, pull equity out of properties periodically to put into managed funds, different market returns etc.
    I am sure a lot of people here have done similar things for themselves to weigh up their options.
    Obviously it is only good for models, but that can help you work out your strategy so you have something to go for, how it actually turns out is up to the gods I'm afraid!
    I started doing it after seeing the "rejigging portfolio to indexing" which I recommend you have a look at as well.

    You already have step one out of the way anyway - having something you are totally passionate about. That should be a good pull towards achieving your goal of doing that on a more full time basis. I applaud you for that!
     
  6. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    See this link which is Vanguard's realistic expectations booklet.

    Long term share market average annual return is 11-13% The last few years are exceptional! Don't be fooled that that can continue!

    Realistic sharemarket expectations - Vanguard Investments Australia Ltd

    I reckon if you model somewhere in the range of 9-12% over the medium term then that's realistic. If you get better then that's great.

    Cheers
    N.