ETF Ive finally rejigged my portfolio to indexing

Ive had 10yrs investing experience
starting small with managed funds - the more I learnt
the more I tried to beat the market - picking stocks, picking funds
selling and buying
I started off with the usual suspects - colonial first state, BT, MLC - a mix of all these, then sold some - tried in the US market on tech stocks, Apple stocks in 2000 for 14 dollars - wish I held them - lost some on speculative stocks, tried applying fundamental analysis using what I learnt from peter span seminars - did OK, went with navrainvest and enjoyed the income

even though Ive had some big winners if I look at overall returns its probably a lot less than the index

Tax inefficiencies are huge with buying and selling


And Im someone who does a lot of research in property and shares
ie im not your average mum and dad investor

I now fully advocate indexes - with returns determined by your asset allocation, and trying to capture alpha with small co and value tilts.
A small amount to emerging markets - all reduces volatility yet increases overall return


After more and more research, and assessment of risk
Ive finally re done my whole portfolio
Its something Im comfortable with
where I will not be likely to sell
and rebalance on a regular basis

Basically a growth portfolio
Low fees
Indexed

The 9 funds ive invested in are
The core equity trusts have a 50/30/20 tilt of large/value/small funds
Ive tilted it more toward value and core with the individual funds

DFA Aus Core Equity Trust
DFA Aus Value Trust
DFA Aus Small Company Trust
DFA Global Core Equity Trust
DFA Global Value Trust
DFA Global Small Company Trust
DFA Emerging Markets Trust
Vanguard Property Indx
Vanguard - Int Property

Heavily into DFA with a value and small company tilt
http://www.dfaau.com/media/pdf/distributions_summary.pdf

Index returns will beat most investors if you hold forever
Let the miracle of compound investing work - as Einstein once put it


Im expecting about 14-15% return long term, with 4.1% yield
With a much lower volatility than - just australian shares, or individual stock portfolio that I was holding before
The beauty of a diversified portfolio is when one sector is down, another is up - cancelling each other - reducing volatility - but not reducing overall return

The fact that it is a tried and tested method with plenty of research behind it gives me peace of mind

I am highly unlikely to sell in the near future

DFA have some of the best non geared long term returns on aust shares around. Their international funds are down due to $A appreciating as they are not hedged.

Its so clear to me now that by looking for higher returns you take on higher risk and volatility. Im just trying to maximise my return for the level of risk im willing to accept.

Im at peace with all my set and forget investments now.

I hold a second portfolio - holding LICs/ ETFs - and will probably move it into this portfolio too once my LOC is setup

People may be tempted to invest a large amount in colonial first state geared - however it is obvious that gearing magnifies risk and in a down market you may get wiped out.

Use a compound calculator like that below
to model your returns - key is time in the market without selling**
Once you sell you take a huge hit

Compound Savings Calculator
I hope this can help others as its taken a lot of reading and failed experiences to get his far

Its late - sorry if my ramblings dont make sense

dkmc

 

Hi dkmc,

Thanks so much for sharing what you've learnt and what you're currently doing. I'm about to start on a similar process myself - although I have not been as active as you have been in the past I have been doing a lot of reading lately and have come to the conclusion that actively managing does not necessarily mean better returns. Maybe that's obvious to everyone else already.

I have also been looking at the DFA funds after a recent article in the Eureka report. The do have quite impressive returns, but so have a lot of funds in recent years. I'm yet to dig further to see where their alpha is coming from.

Thanks again.

John.

 

Hi dkmc.

What type of fees are you paying?

Just wondering if you may have been better served with a couple of LIC's, an ETF and possibly 1 or 2 LPT's .

You obviously know your stuff and have been putting in the hours with the research, but I would imagine that you may be losing a bit on fees.


**The above is not advice, just throwing up something for discussion.**

 

Exactly!!!

People get so caught up and in love with one asset class, then it doesn't perform and they think it's punishing them...It's not, that's the market!

Cheers,

Dan

 

fees roughly from memory
I pay - average MER of 0.35
wrap fee of 0.2
advisor fee 0.44 - tho this reduces the more I have * yes I thought about this very hard - and its worth it even tho I could have gone for a strict fee for service planner.
so total is 1% - and that includes MER and advisor and wrap

The great thing about a discounted wrap - is full reporting -
I get up to date reports on profit
an advisor that keeps me on track, that I can throw ideas against him - and he stops me from doing stupid things

With LICs - the hard thing is dollar cost averaging as you pay $30 each time to buy
with the wrap you get automatic rebalancing

You can bpay into the cash account - and have it setup so that all money above $4000 gets allocated to shares in the allocation percentages specified

so if the aus market has been down 5% and property 2%
and I transfer money in - it will automatically add to the australian market
and property for very minimal cost - to make my allocation percentages back to what I had them

LICs and ETFs- mean u have to monitor everything in etrade or comsec, more statements,paperwork , and hard to add to long term
Yes I do still hold them in my 2nd portfolio - but will eventually move away because of this disadvantage

 

What do you mean by "wiped out"? If CFS have a bad quarter or two, their unit prices will be down. You could argue that would be a good time to purchase more. As a higher risk fund you would have to take a view that perhaps 1 year in 4 could give a negative return, and plan to have cash buffers in place if you were relying on distributions from the fund.
So the unit price might start heading toward zero, but at some stage it will head up again. It just the nature of the market. Hold on long enough and you will be rewarded.

Someone will have to explain (with examples) of a fund being "wiped out"

 

dkmc,

How often do you rebalance? My understanding is that once a year is often considered to avoid excessive CGT, fees and buy/sell split events.

On my wrap I dont rebalance at the moment, but I do take distributions in cash and reallocate them wherever I see fit.

MJK

 

if that happened you would still be holding the same number of units, but the units would be a very low figure. Would people jump on board hoping for growth (ie buy more units while they're cheap), or shy away because of perceived mismanagement?

 

Hi,

Great post.

There's no doubt about it, DFA is reputed to be an excellent fund manager. I haven't looked into them for some time but from memory I thought it was only possible to invest with them through a financial advisor. Although I vaguely recall that Mcquarie Wrap may have included them in their list of fund managers. But being somewhat anti-advisor (based on negative past experiences) and not keen on wraps I shyed away from them.

I think one's investing strategy will often vary depending on the stage of your life you are at. For instance where income is important (eg dividends & LPT distributions) wrap, mer and advisor fees can start to eat into the income. This is not so noticable when the market is doing well but in bad years these fees can have a significant negative impact on the income component.

There may be a little extra paperwork with LICs and EFTs but the work required is still very minimal and there are no wrap and advisor fees. And brokerage is miminal if you trade in decent size parcels. When I say LICs I am generally referring to the older ones with extremely low MER equivilent and proven track records.

Although one could argue that only investing in Australian LICs and LPT indexes etc lacks diversification I have a number of acquaintances who have been doing this for decades and couldn't care less about market highs and lows. However the income component which is very important to them from these investments on average has continued to grow at an incredible rate.

If I was somewhat younger I would definately be looking at doing something similar to what you have done with DFA etc.

Cheers - Gordon

 

In reply to Voigtstr - What do you mean by "wiped out" - On this forum I have seen people post about gearing into - a geared fund, or using LOE to fund shares then margin loan - all Im saying is its quite easy to lose your entire captial - with a 10-15% market drop - thats magnified.
Yes you can make money long term - but there will be huge volatility
Many wouldnt be able to stomach a 40% drop - and end up selling - Yes its not logical but the longer you invest the more you realise about emotions and how it affects your investing.

The comment was not directed at CFS specifically, just that internal gearing magnifies risk and people should not be just looking at 36% return or whatever it was - as the market did 28% (or whatever it was) and if you geared you would have achieved the same or better result

Id rather a diversified portfolio conservatively geared with less volatility - to achieve the same result - or actually a better result once you take into account emotional factors - someone selling as it drops - hoping it will drop lower so that they can pick it up at an even lower price

Again it depends on your risk tolerence - i thought Id be able to hang on long term, and ride things out - but my track record has said no.

 

MJK - with rebalancing - i dont actually sell - I put more money in so no CGT events. I havent worked out how often yet - probably 3x / yr - or when I have spare money available

 

austini - my 2nd portfolio consists of ARG,STW, SLF and CTN
no international exposure
I like CTN for small cap exposure - small amount allocated as it is more risky

SLF - is the property index
STW - aust index
ARG - old LIC with good historical returns
AFI - I used to hold this too

I do like the income component growing in argo or AFI
I like both portfolios and know the DFA portfolio has slightly higher fee, but not by much. I have deliberately tilted the DFA portfolio to australian shares to capture a higher dividend yield - of approx 4.1% on the portfolio

LIC dividend yield is about 3.5% atm

Active funds have MERS 1-2% alone, without advisor or wrap

Also my LIC portfolio is in an environment where I can negatively gear
DFA is in a discretionary trust
There are different tax implications to my strategy that I will not go into

 

Hi dkmc,

Thanks for your reply.

The one thing that is appealing to me about how you have structured your indexing approach and use of wrap is its minimal administration and auto rebalancing etc.

Regardless of implementation I'm a huge fan of passive investing using index funds and/or similar beasts such as LICs. Not only does it require next to no effort to invest this way but the returns are often superior to most active managers or stock pickers (with much less tax to pay). Plus it is one of the safest ways to invest with the risk of the funds going bust almost non-existent. Safe with excellent returns and minimal effort - ah what a way to go.

I used to frequent Aus.invest where Travis Morien (a planner) raved about DFA and indexing in general. He is one FP I had a lot of respect for. There was some great discussion there. Shame about all the spam etc.

Do you mind me asking which wrap platform you are using?

Cheers - Gordon

 

austini - macquarie wrap with a big discount

 

I have SLF and STW (amongst others), as well as HHV and Australian Ethical. If I wasn't such a dabbler I would be fine with just SLF and STW, nice and simple, and low fees - though unfortunately there is no exchange traded international index fund or ethical index fund.

 

Check out ishares.com.au by Barclays. Just what you're after.

 

THANKS! yes this is new and I didn't know about it.. now to wait for it to pop up as an acceptable security in St George Margin lending - or maybe even ask them.

 

I am hopeful it will be on the November list as an alternative to AGF and INES.

 

Thanks for that Glebe.

This will provide a great altenative to Vanguard who I think from memory charge higher fees.

http://www.ishares.com.au/publish/content/press_release/press_9_10_07.pdf

Cheers - Gordon