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Kyle's ETF Portfolio

Discussion in 'Exchange Traded Funds (ETF)' started by KyleT, 28th Dec, 2010.

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  1. KyleT

    KyleT Member

    Joined:
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    Location:
    Perth, WA
    Hi All

    I have been an on and off lurker at these forums for about a year now since I purchased my first investment property. It has been a great site that has provided much education resources!

    I have decided it is time to become more active, and thought it would be best to start with posting my proposed 2011 ETF portfolio. I have never invested in any shares before, so this is all new to me!

    I guess I am looking for people to critique my strategy to see if I am on the right track and if I am selected the specific ETFs for the right reason. It was not easy choosing what ETFs, however, I tried to diversify as much as possible.

    My details

    Age: 23
    Income: $80k approx

    Cash to Invest: $13,000


    Investment Purpose:
    Long term investment for my retirement, so 33 years. My goal is to be financially free and have the option to retire at 55. I would like to have $80,000 a year to live off in retirement. Average life expectancy is 85, so in today’s terms, I need to save at least $2,400,000 (80,000 * 30).


    Other Investments:
    • I currently own a 50% stake in an Investment Property in Perth. I contribute $300 pw to the loan.
    • I am saving for my house deposit. Currently at $0 as I am moving my current savings to shares for the long term. I will be added $600 per fortnight to a high interest savings account.


    Strategy

    I have decided to create an index portfolio using ETFs that is passive and does not require too much time. I am not really into reading up on companies and tracking individual performance, so direct stock buying is out of the question for me.

    Rules I will follow:
    • Reinvest all dividends received
      •Always pay a margin call if one occurs. (This is while my margin loan is small, and I can afford a margin call. I will have to rethink this one if I increase my loan)
      •Rebalance asset allocations yearly
      •DCA quarterly. I will be saving $100 per fortnight in another account, ready to add to my investment. $650 will be added every quarter. (I will increase this amount yearly as my pay goes up by a minimum of the cash rate). I decided to do this after reading Sim’s great comparison http://www.invested.com.au/91/costs-etfs-vs-funds-dca-37444/

    Exit strategy:
    I do not believe I need an exit strategy at this point in time. If the share market was to drop 22.5%, I am happy to pay the $1,500 margin call. I will need to rethink this if I ever increase my margin loan.


    Margin Loan

    I will be taking out a margin loan with Commsec. I will capitalise the interest monthly at 9.6% and then in June I will prepay a year’s worth of interest at a fixed rate to get the tax benefits upfront.

    I will buy into 5 securities, which gives me access to the portfolio LVR (basically higher LVR than if I were to have less than 5 securities in my portfolio).

    Amount I will borrow: $17,000

    This will give me a total investment of $30,000. I will receive a margin call if my stock drops 22.5%.

    [​IMG]

    Used a Margin Loan calculator from Margin loan calculator - Australian Securities and Investments Commission


    Stock Selection

    No cash, bonds or fixed interest because I will be saving in my high interest rate savings account (6%) as well.

    No property because I already own an IP and looking at obtaining another one in the next year or so.


    40% ($12000) STW - SPDR S&P/ASX 200 - Largest 200 Australian stocks MER 0.286%

    I guess living in Australia has a bit of bias for this one. However, I think that Australia has some good times ahead, and I am happy to allocate 40% here.


    20% ($6000) VTS - Vanguard US Total Market Shares Index MER 0.07%

    The MSCI Broad Market Index combines the MSCI® US Investable Market 2500 and MSCI® US Micro Cap Indexes to provide exposure to more than 99.5% of the capitalisation on the U.S. equity market, including large, mid, small and micro-cap companies.

    Since the US stock market accounts for approx 55% of the world’s sharemarket, I thought it would be silly to pass this up. I know they are not having the best run at the moment, but I believe in my timeframe they will make some good increases.


    20% ($6,000) IVE – iShares MSCI EAFE MER 0.35%

    The iShares MSCI EAFE seeks to provide investment results that correspond to the price and yield performance of publicly traded securities in the European, Australasian, and Far Eastern markets, as measured by the MSCI EAFE Index.

    I spent some time trying to decide whether I wanted to go IVE or VEU (Vangaurd All-World ex-US). I decided to go with IVE as it has no or very minimal overlap with BRIC. I am worried a bit about Greece and Ireland’s current state, however, only 0.4% of the ETF is tied between the two countries.


    15% ($4,500) IBK – iShares MSCI BRIC MER 0.72%

    The iShares MSCI BRIC seeks to provide investment results that correspond to the price and yield performance of publicly traded securities in four emerging markets, as represented by the MSCI BRIC Index. The MSCI BRIC Index is a free float-adjusted market capitalisation weighted index that is designed to measure the equity market performance of the following emerging market country indices: Brazil, Russia, India and China.

    I spent some time trying to decide whether I wanted to go IBK or IEM (Emerging Markets). I decided to go for IBK as I do not have any ETFs really covering this area. Emerging markets overlaps with some of my other ETFs.


    5% ($1500) IJR – iShares S&P Smallcap 600 MER 0.20%

    The iShares S&P Small Cap 600 seeks investment results that correspond to the price and yield performance of U.S. small-cap stocks, as represented by the Standard & Poor's SmallCap 600 Index.

    I was trying to decide what ‘higher risk’ ETF I could get with my remaining 5%. It was out of IRU iShares Russell 2000 and IJR S&P Smallcap 600 (both US smallcap). I decided to go with S&P Smallcap 600 as the Russell 2000 tracked the lowest 2000 companies in the Russell 3000 index. I would prefer to have securities in the top 600 smallcap stocks.

    I am aware this clashes with the VTS Vanguard US Total Market Shares Index, however, I am comfortable with 25% of my portfolio in the US market.



    I hope you all had a very Merry Christmas, and a happy new year to come!!

    Regards
    Kyle
     
    Last edited by a moderator: 28th Dec, 2010
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  2. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi Kyle

    Mate! With that attention to detail, you are going to go the distance.

    1st. $80,000 now will not buy $80,000 in 33 years time. So you will have to work out what year 2043 inflated income is needed.

    2nd. Have a bigger than needed buffer.

    3rd The EAFE has doubling up with Au

    4th You are young. Bonds are not for you, now. But as you approach retirement, they become important.



    Johny. :)
     
  3. KyleT

    KyleT Member

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    Hi Johny, thanks for your reply! People normally make fun of my attention to detail haha.

    Yeah I'm aware of that. At the current cash rate of 4.75%, in 32 years 80k will be 332k.... which means I need at least $9,950,820 (and that's excluding cash rate during retirement).

    My buffer will be sitting on 23% when I first start. I think this will be okay. If I ever decide to increase the loan in the future, I will have a larger buffer.

    I saw that EAFE has 8.5% AU. I am quite comfortable with this at the moment and will monitor the balance over time.

    20 * 8.5% = 1.5%
    Therefore I will have 41.5% in Australia (STW + AU in EAFE).

    Thanks, will keep that in mind
     
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  4. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Future income needed

    FIN = todays income * (1 + inflation fiqure) ^ time

    FIN = 80000 * (1.032) ^ 32

    Future income @ 3.2% yearly inflation =

    = $219199.87


    Is your $80000 after tax?

    I would think if you lived a $40000 lifestyle you could get some serious savings!

    Have you worked out a rebalancing strategy?




    Johny.
     
  5. KyleT

    KyleT Member

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    Thanks for that calculation... I used a savings calc and input cash rate instead of inflation :/


    No before tax. I get about $55000 after tax/hecs. I also have a stupid impulse buy car costing me $1200 per month for another year (lease) :(


    Not really. I was planning to rebalance yearly to ensure that I am still happy with the allocations. I will also check on that status of the portfolio/ETFs weekly just to see how they are going.
     
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  6. Johny_come_lately

    Johny_come_lately Well-Known Member

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    There are a couple of ways you can rebalance.

    1 You can pick a fixed date every year, 1/2 year or 3 months. Sell all your gainers and buy your losers.

    2 Collect your dividends and pay them into your losers

    3 Put your DCA into your losers.

    4 Rebalace when any fund rises or drops by a percentage (ei 10% of its total value)

    With only 5 funds it shouldn't be difficult.


    ps. If you think that cars are bad, you try owning murdersickle$.




    Johny.
     
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  7. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Explain your reasoning why you want 5% IJR. :confused:




    Johny.
     
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  8. KyleT

    KyleT Member

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    Thank you for highlighting the possibilities.

    I will start with option 3, placing my DCA into my losers. I think option 1 may be too costly with sell/buy fees. Option 3 is another one I will keep in mind.

    Option 4 might be needed, depending on how much the increase/fall is and whether DCA + dividends cannot balance out my portfolio.

    I'm heading into uncharted territory, so I guess I will have to keep this all in mind and see how I go.

    I actually saw someone else place it in their portfolio in this forum and I couldn't find a reason not to have it too.


    Since the US stock market accounts for approx 55% of the world’s sharemarket, I thought placing another 5% into the US to increase my portfolio to 25% US would be a good idea. I also do not have any ETFs that cover small cap (a part from some in VTS).

    Please let me know if you think I'm thinking incorrectly...

    My possibilities are:
    • Only have 4 ETFs and redistribute the 5%. The downside of this is the margin loan loses 5% LVR (I can have 65% LVR instead of 70%). This means that a) I borrow less or b) I have less buffer
    • Buy some ASX smallcap. However I already have 41.5% of my portfolio in AU.
    • Buy a stock directly.
    • Buy another ETF. There seems to be several new ones that have popped up. Any suggestions what ETFs I should look at that fits in with my portfolio?
     
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  9. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Kyle,

    Modern Portfolio Theory has a concept called The Efficient Frontier. Google them. What this means is; The more two funds do not correlate (follow the same graph), the Less risk there will be and the Higher the returns will be. If you have 2 funds that have the same thing in them, you are not getting the advantage of the EF.




    Johny. :)
     
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  10. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Assets you can pick from are Property, Cash, Fixed Income, Bonds, International Bonds, Australian Shares small/mid/large Cap, Foreign Shares small/mid/large Cap, Emerging markets, Emerging Bonds, Commodities, Precious Metals and Short funds.




    Johny.
     
    Last edited by a moderator: 29th Dec, 2010
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  11. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hey Kyle,
    How are things going?



    Johny. :)
     
  12. KyleT

    KyleT Member

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    Yeah things are going well, been meaning to post an update!

    I have so far managed to purchase 1/3 of my proposed portfolio as I am still waiting for my margin loan to be approved (commsec are taking their time, its been nearly two weeks!).

    I've been reading up on Modern Portfolio Theory's "Efficient Frontier". I understand the concept that you want independent graph following shares, however, am finding it hard to plot where on the Expected Return/Risk graph the ETFs I chose sit.

    Looking at the ETFs available on the ASX, I could not really find 5 independent sector/graphs followers I liked. The new iShares ASX Small Ordinaries (ISO) looked promising, but it tracks the smallest 200 companies of the ASX300 index... STW that I have tracks the ASX200, that's a 50% overlap!

    Another thing I am currently researching is exit strategies. I'm looking at using something like a 200 day moving average to determine when I should leave a ETF when it's heading downhill. More reading required first I think :)
     
  13. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hopefully Commsec will get their act together.

    Sim used a 200 day moving average for his portfolio, and he got burnt badly. Perhaps you could find his thread.

    Have you read 'A random walk down Wall Street.' :cool: It is well written.



    Johny.
     
  14. KyleT

    KyleT Member

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    Thanks Johny for your suggestion. I did a search for moving averages on here and found many interesting posts!

    I just did a dry run with XJO selling with 200 day moving average. I can see why people say it can lag, XJO dropped 25% in 2008 before it went below the 200day moving average. However, testing with the drop in Apr/May 2010, it saved 4% (buying again when it goes above the 50 day moving average). More testing required I think!

    I just bought Rivkin Guide to Getting Started in Shares, might add A random walk down Wall Street to me list, thank you!
     
  15. Johny_come_lately

    Johny_come_lately Well-Known Member

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    If you are going to buy Burton Malkiel's "A random walk down Wall Street", remember it was written in the 70's and there are dozens of revised editions. I'm thinking the 2007 version should be out now.

    This is the book that promoted index funds Before there was index funds. I remember reading about moving averages in the 2006 edition. It is a very good read.

    A lot of investors swear blindly about margin loans. I don't use them, but here's my 2 cents. They amplify your profit or loss. The only good thing about a margin call is it forces you to buy stock at a cheaper price. If you have a big buffer that is good, if you have no buffer then that is bad. Then you have to sell out in a bad market.

    The problem with waiting for the market to drop before you bail out, is the market has dropped. It is too late then. Work out your own system (a point of no return) and regulary monitor your funds. If we have another crash, then you are on top.

    Just leave the blonde and the Porshe until you are 40. :p



    Johny.
     
  16. Waimate01

    Waimate01 Well-Known Member

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    It does? I don't gear, but my understand is that a margin call reduces the banks exposure and increases yours. I thought the money you cough up doesn't go to buy more shares, it goes to lower the banks loan.

    Obviously a larger dollar amount would be required to redress the balance by acquiring more shares instead of purchasing additional securities, so is that common ?
     
  17. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Margin buying is buying securities with cash borrowed from a broker, using other securities as collateral. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value, i.e. the difference between the value of the securities and the loan, is initially equal to the amount of one's own cash used. This difference has to stay above a minimum margin requirement, the purpose of which is to protect the broker against a fall in the value of the securities to the point that the investor can no longer cover the loan.


    Jane buys a share in a company for $100, using $20 of her own money, and $80 borrowed from her broker. The net value (share - loan) is $20. The broker wants a minimum margin requirement of $10.

    Suppose the share goes down to $85. The net value is now only $5 (net value ($20) - share loss of ($15)), and Jane will either have to sell the share or repay part of the loan (so that the net value of her position is again above $10).

    The collateral can be in the form of cash or securities.

    http://en.wikipedia.org/wiki/Margin_(finance)




    Johny.
     
  18. Waimate01

    Waimate01 Well-Known Member

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    Thanks for that .. that's how I understood it. But to the question of forcing you to buy at a cheaper price, isn't Jane's option to either cough up $5 to redress the imbalance, or if done by adding securities, but another $85 share using (say) $60 of the bank's money and $25 of her own? Obviously $25 is way bigger than $5.
     
  19. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Go to post #1 and see Kyles margin loan calculator.


    To meet a margin call and bring the LVR under 70% you:

    a) add additional cash or assets of $1500 from a buffer

    b) Sell assets of $4500 value

    Clearly adding cash/assets is better!

    You need to have the disipline of maintaining a large buffer for any possible future events.




    Johny.
     
  20. thembi

    thembi Member

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    Sector Tilts?

    Kyle,
    Great to see someone with so much attention to detail and rigour! Need to get me some of that.

    I've been an avid ETF investor for several years, mainly via STW and overseas ETFs. Recently I've started adding some 'sector tilts' to my portfolio by investing in sector ETFs. For example, I am currently very bullish on the Australian resources sector and believe that for a long term investor they offer one of the great areas of return for capital growth. I've invested in QRE (Resources Sector ETF) and geared it using Commsec's Margin Loan.

    Then, when my view on resources is slightly less bullish I will switch some of my QRE holdings to QFN (Financials Sector ETF) - with gearing in particular this sector is interesting because its paying a grossed up yield of approx 7.5%.
    Anyway, love to hear how this all goes for you..

    Dave
     
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