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Newbie needs advice

Discussion in 'Investing Strategies' started by sav, 28th Jul, 2010.

  1. sav

    sav Member

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    Hi All, I’m a good saver but don’t have a financial education so haven’t invested at all before and am quite naive. I’ve been reading the very informative forums here (thanks everyone!) and am ready to invest, but not quite sure where to start.

    I’m 30, stable income $85k, no debts, no assets other than $100k in a USaver account. I can save $1500 per month. My investment goal is simply to maximise wealth over the long term (10 years plus). I need to keep $20k at call for future expenses. So with the rest of the money I’m considering either:

    1) investing it all in a portfolio of ETFs or index funds in one hit and keep the $20k at call in the USaver.

    2) dollar cost averaging into a portfolio of ETFs or index funds over a period of time and keep the $20k in the USaver.

    3) buying a home, then I can keep the $20k at call in an offset account to avoid tax, and invest the balance (if any) in a portfolio of ETFs or index funds.

    4) buying an IP, then I can keep the $20k in an offset account to avoid tax, and invest the balance (if any) in a portfolio of ETFs or index funds.

    I’m also concerned about what I’ve read here and elsewhere about Aus property bubble, broader economic concerns and risk of double-dip recession etc. Is it better to just ‘stay out of the market’ altogether for now?

    Sorry it's long. Would appreciate any advice/opinions/criticism/alternative suggestions etc.
     
  2. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi sav

    I also, have read a lot of posts from forums and newspapers, about an Australian housing bubble. I have sold my house.

    I think that if you choose to buy index funds or ETFs, then don't buy in one lump. I know the fees will be a bit more if you DCA, but the market is like a Yoyo at the moment.

    Split your index funds/ETFs between large caps/small caps in Aus/foreign/emerging markets, add commodities/precious metals and cash/fixed interests/Gov Bonds. Research Asset Allocation on the net for percentages or ask a financial planner. :)







    Johny.
     
  3. sav

    sav Member

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    Thanks Johny

    What would be a decent DCA strategy with that amount? I’m thinking maybe 10 or 12 monthly instalments. Yes the fees will be more…I figure unlisted Index Funds would work out a lot better than ETFs if I’m going to DCA. What worries me is if I do this, and then house prices do come down, I wont be able to buy in as I wont have a deposit anymore.

    I’ve done some research into asset allocation (including some of your previous posts here). I have a relatively high risk profile so would put a fair percentage into emerging markets and small caps. I’m thinking I wont worry about fixed interest/bonds and have that component in cash (online saver) instead. Any thoughts on that? I don’t really understand the mechanisms of gov bonds and from what I can tell FI seems to generate lower returns than cash at call and is less liquid, so the only advantage would be better tax treatment?
     
  4. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hey sav,

    Found this good A.A. calculator.
    Asset Allocator

    You really have to think whether you want a house. No point setting up an investment then selling out.

    With $100K you could DCA into a Wholesale account (cheaper MER). Monthly or Bimonthly instalments will soon have you invested.

    My biggest performer was small caps, but emerging markets was woeful this year. 5% in each could be good.

    Fixed int and cash are both around 6% ATM. A FI fund is liquid(3 days) and still high interest. Sorry, same tax.



    Have fun, :rolleyes:
    Johny.
     
  5. sav

    sav Member

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    Thanks for the calculator :)

    If I DCA into a wholesale account (thanks I hadn’t thought of that) it would save on fees, but would the trade-off be that it would be just one fund so I wouldn’t get the diversification or mix of assets?

    On FI vs cash, I have to pay tax every year on the interest earned in my online account. I thought (could be wrong) with an FI fund you would just pay capital gains when you sell units? In any case, what is the advantage of FI fund over online savings a/c?
     
  6. Johny_come_lately

    Johny_come_lately Well-Known Member

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    You'd have to read the Product Disclosure Statement on each company you are interested in. In it they state their threshold (eg 60K) for wholesale investment. Each company holds a basket of index funds. Vanguard, for example, only have index funds, CFS have about 10. check out http://www.ifa.com/

    FI is payed out in income. Tax is payable on this. Even if this is reinvested.

    A FI fund is stable. Ubank rates won't stay high forever, but short term its about even.

    Have you formed a plan. would you mind sharing? :)




    Johny.
     
    Last edited by a moderator: 31st Jul, 2010
  7. sav

    sav Member

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    Right. I think I was confusing wholesale fund with wholesale account, will look into that.

    Ok now I understand FI better (told u I was naive :eek: )

    Yeah I had formed a rough plan based mainly on ETFs (wasn’t planning to DCA at the time). I think it might be a bit too aggressive though.

    VAS or STW 40% - Aus shares
    VEU 20% - Foreign shares
    IEM 10% - Emerging markets
    IBK 10% - BRIC
    IRU 5% - US smallcap
    ETPMPM or GOLD 5% - Precious metals
    Plus a geared Aus share fund
     
  8. Johny_come_lately

    Johny_come_lately Well-Known Member

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    BRIC and emerging markets are doubling up.

    Australian funds have lovely franked dividends (a refund on July 1):D

    Geared funds are great with a rising market but can lose twice a much in a falling market.:eek:

    Equal foreign/Aussie. Can you find any index funds that match those asset categories?



    Johny.
     
    Last edited by a moderator: 1st Aug, 2010
  9. RB

    RB Member

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    Hi Sav,

    I'm no expert but I'll chip in anyway - I looked at the various world index ETFs around a a little while ago and there's significant overlap with VEU, IEM and BRIC.

    - VEU is 23% emerging markets, of which about half is BRIC. I've bought a parcel here - I intend to DCA into it over a couple of years..

    - IEM is problematic - the expense ratio is high (0.72%) and it's suffered from the worst tracking errors (~5%) in it's class for several years. Google EEM + tracking error. The problem seems to be undersampling the index. They say it's not a major issue since liquidity is more important but why are you paying 0.72% for such lousy performance?

    e.g.

    http://www.indexuniverse.com/sections/features/6706-vwo-vs-eem-which-should-you-buy.html

    - IBK - I'm not too hot on: BRIC is heavily hyped but I personally don't feel comfortable doubling up on it - they're still heavily weighted to a few large caps whose fortunes are largely tied to the developed world. Sovereign risk is not negligible either - see Yukos for instance.

    My questions (to anyone really - I'd like to know the answers too):

    (1) Why would you virtually ignore the US in favour of the minor markets? It's still 30% of the global market. A quick search turns up the data from 2009:

    Bespoke Investment Group: World and Country Market Cap

    (2) We all have a domestic bias but is 40-50% Australian shares a good idea? Have a look at the composition of STW or VAS - it's approximately 63% banking and mining. I have 'em as well (the shares too) - I just wonder sometimes if it's realistic diversification. It's only 2.3% of the world market, and over half of that is concentrated in the top 10 companies

    (3) Are you sure you've interpreted your "risk profile" appropriately? I interpret having a "High Risk Tolerance" as being akin to "Having a long investment time window and ample liquidity". That doesn't mean I would chuck all my money down at the horses (or the emerging markets) for the next 30 years. Maybe think about your liquidity/risk profile if you suddenly had a hungry IP to feed?

    (4) To me, when you say you've been researching Asset Allocation that means the Modern Portfolio Theory and implicitly the Efficient Market Hypothesis? Are you aware that in the MPT Risk is correlated to Return but the relationship is not linear - you can increase your risk without getting any further reward? Furthermore the MPT is only valid assuming the EMH. The US may be the most efficient market :)eek: yeah, I know!) - what do you think about the dissemination of information in China? Russia?

    Anyway, those are just my thoughts. If anyone has any good answers to my questions please add them!

    RB
     
  10. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi RB,

    What do you recon would be a healthy ratio of Australian to American funds?

    What would be the maximum funds that you would put in emerging markets?





    Thanks,
    Johny.
     
  11. venger0

    venger0 Active Member

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    WA
    Hi sav,

    for me,
    (1) unfortunately, there is no one perfect answer to your original question regarding best asset allocation for you. My guess is that the more important question to ask is what risks would I be prepared to bear?
    Will I sleep OK tonight if my net worth in shares fell by 50% today?
    How long can I keep my IP if I lost my job tomorrow?
    Trouble with historical data is that it may not repeat itself, so noone knows what the returns will be going forward. So i tend to have a bit of each.

    (2) ASX vs MSCI world ex aus? They've had their share of the limelight in the last 30+ years, so they've been considered as two asset classes. Will that continue? No one knows, so I have a bit of each. Franking credits are better with ASX companies though, so i might have more of those ASX ones.

    (3) outside super, fixed interest is probably not tax efficient if i am a higher income earner, so I'd prefer to hold them in super. But I would then consider my super+outside super as a single portfolio.
    Capital growth is most tax efficient outside super - but i can't eat growth, so it would be nice if i can get a bit of dividends and a bit of growth.

    (4) is DCA a good idea? i think so coz I don't know when is the best time to buy. So i buy a bit at a time. What's the optimal amount? Dunno.. but if i wanted to buy once a month or week, and plan to be fully invested by end of year (say), I'd just count up number of months/weeks left in the year and divvy it up that way.

    (5) ETF vs index fund? Sim did some great calcs earlier this year in the ETF forum. I found it very useful and informative. Encourage you to refer to it...

    (6) as for IP.. again depends on your preference - i'm sure a few investors would have thought we were in a bubble a few years ago... may be we are in a bigger bubble now?
    i suspect IP results are dependent on the location, the demographic there, etc. I know investors that have both made and lost money on them.
     
    Last edited by a moderator: 1st Aug, 2010
  12. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Everything I have learnt comes from books on index funds, asset allocation and some university books on Modern Portfolio Theory. I am always a bit hesitant to tell someone what course to take. What might be good for me might be crap for them.

    Anyway both RB and venger0 have some valuable points. Great to hear from them.

    This is Sim's thread on ETFs versus funds.

    http://www.invested.com.au/91/costs-etfs-vs-funds-dca-37444/




    Johny.
     
  13. RB

    RB Member

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    Sav probably regrets starting this rant-fest :eek:

    Just a couple of points:

    (1) @Venger0 - The only reason I referenced the MPT is because if you talk to a financial planner about asset allocation they'll give you a questionnaire, rank you on a risk profile scale of 1-5 then give you a boilerplate asset-allocation derived AFAICT from MVO simulation. This is all well and good provided MPT works - which assumes the EMH works. At this time it appears the EMH is "not really" true to "sort of true" to mostly true, depending on which market you are in.

    I bring this up because the OP said they were a "High-Risk" profile. Like you, I'm concerned that the commonly quoted tables imply that for X risk you get Y return. That's not clearly not true for all types of risk e.g horse racing.

    (2) @ Johny Re: Emerging Markets: Dunno. I was going to post that question in the forum too! People often say 5-10% but usually dodge the question. The answer that sits most comfortably with me at present is weighted by global market cap less a fudge premium for currency/sovereign/transaction issues. That said, balancing that level of granularity all sounds like too much work for me. I'm only exposed through VEU and I'm happy enough with that.

    Q&A: An Optimal Allocation? - Fama/French Forum

    Re: US market - I'm eventually aiming for 20-30% but it's going to take a few years. It's an easier decision for me though - I'm moving there for work. I'll still carry a relatively overweight position in Aussie shares but I'd like it fall in a similar sort of band to the US market. It's an unsubstantiated patriotic bias but what the hell. My problem is how to get there...

    (3) @ Sav - I'm personally a bit cold on the IP idea. I acquired one through my wife and the whole rental business is kind of annoying... insurance, levies, property managers etc. It's a lot of messing around and unless you can (and want to) add value by doing some renovations/maintenance yourself the returns just don't seem worthwhile to me. I have friends who do their own property management, maintenance, gardening etc. every weekend. Personally, I hate that stuff but YMMV. Owning a house is more of a lifestyle question - it's not an investment IMO.

    btw My point about the Emerging Markets wasn't to belittle you - I'm in the same boat. Just be aware that any tilt away from the market cap represents a tactical allocation that implies you know something the (global) market doesn't. Maybe you do, I definitely don't.

    RB
     
  14. Johny_come_lately

    Johny_come_lately Well-Known Member

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  15. Devoni

    Devoni New Member

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    1) I wouldn't invest all of it into a single thing (by that I mean solely equities). You should attempt to spread it out over numerous asset types including bonds/term deposits etc. (other types already mentioned in the thread).

    2) The only time DCA beats out lump sum is when the market is highly volatile or trending downwards. If you're holding for the long term, then I'd invest the entire amount (less $20K) and add contributions (your savings) each month. But I'd find an investment with low/no fees to do so. The only benefit as far as I can see is if you're timid about entering the market.

    3) Do you want a house? Do you want it solely to increase in capital value or do you actually want it?

    4) IPs can be tax effective but also a bit of a headache. As for the bubble, there's always an ongoing doomsday mentality in every market (these people generally also spruik gold/metals). I'd take all speculation with a giant grain of salt less you end up like Steve Keen.
     
  16. Jenni

    Jenni Active Member

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    Educate Yourself First

    Hi

    The comments here are really amasing and a good reason why asking a question like this on a forum is NOT the way to find an answer.

    For anyone to suggest an asset allocation to someone else and for them to act on it is just plain stupid. Likewise recommending ETFs as an easy share investment is just plain silly (did you know most are thinly traded, the issuer makes the market and the issuer may not actually hold the shares??).

    Likewise dollar cost averaging (also DRPs) is also not recommended (may be OK in an up market). You should NEVER invest in the sharemarket without a predetermined exit strategy eg stop loss.

    If you want to take responsibility for your own investments you must EDUCATE yourself first. Read widely, go to independently run courses (ie not those with some expensive sure-fire product to sell) and taklk to other like-minded investors.

    Read this for a start:

    The vital first step to staying afloat

    Best of luck.
     
  17. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Hi Jenni

    Your link sent me to Australian Investors Association. From what I could find, it costs $130 to join. They have a forum but it has only 189 threads. Is this organisation new?




    Johny.
     
  18. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    That's exactly what we are doing here. We are all like-minded investors, we don't have products to push, we are all just sharing information between ourselves and helping each other find our way in the world of investing.

    You may feel free to disagree with some of the suggestions put forward here - that is kind of the point of the forum. I would love to see more discussion about some of the issues you have raised - care to share?
     
  19. Jenni

    Jenni Active Member

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    Hi

    The Australian Investors Association is not new - set up in 1991 by Austin Donnelly and a few others but the forum is relatively new.

    Regards

    Jenni
     
  20. Jenni

    Jenni Active Member

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    Hi Sim

    Yes, I understand this and as a means of talking to others this forum is quite good - I have used it a few times.

    My point really was that novice investors need some basic education in a more structured environment from someone with known credentials. Without such education the person is really flying blind.

    Regards

    Jenni