28 year old investor [Australia]

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Young Saver
Posts: 5
Joined: Thu Jun 21, 2018 8:30 pm

28 year old investor [Australia]

Post by Young Saver » Thu Jun 21, 2018 9:06 pm

Greetings all,
I am 28 years old, married to a woman my age with a young baby.
I recently started doing some reading on this site and thought it might be able to offer me some guidance.

My portfolio is not as simple as some people here recommend, but I like the idea of tilting towards small cap and value and I am happy to do the rebalancing when I need to. I have conviction in my tilt and I am going to stay the course. I study finance so I don't find it a chore since investing is something I am passionate about. I am just wondering if people think this is a reasonable spin off on the coffeehouse portfolio for an Australian investor.

12.5% REIT
12.5% Emerging Markets
12.5% Australian Shares
12.5% Australian Small Cap Value
12.5% International Large Cap
12.5% International Large Cap Value
12.5% International Small Cap
12.5% International Small Cap Value

I am in all index funds

At the moment I have 160K invested. I have no bonds yet. I am overweight Australian shares because of the tax advantages I get by investing in them. My salary is around 75K. I also get free accomodation since I work on a family farm. My wife is a stay at home Mum. Both of us are from kind of wealthy families. I have been told that I am getting an inheritance valued around 3 million +/- 500K in the next 10 years and there would be more than that later. That is not including my wife's side of the family which would be probably more than that in 20+ years.

I like to be a success in my own right which is why despite this I am still trying to save as much as I can. My living expenses are around 30K. I am saving and investing the rest. Is it reasonable for me to have such an aggressive allocation because of expected inheritance? Or should i pretend there is no inheritance and be more conservative? I am thinking at the moment to go age minus 20 in bonds since I have a security blanket. I would add 10% in bonds when we are both 30. I also have 10 months living expenses in high yield savings account.

I would love your thoughts and opinions fellow bogleheads.

WanderingDoc
Posts: 796
Joined: Sat Aug 05, 2017 8:21 pm

Re: 28 year old investor [Australia]

Post by WanderingDoc » Thu Jun 21, 2018 10:51 pm

Forget about the inheritance. Wipe it from your brain if you can. My unsolicited advice, outright refusal of the inheritance ahead of time is likely to be better for your character as a man and future successes, more likely than not.
Rent where you live, buy where others pay your mortgage for you. | I'm not looking to get rich quick, I'm not looking to get rich slow (indexing}, I'm looking to get rich.. for sure {real estate}.

Young Saver
Posts: 5
Joined: Thu Jun 21, 2018 8:30 pm

Re: 28 year old investor [Australia]

Post by Young Saver » Thu Jun 21, 2018 11:52 pm

WanderingDoc wrote:
Thu Jun 21, 2018 10:51 pm
Forget about the inheritance. Wipe it from your brain if you can. My unsolicited advice, outright refusal of the inheritance ahead of time is likely to be better for your character as a man and future successes, more likely than not.
Thanks for your advice. This is what I'm going to do. I want to be a success in my own right. I think I am off to a decent start. I am studying a bachelor degree in finance at university while working full time because I want to make myself more valuable. This way I can earn my own money and be proud of it. It also means I'm making the most out of my own ability.

Do you think age minus 20 in bonds is a reasonable allocation? This would end up 60/40 stocks bonds when we hit 60 and just stay at that allocation through retirement/ withdrawal stages. I am sure I have a high tolerance for risk. I know I have to stay the course and I don't need the money any time soon.

Regards

AlohaJoe
Posts: 3453
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: 28 year old investor [Australia]

Post by AlohaJoe » Fri Jun 22, 2018 12:09 am

Overall it is fine. That said, I would recommend you think hard about whether the split between large & large value (and small & small value) is worth it.

Here's a classic Bogleheads thread on it: viewtopic.php?f=10&t=38374

Also, the tax advantages for overweighting Australian shares is a dubious proposition :) there is some (but not conclusive or undisputed) evidence that Australian share prices are simply bid up to an amount equal to the franking rights, leaving them with no net benefit. (If you really care you probably search and find previous posts from me on it with references).

In the end, tilting toward Australia is fine. Just don't kid yourself that your perfectly chosen 12.5% slices were carefully calculated due to tax advantages.

WanderingDoc
Posts: 796
Joined: Sat Aug 05, 2017 8:21 pm

Re: 28 year old investor [Australia]

Post by WanderingDoc » Fri Jun 22, 2018 12:14 am

Young Saver wrote:
Thu Jun 21, 2018 11:52 pm
WanderingDoc wrote:
Thu Jun 21, 2018 10:51 pm
Forget about the inheritance. Wipe it from your brain if you can. My unsolicited advice, outright refusal of the inheritance ahead of time is likely to be better for your character as a man and future successes, more likely than not.
Thanks for your advice. This is what I'm going to do. I want to be a success in my own right. I think I am off to a decent start. I am studying a bachelor degree in finance at university while working full time because I want to make myself more valuable. This way I can earn my own money and be proud of it. It also means I'm making the most out of my own ability.

Do you think age minus 20 in bonds is a reasonable allocation? This would end up 60/40 stocks bonds when we hit 60 and just stay at that allocation through retirement/ withdrawal stages. I am sure I have a high tolerance for risk. I know I have to stay the course and I don't need the money any time soon.

Regards
I think 80/20 is a great allocation for a young person. I personally advocate real estate over index funds, unless you decided that you want to work full time for 30-40 years, will never change your mind, and are okay to give up some passion you may have in the future that won't pay well (because you won't have time for it if you are working full time), etc. etc. then indexing is perfectly fine, although its quite slow. I do both personally as a form of diversification, although real estate income is already enough to cover my living expenses in my 30s. Flexibility is never a bad thing in life IMO. It may not matter for you if you accept the future nest eggs anyway :P It sounds like you have the right mindset, good luck!
Rent where you live, buy where others pay your mortgage for you. | I'm not looking to get rich quick, I'm not looking to get rich slow (indexing}, I'm looking to get rich.. for sure {real estate}.

ignition
Posts: 111
Joined: Sun Dec 11, 2016 11:28 am

Re: 28 year old investor [Australia]

Post by ignition » Fri Jun 22, 2018 5:17 am

Young Saver wrote:
Thu Jun 21, 2018 11:52 pm
WanderingDoc wrote:
Thu Jun 21, 2018 10:51 pm
Forget about the inheritance. Wipe it from your brain if you can. My unsolicited advice, outright refusal of the inheritance ahead of time is likely to be better for your character as a man and future successes, more likely than not.
Thanks for your advice. This is what I'm going to do. I want to be a success in my own right. I think I am off to a decent start. I am studying a bachelor degree in finance at university while working full time because I want to make myself more valuable. This way I can earn my own money and be proud of it. It also means I'm making the most out of my own ability.

Do you think age minus 20 in bonds is a reasonable allocation? This would end up 60/40 stocks bonds when we hit 60 and just stay at that allocation through retirement/ withdrawal stages. I am sure I have a high tolerance for risk. I know I have to stay the course and I don't need the money any time soon.

Regards
You're going to refuse the inheritance? I admire your character. If I were in your shoes, I would probably take it with both hands, put it in index funds and never work again :D (I'm also 28 btw)

Valuethinker
Posts: 35024
Joined: Fri May 11, 2007 11:07 am

Re: 28 year old investor [Australia]

Post by Valuethinker » Fri Jun 22, 2018 5:31 am

WanderingDoc wrote:
Fri Jun 22, 2018 12:14 am
Young Saver wrote:
Thu Jun 21, 2018 11:52 pm
WanderingDoc wrote:
Thu Jun 21, 2018 10:51 pm
Forget about the inheritance. Wipe it from your brain if you can. My unsolicited advice, outright refusal of the inheritance ahead of time is likely to be better for your character as a man and future successes, more likely than not.
Thanks for your advice. This is what I'm going to do. I want to be a success in my own right. I think I am off to a decent start. I am studying a bachelor degree in finance at university while working full time because I want to make myself more valuable. This way I can earn my own money and be proud of it. It also means I'm making the most out of my own ability.

Do you think age minus 20 in bonds is a reasonable allocation? This would end up 60/40 stocks bonds when we hit 60 and just stay at that allocation through retirement/ withdrawal stages. I am sure I have a high tolerance for risk. I know I have to stay the course and I don't need the money any time soon.

Regards
I think 80/20 is a great allocation for a young person. I personally advocate real estate over index funds, unless you decided that you want to work full time for 30-40 years, will never change your mind, and are okay to give up some passion you may have in the future that won't pay well (because you won't have time for it if you are working full time), etc. etc. then indexing is perfectly fine, although its quite slow. I do both personally as a form of diversification, although real estate income is already enough to cover my living expenses in my 30s. Flexibility is never a bad thing in life IMO. It may not matter for you if you accept the future nest eggs anyway :P It sounds like you have the right mindset, good luck!
Australia is sitting on the mother of all housing bubbles (Sydney and Melbourne). Vancouver is worse, maybe Toronto is as bad. The Lucky Country could turn unlucky (it has in history: the Victorian housing bubble blew, the Great Depression hit Australia as bad or worse than almost any other country).

One wants to be really careful of residential RE in Australia. Owner occupied housing? Maybe. Investor owned? Maybe not so much.

Valuethinker
Posts: 35024
Joined: Fri May 11, 2007 11:07 am

Re: 28 year old investor [Australia]

Post by Valuethinker » Fri Jun 22, 2018 5:42 am

Young Saver wrote:
Thu Jun 21, 2018 9:06 pm
Greetings all,
I am 28 years old, married to a woman my age with a young baby.
I recently started doing some reading on this site and thought it might be able to offer me some guidance.

My portfolio is not as simple as some people here recommend, but I like the idea of tilting towards small cap and value and I am happy to do the rebalancing when I need to. I have conviction in my tilt and I am going to stay the course. I study finance so I don't find it a chore since investing is something I am passionate about. I am just wondering if people think this is a reasonable spin off on the coffeehouse portfolio for an Australian investor.

12.5% REIT
12.5% Emerging Markets
12.5% Australian Shares
12.5% Australian Small Cap Value
12.5% International Large Cap
12.5% International Large Cap Value
12.5% International Small Cap
12.5% International Small Cap Value

I am in all index funds

At the moment I have 160K invested. I have no bonds yet. I am overweight Australian shares because of the tax advantages I get by investing in them. My salary is around 75K. I also get free accomodation since I work on a family farm. My wife is a stay at home Mum. Both of us are from kind of wealthy families. I have been told that I am getting an inheritance valued around 3 million +/- 500K in the next 10 years and there would be more than that later. That is not including my wife's side of the family which would be probably more than that in 20+ years.

I like to be a success in my own right which is why despite this I am still trying to save as much as I can. My living expenses are around 30K. I am saving and investing the rest. Is it reasonable for me to have such an aggressive allocation because of expected inheritance? Or should i pretend there is no inheritance and be more conservative? I am thinking at the moment to go age minus 20 in bonds since I have a security blanket. I would add 10% in bonds when we are both 30. I also have 10 months living expenses in high yield savings account.

I would love your thoughts and opinions fellow bogleheads.
- you are way overweight Australia. The Australian index is mostly financial services + natural resources. You are overweighting the same sectors that probably drive your labour income & your housing prices (Canadian stock index is similar)

- REITs? If that's global REIT then it's fine - probably won't have much impact on your final portfolio wealth, but arguably adds to your inflation protection in the portfolio.

If it is Australian only REITs then you really are overweighting quite a risky sector - it's correlated with Australian business conditions, and with your job, and Australian housing prices.

The Emerging Market index is weighted towards China, and, again, what happens in China has a big impact on the Australian economy (and the level of the AUD). But that's a lesser concern - there's a correlation there but it is probably not *that* extreme. Normally what happens is China slows down, commodity prices fall, and Australia takes much of the pain in a fall in the AUD (thus making Australia's commodity exports more competitive or rather the global price in USD translates into more in AUD).

In your shoes, I'd want to diversify away from the Australian economy as far as possible. Hold the global index (which is about 3% Australia, from memory) for equities.

Bonds is trickier. AUD government bonds pay a decent yield, last time I checked. Credit rating of the Australian government is very high. Bonds you generally want low volatility/ safety.

But it does mean you are fully exposed to the swings of the AUD. Your buying power drops if AUD goes down. Fortunately your farm prices probably improve, so that's a degree of hedging.

A possible alternative is to be 50% in US Treasury bonds (in USD) which pay a half decent yield these days (3% ish) and 50% in Australian govt bonds. But you would be speculating on the USD/ AUD exchange rate and half of your global equity portfolio would be in US stocks.

To my mind, the Australian economy looks ripe for a bad housing/ debt bust. Domestic personal savings are low (despite Superannuation) and personal debt to GDP is high. Cheer yourself up, Canada looks a lot worse ;-). The response to that is to be as globally diversified as possible.

Young Saver
Posts: 5
Joined: Thu Jun 21, 2018 8:30 pm

Re: 28 year old investor [Australia]

Post by Young Saver » Fri Jun 22, 2018 6:30 am

AlohaJoe wrote:
Fri Jun 22, 2018 12:09 am
Overall it is fine. That said, I would recommend you think hard about whether the split between large & large value (and small & small value) is worth it.

Here's a classic Bogleheads thread on it: viewtopic.php?f=10&t=38374

Also, the tax advantages for overweighting Australian shares is a dubious proposition :) there is some (but not conclusive or undisputed) evidence that Australian share prices are simply bid up to an amount equal to the franking rights, leaving them with no net benefit. (If you really care you probably search and find previous posts from me on it with references).

In the end, tilting toward Australia is fine. Just don't kid yourself that your perfectly chosen 12.5% slices were carefully calculated due to tax advantages.
Thanks for your response. I just picked 12.5% slices because I believe in all the individual components and its easy to keep them the same size. It wasn't just because of tax advantages either for my Australian allocation. I should have also mentioned it was as a way to hedge for currency risk. My wife also wants some Australian shares and I figure it can't really hurt. I do believe in a value and small cap tilt. I think a case could be made to simplify international into just large and small cap value but I've already done it this way so now I think I will just stick it out.

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BeBH65
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Re: 28 year old investor [Australia]

Post by BeBH65 » Fri Jun 22, 2018 7:34 am

The size split is not equal. Different organisations have slightly different %.
Market neutral weights according to Morningstar are: large cap 70%, mid cap 20%, small cap 10%. Value/blend/growth each are about 33%.

You are seriously overweighting to small and value. You might need to weight decades to see the benefit of this. Are you that patient?
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Young Saver
Posts: 5
Joined: Thu Jun 21, 2018 8:30 pm

Re: 28 year old investor [Australia]

Post by Young Saver » Sat Jun 23, 2018 9:37 pm

Valuethinker wrote:
Fri Jun 22, 2018 5:42 am
Young Saver wrote:
Thu Jun 21, 2018 9:06 pm
Greetings all,
I am 28 years old, married to a woman my age with a young baby.
I recently started doing some reading on this site and thought it might be able to offer me some guidance.

My portfolio is not as simple as some people here recommend, but I like the idea of tilting towards small cap and value and I am happy to do the rebalancing when I need to. I have conviction in my tilt and I am going to stay the course. I study finance so I don't find it a chore since investing is something I am passionate about. I am just wondering if people think this is a reasonable spin off on the coffeehouse portfolio for an Australian investor.

12.5% REIT
12.5% Emerging Markets
12.5% Australian Shares
12.5% Australian Small Cap Value
12.5% International Large Cap
12.5% International Large Cap Value
12.5% International Small Cap
12.5% International Small Cap Value

I am in all index funds

At the moment I have 160K invested. I have no bonds yet. I am overweight Australian shares because of the tax advantages I get by investing in them. My salary is around 75K. I also get free accomodation since I work on a family farm. My wife is a stay at home Mum. Both of us are from kind of wealthy families. I have been told that I am getting an inheritance valued around 3 million +/- 500K in the next 10 years and there would be more than that later. That is not including my wife's side of the family which would be probably more than that in 20+ years.

I like to be a success in my own right which is why despite this I am still trying to save as much as I can. My living expenses are around 30K. I am saving and investing the rest. Is it reasonable for me to have such an aggressive allocation because of expected inheritance? Or should i pretend there is no inheritance and be more conservative? I am thinking at the moment to go age minus 20 in bonds since I have a security blanket. I would add 10% in bonds when we are both 30. I also have 10 months living expenses in high yield savings account.

I would love your thoughts and opinions fellow bogleheads.
- you are way overweight Australia. The Australian index is mostly financial services + natural resources. You are overweighting the same sectors that probably drive your labour income & your housing prices (Canadian stock index is similar)

I understand where you are coming from. My portfolio has a lot of home country bias for sure. I did notice that on the investing in Australia part of the boglehead forum it seemed to say that it was ok. I am actually much more diversified globally than the vast majority of Australian investors from what I have seen so far.

- REITs? If that's global REIT then it's fine - probably won't have much impact on your final portfolio wealth, but arguably adds to your inflation protection in the portfolio.

For REIT's I was planning on 2:1 international/Australia. At the moment I only hold global REIT's. I think I might just stick to global since I don't think it will make much difference to the final outcome if I split it up.

If it is Australian only REITs then you really are overweighting quite a risky sector - it's correlated with Australian business conditions, and with your job, and Australian housing prices.

The Emerging Market index is weighted towards China, and, again, what happens in China has a big impact on the Australian economy (and the level of the AUD). But that's a lesser concern - there's a correlation there but it is probably not *that* extreme. Normally what happens is China slows down, commodity prices fall, and Australia takes much of the pain in a fall in the AUD (thus making Australia's commodity exports more competitive or rather the global price in USD translates into more in AUD).

In your shoes, I'd want to diversify away from the Australian economy as far as possible. Hold the global index (which is about 3% Australia, from memory) for equities.

Bonds is trickier. AUD government bonds pay a decent yield, last time I checked. Credit rating of the Australian government is very high. Bonds you generally want low volatility/ safety.

But it does mean you are fully exposed to the swings of the AUD. Your buying power drops if AUD goes down. Fortunately your farm prices probably improve, so that's a degree of hedging.

A possible alternative is to be 50% in US Treasury bonds (in USD) which pay a half decent yield these days (3% ish) and 50% in Australian govt bonds. But you would be speculating on the USD/ AUD exchange rate and half of your global equity portfolio would be in US stocks.

I think this is what I am going to do.

To my mind, the Australian economy looks ripe for a bad housing/ debt bust. Domestic personal savings are low (despite Superannuation) and personal debt to GDP is high. Cheer yourself up, Canada looks a lot worse ;-). The response to that is to be as globally diversified as possible.

Thanks a lot for taking the time to give me some ideas. Australian house prices have started to run into some trouble here this year. I think Sydney has fallen 4% so far this year. It will be interesting to see what happens in the future. This is one of the reasons I feel more comfortable investing in shares at the moment than real estate.

Young Saver
Posts: 5
Joined: Thu Jun 21, 2018 8:30 pm

Re: 28 year old investor [Australia]

Post by Young Saver » Sat Jun 23, 2018 9:43 pm

BeBH65 wrote:
Fri Jun 22, 2018 7:34 am
The size split is not equal. Different organisations have slightly different %.
Market neutral weights according to Morningstar are: large cap 70%, mid cap 20%, small cap 10%. Value/blend/growth each are about 33%.

You are seriously overweighting to small and value. You might need to weight decades to see the benefit of this. Are you that patient?
For the large portion of my International shares the morning star style box is 91% large cap and 9% mid cap, no small cap. I don't think I am going to have to wait decades for it to start helping. If I do I just got unlucky imo and I still made the best decision at the time for my plan based on all the information I had available to me. Also I still have plenty of large cap so if it does well I should still be in good shape. Also I have 32 years (hopefully). The other thing is I feel like if I am going to tilt I may as well do a big enough tilt that it will make a difference. If I just tilt a little bit I don't think there is much point in even doing it.

smectym
Posts: 125
Joined: Thu May 26, 2011 5:07 pm

Re: 28 year old investor [Australia]

Post by smectym » Sat Jun 23, 2018 10:38 pm

Young Saver is clearly ahead of the game, and therefore too intelligent to pull some puerile stunt such as refusing the inheritance; no doubt WanderingDoc is adroitly deploying the rhetorical trope of hyperbole to make his valid point: invest, and save and live ones life, AS IF one had no coming inheritance. Quite correct.

Smectym

smectym
Posts: 125
Joined: Thu May 26, 2011 5:07 pm

Re: 28 year old investor [Australia]

Post by smectym » Sun Jun 24, 2018 12:11 am

Reviewing the allocation, and taking OP’s explanation that he’s All-Australia for tax purposes as a given, I’d say Young Saver (“YS”) is doing it right.

Yes, if upon review YS can find a way to diversify to (1) the U.S. market, and secondarily and to a lesser degree, (2) international ex-U.S, without incurring some onerous tax consequence that negates any prospective diversification advantage, then judicious allocations to those markets may generate a bit of alpha. But very often tax is the tail that wags the dog. Leave it to YS to do that math.

Smectym

Valuethinker
Posts: 35024
Joined: Fri May 11, 2007 11:07 am

Re: 28 year old investor [Australia]

Post by Valuethinker » Sun Jun 24, 2018 7:24 am

Young Saver wrote:
Sat Jun 23, 2018 9:37 pm

I am in all index funds

At the moment I have 160K invested. I have no bonds yet. I am overweight Australian shares because of the tax advantages I get by investing in them. My salary is around 75K. I also get free accomodation since I work on a family farm. My wife is a stay at home Mum. Both of us are from kind of wealthy families. I have been told that I am getting an inheritance valued around 3 million +/- 500K in the next 10 years and there would be more than that later. That is not including my wife's side of the family which would be probably more than that in 20+ years.

I like to be a success in my own right which is why despite this I am still trying to save as much as I can. My living expenses are around 30K. I am saving and investing the rest. Is it reasonable for me to have such an aggressive allocation because of expected inheritance? Or should i pretend there is no inheritance and be more conservative? I am thinking at the moment to go age minus 20 in bonds since I have a security blanket. I would add 10% in bonds when we are both 30. I also have 10 months living expenses in high yield savings account.

I would love your thoughts and opinions fellow bogleheads.
- you are way overweight Australia. The Australian index is mostly financial services + natural resources. You are overweighting the same sectors that probably drive your labour income & your housing prices (Canadian stock index is similar)

I understand where you are coming from. My portfolio has a lot of home country bias for sure. I did notice that on the investing in Australia part of the boglehead forum it seemed to say that it was ok. I am actually much more diversified globally than the vast majority of Australian investors from what I have seen so far.[/quote]

https://www.ishares.com/us/products/239 ... tralia-etf

$AUD 100k in the Australian index, above => nearly $10k in *one stock* - Commonwealth Bank
$38k in Financials
$18k in Materials
$6k in Energy

No technology. No big pharmaceuticals. None of the world's leading industrial corporations. This is not a diversified portfolio.

- REITs? If that's global REIT then it's fine - probably won't have much impact on your final portfolio wealth, but arguably adds to your inflation protection in the portfolio.

For REIT's I was planning on 2:1 international/Australia. At the moment I only hold global REIT's. I think I might just stick to global since I don't think it will make much difference to the final outcome if I split it up.
I agree and you want to dilute down your Australian exposure. Australian REITs will correlate with Australian financials and the Australian economy generally - see concentration in the index above.
If it is Australian only REITs then you really are overweighting quite a risky sector - it's correlated with Australian business conditions, and with your job, and Australian housing prices.

The Emerging Market index is weighted towards China, and, again, what happens in China has a big impact on the Australian economy (and the level of the AUD). But that's a lesser concern - there's a correlation there but it is probably not *that* extreme. Normally what happens is China slows down, commodity prices fall, and Australia takes much of the pain in a fall in the AUD (thus making Australia's commodity exports more competitive or rather the global price in USD translates into more in AUD).

In your shoes, I'd want to diversify away from the Australian economy as far as possible. Hold the global index (which is about 3% Australia, from memory) for equities.
The Bank of England has just published a report re the high British exposure to China, if it is has a debt bubble meltdown (and it has grown the largest pool of private debt in human history, quite fast). Not only the export exposure (think Burberry, or Johnny Walker whiskey) but also the financial services exposure (HSBC, Standard & Chartered). The exposure of the London flat market to Chinese buyers (perhaps 40% of new flats in Central London?).

Australia and Canada will also be high on that list, too. Direct exposure via commodity prices and volumes, indirect via the investment channel and the exposure of our banks to China.
Bonds is trickier. AUD government bonds pay a decent yield, last time I checked. Credit rating of the Australian government is very high. Bonds you generally want low volatility/ safety.

But it does mean you are fully exposed to the swings of the AUD. Your buying power drops if AUD goes down. Fortunately your farm prices probably improve, so that's a degree of hedging.

A possible alternative is to be 50% in US Treasury bonds (in USD) which pay a half decent yield these days (3% ish) and 50% in Australian govt bonds. But you would be speculating on the USD/ AUD exchange rate and half of your global equity portfolio would be in US stocks.

I think this is what I am going to do.
It will not make a huge difference, but it is diversification. I don't have credit risk concerns re Australia's government-- lowest debt to GDP in the world, I believe (among major countries). But the AUD itself and the China factor.
To my mind, the Australian economy looks ripe for a bad housing/ debt bust. Domestic personal savings are low (despite Superannuation) and personal debt to GDP is high. Cheer yourself up, Canada looks a lot worse ;-). The response to that is to be as globally diversified as possible.

Thanks a lot for taking the time to give me some ideas. Australian house prices have started to run into some trouble here this year. I think Sydney has fallen 4% so far this year. It will be interesting to see what happens in the future. This is one of the reasons I feel more comfortable investing in shares at the moment than real estate.
[/quote]

US housing prices peaked December 2006. The first real signs of trouble were August 2007, and it was the summer of 2008 before it really started to hit the fan, and housing prices did not bottom until 2010-2012, depending on which city.

Thus, these things have long cycles to them. Both Sydney and Toronto seem off the peak, but Vancouver is going back up again. If they do go the way I think they will go (falling property values leads to private sector seeking to deleverage, which leads to majorly recession (and it will feel like a Depression if you work in housing related industries)) then this will take years to work itself out. Peak to trough could be 5-10 years.

You are young. You can afford to wait before climbing on the housing ladder. And, I would argue, you need to be as globally diversified in your equity investments as possible. Your bonds this is less clear - taking Foreign eXchange rate bets on bonds (i.e. currency unhedged) is usually just a way to add unrewarded volatility. So mostly what you want is no credit risk bonds (Australian Federal government counts in this to my mind). But it's not unreasonable to diversify a bit.

If Canada plays out the way I think it will, the CAD will drop. It has been $1.05 per $1 USD, it's now close to 0.80, it has fallen to $0.62 -- all in the last 30 years or so. I think it could go down into the $0.50s, this cycle.

AUD in my impression has been even more volatile against USD, thus the swing could be as bad.

asset_chaos
Posts: 1305
Joined: Tue Feb 27, 2007 6:13 pm
Location: Melbourne

Re: 28 year old investor [Australia]

Post by asset_chaos » Sun Jun 24, 2018 8:17 pm

While I don't advocate a large overweight to Australian shares (and don't do it with my own Australian investments), a contrary opinion is that your 25% weighting to Australian shares is not outside the realm of what other reasonable Australian investors do. Vanguard's Australian lifestrategy balanced funds, for instance, place something like 40% of equity investment into Australian shares (https://www.vanguardinvestments.com.au/ ... /?overview); although, I presume Vanguard AU has made a business decision to cater to home bias, one which you need not follow. It may also be worth noting that even Vanguard's Australia High Growth balanced fund has 10% in bonds.

You don't say if you're investing via salary sacrifice into superannuation. If not, you may want to investigate whether that's a more tax effective way to invest. Super funds downunder can be quite expensive, so you would need to investigate the ones that aren't. There is a thread on "Low Cost Australian Superannuation Providers?" viewtopic.php?t=225296.
Regards, | | Guy

2015
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Re: 28 year old investor [Australia]

Post by 2015 » Sun Jun 24, 2018 8:51 pm

Young Saver wrote:
Thu Jun 21, 2018 11:52 pm
WanderingDoc wrote:
Thu Jun 21, 2018 10:51 pm
Thanks for your advice. This is what I'm going to do. I want to be a success in my own right. I think I am off to a decent start. I am studying a bachelor degree in finance at university while working full time because I want to make myself more valuable. This way I can earn my own money and be proud of it. It also means I'm making the most out of my own ability.

...
Outstanding. Working and going to school full time particularly at your age says much (good) about you.

The best investments are always in ourselves, because the external never fails to correspond to the internal.

Valuethinker
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Re: 28 year old investor [Australia]

Post by Valuethinker » Mon Jun 25, 2018 2:55 am

asset_chaos wrote:
Sun Jun 24, 2018 8:17 pm
While I don't advocate a large overweight to Australian shares (and don't do it with my own Australian investments), a contrary opinion is that your 25% weighting to Australian shares is not outside the realm of what other reasonable Australian investors do. Vanguard's Australian lifestrategy balanced funds, for instance, place something like 40% of equity investment into Australian shares (https://www.vanguardinvestments.com.au/ ... /?overview); although, I presume Vanguard AU has made a business decision to cater to home bias, one which you need not follow. It may also be worth noting that even Vanguard's Australia High Growth balanced fund has 10% in bonds.
Why home country bias is so strong is an interesting question, even among those who should know better (big mutual fund companies).

It's the familiarity bias in human reasoning (Representativeness) writ large.

Given where one's home equity sits, and one's future labour income (career), the actual optimum is 100% *outside* the home country-- or certainly not more than the c 3% Australia is in world markets . Given the concentration of the Australian index - 10% is in one stock, Commonwealth Bank, putting 40% of one's money into the Australian index is the same as betting 4% of your total portfolio on one bank, and c. 16% on Australian financials stocks. No technology as another example of the effect of the index. It is underdiversifying.

It gets more complicated re currency hedging -- you can argue that one both ways, whether to be 100% hedged into AUD or not. My own view is that, given Australia is a small open economy with a big trade sector (particularly natural resources to China and East Asia - both volumes & price sensitive) that it's better to diversify away from the AUD. But that's not a terribly scientific analysis.

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