First Portfolio Ever (Australian ETFs)

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LongHaulLou
Posts: 6
Joined: Sat Jul 07, 2018 9:22 pm

First Portfolio Ever (Australian ETFs)

Post by LongHaulLou » Sat Jul 07, 2018 10:06 pm

Hi everyone,

I am really new to the investment game and been reading a lot to get myself educated but still have lots to learn! I'm in a place where I am comfortable I understand enough to start investing with an initial $5K, but I would love some advice/feedback on the following portfolio and whether this looks like a good mix. A bit about me first:

My husband and I are 36 and live in South Australia, with 1 small child. We have a fairly high risk tolerance I would say, our approach is to invest regularly, and continuously, slow and steady wins the race, not looking to 'time' the market. We'll be saving money to purchase more ETF's probably quarterly, to save on trading costs - although I would love a 'set and forget' arrangement where I can BPAY an amount every fortnight as well and slowly grow our portfolio, I'm just worried about fees being too high to achieve this, in which case I'm happy to manage myself on a quarterly basis. Funds will be left alone for at least 10 years, as we add to our portfolio the idea is for that to supplement superannuation that we could access before retirement age if we choose, or to pay for things like private school fees. No particular home bias and there is a small chance in the future we may live in the US. I like ETF's for their ability to offer diversification with low fees. We have balanced super option funds with decent regular contributions. Don't own our own home yet, but looking to purchase in the next two years, keeping cash for that in a high interest savings account given the short time frame. We have $20k saved for an emergency fund in a high-interest account.

The portfolio allocation we've proposed so far looks like this:
VGS - 35% - Vanguard MSCI Index International Shares
VAS - 25% - Vanguard Australian Shares Index
VAF - 20% - Vanguard Australian Fixed Interest Index
VBND - 10% - Vanguard Global Aggregate Bond Index (Hedged)
IJR - 5% - Vanguard International Small Companies Index Fund
VGE 5% - Vanguard FTE Emerging Markets Shares

I also liked the look of Vanguard's High Growth ETF Portfolio which has a 0.27 fee and includes allocations of all the above ETFs (in different %) with the exclusion of VAF & VBND, with inclusion of VGAD (Vanguard International Shares Index Fund (Hedged)). Attractive because of the automatic rebalancing too, but when I did a quick back of envelope calculation it seemed to me fees were then about double buying this 'off the shelf ' ETF. We'll be opting for the dividend reinvestment plan either way.

Would love some feedback please, do you think the above portfolio looks ok, or would you recommend replacing any of those particular ETF's, or weighting one or more, more heavily? Or would you suggest paying the higher fees and going with the packaged Vanguard High Growth ETF portfolio instead https://www.vanguardinvestments.com.au/ ... /?overview? Any other advice is very welcome and appreciated, thank you!

Valuethinker
Posts: 35652
Joined: Fri May 11, 2007 11:07 am

Re: First Portfolio Ever (Australian ETFs)

Post by Valuethinker » Sun Jul 08, 2018 7:10 am

LongHaulLou wrote:
Sat Jul 07, 2018 10:06 pm
Hi everyone,

I am really new to the investment game and been reading a lot to get myself educated but still have lots to learn! I'm in a place where I am comfortable I understand enough to start investing with an initial $5K, but I would love some advice/feedback on the following portfolio and whether this looks like a good mix. A bit about me first:

My husband and I are 36 and live in South Australia, with 1 small child. We have a fairly high risk tolerance I would say, our approach is to invest regularly, and continuously, slow and steady wins the race, not looking to 'time' the market. We'll be saving money to purchase more ETF's probably quarterly, to save on trading costs - although I would love a 'set and forget' arrangement where I can BPAY an amount every fortnight as well and slowly grow our portfolio, I'm just worried about fees being too high to achieve this, in which case I'm happy to manage myself on a quarterly basis. Funds will be left alone for at least 10 years, as we add to our portfolio the idea is for that to supplement superannuation that we could access before retirement age if we choose, or to pay for things like private school fees. No particular home bias and there is a small chance in the future we may live in the US. I like ETF's for their ability to offer diversification with low fees. We have balanced super option funds with decent regular contributions. Don't own our own home yet, but looking to purchase in the next two years, keeping cash for that in a high interest savings account given the short time frame. We have $20k saved for an emergency fund in a high-interest account.

The portfolio allocation we've proposed so far looks like this:
VGS - 35% - Vanguard MSCI Index International Shares
VAS - 25% - Vanguard Australian Shares Index
VAF - 20% - Vanguard Australian Fixed Interest Index
VBND - 10% - Vanguard Global Aggregate Bond Index (Hedged)
IJR - 5% - Vanguard International Small Companies Index Fund
VGE 5% - Vanguard FTE Emerging Markets Shares

I also liked the look of Vanguard's High Growth ETF Portfolio which has a 0.27 fee and includes allocations of all the above ETFs (in different %) with the exclusion of VAF & VBND, with inclusion of VGAD (Vanguard International Shares Index Fund (Hedged)). Attractive because of the automatic rebalancing too, but when I did a quick back of envelope calculation it seemed to me fees were then about double buying this 'off the shelf ' ETF. We'll be opting for the dividend reinvestment plan either way.

Would love some feedback please, do you think the above portfolio looks ok, or would you recommend replacing any of those particular ETF's, or weighting one or more, more heavily? Or would you suggest paying the higher fees and going with the packaged Vanguard High Growth ETF portfolio instead https://www.vanguardinvestments.com.au/ ... /?overview? Any other advice is very welcome and appreciated, thank you!
Since your job, your govt provided state pension, any housing equity you have are all in AUD I would diversify as much as you can i.e.

55 per cent international index 5 per cent Australian index.

If you look at the Australian index it is mostly financials and natural resources so you will also improve your sector diversification doing that.

Bonds are ok.

On Emerging Markets is this not in Total International? If it is then you do not need to double up. The linkage between AUD Australian stock market and China is well known and c 40% EM is China. You'd be amazed how much is 3 Chinese internet companies.

In the case of both small cap and EM if you don't have 10 per cent in each one than it will make almost no difference to your final portfolio value. So you either have 10 per cent and accept significant tracking error ( risk performance is different from underlying index) or don't have the additional complexity.

The Vanguard alternative may be a good one because you won't have to rebalance. It's hard to rebalance away from stocks when they are doing well or into stocks when they are doing badly.

However I believe that fund also overweights Australia. Australia is 3 per cent of world markets. There is no strong reason to overweight that in equities. In bonds one tends to hold either own currency bonds (assuming your federal government bond market to be risk free which it pretty much is) or global bonds hedged back into own currency (most bond funds currency hedge most stock funds do not).

Remember virtually all your other financial risks are in AUD. Nice when China is blazing an not when it is not. Thus diversification globally is your friend.

LongHaulLou
Posts: 6
Joined: Sat Jul 07, 2018 9:22 pm

Re: First Portfolio Ever (Australian ETFs)

Post by LongHaulLou » Sun Jul 08, 2018 10:12 pm

Thanks so much for your response. I've had another look and compared both the VGS/IJR international funds and the VGE to one another and I can't see any double ups with a quick search comparison in either of those. I definitely want to stray away from too much home bias though, so I'll weight more heavily I think on the VGS rather than VAS and increase that EM and small cap to at least 10% too.

Can I just clarify re the bonds then, do you think I'd be better placed to forget the VBND allocation altogether and keep an allocation in the Australian Fixed Interest VAF? Great point re no real strong reason to overweight in equities, honestly I think I had subconsciously leaned towards equities so need to give that some further thought too. Not sure if it's smarter to have an international/domestic mix in bonds, like you said our federal govt bond market is pretty stable.

I will need to compare to my superannuation and where specifically my exposure is there as well, not sure how much my portfolio there is skewed towards the Australian market, I want to make sure I have a balance across both my super and ETFs portfolios.

Thanks again!

asset_chaos
Posts: 1346
Joined: Tue Feb 27, 2007 6:13 pm
Location: Melbourne

Re: First Portfolio Ever (Australian ETFs)

Post by asset_chaos » Mon Jul 09, 2018 3:41 am

Valuethinker wrote:
Sun Jul 08, 2018 7:10 am
On Emerging Markets is this not in Total International? If it is then you do not need to double up. The linkage between AUD Australian stock market and China is well known and c 40% EM is China. You'd be amazed how much is 3 Chinese internet companies.
Puzzlingly no. Vanguard uses the MSCI World ex-Australia index, and it's a developed markets only index---and mis-named at that. It's baffling why Vanguard didn't use or create a truly total world ex Australia index fund, but that's what we have. Personally with a nod to greater simplicity and lower cost I take the developed markets "world" ex Aus fund as close enough to a global fund to dispense with a separate emerging markets fund.

If you're (the OP) buying etfs quarterly and paying even $10 brokerage per transaction with six funds that's $240 per year in brokerage fees. That's a 2.4% cost for even a $10,000 portfolio, which dwarfs the quarter percent or so fund management fees. Is making only four transactions a year an argument in favor of the balanced fund, even with its shortcomings?
Regards, | | Guy

LongHaulLou
Posts: 6
Joined: Sat Jul 07, 2018 9:22 pm

Re: First Portfolio Ever (Australian ETFs)

Post by LongHaulLou » Mon Jul 09, 2018 6:09 am

Great info Guy re the fees, thank you. Being a newbie who has never actually completed a trade yet, I didn’t realise I would be paying a fee per fund, I stupidly assumed it was for the whole trade I wanted to make. So that insight is so helpful, thank you. Would have gone to sort it out and realised and then had to stop and re-evaluate! Given that and with a low total balance to start with you’re right, it probably makes more sense to start with their high growth portfolio even if it is skewed towards the Australian market. As long as I diversify my super fund more towards international markets I should have a good overall, balanced mix. Then I can reassess and allocate as my balance grows if I want to.

String
Posts: 1
Joined: Sun Jul 08, 2018 11:19 pm

Re: First Portfolio Ever (Australian ETFs)

Post by String » Mon Jul 09, 2018 7:29 am

The other simple option is to put your Australian allocation in super due to tax efficiency, and then just use VAF/VGS outside to make up whatever doesn't fit in super. This would leave you with just 2 funds outside of super which would be easier to deal with.

You can always add emerging/extra small caps later once you have a bigger portfolio if you want that, but you might find you like the simplicity. Also note that IJR is only American small caps, not international. The Vanguard international small cap fund is wholesale fund only so you need at least 100k to start.

Mors
Posts: 192
Joined: Wed Aug 16, 2017 10:06 am

Re: First Portfolio Ever (Australian ETFs)

Post by Mors » Mon Jul 09, 2018 2:06 pm

Your allocation is great.

I like the new Vanguard all-in-one etfs. The extra fees fully justify the automatic rebalance and convenience. I find it ideal if you are new to investing, I would probably suggest it over the more complex alternative.

Will you invest through a tax-advantaged account? I know that you have superannuation but my knowledge ends there regarding this topic.

Tax advantaged has also the benefit of potentially selling the all-in-one fund in the future when you have accumulated more wealth and splitting it in more specific funds without paying taxes on gains.

LongHaulLou
Posts: 6
Joined: Sat Jul 07, 2018 9:22 pm

Re: First Portfolio Ever (Australian ETFs)

Post by LongHaulLou » Mon Jul 09, 2018 10:28 pm

String wrote:
Mon Jul 09, 2018 7:29 am
The other simple option is to put your Australian allocation in super due to tax efficiency, and then just use VAF/VGS outside to make up whatever doesn't fit in super. This would leave you with just 2 funds outside of super which would be easier to deal with.

You can always add emerging/extra small caps later once you have a bigger portfolio if you want that, but you might find you like the simplicity. Also note that IJR is only American small caps, not international. The Vanguard international small cap fund is wholesale fund only so you need at least 100k to start.
I like this idea, but my super already has a generous ongoing contribution from my employer well above the federal mandatory minimum (and I was topping it up even further for a long period of time too), so It's got a pretty healthy balance already and will continue to grow. I really want to be able to access other investments outside of super if I choose to, before retirement age which is 65 here.

Good to know re the int'l small cap fund - not sure how I missed that detail!

LongHaulLou
Posts: 6
Joined: Sat Jul 07, 2018 9:22 pm

Re: First Portfolio Ever (Australian ETFs)

Post by LongHaulLou » Mon Jul 09, 2018 10:32 pm

Mors wrote:
Mon Jul 09, 2018 2:06 pm
Your allocation is great.

I like the new Vanguard all-in-one etfs. The extra fees fully justify the automatic rebalance and convenience. I find it ideal if you are new to investing, I would probably suggest it over the more complex alternative.

Will you invest through a tax-advantaged account? I know that you have superannuation but my knowledge ends there regarding this topic.

Tax advantaged has also the benefit of potentially selling the all-in-one fund in the future when you have accumulated more wealth and splitting it in more specific funds without paying taxes on gains.
Thanks so much for your response. I've never heard of tax-advantaged accounts until now so I need to look into that for sure, thank you! Definitely want to avoid CGT if at all possible in the future and I'm pretty ignorant of all of that so looks like I need to do some more research/reading.

LongHaulLou
Posts: 6
Joined: Sat Jul 07, 2018 9:22 pm

Re: First Portfolio Ever (Australian ETFs)

Post by LongHaulLou » Wed Jul 11, 2018 5:46 am

Ok I see what you mean re tax advantages, like a Roth 401k. Unfortunately I don't think we have an option like that in Aus, we do have tax advantages in contributing to superannuation but not with ETFs outside of super by the looks of it :(

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