Australian Portfolio

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Topic Author
alex123711
Posts: 107
Joined: Sun May 20, 2018 5:01 am

Australian Portfolio

Post by alex123711 » Thu Oct 10, 2019 7:33 pm

I've pretty much settled on a VAF, VEU, VTS, VAE portfolio for more diversity and less costs than VGS, however not too sure how I should hedge for currency risk, especially since the AUD is pretty low at the moment, is VGAD the best way to do this, are there other options? How much should I have?

Edit - These are the ticker symbols:

VAF - Australian aggregate bonds (mostly govt with some high quality corporate)

VTS - US market
VEU - ex-US market (inc EM)
VAE - Asia-ex-Japan

VGAD - developed markets, hedged to AUD
Last edited by alex123711 on Sat Oct 12, 2019 1:18 am, edited 2 times in total.

andrew99999
Posts: 508
Joined: Fri Jul 13, 2018 8:14 pm

Re: Australian Portfolio

Post by andrew99999 » Thu Oct 10, 2019 9:55 pm

Good idea for to mention what the ticker symbols are so non-Australian people (who have an enormous amount of valuable input here) can also offer their thoughts.

--------------------------

VAF - Australian aggregate bonds (mostly govt with some high quality corporate)

VTS - US market
VEU - ex-US market (inc EM)
VAE - Asia-ex-Japan

VGAD - developed markets, hedged to AUD
--------------------------

VEU contains everything in VAE. If you are aware and this was your decision, fine, just pointing it out in case you were not aware.


For whether to use currency hedging -

Generally, you want some AUD based assets to hedge against upside currency risk and some non-AUD based assets to hedge against downside currency risk.

However, the AUD-based assets includes your total assets (house, investment property, Australian business, AUD based bonds, Australian equities, AUD-hedged global equities).

If you are likely to retire with a paid off house, and with a high allocation of bonds (which is normal for those retiring at regular retirement age of 60-70), then you already have a lot of AUD based assets and probably no need any hedged equities.

If you retire early and need a more aggressive portfolio and/or you will likely rent in retirement, and if you have a high proportion of global shares to reduce the concentration risk of Australian shares, then having so much of your assets exposed to currency risk probably warrants some AUD-hedged global equities like VGAD/IHWL

I've put up a detailed page on this, but I think I'm not allowed to post a link to my own site, so feel free to PM me.
PassiveInvestingAustralia.com

AlohaJoe
Posts: 4830
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Australian Portfolio

Post by AlohaJoe » Thu Oct 10, 2019 10:33 pm

Everytime there's an Australian post andrew99999 gets to it before me! He never sleeps!
andrew99999 wrote:
Thu Oct 10, 2019 9:55 pm
I've put up a detailed page on this, but I think I'm not allowed to post a link to my own site, so feel free to PM me.
FWIW, I've never got in trouble (or even a hint of it) for posting some information and then saying "and here's a blog I wrote with even more detail and examples". My rule of thumb is 1) obviously my blog isn't monetized in any substantial way, 2) the post content itself should be standalone & helpful so that people don't have to click on the link to feel they learned something/got value.

Valuethinker
Posts: 38938
Joined: Fri May 11, 2007 11:07 am

Re: Australian Portfolio

Post by Valuethinker » Fri Oct 11, 2019 8:54 am

alex123711 wrote:
Thu Oct 10, 2019 7:33 pm
I've pretty much settled on a VAF, VEU, VTS, VAE portfolio for more diversity and less costs than VGS, however not too sure how I should hedge for currency risk, especially since the AUD is pretty low at the moment, is VGAD the best way to do this, are there other options? How much should I have?
Unless you are within say 10 years of retirement I would not worry too hard about currency hedging.

Or rather, if your bonds are in AUD, then I would not worry about currency hedging in your equity portfolio. You have plenty of exposure to AUD with your job, your home equity if you own a home, and whatever your state pension entitlement is (don't know how that works in Australia).

Own the global market. That's the important thing. In the very long run AUD will probably tend to even out (i.e. reflect, properly, the difference in inflation with other major currencies).

(your other big issues is dividend franking which makes it more attractive to own dividend-paying Australian stocks. Pace against that, the Australian stock market, like the Canadian, has very little diversification - mostly financials and natural resource stocks. I would suggest you don't want to be more than 20-30% Australian stocks in your portfolio, and I would aim for less than that, in truth. Depends whether in taxable accounts or not, I suppose?).

I could argue for an Australian you don't need Emerging Markets. Because China is over 1/3rd of that, and Australia's economy and property markets have quite a lot of linkage to China already (so does its currency strength or weakness - probably the iron ore price is the single biggest driver of AUD*).

* for Canada it's something called WCS oil price - Western Canada Syncrude. Our single biggest export.

andrew99999
Posts: 508
Joined: Fri Jul 13, 2018 8:14 pm

Re: Australian Portfolio

Post by andrew99999 » Fri Oct 11, 2019 10:05 am

AlohaJoe wrote:
Thu Oct 10, 2019 10:33 pm
Everytime there's an Australian post andrew99999 gets to it before me! He never sleeps!
Haha I'm in a timezone 3 hours behind Australia so I'm up 3 hours later than eveyrrone else.
AlohaJoe wrote:
Thu Oct 10, 2019 10:33 pm
andrew99999 wrote:
Thu Oct 10, 2019 9:55 pm
I've put up a detailed page on this, but I think I'm not allowed to post a link to my own site, so feel free to PM me.
FWIW, I've never got in trouble (or even a hint of it) for posting some information and then saying "and here's a blog I wrote with even more detail and examples". My rule of thumb is 1) obviously my blog isn't monetized in any substantial way, 2) the post content itself should be standalone & helpful so that people don't have to click on the link to feel they learned something/got value.
Oh right, didn't realise. Yes mine is not monetized either. Ok I'll include it in future and stop if a mod tells me to. Cheers.
PassiveInvestingAustralia.com

Topic Author
alex123711
Posts: 107
Joined: Sun May 20, 2018 5:01 am

Re: Australian Portfolio

Post by alex123711 » Sat Oct 12, 2019 1:12 am

andrew99999 wrote:
Thu Oct 10, 2019 9:55 pm
Good idea for to mention what the ticker symbols are so non-Australian people (who have an enormous amount of valuable input here) can also offer their thoughts.

--------------------------

VAF - Australian aggregate bonds (mostly govt with some high quality corporate)

VTS - US market
VEU - ex-US market (inc EM)
VAE - Asia-ex-Japan

VGAD - developed markets, hedged to AUD
--------------------------

VEU contains everything in VAE. If you are aware and this was your decision, fine, just pointing it out in case you were not aware.


For whether to use currency hedging -

Generally, you want some AUD based assets to hedge against upside currency risk and some non-AUD based assets to hedge against downside currency risk.

However, the AUD-based assets includes your total assets (house, investment property, Australian business, AUD based bonds, Australian equities, AUD-hedged global equities).

If you are likely to retire with a paid off house, and with a high allocation of bonds (which is normal for those retiring at regular retirement age of 60-70), then you already have a lot of AUD based assets and probably no need any hedged equities.

If you retire early and need a more aggressive portfolio and/or you will likely rent in retirement, and if you have a high proportion of global shares to reduce the concentration risk of Australian shares, then having so much of your assets exposed to currency risk probably warrants some AUD-hedged global equities like VGAD/IHWL

I've put up a detailed page on this, but I think I'm not allowed to post a link to my own site, so feel free to PM me.

Thanks for your detailed response, very helpful.

I am inclined to think that investing in Australian equities is unnecessary as its already included in the indexes and don't see any reason to be overweight a small economy.

andrew99999
Posts: 508
Joined: Fri Jul 13, 2018 8:14 pm

Re: Australian Portfolio

Post by andrew99999 » Sat Oct 12, 2019 7:39 am

alex123711 wrote:
Sat Oct 12, 2019 1:12 am
I am inclined to think that investing in Australian equities is unnecessary as its already included in the indexes and don't see any reason to be overweight a small economy.
Yes since AUD-hedged global index funds are only 3 basis points over the unhedged version, the use of home currency equities to reduce currency risk is no longer a relevant reason - the AUD-hedged fund removes currency risk from global equities and removes idiosyncratic risk from home country equities.

So the only benefit remaining for Australian equities is whatever franking is not priced in, which isn't a great deal, so if you can make up that extra small return from other means (saving a bit more, saving a bit longer), then you can remove idiosyncratic risk entirely by not bothering with Australian equities beyond market cap weight.
PassiveInvestingAustralia.com

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