[Australia] Portfolio Review

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Topic Author
Murdoch
Posts: 34
Joined: Mon Apr 15, 2013 4:33 am

[Australia] Portfolio Review

Post by Murdoch »

Seeking feedback on current portfolio.

Australian.
Married (40yo, 40yo) with two children (8yo, 6yo).

His income 550k
Her income 25k
Tax https://www.ato.gov.au/tax-rates-and-co ... -residents

Debt: nil

Emergency fund: 30k. Cash.
His superannuation: 756k. 50% International Shares (MSCI ex Aus) / 50% Australian Shares (ASX200).
Her superannuation: 425k. 50% International Shares (MSCI ex Aus) / 50% Australian Shares (ASX200).
Taxable Vanguard Account: 410k International Shares (MSCI ex Aus) held in discretionary trust.
House: 2,500k

Comments:
We live very remote and my work pays for all housing and utilities.
We are fortunate to have good schooling for the kids, though will send them to boarding school for senior. Costs approx. 60k per annum per child.
Relatively small emergency fund. Offset by having 4+ months annual and long service leave and another 3+ months in sick leave at a stable government job.
Superannuation in an industry super fund. 50/50 split is not scientific but a blunt attempt to diversify. Have been 100% shares in these accounts for almost a decade.
House is an investment property. Cost neutral. Personal/private reasons to purchase. Bought in 2022 for 1,500k. Current value 2,500k. Chose to pay off mortgage early 2024 when fixed rate of 2.64% rose to 6.56% by liquidating shares. Read every thread on this forum (and other) debating mortgage vs invest, ultimately informing my decision to pay off the mortgage in entirety when interest rates rose. It was the right decision for us.
Both partner and I have life insurance (2,000k) and I have income protection insurance.
Taxable was in a Life Strategy fund when COVID hit and experienced the 30%+ drop. Sold and immediately repurchased into 100% shares and continued to add throughout. Tolerance supported by safe career, accumulation phase, and MMM/BH teachings.
Retirement intent is opaque. Age, 'number', activities, expenses are all unknown. No fixed goals, and not overly interested in fixing any at this stage of life. Work is exciting, stimulating, challenging, sometimes dangerous, and meaningful.

I've been on autopilot with the investing approach for over a decade now with minor tweaks along the way.
Boring (investments) is good and it is working.
Posting now to seek insight into my blind spots, areas for optimisation (not the house which I'm aware isn't financially optimal), or suggestions from collective experience and wisdom on this forum please.

Murdoch.
pseudoiterative
Posts: 612
Joined: Tue Sep 24, 2019 6:11 am
Location: australia

Re: [Australia] Portfolio Review

Post by pseudoiterative »

Murdoch wrote: Tue Jun 04, 2024 5:00 am His superannuation: 756k. 50% International Shares (MSCI ex Aus) / 50% Australian Shares (ASX200).
Her superannuation: 425k. 50% International Shares (MSCI ex Aus) / 50% Australian Shares (ASX200).
Taxable Vanguard Account: 410k International Shares (MSCI ex Aus) held in discretionary trust.
Your three portfolios are elegant in their simplicity.

That said, I wouldn't be comfortable with 50% allocation to Australian shares in the super accounts. The Australian share market is not very diversified. About 50% of the ASX 200 is Australian financials and Australian materials. There are many countries and industries that could produce unusually good returns over the next few decades, it's not obvious to me why to expect Australian financials or Australian materials to do dramatically better than anything else. If you are a believer in passive indexing weighted by market capitalisation, the market cap of the ASX is around 1%-2% of the total global stock market capitalisation, so a global market-cap weighted passive index for 100% stock allocation would look something like 98% intl ex aus and only 2% aus.
Valuethinker
Posts: 49659
Joined: Fri May 11, 2007 11:07 am

Re: [Australia] Portfolio Review

Post by Valuethinker »

Murdoch wrote: Tue Jun 04, 2024 5:00 am Seeking feedback on current portfolio.

Australian.
Married (40yo, 40yo) with two children (8yo, 6yo).

His income 550k
Her income 25k
Tax https://www.ato.gov.au/tax-rates-and-co ... -residents

Debt: nil

Emergency fund: 30k. Cash.
His superannuation: 756k. 50% International Shares (MSCI ex Aus) / 50% Australian Shares (ASX200).
Her superannuation: 425k. 50% International Shares (MSCI ex Aus) / 50% Australian Shares (ASX200).
I am based in London UK not Australia. I don't know your tax and investment system.

Roughly speaking, though, Australia is about 3% of world markets. I wouldn't want to own anything like a 47% overweighting. I would suggest something more like 20% -- which is still a massive overweighting.

A couple of caveats:

- perhaps surprisingly, it probably won't have a huge effect on final outcomes. Australia is highly exposed to the world economy. Australia's index is very concentrated : banks plus natural resource stocks. The latter are directly linked to the world economy and the former indirectly so.

- the US index (which is over 65% of the global developed market index, now) is quite concentrated on a handful of internet-related stocks: Microsoft, Amazon, Google, Meta, Nvidia, Apple. About 25% of US index. Some things about valuation and other conditions now remind me of 2000 when we were just about to have the dot com bust. US index will underperform in that case (for the same reasons it has outperformed ie concentration on the technology sector).

Now we generally hold here that markets are efficient and it's best just to track the index. But the situation feels (with some significant differences) like it did in 2000, and that would give me pause on just making the shift all in one go. Just be aware that is a highly non-Boglehead view, and we generally tend to discount those.

It is worth reflecting that your salary and all of your home equity are in AUD. So you have a *lot* of exposure to AUD already. You may not wish to have more ie by being 50% in Aussie shares? Also is there any type of Defined Benefit (final salary or career average salary) pension attached to your job?

Taxable Vanguard Account: 410k International Shares (MSCI ex Aus) held in discretionary trust.
House: 2,500k
h for over a decade now with minor tweaks along the way.
Boring (investments) is good and it is working.
Posting now to seek insight into my blind spots, areas for optimisation (not the house which I'm aware isn't financially optimal), or suggestions from collective experience and wisdom on this forum please.

Murdoch.
Congratulations on the wedding Rupert ;-). (but you should have a few more 0s after the numbers?)

Main issue with the house is it is a big investment and it's not diversified. If it is in Sydney Melbourne Brisbane, as long as not too close to sea level, then it's hard to see it being a serious risk. I mean Australian housing prices may fall, but 30 or 40% is not the end of the world (unless someone is in negative equity then). In the world we are living in, Australian real estate doesn't feel like a huge risk. (Canberra I guess too given the stability of employment etc in the ACT).

If it is in a more remote part of Australia then as always it's the question of the local economy + whatever specific risks there are. And houses can be hard to shift. I have a friend in St John's Newfoundland (so far out in the Atlantic that it has its own time zone 30 minutes ahead of East Coast Canada and USA!). The main local industry besides government is oil & gas. So houses there can be quite hard to sell.
Topic Author
Murdoch
Posts: 34
Joined: Mon Apr 15, 2013 4:33 am

Re: [Australia] Portfolio Review

Post by Murdoch »

Thanks Pseudoiterative,

The market capitalization in Australia comments being acknowledged, I was aware when I set this.
An odd mix of considerations were applied: belief in Australia as a country, 'patriotism', 'gut feeling' that our minerals and strong financial sector would deliver etc... None of which stand up to scrutiny in the cold light of day.
Based on the reasons you and Valuethinker provide I've long thought about reducing or removing it entirely and just sticking with international.
This has been countered by a commitment to set a position and stick to it through thick and thin.
Given the long-time frame I've held firm on this likely suboptimal allocation, it may be time to stage a transition to less Australian exposure.
Both your and Valuethinker's comments are ones I agree with entirely. Thank you.

Thanks Valuethinker,

Superannuation is an accumulation account. Defined benefit options have been steadily phased out in most areas.
Pension access when I am older will depend on assets and structures, as well as any legislative changes over the next two decades.
I am not counting on being able to access the pension and intend to self-fund retirement in entirety.
The house is in an inner capital city suburb, on a hill, large block, option to subdivide. It is likely/possible that the purchase will end up being a high performing investment, however it was not purchased for this reason and is a consequence of luck if it eventuates.
If I look like Rupert at 40yo I'd be fairly concerned :).

Murdoch.
pseudoiterative
Posts: 612
Joined: Tue Sep 24, 2019 6:11 am
Location: australia

Re: [Australia] Portfolio Review

Post by pseudoiterative »

Murdoch wrote: Tue Jun 04, 2024 7:08 pm commitment to set a position and stick to it through thick and thin.
Given the long-time frame I've held firm on this likely suboptimal allocation, it may be time to stage a transition to less Australian exposure.
If you did decide to transition to a different target allocation for australian shares, maybe there's the question of how best to go about it.

Suppose for argument's sake that you pick Valuethinker's suggestion of 20% australian shares as your new target. I can think of two extreme strategies to transition to this:
  • strategy A - don't sell any existing australian shares. instead, inform your superannuation fund that 100% of all new contributions should be invested in international ex australia
  • strategy B - immediately liquidate the excess 30% of your portfolio that is in australian shares and reinvest in international ex australia. inform your superannuation fund that 80% of all new contributions should be invested in australia
Strategy A feels better from a tax perspective as by avoiding selling you avoid incurring capital gains tax. My understanding is that realised capital gains inside a super account are subject to 15% tax. But the downside is that your over-exposure to a concentration of Australian shares above your new target remains for a long time. E.g. suppose you made the $30k annual concessional contributions of 100% international ex australia for the next 25 years, you might still have a > 30% australian allocation by 2049 given the current starting point of a 50% allocation.

Strategy B immediately updates your allocation to your new target, but doesn't feel good from a tax perspective. Selling would incur capital gains tax on the portion of unrealised gains. Suppose you sold 30% of your portfolio, to reallocate to international, and were sitting on 1/3rd unrealised capital gains. At 15% capital gains tax, this would incur tax of about $756k * 30% alloc sold * 1/3 cap gains * 15% cap gains tax rate for super = $11.34k cap gains tax.

But, after thinking about it more, I suspect in every future scenario, when you went to liquidate the australian shares for whatever reason to access the funds, you'd need to realise the capital gains and pay the 15% tax. I don't think it makes a difference if you pay the capital gains tax earlier or later. From that perspective there's no tax downside of Strategy B to rebalance to your target immediately. (i am not an australian tax expert or super expert, so this might not be quite right).
Valuethinker
Posts: 49659
Joined: Fri May 11, 2007 11:07 am

Re: [Australia] Portfolio Review

Post by Valuethinker »

pseudoiterative wrote: Wed Jun 05, 2024 4:46 am
Murdoch wrote: Tue Jun 04, 2024 7:08 pm commitment to set a position and stick to it through thick and thin.
Given the long-time frame I've held firm on this likely suboptimal allocation, it may be time to stage a transition to less Australian exposure.
If you did decide to transition to a different target allocation for australian shares, maybe there's the question of how best to go about it.

Suppose for argument's sake that you pick Valuethinker's suggestion of 20% australian shares as your new target. I can think of two extreme strategies to transition to this:
  • strategy A - don't sell any existing australian shares. instead, inform your superannuation fund that 100% of all new contributions should be invested in international ex australia
  • strategy B - immediately liquidate the excess 30% of your portfolio that is in australian shares and reinvest in international ex australia. inform your superannuation fund that 80% of all new contributions should be invested in australia
Strategy A feels better from a tax perspective as by avoiding selling you avoid incurring capital gains tax. My understanding is that realised capital gains inside a super account are subject to 15% tax. But the downside is that your over-exposure to a concentration of Australian shares above your new target remains for a long time. E.g. suppose you made the $30k annual concessional contributions of 100% international ex australia for the next 25 years, you might still have a > 30% australian allocation by 2049 given the current starting point of a 50% allocation.

Strategy B immediately updates your allocation to your new target, but doesn't feel good from a tax perspective. Selling would incur capital gains tax on the portion of unrealised gains. Suppose you sold 30% of your portfolio, to reallocate to international, and were sitting on 1/3rd unrealised capital gains. At 15% capital gains tax, this would incur tax of about $756k * 30% alloc sold * 1/3 cap gains * 15% cap gains tax rate for super = $11.34k cap gains tax.

But, after thinking about it more, I suspect in every future scenario, when you went to liquidate the australian shares for whatever reason to access the funds, you'd need to realise the capital gains and pay the 15% tax. I don't think it makes a difference if you pay the capital gains tax earlier or later. From that perspective there's no tax downside of Strategy B to rebalance to your target immediately. (i am not an australian tax expert or super expert, so this might not be quite right).
Ouch. I did not realise that Australians pay Capital Gains Tax on their Superannuation accounts. In Britain, in effect, all your CG are converted into income tax, when you draw down on your pension (with 25% of withdrawals tax free).

Given the OP's accumulation rate it might be better just to redirect new contributions? Get there via the slowboat?

The thing about deferring CG is it is, in effect, an interest free loan from the taxation authority. That tax deferred compounding of a larger sum is very valuable.
Topic Author
Murdoch
Posts: 34
Joined: Mon Apr 15, 2013 4:33 am

Re: [Australia] Portfolio Review

Post by Murdoch »

Thanks Pseudoiterative,

I didn't think an individual CGT event was triggered when moving within a superannuation funds investment options.
Something to do with the superannuation fund absorbing transaction costs (inclusive of CGT) as an aggregate that is factored into the unit price.
Also, their ability to manage most switches internally by moving collectively owned investment between beneficiaries without actually selling anything.

Recent article at https://www.theaustralian.com.au/busine ... 093bae5960 notes "Although changing super funds or changing an investment option within your fund does not trigger capital gains tax (CGT) personally, depending on your super fund and status, there could be significant CGT payable inside of super that many do not realise happens."

I thought the fund itself incurred the costs of buy, sell, gains, losses, and factored that into the unit price of the pooled option.
When COVID withdrawals were allowed, one of the concerns I read regarded the hit other members of the fund would take if a large portion of investors/members withdrew. CGT incurred in unit price which was a shared pain even if you didn't sell yourself.

Let me know if I have this all backwards please.

Murdoch

Edit: spelling error.
Valuethinker
Posts: 49659
Joined: Fri May 11, 2007 11:07 am

Re: [Australia] Portfolio Review

Post by Valuethinker »

Murdoch wrote: Tue Jun 04, 2024 7:08 pm Thanks Pseudoiterative,

The market capitalization in Australia comments being acknowledged, I was aware when I set this.
An odd mix of considerations were applied: belief in Australia as a country, 'patriotism', 'gut feeling' that our minerals and strong financial sector would deliver etc... None of which stand up to scrutiny in the cold light of day.
You are not wrong about natural resources. Australia is well positioned for the demands of rapidly expanding populations, 100% electrification etc. This world will need metals - and you have them. Also (maybe) surplus food.

Financials? I have the Canadian example in my head, and the expansion of the housing market, seemingly never stop rising, has definitely made a lot of profitable business for banks - directly via consumer finance and mortgages, but other channels as well (real estate related businesses). which means when the housing party ends, it will be painful.

Patriotism? I have the British example - and it's not a happy one. Our failure to understand our bit part role in a world of superpower blocs is a big part of the problems we now have -- we are no longer any playwright's main character. Australia and Canada? More realistic understanding of their positions in the world. Our stockmarket is the worst performing of all the world's major markets, I believe (basically since the Global Financial Crisis).

Daniel Kahneman and Amos Tversky. Daniel Ariely (although his results have been questioned). Basically "gut feel" is a very poor guide for behaviour, when there are objective facts available. Our intuition is often very, very wrong.

You can shift your asset allocation. Australia 20% is still c 6x its actual weighting in world markets. So you could frame this as a "move to a very overweight position in Australian stocks"? Just from a "very very very overweight position".
Based on the reasons you and Valuethinker provide I've long thought about reducing or removing it entirely and just sticking with international.
This has been countered by a commitment to set a position and stick to it through thick and thin.
Given the long-time frame I've held firm on this likely suboptimal allocation, it may be time to stage a transition to less Australian exposure.
Both your and Valuethinker's comments are ones I agree with entirely. Thank you.
Don't confuse resolve with sticking with stupid decisions. Think British generals (with British, and Australian and Canadian, and Indian) soldiers on the Western Front in WW1. "One more try". As if human lives were a rugby game and the prize was a cup, not the monument at Menin Gate (or Gallipoli) to our "glorious dead"*.**

Your position is not actually disastrous - as I say, in the long run 50/50 probably doesn't work out vastly different from another weighting. But something like 80/20 reduces the "tracking error" risk of a major underperformance.
Thanks Valuethinker,

Superannuation is an accumulation account. Defined benefit options have been steadily phased out in most areas.
Pension access when I am older will depend on assets and structures, as well as any legislative changes over the next two decades.
I am not counting on being able to access the pension and intend to self-fund retirement in entirety.
The house is in an inner capital city suburb, on a hill, large block, option to subdivide. It is likely/possible that the purchase will end up being a high performing investment, however it was not purchased for this reason and is a consequence of luck if it eventuates.
If I look like Rupert at 40yo I'd be fairly concerned :).

Murdoch.
I don't know, Rupert Murdoch is on his 5th wife. I am sure they are marrying him for his looks ;-).

The house is fine. If it drops 40%, it probably doesn't ruin you. Toronto did the sort of minus 40% in the early 90s and took 15 years to recover, so that's my sort of benchmark for housing crashes (I think the USA did something like -30% from absolute peak in Dec 2006 to absolute bottom in spring 2010?).

* outside my office there used to be a monument to the brave, brave young men - who had fallen in South Africa, fighting the Boers. A complete monument to human futility. There's also a monument in London to the Camel Corps, who fought in the Middle East 1914-1918.

** there's a reason the US did so well in the 1990 Gulf War, and in 2003 (the early part). The generals had all been junior officers in Vietnam - Colin Powell etc. They had all seen what blind headed repeating of the same mistakes, again and again, had cost the troops and junior officers on the ground. They knew the costs of the stupid mistakes.

General Franks (not the one who led the USA into Iraq in 2003) who commanded one of the army corps in Gulf War 1, sweeping round the enemy flank and surrounding his army in Iraq, had lost a leg in Vietnam. It will go down in history as one of the greatest armoured sweeps of all time - the sort of things the Germans pulled in the Western Desert in WW2, or in Russia in 1941-42.
Topic Author
Murdoch
Posts: 34
Joined: Mon Apr 15, 2013 4:33 am

Re: [Australia] Portfolio Review

Post by Murdoch »

Thanks Valuethinker,

I enjoyed reading your post.
I noted that a few of my reasons for the asset allocation would not stand up to scrutiny, and you've proved that point:)

Minerals: regulatory and legislative changes within Australia may undermine their performance from a shareholder perspective dramatically.
Patriotism: purely emotional and acknowledged. In many ways Australia does not realise it's small power/influence on the world stage. If we do realise it in pockets, we don't necessarily act on this realisation on the world stage or with our internal decisions.
Kahneman and Tversky: I am aware of more personal bias than I used to be after reading their books. This hasn't necessarily led to changed decisions in all areas of life though I should arguably apply this awareness more often to decisions such as investments.
Financials: our financial sector is less prone to such major failings, though they obviously exist. Recent Royal Commission and other regulatory reviews/changes have led to such tight regulation, that it risks slowing the economy which may be a worse outcome.
House: a 50% drop in value and then being forced to sell at that low value would result in a nominal 250k loss (and lost opportunity cost). Not an impossible scenario, and if eventuated would not ruin me as you note. More likely I would aim to hold (cost neutral) till a rosier future arrives.
Resolve (context): I really like your military examples and references. I could apply similar in the medical field, where anchoring bias (and others) or inability/unwillingness to shift position/approach/thinking resulted in harm/death (for single patients, or entire populations). The outcomes of such 'resolve'/'pig headedness' in these contexts results in real harm to people. The use of resolve in a decided asset allocation may result in financial ruin, and that may indirectly lead to relationship breakdown and in an absolute worst-case scenario premature death. I consider the consequences of the pig headedness I've shown in the 50/50 Int/Aus split for superannuation investments as acceptable. It is however long overdue I considered its appropriateness, and that was one of the drivers for me posting:)

Murdoch
Valuethinker
Posts: 49659
Joined: Fri May 11, 2007 11:07 am

Re: [Australia] Portfolio Review

Post by Valuethinker »

Murdoch wrote: Wed Jun 05, 2024 7:07 pm Thanks Valuethinker,

I enjoyed reading your post.
I noted that a few of my reasons for the asset allocation would not stand up to scrutiny, and you've proved that point:)

Minerals: regulatory and legislative changes within Australia may undermine their performance from a shareholder perspective dramatically.
Patriotism: purely emotional and acknowledged. In many ways Australia does not realise it's small power/influence on the world stage. If we do realise it in pockets, we don't necessarily act on this realisation on the world stage or with our internal decisions.
Kahneman and Tversky: I am aware of more personal bias than I used to be after reading their books. This hasn't necessarily led to changed decisions in all areas of life though I should arguably apply this awareness more often to decisions such as investments.
Financials: our financial sector is less prone to such major failings, though they obviously exist. Recent Royal Commission and other regulatory reviews/changes have led to such tight regulation, that it risks slowing the economy which may be a worse outcome.
House: a 50% drop in value and then being forced to sell at that low value would result in a nominal 250k loss (and lost opportunity cost). Not an impossible scenario, and if eventuated would not ruin me as you note. More likely I would aim to hold (cost neutral) till a rosier future arrives.
Resolve (context): I really like your military examples and references. I could apply similar in the medical field, where anchoring bias (and others) or inability/unwillingness to shift position/approach/thinking resulted in harm/death (for single patients, or entire populations). The outcomes of such 'resolve'/'pig headedness' in these contexts results in real harm to people. The use of resolve in a decided asset allocation may result in financial ruin, and that may indirectly lead to relationship breakdown and in an absolute worst-case scenario premature death. I consider the consequences of the pig headedness I've shown in the 50/50 Int/Aus split for superannuation investments as acceptable. It is however long overdue I considered its appropriateness, and that was one of the drivers for me posting:)

Murdoch
I get the small country stuff. Well, big country, small number of people, harsh climate and terrain. Canadians are the super patriots who always tell themselves they are not very patriotic ;-). The following clips are from "Heritage Minutes" a series of 1 minute vignettes of Canadians and Canadian history. They all relate to D Day (the first one is called "D Day)

https://www.youtube.com/watch?v=-AuKXAf ... A&index=12

https://www.youtube.com/watch?v=stnMHGw ... 4A&index=9

https://www.youtube.com/watch?v=JCWANop ... A&index=10

You have done the right thing, which is periodically stop and check your thinking. What you are doing all sounds sensible, I just question the ASX overweighting. I would suggest 20% is the thing to aim for, but you don't need to do it all in one go.

Institutional momentum and group dynamics leading to manifest stupidity. And a refusal to admit something is not working. I can think of a very good British example as we speak ;-). But it must be hard to build up an Empire, think you count in the world, and find out it's the 21st Century and nobody is that bothered about the 19th C. Also Island nation (or rather, nations) which complicates things even further.
Topic Author
Murdoch
Posts: 34
Joined: Mon Apr 15, 2013 4:33 am

Re: [Australia] Portfolio Review

Post by Murdoch »

Thanks Valuethinker.

I contacted the superannuation fund today who confirmed that individuals do not pay CGT when switching investment options.
The fund incorporates all expenses/taxes (inclusive of CGT) into unit price which is shared by all members invested in that fund.

I have subsequently switched to 100% International Shares in both superannuation funds.

Updated investments as per below:
Emergency fund: 30k. Cash.
His superannuation: 760k. 100% International Shares (MSCI ex Aus).
Her superannuation: 429k. 100% International Shares (MSCI ex Aus).
Taxable Vanguard Account: 410k. 100% International Shares (MSCI ex Aus) held in discretionary trust.
House: 2,500k.

Seeking other feedback on areas for improvement or any blind spots please.

Murdoch.
Valuethinker
Posts: 49659
Joined: Fri May 11, 2007 11:07 am

Re: [Australia] Portfolio Review

Post by Valuethinker »

Murdoch wrote: Fri Jun 07, 2024 1:55 am Thanks Valuethinker.

I contacted the superannuation fund today who confirmed that individuals do not pay CGT when switching investment options.
The fund incorporates all expenses/taxes (inclusive of CGT) into unit price which is shared by all members invested in that fund.

I have subsequently switched to 100% International Shares in both superannuation funds.

Updated investments as per below:
Emergency fund: 30k. Cash.
His superannuation: 760k. 100% International Shares (MSCI ex Aus).
Her superannuation: 429k. 100% International Shares (MSCI ex Aus).
Taxable Vanguard Account: 410k. 100% International Shares (MSCI ex Aus) held in discretionary trust.
House: 2,500k.

Seeking other feedback on areas for improvement or any blind spots please.

Murdoch.
I think that is fine.

One of the Australians here, Andrew9999 I think, points out that you do see these upswings and downswings in AUD which last for decades.

So when you get within say 10 years of retirement, you want to be moving *some* of your stock funds into Australian Dollar hedged international equity funds. To account for a period of prolonged strength in AUD (which would cause international investments to underperform).

The other offset is increasing your bond investments as you near retirement. To reduce volatility of portfolio. Tradeoff on that is the real risk in retirement is inflation, and I believe Australia now has inflation-linked bonds that are available to individual investors? You see model portfolios out there, from people who are really up with investment (Dimensional Fund Advisors, which is a US house totally driven by "smart indexing" to exploit investment anomalies), 60-70% in inflation linked bonds (US TIPS).

I often suggest to people that they hold 20% in fixed income. Given the stability of your job, that's probably not as relevant in this case. But this asset allocation will magnify the bumpy ride.

Again this is a thing to think about as you near retirement (say 10 years or less).

Right now you have maximum volatility - you could lose 50% of your portfolio almost overnight. Say if H5N1 starts spreading human to human, and we don't have a treatment. Or if it kicks off in the Taiwan Straits. Russia uses the A-bomb on Ukraine, etc.

Equity investing is a bumpy ride. High returns, but you pay for it in the risk.

It's not wrong to have 10-20% in ASX, so you could make investments in that regard now -- from new money.
Last edited by Valuethinker on Fri Jun 07, 2024 4:25 am, edited 1 time in total.
pseudoiterative
Posts: 612
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Location: australia

Re: [Australia] Portfolio Review

Post by pseudoiterative »

Murdoch wrote: Fri Jun 07, 2024 1:55 am I contacted the superannuation fund today who confirmed that individuals do not pay CGT when switching investment options.
The fund incorporates all expenses/taxes (inclusive of CGT) into unit price which is shared by all members invested in that fund.
Thank you for replying and updating this thread with this information, I've certainly learned something, and your update may also help other Australians in future with similar super questions who search these forums.
Hockey Monkey
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Re: [Australia] Portfolio Review

Post by Hockey Monkey »

Murdoch wrote: Fri Jun 07, 2024 1:55 am I contacted the superannuation fund today who confirmed that individuals do not pay CGT when switching investment options.
The fund incorporates all expenses/taxes (inclusive of CGT) into unit price which is shared by all members invested in that fund.
Andrew99999 has a good article on this.

https://passiveinvestingaustralia.com/t ... led-funds/

Unless you hold the assets directly via a self managed fund or non pooled (direct) account within a super fund you have already had the unrealized CGT provisioned for through lower returns
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JamesG
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Re: [Australia] Portfolio Review

Post by JamesG »

I'm not sure that some overweighting (above the 2% global share) in Australian equities for an Australian resident for tax purposes is obviously wrong. It is a matter of personal preference, based on how important the potentially higher post-tax returns might be to the investor given their risk tolerance.

My current understanding is that the Australian resident can claim franking credits as a rebate on the tax payable on the domestic equity component of their superannuation earnings. Despite tax treaties, my understanding is that a proportion of foreign equity income is double taxed in the hands of the Australian tax resident. If anyone thinks I have this wrong, please let me know. I believe all this is handled by the superannuation fund and built into their earning crediting rates, but again, if anyone thinks I have this wrong, please let me know. I would be grateful to be corrected.

My back-of-the-envelope estimate of the real post-tax return on Australian equities held in superannuation (during accumulation mode) is currently 5.1%. The same for foreign equities is 3.8%. For reference, the formula I use to calculate the latter is here: viewtopic.php?p=6922469#p6922469. I'm not claiming this formula is final, definitive and correct: I update it from time-to-time when I learn new things about how the tax and super systems operate. Again, if anyone thinks the equation can be improved or corrected, I would be very happy to learn how it can be.

Partly, the current gap in real post tax rates of return on the two asset classes is due to current differences in the inverse of the P/E ratios for Australian versus international equities (0.052 versus 0.047). But if I set the inverse of the P/E ratio for Australian equities equal to the same for international equities (0.047) then I estimate real post tax rates of return on Australian versus international equities at 4.6% versus 3.8%.

The other factor potentially militating in favour of an overweight domestic position is that one's spending responsibilities are denominated in Australian dollars.

The over-weighting of the Australian equity market in banks and mining companies is an issue. It certainly makes me uncomfortable. I try to push back against it somewhat by overweighting a small companies index fund.
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Hockey Monkey
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Re: [Australia] Portfolio Review

Post by Hockey Monkey »

JamesG wrote: Sun Jun 09, 2024 9:39 pm I'm not sure that some overweighting (above the 2% global share) in Australian equities for an Australian resident for tax purposes is obviously wrong. It is a matter of personal preference, based on how important the potentially higher post-tax returns might be to the investor given their risk tolerance.

My current understanding is that the Australian resident can claim franking credits as a rebate on the tax payable on the domestic equity component of their superannuation earnings. Despite tax treaties, my understanding is that a proportion of foreign equity income is double taxed in the hands of the Australian tax resident. If anyone thinks I have this wrong, please let me know. I believe all this is handled by the superannuation fund and built into their earning crediting rates, but again, if anyone thinks I have this wrong, please let me know. I would be grateful to be corrected.
Some overweighing is probably ok. There are various studies that suggest 30-40% domestic bias is optimal when franking credits are considered. Vanguard even have a paper on it.

Can you elaborate on your double taxation understanding? For countries with a DTA agreement, you should get a foreign tax offset on Australian taxes. Eg my self managed super fund gets 15% withheld by the US but is offset against Australian taxes.
Valuethinker
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Re: [Australia] Portfolio Review

Post by Valuethinker »

JamesG wrote: Sun Jun 09, 2024 9:39 pm
The over-weighting of the Australian equity market in banks and mining companies is an issue. It certainly makes me uncomfortable. I try to push back against it somewhat by overweighting a small companies index fund.
Do you mean small cap Australian stocks? In the Canadian index (which was also 80% banks + resource stocks) that puts you into the land of some truly speculative companies - no earnings, natural resource plays etc.

If you mean globally, I question whether underweighting the super tech stocks - MSFT, Alphabet, Meta, Apple, TSMC, NVidia - can really be compensated for by owning small cap stocks. You would actually probably have underperformed by *even more* in recent years, than just by being overweight Australia.

I really think the right level of Australian concentration is around 20%. So still c 6x the weighting in the global index.

Yes Australian stocks have a high dividend payout : due to sectors perhaps, also due to dividend franking. But I think the distortions to sector weighting are large. A 40% Australian stocks is really underdiversified (In a Canadian context, that's something like nearly 4% in *one bank*; and over 12% in oil sands stocks). Plus you have REITs etc.

The counterargument is the long run correlations with the global developed market index are high, so it won't matter so much.

However I note, as I always do, that most Australians (who post here) probably own a property in Australia. They have a job that pays in AUD, and there may be some state pension rights in AUD. That's a lot of exposure to the currency.

As Andrew9999 has pointed out, however, Purchasing Power Parity doesn't seem to hold that well. Australian Dollar moves up and down v say USD and does so for decadal periods. The theoretically correct way to address that is to hold global equity portfolios that are currency-hedged. However those have higher expense ratios - it should not be much, but I haven't seen anyone post on the impact of that.

I think Andrew9999 also pointed out that the prices of Australian stocks seem to adjust for the franking. There's no free win there.

I shrug. For a Canadian or a Brit, I am sure global diversification is better. I happen to modestly overweight Japan on value reasons - it's the only major stockmarket that has looked cheap (but it has done so for, literally, decades).
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andrew99999
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Re: [Australia] Portfolio Review

Post by andrew99999 »

Valuethinker wrote: Mon Jun 10, 2024 4:59 am As Andrew9999 has pointed out, however, Purchasing Power Parity doesn't seem to hold that well. Australian Dollar moves up and down v say USD and does so for decadal periods. The theoretically correct way to address that is to hold global equity portfolios that are currency-hedged. However those have higher expense ratios - it should not be much, but I haven't seen anyone post on the impact of that.

I think Andrew9999 also pointed out that the prices of Australian stocks seem to adjust for the franking. There's no free win there.
There is still some benefit to franking. It appears to be priced into a fair amount, but not fully. My understanding is this is likely due to the fact that about half of Australian equities are held by non-residents (e.g., that 2% held in lots of index funds around the world) who can not claim the franking credit and as a result, it is roughly priced-in for approximately those who can claim it. The result is that there are some benefits for Australian tax residents, which are paid for by non tax residents. Another example of the brilliant Australian government's actions driving away investment in Australia.

Personally, I don't mind a compromise on all sides of something like 20/20/60 Au/Int-hedged/int-unhedged.

In my opinion:
* The 20% concentration risk gives some reduction in upside currency risk and a little benefit from tax credits.
* The 40/60 currency exposure (both upside and downside) is important, considering how much our currency fluctuates relative to the rest of the world (and over very long periods) due to the commodity cycle.
* Any cost of hedging with only 20% of the equities is not going to cost much.

I think that's an easy and simple solution that is 'good enough' on all accounts while retaining the long list of benefits of indexing along with the effectiveness, simplicity, and ease of management of the 3-fund portfolio (with one extra fund).
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JamesG
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Re: [Australia] Portfolio Review

Post by JamesG »

Hello Hockey Monkey, Valuethinker and Andrew99999, Thank you for your comments. I plan to reply, but I will not have a chance to do so before the weekend. Until then, thank you again.
He who has a garden and a library wants for nothing. Cicero.
Valuethinker
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Re: [Australia] Portfolio Review

Post by Valuethinker »

andrew99999 wrote: Mon Jun 10, 2024 9:59 am
Valuethinker wrote: Mon Jun 10, 2024 4:59 am As Andrew9999 has pointed out, however, Purchasing Power Parity doesn't seem to hold that well. Australian Dollar moves up and down v say USD and does so for decadal periods. The theoretically correct way to address that is to hold global equity portfolios that are currency-hedged. However those have higher expense ratios - it should not be much, but I haven't seen anyone post on the impact of that.

I think Andrew9999 also pointed out that the prices of Australian stocks seem to adjust for the franking. There's no free win there.
There is still some benefit to franking. It appears to be priced into a fair amount, but not fully. My understanding is this is likely due to the fact that about half of Australian equities are held by non-residents (e.g., that 2% held in lots of index funds around the world) who can not claim the franking credit and as a result, it is roughly priced-in for approximately those who can claim it. The result is that there are some benefits for Australian tax residents, which are paid for by non tax residents. Another example of the brilliant Australian government's actions driving away investment in Australia.

Personally, I don't mind a compromise on all sides of something like 20/20/60 Au/Int-hedged/int-unhedged.

In my opinion:
* The 20% concentration risk gives some reduction in upside currency risk and a little benefit from tax credits.
* The 40/60 currency exposure (both upside and downside) is important, considering how much our currency fluctuates relative to the rest of the world (and over very long periods) due to the commodity cycle.
* Any cost of hedging with only 20% of the equities is not going to cost much.

I think that's an easy and simple solution that is 'good enough' on all accounts while retaining the long list of benefits of indexing along with the effectiveness, simplicity, and ease of management of the 3-fund portfolio (with one extra fund).
This is all very sensible and pragmatic, in my view.

If the commodity cycle goes your way, so does the ASX I would expect. Notwithstanding a rising AUD is not great for mining companies that export.

Conversely if commodity prices are lower, the AUD will be lower. But then mining companies benefit from the falling AUD.

In other words, it's not possible to call it. Being the world's second or third largest lithium miner + all the other things Australia exports, seems like a relatively good place to be.
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