[Australia] Review of two separate portfolio allocations, using Vanguard ETFs

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Topic Author
geddon
Posts: 4
Joined: Sat Jan 08, 2022 11:50 pm

[Australia] Review of two separate portfolio allocations, using Vanguard ETFs

Post by geddon »

Good morning / afternoon / evening (wherever in the world this finds you)

I would greatly appreciate some advice on two separate portfolio allocations I am trying to put together. But first, some background information.

When I was a younger man I didn't see much point in planning for my financial future. But recent marriage and the possibility of children tends to focus the mind on what's important! So I've spent the last month learning about investing, with the aim of embarking on an investment program by no later than the end of January 2022. At some point I stumbled across the "Passive Investing Australia" website, and for the last few weeks I've been consuming as much information as I can on passive investing and the philosophy behind indexing and ETFs. Which has led me here.

At the same time I've been talking to my parents about the things I've been learning. They're old-school boomers who have never held any debt (they paid for their house in cash, back when you could do this for less then $200k) and have only ever held their savings in long-term deposits. But they're starting to realise that, as they approach retirement, they need an investment plan more sophisticated than just holding cash indefinitely. So I've agreed to give them a suggested portfolio allocation, which they could then either use as is or at least take to a financial planner as a starting point.

Hence the need for advice on two separate portfolio allocations, as per the title. Please note that both plans will be for retirement in Australia.

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Investment plan 1 ("the young 'uns")

Age: Early 30s
Existing assets: $100,000 in savings to be initially invested
Ongoing investments: Ability to invest ~$25,000 per year
Superannuation: Irrelevant, since we can't touch it for 30+ years
Debt: A large PPOR mortgage, recently acquired
Emergency fund: ~$20,000 in a mortgage offset account
Retirement: No interest in "early" retirement, so 65+ (assume 30 more years of working life)

Proposed asset allocation: 100% stocks
Proposed portfolio:

VAS (Australian market) 15%
VGAD (global market hedged in AUD) 15%
VGS (global market unhedged) 50%
VISM (global small cap) 10%
VGE (emerging markets) 10%

Rationale: My wife and I have a high risk tolerance, with long working lives and the ability to leave our money in the market for as long as needed. We will dial up our "safe" allocation as we enter our mid-50s, with the aim of holding ~30% in bonds/cash by retirement.

Questions:
1. Is the allocation in VGAD necessary? The Passive Investing Australia website is very big on having some of your global equities hedged to control for currency risk - but if we're committed to keeping our money in the market for the long-term, is currency risk really a problem for us at this stage?
2. Is the allocation in VISM sensible? I've read conflicting information on whether investing in small caps is desirable, but am leaning towards it because it appears to be a good diversifier and also fits our higher risk tolerance.
3. I've read about, but don't really understand, "multi-factor" investing. Some commentators suggest that using a combination of VVLU (global value) and VGMF (global multi-factor) might play a useful component in a portfolio allocation, with talk of "tilting" towards better returns. Any thoughts on this? If it's a good idea, what kinds of percentages would you allocate to each fund? I notice they each have high management fees and are also actively managed - does this make them no-goes from the start?

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Investment plan 2 ("the oldies")

Age: Early 60s
Existing assets: $500,000 in savings to be initially invested, plus a fully-owned house (~$800,000)
Ongoing investments: Ability to invest ~$60,000 per year until retirement
Superannuation: Not sure, but assume it's at least $500,000
Debt: Nil
Emergency fund: 10% portfolio in term deposits (see below)
Retirement: Imminent (less than 5 years)

Proposed asset allocation: 70% stocks, 30% bonds/cash
Proposed portfolio:

VAS (Australian market) 10%
VGAD (global market hedged in AUD) 15%
VGS (global market unhedged) 30%
VISM (global small cap) 8%
VGE (emerging markets) 7%

VGB (Australian government bonds) 20%
Term deposits (cash) 10%

Rationale: My parents have a medium risk tolerance. Despite looming retirement, owning their own home and having no debt and a frugal lifestyle gives them a reasonable ability to leave their money in the market during a downturn. They will also need to be a little more aggressive with their risky allocation, since they are entering the market later in life with a relatively low initial investment (for their age bracket).

Questions:
1. I've increased the allocation in VGAD to ~21% of the equities allocation, since there is a higher chance of needing to manage for currency risk. Should this percentage be higher?
2. Is it necessary to keep VISM and VGE for diversification, or do these funds add unnecessary risk to a retirees' portfolio?
3. What do people think about buying a bond fund right now? I've read quite a lot of opinions that as rates rise in Australia over the next few years, you might be better off investing your entire "safe" allocation in term deposits. Any thoughts on this?

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Happy to also hear any general comments or answers to questions that I haven't had the wisdom or experience to know to ask!

Cheers all
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andrew99999
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Joined: Fri Jul 13, 2018 8:14 pm

Re: [Australia] Review of two separate portfolio allocations, using Vanguard ETFs

Post by andrew99999 »

- You can leave out VGAD and revisit it when you are nearer to drawing down.
- VISM is optional. There is a page on PIA about it also.
- I would leave out factor investing until/unless you have a strong belief in it.

- You have 55% in AUD based assets, so I think it looks good to me.
- For retirees, I wouldn't bother with VISM. Their risk tolerance is lower, and a 7% won't make a huge difference, so I would simplify and remove it. Otherwise, it looks good to me.
- It can go either way since you have access to high interest savings accounts and get higher retail rates than high-quality bonds. A mix as you have done is a good way to hedge your bets if you are not sure.
Topic Author
geddon
Posts: 4
Joined: Sat Jan 08, 2022 11:50 pm

Re: [Australia] Review of two separate portfolio allocations, using Vanguard ETFs

Post by geddon »

Thanks andrew99999. Are you by chance the Eli that runs Passive Investing Australia? If so, thanks for your incredible efforts in educating ignorant non-investors like myself! :D

With regard to portfolio 1 (the "young 'uns"):
- leaving out VGAD makes sense, thanks
- given we'll be investing over a long time period, would including VISM be useful over that time frame, or is it really a very marginal allocation that makes no real difference either way, no matter what time period?

With regard to portfolio 2 (the "oldies"):
- leaving out VISM makes sense, thanks
- could you please elaborate on what you mean by "it can go either way since you have access to high interest savings accounts and get higher retail rates than high-quality bonds"? Do you mean to say that, in an environment where rates may soon rise, cash is likely to have higher returns than bonds? Or something else that I'm not understanding correctly?

Thanks! Really appreciate your work!!
Topic Author
geddon
Posts: 4
Joined: Sat Jan 08, 2022 11:50 pm

Re: [Australia] Review of two separate portfolio allocations, using Vanguard ETFs

Post by geddon »

One more question, although this one on an unrelated topic.

If you're planning on commencing a debt recycling strategy, do you have to commit to staying with the same bank for the duration?

Let's say you're 5 years into the strategy, and have four loans: your remaining PPOR loan, and three smaller "chunks" which you've split off using redrawn funds. If you then refinanced with another bank, wouldn't that break your structures - because they'd pay out your current loans and then give you one single new loan in the new bank?
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andrew99999
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Re: [Australia] Review of two separate portfolio allocations, using Vanguard ETFs

Post by andrew99999 »

Yep, I put up the PIA site.

Hard to say if VISM will make a lot of difference. My guess is that a 10-15% allocation won't make a huge difference. I don't see a real issue with either leaving it out or including it.

So cash is a zero-term bond. If retail investors (us) did not have access to high interest savings accounts that return the same as intermediate bonds, the argument is for bonds due to a higher expected return (as a result of a bit more risk), but with rates so low and some people predicting it will eventually go up, they may feel more comfortable without interest rate risk (which is the case for cash). You do lose some diversification since bonds can still go up in price if there is another leg of an economic crisis (rates can go below zero), so you could hedge your bets and go half intermediate bonds half cash, but you could also go all cash or all bonds since the return is similar as a result of HISA returning about as much as intermediate bonds.

I think you are fine to move banks the same way that you can move banks with an investment property, and you still get the tax deductions. This would be different to selling the property and buying another, which I *think* would stuff it up.
Topic Author
geddon
Posts: 4
Joined: Sat Jan 08, 2022 11:50 pm

Re: [Australia] Review of two separate portfolio allocations, using Vanguard ETFs

Post by geddon »

Thanks Eli

Having had a look, I can't see a lot of good HISA options. They all seem to be either lame (0.1%) or else they offer good rates (~1%) but require you to jump through hoops to access them (twice monthly deposits, no withdrawals, etc etc). Do you have any preferred HISA providers you know of or have heard of others using?

Re: moving banks, would you have to preserve your split loan structure to maintain the tax deduction?

Thanks!
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andrew99999
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Re: [Australia] Review of two separate portfolio allocations, using Vanguard ETFs

Post by andrew99999 »

geddon wrote: Fri Jan 14, 2022 8:28 am Having had a look, I can't see a lot of good HISA options. They all seem to be either lame (0.1%) or else they offer good rates (~1%) but require you to jump through hoops to access them (twice monthly deposits, no withdrawals, etc etc). Do you have any preferred HISA providers you know of or have heard of others using?
I would ask on reddit or ask in this whirlpool thread to see if it the spreadsheet of banks and their rates and requirements are still up-to-date. You will get better responses than I can give on a HISA.

geddon wrote: Fri Jan 14, 2022 8:28 am Re: moving banks, would you have to preserve your split loan structure to maintain the tax deduction?
I would imagine so, but you need to ask an accountant to be sure.
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