1M Portfolio - Asset allocation for mid 40's [Australia]

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iceworks
Posts: 4
Joined: Sat Oct 13, 2018 9:01 pm

1M Portfolio - Asset allocation for mid 40's [Australia]

Post by iceworks » Sat Oct 13, 2018 9:22 pm

Hi Bogleheads,

I'm looking for some input on the following fund portfolio and how to allocate 1M.

> Australian, mid 40's
> 1M already invested directly in Australian residential property
> Like the idea of a simple 3 fund portfolio with rebalancing, open to only one fund or 4-6 funds also
> 1M to invest, mostly outside of super system, looking to buy commercial property in super fund
> Exposure to higher risk ok as several decades of working life to go and strong business prospects, don't need immediate income
> Looking for ideas around allocation, funds etc, obviously a lot of exposure to Aus and property already so diversifying away from that might be a good idea.

VGS (world shares ex AUS) 50%
VAS (Aus shares) 20%
VGB (Aus bonds) 30%

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

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by AlohaJoe » Sat Oct 13, 2018 10:03 pm

This look like a perfectly fine choice for an Australian. I don't know of any decent all-in-one funds in Australia. I mean, the asset allocation of something like Vanguard LifeStrategy® High Growth Fund is okay. But 0.90% fees? And a 0.11% bid/ask spread on top of that?

There's also a wiki article on Investing in Australia but it doesn't look like you need to read it :) https://www.bogleheads.org/wiki/Investing_in_Australia

DJN
Posts: 162
Joined: Mon Nov 20, 2017 12:30 am

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by DJN » Sat Oct 13, 2018 10:28 pm

Hi,
I know nothing about Australia, however it would be helpful to set out your current situation clearly, in terms of your current allocation. You seem to be saying that you are already A$1M into Australian property directly, that you want to invest more into Australian property and that you also wish to invest in stocks and bonds? Have a look at the Wiki BH site and set out your query in the "Asking Portfolio Questions" format suggested this will help to understand your o/a plan. viewtopic.php?f=1&t=6212
It looks to me like you are over dependent upon property, I would look at that aspect as a business interest.
good luck.
DJN

andrew99999
Posts: 109
Joined: Fri Jul 13, 2018 8:14 pm

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by andrew99999 » Sun Oct 14, 2018 3:06 am

AlohaJoe wrote:
Sat Oct 13, 2018 10:03 pm
This look like a perfectly fine choice for an Australian. I don't know of any decent all-in-one funds in Australia. I mean, the asset allocation of something like Vanguard LifeStrategy® High Growth Fund is okay. But 0.90% fees? And a 0.11% bid/ask spread on top of that?
The same fund is available 3 ways (all wrappers for the same fund)
  • Wholesale version (need 100k min to start and access these) 0.29% plus 0.1% buy sell spread
  • Retail version (need only 10k to start) starts at 0.9% (which is insane to me) plus 0.1% buy sell spread
  • ETF 0.27% plus your own brokerage fee
So obviously go for the ETF and not the retail fund.
You can combine it with VAF or VGB so you can adjust your bond allocation over time.

VGS/VAS/[VGB or VAF] is also a pretty good combo.

carguyny
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Joined: Mon Aug 08, 2016 4:56 pm

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by carguyny » Sun Oct 14, 2018 5:42 am

Just having a quick look at the Vanguard Australia website, can't you save on fees by going with VTS (Vanguard US Total Market Index) and VEU (anguard All-World ex-US Shares Index) vs VGS? Not sure on the currency differences, but VGS isn't hedged either.

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

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by andrew99999 » Sun Oct 14, 2018 7:01 am

carguyny wrote:
Sun Oct 14, 2018 5:42 am
Just having a quick look at the Vanguard Australia website, can't you save on fees by going with VTS (Vanguard US Total Market Index) and VEU (anguard All-World ex-US Shares Index) vs VGS? Not sure on the currency differences, but VGS isn't hedged either.
Yes VTS/VEU are better than VGS as it contains EM and small caps which VGS doesn't, and has around 6.5k companies vs 1.2k plus the expense ratio is fantastic at 0.04 and 0.11 vs 0.18.
The problem is that those 2 funds are US domiciled, which means it is subject to the draconian US estate tax, meaning if you die while holding those, the US takes a big cut of it. I think there might be some agreement with Australia where you would be ok with under 10mil or 12mil of assets, provided you did not forget to fill out some W8-BEN form or something every few years, but I haven't checked into it. Most Australian investment forums steer people away due to this problem.
A number of people I know have emailed them to re-domicile it (like iShares are doing right now with the last of their US domiciled funds being converted to Aussie domiciled this month I believe), and we all received the same automated response from Vanguard "We released a bunch of ETDs this year blah blah blah. Thank you for your suggestion", but someone very recently posted a response where they actually replied saying they are looking into the legal aspects of re-domiciling them, in which case VTS/VEU/VAS/VAF would essentially be the perfect 3 fund portfolio, you would just have to split the international part into VTS & VTU.

Valuethinker
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Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by Valuethinker » Sun Oct 14, 2018 11:06 am

iceworks wrote:
Sat Oct 13, 2018 9:22 pm
Hi Bogleheads,

I'm looking for some input on the following fund portfolio and how to allocate 1M.

> Australian, mid 40's
> 1M already invested directly in Australian residential property
> Like the idea of a simple 3 fund portfolio with rebalancing, open to only one fund or 4-6 funds also
> 1M to invest, mostly outside of super system, looking to buy commercial property in super fund
> Exposure to higher risk ok as several decades of working life to go and strong business prospects, don't need immediate income
> Looking for ideas around allocation, funds etc, obviously a lot of exposure to Aus and property already so diversifying away from that might be a good idea.

VGS (world shares ex AUS) 50%
VAS (Aus shares) 20%
VGB (Aus bonds) 30%
If you have big exposure to Australian residential real estate I would not be adding Australian commercial property.

The recession that hits one would hit the other.

The Australian stock index is heavily financial services and natural resources. The same factors that would hit Australian real estate would also hit those stocks.

I would not be more than 10 per cent in Australian stocks ie 3x the global weight.

China has what looks to be the biggest property and debt bubble in history. Even if they manage their way out of it rather than crash, it does bad things for natural resources demand and for financial capital flows.

This would be bad news for Australian and Canadian exports and also for housing markets in certain cities. Vancouver number one but also Toronto Sydney Melbourne Auckland. And thus for banks that lend yo consumers in those cities.

Philip Soos is a good source on Australian exposure. Hillard Macbeth for Canadian.

Soft landing is possible of course but history says hard landing at least as likely.

EDIT

My case for Australian dollar and CAD is pretty bearish. All you can do as a Central Bank in an asset meltdown is cut interest rates devalue your currency and pray.

That would speak to holding US Treasury bonds for half your bonds.

Given your job and your housing equity are in AUD.

iceworks
Posts: 4
Joined: Sat Oct 13, 2018 9:01 pm

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by iceworks » Sun Oct 14, 2018 8:49 pm

Thanks for the thought provoking and informative replies.

I've read the wiki's and as much as I can for the moment, still learning about this form of investing so my questions are likely not as targeted as they could be. I've been focused very much on business and direct investing previously.

I'm aware of being heavily overweight Australian property and Australia, previously I've run a 50% geared local shares and 50% geared international shares in super but looking for a more diverse approach now.

Perhaps even 20% to local shares (VAS) might be considered high considering the direct property ownings. Also there doesn't seem to be any emerging markets exposure but otherwise looks like a solid 3 fund portfolio.

andrew99999
Posts: 109
Joined: Fri Jul 13, 2018 8:14 pm

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by andrew99999 » Sun Oct 14, 2018 9:07 pm

iceworks wrote:
Sun Oct 14, 2018 8:49 pm
Also there doesn't seem to be any emerging markets exposure but otherwise looks like a solid 3 fund portfolio.
Easy enough to add in VGE if you wanted.

iceworks
Posts: 4
Joined: Sat Oct 13, 2018 9:01 pm

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by iceworks » Sun Oct 14, 2018 9:31 pm

Valuethinker wrote:
Sun Oct 14, 2018 11:06 am
If you have big exposure to Australian residential real estate I would not be adding Australian commercial property.

The recession that hits one would hit the other.

The Australian stock index is heavily financial services and natural resources. The same factors that would hit Australian real estate would also hit those stocks.

I would not be more than 10 per cent in Australian stocks ie 3x the global weight.

China has what looks to be the biggest property and debt bubble in history. Even if they manage their way out of it rather than crash, it does bad things for natural resources demand and for financial capital flows.

This would be bad news for Australian and Canadian exports and also for housing markets in certain cities. Vancouver number one but also Toronto Sydney Melbourne Auckland. And thus for banks that lend yo consumers in those cities.

Philip Soos is a good source on Australian exposure. Hillard Macbeth for Canadian.

Soft landing is possible of course but history says hard landing at least as likely.

EDIT

My case for Australian dollar and CAD is pretty bearish. All you can do as a Central Bank in an asset meltdown is cut interest rates devalue your currency and pray.

That would speak to holding US Treasury bonds for half your bonds.

Given your job and your housing equity are in AUD.
Thanks for that input, I agree about the higher risk for asset prices re: Aus property, the suggestion of US Tbonds is interesting, I don't know enough to comment. That's an interesting discussion around what might happen with the high Canadian and Aussie housing prices!

iceworks
Posts: 4
Joined: Sat Oct 13, 2018 9:01 pm

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by iceworks » Sun Oct 14, 2018 9:32 pm

andrew99999 wrote:
Sun Oct 14, 2018 9:07 pm
iceworks wrote:
Sun Oct 14, 2018 8:49 pm
Also there doesn't seem to be any emerging markets exposure but otherwise looks like a solid 3 fund portfolio.
Easy enough to add in VGE if you wanted.
Have added it to the research list, thanks.

AlohaJoe
Posts: 3925
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by AlohaJoe » Sun Oct 14, 2018 9:40 pm

andrew99999 wrote:
Sun Oct 14, 2018 7:01 am
The problem is that those 2 funds are US domiciled, which means it is subject to the draconian US estate tax, meaning if you die while holding those, the US takes a big cut of it. I think there might be some agreement with Australia where you would be ok with under 10mil or 12mil of assets
I wouldn't characterise it as "draconian estate tax", at least in this context, just because it is a bit misleading. When we talk about "draconian estate tax" in the context of foreign investors and US domiciled funds it has a (relatively) specific meaning: any assets over $60,000 are taxed at the US estate tax rates. So (at least in common usage on Bogleheads), "draconian" refers to that very low threshold and the apparent unfairness of non-US people being subjected to a very different double standard simply because of their inability to affect change about it. It is low enough that virtually everyone will be caught by it.

That limit does not apply to Australians. The US-Australia Estate Tax Treaty means that a limit of USD$5 million for individuals and USD$11 million for couples is used instead. (Though keep in mind that that number changes based on whatever is current law in the US.) The number is high enough that most people don't have to worry. However, since the value of estate includes property -- and Australian property prices can be quite high -- you might get there sooner than you'd otherwise expect.

Given the uncertainties -- what if the US changes their laws? -- I can understand why people would prefer the funds to be re-domiciled. And hopefully Vanguard will do that. But in reality the vast majority of Australians don't have to worry about US domiciled funds.

That said, you still will need to do some paperwork when dealing with the estate, like filing a Form 706NA with the IRS (even though no tax is due) and getting a Federal Transfer Certificate, which may require a medallion signature...not even sure where you'd get that in Australia, so it isn't exactly smooth & seamless.

andrew99999
Posts: 109
Joined: Fri Jul 13, 2018 8:14 pm

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by andrew99999 » Mon Oct 15, 2018 2:47 am

Thanks for the clarification, but too many if's for my liking.

Valuethinker
Posts: 36662
Joined: Fri May 11, 2007 11:07 am

Re: 1M Portfolio - Asset allocation for mid 40's [Australia]

Post by Valuethinker » Mon Oct 15, 2018 3:20 am

iceworks wrote:
Sun Oct 14, 2018 9:31 pm
Valuethinker wrote:
Sun Oct 14, 2018 11:06 am
If you have big exposure to Australian residential real estate I would not be adding Australian commercial property.

The recession that hits one would hit the other.

The Australian stock index is heavily financial services and natural resources. The same factors that would hit Australian real estate would also hit those stocks.

I would not be more than 10 per cent in Australian stocks ie 3x the global weight.

China has what looks to be the biggest property and debt bubble in history. Even if they manage their way out of it rather than crash, it does bad things for natural resources demand and for financial capital flows.

This would be bad news for Australian and Canadian exports and also for housing markets in certain cities. Vancouver number one but also Toronto Sydney Melbourne Auckland. And thus for banks that lend yo consumers in those cities.

Philip Soos is a good source on Australian exposure. Hillard Macbeth for Canadian.

Soft landing is possible of course but history says hard landing at least as likely.

EDIT

My case for Australian dollar and CAD is pretty bearish. All you can do as a Central Bank in an asset meltdown is cut interest rates devalue your currency and pray.

That would speak to holding US Treasury bonds for half your bonds.

Given your job and your housing equity are in AUD.
Thanks for that input, I agree about the higher risk for asset prices re: Aus property, the suggestion of US Tbonds is interesting, I don't know enough to comment. That's an interesting discussion around what might happen with the high Canadian and Aussie housing prices!
Pros for holding Australian Treasury Bonds

- highest credit rating country - risk of default (on Federal debt, cannot speak to State or local government) is essentially zero
- your bills in retirement will mostly be in AUD
- interest rates are reasonable (haven't checked but a bit less than USA?)

Negatives

- increases the weight of bet on AUD (this is less of a problem the more international equity you hold)

Pros for holding US Treasury Bonds

- high credit rating country (main problem is a political predilection to flirt w default, that's not an issue of debt carrying capacity but of the split govt (Executive v Legislative) America runs)
- relatively high yield (compared to EUR, GBP, CHF)
- diversifies Australian currency risk

It is an idea, it's certainly not essential to put 15% of your portfolio into US Treasury bonds. When commodity prices are blazing and AUD is way up, it will feel like it was a really bad decision. If Australia has the housing crash that I foresee* then it will feel like a good idea (but you would also make money on Australian treasury bonds as interest rates fall).

On Emerging Markets generally you don't *need* them. Australia as an economy (and currency sentiment) is heavily linked to commodity prices, which is also what drives EM. And in particular on China (40% of EM index) - the linkage to Australia is very tight. Given that underlying correlation (to commodity prices; to Chinese economy) of the Australian economy and stock market (and housing prices, arguably) EM adds relatively little diversification.

* it's not that I know so much about Oz, but I have seen the Canadian housing bubble first hand through family. And Canada and Australia and New Zealand are very similar economies in many ways, and strikingly similar stock markets (80% financial services + resources). BTW I have been saying this for about 5 years and it has not happened yet ;-).

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