How do I invest ?

The aim of this post is to share how I’m approaching our investments as an early retiree. Please do not consider any of this as financial advice or recommendation. It’s really just a description of what we’re doing, which may or may not be good for us, let alone for your circumstances which I have no idea about!

Basically I view our portfolio in two parts : A ) residential property and B ) the rest (includes super).

At the point of retiring early, the split was 57% / 43% (of which 10% super). This split excludes the value of our own home in Australia and a cash emergency fund.

We immediately sold the overseas property we were staying in. This shifted the ratio to 42% / 58% and left us with a large lump sum to invest. I would like to reduce our property exposure A) further and firmly intend to sell at least one more property in the next 5 years. As for the lump sum, we invested about a third of it in index ETF’s and the rest is in high interest accounts. I intend to dollar cost average it over the next year or two. More on this later.

I probably better say a bit more about the investment strategy for B)...

I view the asset allocation on an overall basis with super included. My target allocation is 70% growth / 30% defensive. The asset classes I invest in and target allocations are as follows :

GROWTH

Australia shares (mainly ETF but also some direct blue chips) = 38.5%

Global shares = 31.5% (target around 3% of this AUD hedged)

Commercial property = 0%

DEFENSIVE

Aus Fixed interest (including term deposits) = 7.5%

 Global FI = 0%

Cash (includes high interest saving accounts) = 22.5%

 

A bit of explanation, starting with the portfolio exclusions...

I’m not keen on commodities, hedge funds, private equity, etc. Commods : I just don’t buy the arguments about diversification / inflation hedging, and I don’t see them as being assets worth holding for any other reason. HF/PE : very high in fees and again I’m not convinced they bring the diversification benefits many others hope for.

Commercial property, I feel there’s already enough in the ASX, not to mention my own overweight residential portfolio.

Global FI. I don’t want to touch it in this world of zero interest rates and QE. Even Aus FI I have set quite low for the same reason. I believe interest rates are at an extreme setting and they will eventually normalise. Once that happens I will be willing to invest a bit more of my defensive into FI, perhaps half or even a bit more of the defensive part.

For the shares I have split it 55% Aus / 45% global. I have been keen on 50/50 (as I’ve discussed quite a bit in the MMM forums), but eventually tilted a bit to the local as the franking credits and yield are ever so alluring. It’s also a pragmatic issue, as my international is held in VTS/VEU which do not allow dividend reinvestment. Whereas my Aus shares have a large portion of dividends reinvesting. Furthermore VEU has 5% Australia embedded. Due to these effects, it basically means if I add new contributions in a 50/50 ratio, it will roughly work out being allocated 55% Aus / 45% global. So I plan to alternate fresh fund investments every four months VAS/VTS/VAS/VEU in the same clip size.

To reiterate my position as per MMM forums, you need global shares for diversification as the ASX is highly concentrated in banks, property, mining, etc ; and gives limited exposure to Tech, pharmaceutical, heathcare etc. However there are big advantages to investing locally with the ASX high yield and franking credits. I don’t think there’s any scientific optimum, but personally I feel anywhere in the range 70/30 to 40/60 is acceptable, depending on which factors you weight the most. As it happens, my 55/45 split is at the midpoint of this...

So, after explaining the plan/strategy for B), I will backtrack to our lump sum from the overseas property sale. The actual asset allocation is currently quite divergent from target. I’m around 51% growth / 49% defensive right now. I’ll be investing decent amounts on a monthly basis until I reach the target. I’m not aiming to time the market, so I will adopt a regular pattern. On the 1st of the month I will invest 2.5k in Mrs FFA’s super. On the 10th day I will invest 20k in VAS/VTS/VEU (alternating as explained earlier). On the 20th day I will invest 2.5k in my super. This will put $30k in each of our super which is the concessional limit. And it means we’re investing 80% outside super and 20% inside. I’m not keen to add any further into super if there is no additional tax benefit (up to $30k we can tax deduct as self/unemployed). Our marginal tax rates are likely to be 19%, so super only gives a small tax benefit at 15%, which I don’t think is adequate to compensate the lengthy restrictions and regulatory risk. Of course if you are salary sacrificing and getting other tax benefits it’s a different story (hence we are maximising concessional contributions).

A caveat on market timing, if there’s a substantial correction in share prices, I will accelerate the investment plan with some additional bargain hunting purchases. I don’t intend to monitor the markets closely. But if it’s the kind of thing you hear about regardless, e.g. you see newspapers on the table with “MARKET MELTDOWN” on the front page, I will be tempted to make an extra online trade and scoop up additional cheap units. If the ASX ever heads back to 5,000 or thereabouts I will be doing this surely.

Once the asset allocation eventually reaches target, I will drop the large regular investments and maintain/rebalance periodically. There might be another big lump sum to invest when we sell the next property (we might wait a few years as it’s in perth and the market is weak there now), after which I will probably repeat this process, i.e. invest a third/half straight away and trickle the rest in over a year or two. So far the decision has paid off, as the share markets were higher back in April/May, but who knows how it will turn out. In any case, I have made this plan and I intend to stick to it.

I hope this gives you some insight into how I’m approaching our investment portfolio. It is far from perfect and there are quite a few legacy aspects that I would not repeat if I was starting over. Where possible I will try and simplify the approach and portfolio. I look forward to playing this out and see how well we can comply with the plan! Please feel free to leave any comments, suggestions or questions....