Tuesday 28 July 2015

AA


I wanted to write a post about what I consider to be two of the most important attributes for FF (and life success/fulfillment in general, for that matter)... And just to keep you guessing, it doesn’t stand for Asset Alocation this time!
Attitude
You’ve probably heard the saying “Your attitude determines your altitude”. I’m a big believer in this, but it wasn’t always the case. In my school days and early career I was quite the opposite actually. I thought it was all about brains, IQ over EQ. You need a qualification to be able to practice, etc. Over time and with experience, I’ve slowly learnt that this is not the case. Pretty well anyone can do anything in this world, if they set their mind to it and persist through thick and thin. I honestly believe this and it’s a very positive and empowering approach to take towards life. When I reflect back on friends from school and how people have progressed in life, I don’t see much correlation at all between grades and “success”.
So what kind of attitude should one take ? First and foremost, it’s important to be Positive. For some people this comes naturally. For others, it really requires effort. But there is definitely value in seeing the glass half full. Lean forward. If in doubt, say “yes” and give it a go. Remember those reflections from people in the final days of their life. People rarely regret the things they’ve done, but they do regret the things left unsaid and untried.
In addition to positivity, let’s add Activity. As Nike put it so well, Just do it! Your attitude should be biased towards taking action. Obviously sometimes a bit of planning and pre-thought is useful, but don’t overdo it and get into motion as soon as possible. Be flexible, experiment and use trial and error.
The final piece of attitude I would add is Curiousity. Try to remember what it was like when you were a kid, and learning everything. Ask lots of questions, inquire, open your eyes and explore. If you have young kids, try to be more like them. And tell them not to be in such a hurry to be more like you !
Since acronyms are useful to remember, let’s call it a PACitude !
Now for the second of the A’s....
Accountability
During my working life I recall being taught the difference between responsibility and accountability. Response – able, literally, means you are able to respond. If someone asks you to make your bed in the morning, then it’s reasonable to assume this is within your power to respond. However, if someone asks you to fix the country’s budget deficit and return it to a surplus, then unless you happen to be Joe Hockey, you would not really have the power to meet such a request. Accountability is a similar concept, the ability to be held to account. Responsibility is a prerequisite to accountability. You can’t be held accountable for something you are not responsible for. So don’t try and blame me for the country’s budget problems.
Anyway, enough of semantics, the point i’m making here is you need to have an attitude of accountability. It doesn’t matter too much if you prefer the word responsibility, or “ownership” is a good word to use also. You are the captain of your ship. Don’t blame the wind or the weather, you have to steer the course you want to travel, no matter what else is going on around you.
Here’s a bit of a confession coming up, one of the best self-help books I’ve read is called Life Strategies and it’s by Dr Phil. Yes that’s right Dr Phil..... His afternoon tv show can make me cringe at times, but I found this book really useful. One of his key things is responsibility and he won’t tolerate a victim mentality. No matter what kind of setback or trauma you have faced, he holds you accountable for how you respond to it. Victor Frankl is another excellent reference for this. It was a huge learning for me. You can adjust the way you feel. Start to become more aware of the dialogue inside your head. If you can influence your thoughts, it affects the way you feel and the actions you take. Think positive thoughts about the life you dream for, and you will feel better and orientate your behaviour towards achieving these goals. If you think negative thoughts about things that have gone wrong, or people who annoy you, then you just end up feeling worse and behaving accordingly.
A final aspect of accountability is living a life of intent. I’m reminded of Good Will Hunting. The scene where Robin Williams holds Matt Damon up and shouts at him “What do you wanna do ?”. It’s a very primal and basic yet confronting question, what do you really want to do with your life ? Sadly, most people don’t even give it any thought. Many of us are just drifting along. Living the life we feel we are supposed to lead. Following what our parents or friends are doing. Accumulating stuff to try and make ourselves happy.
In the world of FF, we talk about active vs passive in a few different contexts. There’s active vs passive income, in which case passive is better (you are FF when your passive income finally gets big enough to cover your living costs). There’s active vs passive investing, again I would say passive is better, but that’s a matter for debate. To add a third context, there is accountability for all the decisions, big and small, that you make in the course of your life. Do you actively decide for yourself, using your own brain, or do you passive go along with what is suggested or the way things always were ? In this third arena, it’s very important to be active, not passive. Even if you decide to do nothing, decide it actively, not because you were too lazy or too scared to decide. Live your life with intent, don’t just drift along like seaweed.
Summary
This is a philosophical post about life in general and my suggestion that Attitude and Accountability are two key things to focus on. Adopt a Positive, Active and Curious - PACitude - and be accountable for all aspects of your life, no matter what circumstances you find yourself in. These two things are interlinked of course. You are accountable for your attitude, and you should adopt an attitude of accountability.
All this is very theoretical. You might be wondering, in the real world, is FFA some kind of zen Buddha who practices what he preaches ? Most of the time, honestly, nope. I’m only human and a very fallible one at that. But in my better moments and when I have the rare chance to pause and reflect, this is what I try and focus on. And I feel it helps me to be a better person when I do so... Why not give it a try and see if it works for you ?

Thursday 16 July 2015

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....