eBook is coming !

Happy New Year to all !!

It's a nice time of year, I hope you've all had an enjoyable Christmas and new year with your friends and families.

It was great for us to be home, after missing so many Christmases away in the past decades.

I guess like many I've done my share of reflecting on 2015 and resolving for 2016... On the whole it was a pleasing year, we took the plunge and made the transition back to Oz. It's been quite an adjustment as I described in the previous post, but after recalibrating my expectations I'm finding a lot of happiness and satisfaction in this new life, we definitely made the right decision and no regrets !

Re: finances, it's been quite a big focus for me the past 18 months. it's now quite well on track. Asset allocation is largely on target. I would like to tone down finances and focus on different areas going forwards. There's a few more things to tidy up :

1. Write a 5 year plan : keen to sell two properties (leaving just one IP and our PPOR). Re-invest the funds in shares / FI / cash as per existing AA. These are the first properties we bought, have held them a long while. And they are located in perth which is a pretty tough market right now. No rush to sell, but definitely will move at least one of them (ideally both) in the next 5 years. And certainly to sell both in the next 10 years. In the 5 year plan, I'm going to estimate the proceeds (after CGT) from these sales, plus other income we expect in the next 5 years, less living costs, to work out the net savings/investment rate per quarter. And set a regular invest plan based on this. My idea is to spread it over 5 years instead of doing nothing until the property sells and then having a huge lump to deal with. I think this is not much work maybe 30mins or an hour max. And once I have this plan, the goal is to switch finances to autopilot mode, with regular monthly investments and minimal market watching in between (let's see how long this will last :) )

2. Write an eBook : I've been mulling the idea for sometime, and a recent exchange in the MMM forums put this back on my radar. There's been a lot of great exchange in the Australian investing Thread. I'm keen to summarise FFA's views on how to invest simply, based on my experience and what I've read and learned. I'm also keen to fundraise for a charity, so will be requesting voluntary (completely optional) donations to a yet to be determined worthwhile cause, for those who read the eBook and find it useful and decide they want to make a donation. The drafting is well under way and I'm tapping up some kind and knowledgeable souls from the MMM forum to give me feedback. Regarding the subject, it's going to be focused on simple investing. May aim is to write something helpful to a wide audience, and I believe simple index investing is an 80/20 rule approach. Actually even better really, since the final 20% usually detracts from performance rather than adding ! There's diminishing returns and then there's shooting yourself in the foot..... Aim is to have it out in Feb, so watch this space !!

Re: other goals/changes. We've decided to put the kids in childcare for a few days per week from Feb. We feel we need a bit more time to get our lives back. I've also started part-time work which might increase from 1 day to maximum 2 days per week. But in the long term (e.g. after 6 months or so) i'm thinking to go back to 1 day. I'm keen to spend more time in our garden which is a work in progress, to get back into some exercise, and socially to re-connect with old friends and make some new ones. Less time checking emails and online is also a goal (MMM forum only once or twice per week, let's see how long that lasts too :)  )

Well, that's about it for now. I'm excited about the year ahead and hope you all have some plans and goals to look forward to!

A final thought that I read recently " Find happiness in the simple things. Life is short ! " - by kane cornes, reflecting on the sad and unexpected death of football coach and mentor, Phil Walsh

Day to day life after FIRE

I got this question in response to the last post " If possible, can you talk a bit about what you do in your day to day life after FIRE? "

Of course it's possible, so here goes....

Well, it's been a little over 9 months since we moved back to Oz and I quit my job. I guess there are many different versions of FIRE, depending on your life situation, age, etc. In my case, FIRE involved moving countries and returning to the place I grew up, but hadn't lived here for 17 years. The bigger transition by far has been giving up a cushy Mon-Fri office job to be a Stay At Home Dad. I guess that would be the four letter answer to this question - SAHD.

I severely underestimated how time consuming and exhausting it is to look after kids. I took a lot of things for granted before when I used to walk out the door to head to work. But just to catch myself in case I start whinging, it is completely a labour of love ! I wouldn't change anything. And I know it will only be the blink of an eye before my eldest is in kindy (well, a little over a year actually but the time flies), so I want to make the most of this time while I have it.

I think it would've been helpful though to have a more realistic expectation of Stay at Home Parenting before I started. It would've saved me some frustration in the first months, as I gradually re-calibrated ... Maybe something for you to consider Rob_S (?)

So coming back to the question, usually 5-6 days of each week I'm looking after two toddlers together with my wife. We have 1-2 days where grandparents help out with childcare, and those are usually bursts of productivity to do shopping, gardening, maintenance, errands, etc. I visit my great grandmother who's in an aged care facility.

And now to share a recent development for me, I've started some part time contracting work in the past months. I'll put this forward as my excuse for the infrequent blogging of late ! It's only one day per week, but has been a nice change for me. I guess I wasn't that successful at the "RE" part of FIRE !!

What else can I share ? We see plenty of family and the kids are developing bonds with their grandparents, uncles/aunties and cousins, which is the main reason we wanted to be back, so that is fantastic. Asides from family our social life has been limited, which I guess is not uncommon for parents with toddlers, but it's something we're keen to change in 2016 to reconnect with old friends (and make new ones too hopefully !)

Well, that's all I can think of for now. Maybe quite different to expectations, sorry no fairytale holidays or golfing to report as yet, but hopefully more of those to come also :)

Wishing you all every happiness in 2016 ahead !!!

Financials Tracking

There was some discussion recently in the MMM forum. The context was tracking the cost base of share parcels for capital gains tax. I promised to share how I go about this and monitoring overall financials with my spreadsheet. Sorry, I’m not going to provide a template, just a description of how I do it. I believe in DIY and encourage people to take ownership by building their own tools. Furthermore, I’m not even sure if what I’m doing is a best practice worth sharing, it’s just what I’m doing.

My spreadsheet has evolved over time. Initially the purpose was Net Worth tracking. This extended to calculating the Asset Allocation. Then I added Transaction and Dividend’s history, as well as several other adhoc worksheets which I will not mention here, seeing as they are “adhoc”.

Net Worth worksheet

This is basically a balance sheet for those who have done any accounting. List out all your assets and liabilities. I use the following headings : Property, Shares, Cash/Term Deposit/Fixed Interest, Superannuation, Tax. Under each heading, include separate rows to list specific assets or sub categories. E.g. Under property you might have PPOR (Primary Place of residence), IP1 (Investment property 1), IP2, ..... Sub categories for shares might be – Australian Direct holdings, Australia ETF, Global ex US, US, Global hedged. Cash/TD/FI and Super are self explanatory. Under Tax I include known liabilities, e.g. Capital Gains Tax on IP’s that I intend to sell one day. You might also have Income Tax liabilities accruing. I don’t include potential CGT on shares since I intend to hold the shares “forever”.   Then the columns are Asset value, debt owing, Net income, Yield. Note - The last two are not “balance sheet” items, but I also use this to calculate my passive income so they are needed.

After completing the resultant table, you should be able to calculate Net Worth, which is the sum of all the asset values less the debt owing on those assets. For my purposes, I don’t include personal assets (e.g. contents, cars) in this.

As mentioned earlier, this was the original intent of the spreadsheet. To keep a track of NW as the basic goal post for our progress towards FI. However over time it evolved and I also wanted to add in Asset Allocation. To the right of the NW balance sheet, I added a table for Asset Allocation. This breaks down the assets into the various asset classes : Growth (Aus Shares, Global shares, Property) and Defensive (Cash, FI, TD). You will need to include your superannuation asset allocation, to translate the super balance into these asset class categories. I also subtract my “emergency fund” from the Cash, to keep this outside the Asset Allocation. I construct the table to show my AA inside and outside Super, as well as the overall/combined AA. Then I include my target AA and the delta between Actual and Target. I have some conditional formatting to highlight in green or red those positive and negative deltas (for those inclined to add such bells and whistles). This is how I manage my investments to try and keep in line with the plan. As we are still making regular contributions, I stay balanced by investing the next chunk in the asset class that is below target. This avoids making sales and incurring extra transaction costs and incurring capital gains/losses.

Trades Log worksheet

This is where I track of all my transactions. Everytime I transact any shares, ETF’s, managed funds or super contributions, I keep a log of it here. I also include and shares bought under DRP’s (Dividend Reinvestment Plans). This requires some discipline to update the spreadsheet everytime, but I think it’s a simple and quick task and helps me cross check to ensure nothing goes missing. The columns are date, name, category (e.g. Shares, ETF, Mgd Fund, Super), $, Units, Price, Brokerage, Other Costs, Tax deferred income (each year a new column), Cost Base.

The further functions of this sheet are :

CG cost base : Calculate the cost base for CGT for each parcel. For ETF’s with tax deferred income, this is updated at the end of each tax year to show the reduction in cost base due to tax deferred income in these funds.

Cross link to NW worksheet : Every time I add purchases to my core portfolio (which is basically four ETFs – VAS IOZ VTS and VEU) , this is automatically updated in the NW Worksheet using a sumif() formula that cross links to the Trades Log. That makes it very easy and effortless to see the latest impact on Asset Allocation as soon as new trades are entered and the current ETF prices are input. It can also be used to do “what if” analysis by adding in future purchases and see how much of each ETF is needed to achieve the desired AA.

Dividends worksheet

This worksheet is used to track dividends. Each line is a dividend or distribution. The columns record the details, i.e. Record date, Payment date, c/share, Franked Dividend, Unfranked Dividend, Franking credit, Withholding tax, FX rate (if applicable), etc. Again it requires a small effort. Everytime I receive an electronic dividend statement, at the same time as e-filing this away, I just enter the data as a new row in this worksheet. It comes in handy at tax time to cross check whatever is pre-filled in your eTax. It can also help monitor your expected dividend income, in case you want to take any actions to optimise your tax (e.g. making voluntary after tax super contributions which might be deductible if you are self-employed or unemployed).

Other useful features

One big bonus is the auto-filter function in Excel. I use it on both the Trades Log and Dividends worksheet. That way I can easily sort data to answer questions such as – How much have I invested in the past few months ? How many transactions did I make in the last financial year ? How much have I contributed to super (after tax) versus the concessional limit? What is my total purchase cost for VAS ? How much dividends have I received for VAS ? etc. There is much more you can do with structured data using pivot tables, but I haven’t found the need as yet.

How do I invest ? -- update --

Just a brief update on asset allocation. After the recent sharemarket dip, especially on the ASX relative to global shares, I decided to adjust my AA a little. No big changes. I have also been pouring some money into shares at these more attractive levels, so coming closer to target AA but still remain underinvested and have some way to go.

Updated target allocation is 65% growth / 35% defensive (instead of 70% growth / 30% defensive). I consider these +/- 5%, e.g. 60-70% growth and 30-40% defensive.  Current mix is 59% / 41%, so good progress on investing the lump sum and I can allow myself some small pleasure in the decision not to throw it all in the market back in April/May ! I plan to keep investing actively in the next month to get to the target 65% or very close at least.

The asset class split is as follows. The main change is the Aus/global share split now at 60/40%. I just see better value in the ASX, the yield is too enticing and with the AUD corrected down to a long-term fair value the upside for global shares is much less. Having tweaked a bit here and there, I intend to set this in stone now. The plan is to get portfolio in line with target allocations in the near term (next few months) and then stick to it as best as possible.

GROWTH

Australia shares (mainly ETF but also some direct blue chips) = 39%  [prev 38.5%]

Global shares = 26% (target around 3% of this AUD hedged)        [prev. 31.5%]

Commercial property = 0%

DEFENSIVE

Aus Fixed interest (including term deposits) = 8.7%     [prev 7.5%]

 Global FI = 0%

Cash (includes high interest saving accounts) =  26.3%   [prev 22.5%]

 

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 ?

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....

The great active vs passive investing debate

This is a huge topic, potentially a bottomless pit. There are deep theoretical arguments one can wade through about the relative merits of each approach. Then there is the more practical approach of picking out examples, or reflecting on your own experience of trying to pick stocks or time the market. It’s hard to know where to begin, but let’s try to lay down some thoughts on this.

Efficient Market Hypothesis

Starting with the theory, most economic doctrine is underpinned by this EMH premise, which makes a lot of assumptions about rational behaviour, perfect information, etc. Basically everything is already in the price thanks to the efficient market. If you believe this, then it leads towards a passive index approach, because there is no value arbitrage to be monetised via active investing.

I don’t believe markets are efficient in this sense. You just have to look at the bubbles and crashes to see that the level of price variation goes far beyond the movement in fundamental asset value. Largely this is because of human behavioural aspects, e.g. fear and greed, which defy the assumption of rational behaviour. So then, does that make me an active investor ? Well not really nowadays, but I have certainly tried over the years. Basically I evolved to the view that it is possible, but not easy, to beat the market. A safer and more reliable approach is to simply accept market returns, focus on asset allocation and minimise costs whereever possible.

Follow the smart money

It’s funny to hear phrases like this. I thought all those $20 notes were the same, but apparently some are smarter than others. And then there’s the “dumb” money going into passive index funds. Diworsification, as some traders/investors/fund managers might mock. You hear comments like “why would you want to buy the index when it means you’re going to own BHP / WOW” (or in the past it would’ve been TLS, or whatever company/sector is out of vogue). I don’t really buy into these arguments. Call me cynical, but if someone really had an investing edge to sustainably beat the market, then they should be smart enough to use it to their own advantage and bet their own money (with leverage of course). I guess most of them must hope for healthy overall market performance in which case many investors will gloss over the issue of performance vs benchmark and fees.

There is one glaring case that deserves a special mention. This of course is Warren Buffett and Berkshire Hathaway. Surely this must be the poster child for active investment. But is he the exception rather than the rule? Statistically you would have to say so.

Stock picking and market timing is foolish

At the other end of the spectrum, you will hear index advocates pan active investing as foolish and pull out any number of statistics to support their view. You will read a lot of this especially if you hang around bogleheads, MMM, etc forums. While I have gravitated towards this end of the spectrum, I am certainly not in this camp either. As I said already, I believe it is certainly possible to beat the index, just not easy. However for those who have the interest, desire and mindset, I think it certainly is a valid approach to pick stocks and/or time the market. Some of the biggest investment opportunities I have seen in my lifetime have been during market crashes (2002/3 Iraq war, 2008 GFC). If you had the temperament and conviction to buy when everyone else was running for cover, then these opportunities (that will come up a handful of times in your life) are huge shortcuts to FF. Of course, the opposite is also true. If you don’t have the temperament and discipline, then you will end up buying the bubble and selling the crash, which is a great way to extend your working career. I will say it again, it’s not easy to beat the market. One might think bottoms and tops are easily spotted on a chart, after the fact. They are much harder to see at the right end side though. And further to this, even if you can pick the top/bottom, will you have the conviction to trade it.... Or will you lose your neutral, unemotional view and get caught up in the fear/greed like most others ? I’m convinced the mindset factors are critical to success. Unfortunately human beings seem to be hard wired to fail at speculative investing. As I read somewhere, you need to reverse your natural instincts. Learn to be fearful with your losing trades (cut loss) and greedy with your winners (let profits run). Most people are fearful with their winners (worry about giving up gains / being “wrong”, take profit early) and greedy/stubborn with their losers (hold on and hope, usually as losses get magnified).

So far I’ve been talking market timing but how about stock picking - can one even hope to compete with the army of market analysts out there ? At risk of sounding like a broken record, I think it will be tough. Even to find the time to read all the annual reports and company disclosures nowadays is a challenge. Also one of the key drivers is the quality of management. Is it possible to really judge this as an amateur investor who will never be granted a private audience with the CEO and management team of a listed company ? It really takes skill and effort to succeed here, but again, I’m sure it’s possible. Personally if I had to pick one or the other, I would choose market timing as a better chance of success, purely because of the market cycles of fear and greed that you can try and gauge (provided of course that you can remain adequately detached yourself!).

Willingness, capability and need to take risk

I think that’s a quote from the bogleheads, and something I’ve found quite instructive. For me, nowadays, there is not much need to take risk. Therefore I’ve kind of ended up ditching any thoughts of active investing. Even though I believe it’s possible and I have an interest in the area, why bother if there is 1) no need and 2) bearing in mind my view that it’s not easy to achieve a positive result. If I was starting out again, or still on the journey to FF (i.e. 1) does not apply and there is a need), I guess I would be tempted to give active investing a try. It is yet another “shortcut to riches” that I have written about before. But I hope ultimately I’d have the sense to follow my own advice and stick with the boglehead approach, which I have now broadly adopted (although not in a religious way). Nearly all of it resonates with me, especially the part about minimising costs (why pay for your fund manager’s Ferrari). I think investors are spoilt nowadays to have index ETF’s with such negligible fees. Really when you think about it, having the opportunity to invest in 100’s or 1000’s of companies with a relatively small amount of capital and paying <0.2% p.a. Most people would be best served to be thankful for such facilities. Just take this easy option and find a less costly hobby. Old habits die hard though, and on the market timing front, I haven’t entirely given up : I am holding a decent cash allocation and hoping I will have the courage to “fill my boots” should another serious market panic arise in the coming years. I do slightly regret missing the previous few opportunities I’ve had in my investing lifespan.

Active investing

I’ll just finish with a few thoughts on what it might take to succeed as an active investor. As already stated, I’m not an active investor myself so take it for what it’s worth...

Firstly, should you DIY or delegate to a fund manager ? I think it depends on your capability, interest and approach. In most cases, it will be better to use a fund manager. And if you DIY, you should mentally consider it as though you are employing yourself as a fund manager. Sounds a bit silly/contrived, but basically you need to have two hats, one as the investor and another as the fund manager who works for the investor. This fund manager should prepare an investment plan, quarterly reports to review results and actions taken. The investor could even pay the fund manager (a notional payment of course, it’s all your money afterall) a fee of say 1% of funds under management, and see if this fee is recovered or even outperformed. Basically the point is you have to treat it like a pro. If you are going to be an amateur / hobbyist, then either don’t do it (use an active fund manager or go back to indexing), or keep the percentage of assets low, e.g. 20% max, to minimise the risk to your hard earned stash.

Secondly, if you decide to use an active fund manager, the question will arise of how to pick one. As many researchers have shown, past performance is not a reliable indicator. So I wouldn’t just pick the fund with the best returns last year. Really you are betting on the fund manager’s skill and capability so it makes sense to get to know the fund manager. As a minimum, read their prospectus and market reports. Do they have an active website/blog which gives good insights into their investment approach. Do you understand what they are doing and their strategy to beat the average market return ? Are their fees reasonable ? These are the questions I’d be asking myself. If all else fails, there are some Listed Investment Co’s in Australia and a very notable one in the US that have a long track record of solid performance and reasonable fees. They might be a good starting point for your research!