Revision log

May 2022

Removed/edited pages due to ASICs information sheet INFO269:

I did not consider these articles to be general advice, but ASICs vague wording on anything that may ‘influence‘ and the harsh penalties makes it not worth the risk to me to keep it.

Apr 2022

How 1% fees cost you a third of your nest egg

• New article

DHHF and other VDHG alternatives

• Updated the MER of the BlackRock High Growth Multi-Index Fund to include transaction fees, so 0.30% instead of 0.19%

Mar 2022

How is VDHG tax-inefficient?

• New article

Jan 2022

Non-residents or not planning on retiring to Australia

• Updated the brokerage fees for OpenTrader. They are removing the $5 fee for up to $5,000 trades, and the minimum is $10 (for up to $10,000).

How much do I need to save every month to meet my retirement goal?

• Added the following into the “desired annual passive income” field.

This depends on the individual, but as a guide, the ASFA Retirement Standard benchmarks the minimum annual cost of a comfortable or modest standard of living in retirement for singles and couples.
As of January 2022:
• A comfortable retirement for singles is benchmarked at $45,239 and for couples $63,799.
• A modest retirement for singles is benchmarked at $28,775 and for couples $41,446.

The truth about investment bonds

• Removed the section on provisioning and added a note for why

2. Losing the ability to earn and compound returns on future tax to be paid
After ten years, the bond holder pays no capital gains, so can the capital gains just be wiped? No. The 10-year rule doesn’t affect the fund — the 10-year rule only relates to the individual’s personal tax liability. So the provisioning and payment of tax in the fund is the same regardless, e.g. taxed at company rates, as if it was a company. Capital gains within an investment bond are included as income each year. Consequently, investments within investment bonds have tax provisioned (set aside) to pay the tax when assets are sold to pay out bond holders who redeem their bond after ten years. The investment price in the insurance bond reflects these tax provisions being removed. As a result, the ability to earn money on future taxes to be paid is lost. See this for an example using a like for like comparison with a bit of a track record. The left is the same underlying product but in an investment bond.

Note added:

An earlier version of this article stated that due to the tax provisioning requirements of investment bonds, tax is paid on capital gains each year, losing the ability to compound capital gains until it is redeemed. This does not appear to be correct, so it has been removed. Provisioning is merely numbers in the accounting ledger.

Nov 2021

The truth about investment bonds

• Added the following paragraph and link to actual return comparisons of investment bonds vs holding the ETF directly.

Many analyses (such as the one above) use theoretical numbers and approximations, which come up with similar negative results for investment bonds. But with approximate numbers used in theoretical scenarios, investment bond providers can (rightfully) claim that the assumptions and nominal return figures used in the analysis are not realistic, so the results can be taken with a grain of salt.

If we are using real world numbers that show how poor investment bond returns are, there is no longer any argument.

Thanks to ghostdunks for doing just that in the following post.

Investment Bonds as a tax-paid investment compared to holding equivalent ETF directly : AusFinance

Non-residents or not planning on retiring to Australia
• In the list of brokers, updated to reflect the removed inactivity fee from Interactive Brokers

Oct 2021

Portfolio maintenance – rebalancing

• Updated the section on rebalancing in super to note that it is more tax efficient to hold your bonds outside super at low interest rates.

• Added the (now) first 2 sections — “Why rebalance?” and “Rebalancing growth-to-defensive assets vs rebalancing within growth assets”

Aug 2021

Wraps and why advisors love them

• New article

Jun 2021

How to get worldwide index exposure on the ASX

• Removed IWLD because it is no longer a broad market index and has been converted to an ESG fund.

Feb 2021

The truth about investment bonds

• New article

Jan 2021

The problem with pooled funds

• Update – previously showed AustralianSuper member direct investment fee of $395 p.a. + 0.04% of balance, but in page 8 of the PDS) under ‘other fees’, it says that the 0.04% doesn’t apply to the member direct option, only to funds in their pre-mixed or DIY options.

Dec 2020

The problem with pooled funds

• New article

• Added the following based on a comment by dunno on propertychat regarding the importance and significance of provisioning in pooled super funds.

As explained in the link below, to avoid the problem of capital gains building up in super pooled funds and being unfairly distributed, capital gains are provisioned (i.e. set aside) daily. The result of this is that unrealised capital gains are treated the same as realised gains. This has a significant drag on returns due to missed compounding of those gains over time. I strongly recommend having a read of Pat’s article which goes into detail on this.
Not so Super Retirement Savings – Part 4

Nov 2020

DHHF and other VDHG alternatives

• New article

Non-residents or not planning on retiring to Australia

• Added OpenTrader to the list of brokers available to non-residents. It is the only one available to non-residents that fills both requirements of being CHESS sponsored and on a reliable trading platform.

Oct 2020

What’s the deal with small caps?

• New article

Sep 2020

How to get worldwide index exposure on the ASX

• Added addendum wth link to a post pointing out that after tax drag is factored in, the cost between each option appears to be within just a few basis points of each other

What’s the deal with REITs?

• Added to the tax section the problem with REITs inside super (before pension phase).

Even in super there’s a cost, in fact more so than outside super. In super, income is taxed at 15%, which is better than outside super, but in super, capital gains that have not been realised (for potentially decades) are not payable (it’s essentially wiped) once you meet a condition of release and convert your super to pension mode for drawing down, so you’re still swimming upstream with REITs in super compared to using total market index funds which tend to have more of their returns as capital gains instead of income.

This compares to the US where a 401k (the US retirement vehicle) is income tax free when putting money in (compared to our 15%), but those gains are never wiped and are payable when drawing down in retirement at the same rate as income. So, REITs don’t have as much of a disadvantage there like in Australian superannuation.

Aug 2020

How to get worldwide index exposure on the ASX

• New article

Jul 2020

Risk premium explained

• Updated to explain the risk premium more generally (in regards to asset classes such as stocks vs cash/bonds), before continuing with asset subclasses of various high risk stocks (small, value, emerging markets) and low risk stocks (utilities) relative to the broader stock market.

Stock market risk

• New article

What about other asset classes besides stocks and bonds?

• Updated the long term bond fund section to note that there’s a new long term government bond fund available on the ASX.

Jun 2020

LICs – are they all they’re cracked up to be?

• Re-write of the dividend smoothing section.

Why bonds?

• New article

May 2020

Asset allocation and your risk tolerance

• Added goal based allocation section.

Bond funds

• In the “Australian vs Global” section, a clearer explanation of unsystematic vs systematic risk was added to explain why the importance of diversification for equities and corporate bonds does not carry over to government bonds (of developed country governments).

• Added section “Bond fund expected returns” to explain that past returns are meaningless and it is YTM that matters for high quality bond funds.

• Added section “Tax” explaining factors to consider on whether to hold bonds in super or not, both in an interest rate environment that isn’t so low, and in the current low interest rate environment.

Lump sum investing

• This was originally tacked on to the end of The market has never been this high, should I wait to invest?. It has now been moved to its own page.

• Added section “How to DCA the right way”.

Non-residents or not planning on retiring to Australia

• Added at the end of first section that franking credits create a large drag on returns for non-residents.
• Added section “How to invest if you don’t know where you’ll retire to”.

• Added an update (highlighted in red) that NAB Trade had serious trading problems during Covid-19 causing investors using their trading platform to be unable to trade, noting there’s no way I would use NAB Trade after that.

Currency risk – personalising your AUD to non-AUD allocation

• Removed the following from the section under “Argument 3” about drag on returns. The reason for removal is that over time this would even out, so I after rereading it, I don’t consider it useful.

This article arguing against hedging states

Because most financial institutions adjust their hedging once per month, fluctuations in currencies ensure that part of the assets are always underhedged or overhedged. If, for example, the S&P 500 lost money over the course of a month, then the fund would become overhedged. Using the figures above, if the $100-million long position dropped 3 per cent to $97-million, the fund would be overhedged by $3-million – exposing it to potential losses on currency movements.

What’s the deal with REITs?

• Added a short but important section on tax.

Revision log

• New page

Non-residents or not planning on retiring to Australia

• Added the following towards the end of the page discussing tax consequences of not disposing of shares when ceasing to be a resident.

This article also makes the important point that if you do defer and then sell it while a non-resident, you also miss out on the CGT discount (as well as the tax free threshold due to paying non-resident income tax rates). At the time of writing, I believe you still get the 50% CGT discount calculated on a pro rata basis. So, with 700 days in Australia and 100 days out of Australia, the 50% CGT discount would be reduced to (700/800) or 43.75%. You would then pay tax based on higher non-resident marginal tax rates which does not include the tax-free threshold.

April 2020

Risk premium explained

• New article

Low interest rates – should I move from HISA to Bonds?

• New article

What are ETFs, LICs, index funds, and managed funds

• Added in new section “Are ETF’s accurately priced?” and a link to explain what market makers are and to lead into the (existing) next section so that it is more clear why not to place an order in the first and last 15 minutes of the trading day, or outside market open hours, and why to always use limit orders.

LICs – are they all they’re cracked up to be?

• Expanded on why the fact that Australian companies sell overseas is not a valid reason not to diversify globally.

Whipsaws and hopping out of the market when there’s bad news

• New article

Should I hold off buying stocks until the volatility from coronavirus has reduced?

• New article

February 2020

Fear of investing

• New article

Index funds

• In “idiosyncratic risk” section, added examples of blue chip companies that many would consider too big to fail (and failed).

Franking credits – how much more are you really getting

• Added section “So how much are franking credits really worth?” showing actual numbers to highlight how small the benefit is vs the lost diversification.

VDHG or roll your own

• In section “Pros of a Vanguard diversified fund” added the following subsection.
“4. Enables your partner to manage finances when you’re unable to”

• In section “Pros of the DIY approach”, under subsection “Tax efficiency”, added that ETFs are more tax efficient due to their legal structure because in managed funds when a unit holder sells units, all investors of the fund are forced to realise some gains.

What are ETFs, LICs, index funds, and managed funds

• Added into subsection “Advantages of ETFs” the tax difference between ETFs and managed funds along with links.

Summary & further reading

• Added in link to Lars Kroijer’s Investing Demystified short-video series because it’s so fantastic that everyone should see it.

What about other asset classes besides stocks and bonds?

• Added a quote from an article under the “unlisted property trusts” section and text immediately below it highlighting the risks of illiquidity with examples from the past.

• In the section on gold, added the quoted section “Grok’s tips” to show more clearly the volatility with gold.
Also added below that quoted section, a two century long graph to show that the recent 30 years is an outlier and over the longer term the real return of gold zero.
Below that, I linked to a Larry Swedroe article on it explaining that even if gold is a good hedge over the long term (a century or more), it may still not be useful over the medium term such as a few decades.

• Added section “Emerging market bonds”.

Low interest rates – should I move to high dividend stocks instead?

• New article

What’s the deal with REITs?

• New article

Pay off the mortgage faster or invest?

• Added section “Don’t use a redraw for investing, get a separate loan split instead”.

Dividends are not safer than selling stocks

• New article

What is total return investing?

• New article

Why you can ignore the index bubble argument

• New article

January 2020

Cash vs bonds in your portfolio

• New article

Bond funds

• Added section on bond funds vs individual bonds, indicating that bond funds are more appropriate for those without a specific date of use, but more importantly explained that bonds carry two opposing interest rate risks – price risk and reinvestment risk – and that the second is seldom mentioned but still important to understand.

Creating an investment plan and Investment Policy Statement (IPS)

• New article

How much do I need to save every month to meet my retirement goal?

• New article