Apr 2024
• New article
Mar 2024
Ceasing any employment after 60
• New article
Pre-mixed vs single-asset-class investments
• New article
Feb 2024
• New article
When will the super caps increase
• New article
Jan 2024
• New article
• New article
Dec 2023
• New article
• New article
Nov 2023
• New article
Government super co-contribution
• New article
The truth about investment bonds
• Added the following paragraph section.
But investment bond advertising says they have an effective tax rate of much lower than 30%
Any investment held by an Australian resident (company, trust, or individual) is eligible to receive franking credits.
Let’s say an investment bond held Australian shares that paid fully franked dividends, and let’s say the dividends were 4% (roughly what the Australian index pays). The franking credits that are refunded would result in an income of 5.7%. If the investment bond is taxed at 30% of the 5.7%, that comes to a 4% after-tax return on those dividends. The capital gain, as well as any distributions that were not franked, would be taxable, so the overall effective tax rate would be above zero, but the franking would reduce your effective tax rate significantly.
However, as this benefit is available to all Australian residents, not just in investment bonds, using investment bonds does not provide any advantage in this regard. If you own Australian shares, your own effective tax rate is also lower.
In addition to franking credits, your own effective tax rate is likely to be far lower than your current marginal tax rate due to what was mentioned above – the 50% CGT discount and the ability to sell down once retired and on a much lower marginal tax rate.
Investment bond advertising routinely quotes an effective tax rate much lower than 30% because they rely on the fact that almost nobody understands this, and they just see a low number for the tax rate and think it shows that investment bonds are tax effective. It is designed to mislead customers into thinking investment bonds are more tax-effective than they really are.
Oct 2023
• New article
• New article
• New article
Sep 2023
How much to save inside vs outside super
• New article
The stock market is forward looking
• New article
Why not just invest everything in the Australian market?
• New article
Superannuation contribution types
• New article
What about other asset classes besides stocks and bonds?
• Updated the section on long-term bonds (GGOV tracks a different index to before, and XGOV is a new fund coming on the market)
Aug 2023
• New article
• New article
Feb 2023
• New article
• New article
Jan 2023
What do financial advisers do?
• New article
How to choose a financial adviser
• New article
ETFs vs managed funds vs index funds
• Moved the section on market makers and marketable limit orders (and expanded further) to it’s own page (Marketable limit orders) so that it can be directly linked when people ask about market depth or limit orders vs market orders.
Aug 2022
Non-residents or not planning on retiring to Australia
• Opentrader — previously non-residents could use this platform, but as of August 24, 2022, the linked cash account that non-residents could use (the ANZ Cashactive account), is no longer available. So it appears this is not to be an option anymore.
Jun 2022
Fund domicile and avoidable US taxes
• Previously stated that the W8-BEN form was also for the estate tax treaty. Changed to reflect that it is only used for the income tax treaty.
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
• 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 advisers 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
• 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
• 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
• 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
• 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.
• 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.
• New article
May 2020
Asset allocation and your risk tolerance
• Added goal based allocation section.
• 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.
• 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.
• Added a short but important section on tax.
• 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
• 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 ETFs 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
• New article
• 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.
• 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.
• 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
• 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
• 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