Newbie needs advice

Hi All, I’m a good saver but don’t have a financial education so haven’t invested at all before and am quite naive. I’ve been reading the very informative forums here (thanks everyone!) and am ready to invest, but not quite sure where to start.

I’m 30, stable income $85k, no debts, no assets other than $100k in a USaver account. I can save $1500 per month. My investment goal is simply to maximise wealth over the long term (10 years plus). I need to keep $20k at call for future expenses. So with the rest of the money I’m considering either:

1) investing it all in a portfolio of ETFs or index funds in one hit and keep the $20k at call in the USaver.

2) dollar cost averaging into a portfolio of ETFs or index funds over a period of time and keep the $20k in the USaver.

3) buying a home, then I can keep the $20k at call in an offset account to avoid tax, and invest the balance (if any) in a portfolio of ETFs or index funds.

4) buying an IP, then I can keep the $20k in an offset account to avoid tax, and invest the balance (if any) in a portfolio of ETFs or index funds.

I’m also concerned about what I’ve read here and elsewhere about Aus property bubble, broader economic concerns and risk of double-dip recession etc. Is it better to just ‘stay out of the market’ altogether for now?

Sorry it's long. Would appreciate any advice/opinions/criticism/alternative suggestions etc.

I also, have read a lot of posts from forums and newspapers, about an Australian housing bubble. I have sold my house.

I think that if you choose to buy index funds or ETFs, then don't buy in one lump. I know the fees will be a bit more if you DCA, but the market is like a Yoyo at the moment.

Split your index funds/ETFs between large caps/small caps in Aus/foreign/emerging markets, add commodities/precious metals and cash/fixed interests/Gov Bonds. Research Asset Allocation on the net for percentages or ask a financial planner.







Johny.

Thanks Johny

What would be a decent DCA strategy with that amount? I’m thinking maybe 10 or 12 monthly instalments. Yes the fees will be more…I figure unlisted Index Funds would work out a lot better than ETFs if I’m going to DCA. What worries me is if I do this, and then house prices do come down, I wont be able to buy in as I wont have a deposit anymore.

I’ve done some research into asset allocation (including some of your previous posts here). I have a relatively high risk profile so would put a fair percentage into emerging markets and small caps. I’m thinking I wont worry about fixed interest/bonds and have that component in cash (online saver) instead. Any thoughts on that? I don’t really understand the mechanisms of gov bonds and from what I can tell FI seems to generate lower returns than cash at call and is less liquid, so the only advantage would be better tax treatment?

Hey sav,

Found this good A.A. calculator.
Asset Allocator

You really have to think whether you want a house. No point setting up an investment then selling out.

With $100K you could DCA into a Wholesale account (cheaper MER). Monthly or Bimonthly instalments will soon have you invested.

My biggest performer was small caps, but emerging markets was woeful this year. 5% in each could be good.

Fixed int and cash are both around 6% ATM. A FI fund is liquid(3 days) and still high interest. Sorry, same tax.



Have fun,
Johny.

Thanks for the calculator

If I DCA into a wholesale account (thanks I hadn’t thought of that) it would save on fees, but would the trade-off be that it would be just one fund so I wouldn’t get the diversification or mix of assets?

On FI vs cash, I have to pay tax every year on the interest earned in my online account. I thought (could be wrong) with an FI fund you would just pay capital gains when you sell units? In any case, what is the advantage of FI fund over online savings a/c?

You'd have to read the Product Disclosure Statement on each company you are interested in. In it they state their threshold (eg 60K) for wholesale investment. Each company holds a basket of index funds. Vanguard, for example, only have index funds, CFS have about 10. check out http://www.ifa.com/

FI is payed out in income. Tax is payable on this. Even if this is reinvested.

A FI fund is stable. Ubank rates won't stay high forever, but short term its about even.

Have you formed a plan. would you mind sharing?




Johny.

Right. I think I was confusing wholesale fund with wholesale account, will look into that.

Ok now I understand FI better (told u I was naive )

Yeah I had formed a rough plan based mainly on ETFs (wasn’t planning to DCA at the time). I think it might be a bit too aggressive though.

VAS or STW 40% - Aus shares
VEU 20% - Foreign shares
IEM 10% - Emerging markets
IBK 10% - BRIC
IRU 5% - US smallcap
ETPMPM or GOLD 5% - Precious metals
Plus a geared Aus share fund

BRIC and emerging markets are doubling up.

Australian funds have lovely franked dividends (a refund on July 1)

Geared funds are great with a rising market but can lose twice a much in a falling market.

Equal foreign/Aussie. Can you find any index funds that match those asset categories?



Johny.

Hi Sav,

I'm no expert but I'll chip in anyway - I looked at the various world index ETFs around a a little while ago and there's significant overlap with VEU, IEM and BRIC.

- VEU is 23% emerging markets, of which about half is BRIC. I've bought a parcel here - I intend to DCA into it over a couple of years..

- IEM is problematic - the expense ratio is high (0.72%) and it's suffered from the worst tracking errors (~5%) in it's class for several years. Google EEM + tracking error. The problem seems to be undersampling the index. They say it's not a major issue since liquidity is more important but why are you paying 0.72% for such lousy performance?

e.g.

http://www.indexuniverse.com/section...d-you-buy.html

- IBK - I'm not too hot on: BRIC is heavily hyped but I personally don't feel comfortable doubling up on it - they're still heavily weighted to a few large caps whose fortunes are largely tied to the developed world. Sovereign risk is not negligible either - see Yukos for instance.

My questions (to anyone really - I'd like to know the answers too):

(1) Why would you virtually ignore the US in favour of the minor markets? It's still 30% of the global market. A quick search turns up the data from 2009:

Bespoke Investment Group: World and Country Market Cap

(2) We all have a domestic bias but is 40-50% Australian shares a good idea? Have a look at the composition of STW or VAS - it's approximately 63% banking and mining. I have 'em as well (the shares too) - I just wonder sometimes if it's realistic diversification. It's only 2.3% of the world market, and over half of that is concentrated in the top 10 companies

(3) Are you sure you've interpreted your "risk profile" appropriately? I interpret having a "High Risk Tolerance" as being akin to "Having a long investment time window and ample liquidity". That doesn't mean I would chuck all my money down at the horses (or the emerging markets) for the next 30 years. Maybe think about your liquidity/risk profile if you suddenly had a hungry IP to feed?

(4) To me, when you say you've been researching Asset Allocation that means the Modern Portfolio Theory and implicitly the Efficient Market Hypothesis? Are you aware that in the MPT Risk is correlated to Return but the relationship is not linear - you can increase your risk without getting any further reward? Furthermore the MPT is only valid assuming the EMH. The US may be the most efficient market ( yeah, I know!) - what do you think about the dissemination of information in China? Russia?

Anyway, those are just my thoughts. If anyone has any good answers to my questions please add them!

RB

Hi RB,

What do you recon would be a healthy ratio of Australian to American funds?

What would be the maximum funds that you would put in emerging markets?





Thanks,
Johny.