Ive finally rejigged my portfolio to indexing

Ive had 10yrs investing experience
starting small with managed funds - the more I learnt
the more I tried to beat the market - picking stocks, picking funds
selling and buying
I started off with the usual suspects - colonial first state, BT, MLC - a mix of all these, then sold some - tried in the US market on tech stocks, Apple stocks in 2000 for 14 dollars - wish I held them - lost some on speculative stocks, tried applying fundamental analysis using what I learnt from peter span seminars - did OK, went with navrainvest and enjoyed the income

even though Ive had some big winners if I look at overall returns its probably a lot less than the index

Tax inefficiencies are huge with buying and selling


And Im someone who does a lot of research in property and shares
ie im not your average mum and dad investor

I now fully advocate indexes - with returns determined by your asset allocation, and trying to capture alpha with small co and value tilts.
A small amount to emerging markets - all reduces volatility yet increases overall return


After more and more research, and assessment of risk
Ive finally re done my whole portfolio
Its something Im comfortable with
where I will not be likely to sell
and rebalance on a regular basis

Basically a growth portfolio
Low fees
Indexed

The 9 funds ive invested in are
The core equity trusts have a 50/30/20 tilt of large/value/small funds
Ive tilted it more toward value and core with the individual funds

DFA Aus Core Equity Trust
DFA Aus Value Trust
DFA Aus Small Company Trust
DFA Global Core Equity Trust
DFA Global Value Trust
DFA Global Small Company Trust
DFA Emerging Markets Trust
Vanguard Property Indx
Vanguard - Int Property

Heavily into DFA with a value and small company tilt
http://www.dfaau.com/media/pdf/distr...ns_summary.pdf

Index returns will beat most investors if you hold forever
Let the miracle of compound investing work - as Einstein once put it


Im expecting about 14-15% return long term, with 4.1% yield
With a much lower volatility than - just australian shares, or individual stock portfolio that I was holding before
The beauty of a diversified portfolio is when one sector is down, another is up - cancelling each other - reducing volatility - but not reducing overall return

The fact that it is a tried and tested method with plenty of research behind it gives me peace of mind

I am highly unlikely to sell in the near future

DFA have some of the best non geared long term returns on aust shares around. Their international funds are down due to $A appreciating as they are not hedged.

Its so clear to me now that by looking for higher returns you take on higher risk and volatility. Im just trying to maximise my return for the level of risk im willing to accept.

Im at peace with all my set and forget investments now.

I hold a second portfolio - holding LICs/ ETFs - and will probably move it into this portfolio too once my LOC is setup

People may be tempted to invest a large amount in colonial first state geared - however it is obvious that gearing magnifies risk and in a down market you may get wiped out.

Use a compound calculator like that below
to model your returns - key is time in the market without selling**
Once you sell you take a huge hit

Compound Savings Calculator
I hope this can help others as its taken a lot of reading and failed experiences to get his far

Its late - sorry if my ramblings dont make sense

dkmc

Hi dkmc,

Thanks so much for sharing what you've learnt and what you're currently doing. I'm about to start on a similar process myself - although I have not been as active as you have been in the past I have been doing a lot of reading lately and have come to the conclusion that actively managing does not necessarily mean better returns. Maybe that's obvious to everyone else already.

I have also been looking at the DFA funds after a recent article in the Eureka report. The do have quite impressive returns, but so have a lot of funds in recent years. I'm yet to dig further to see where their alpha is coming from.

Thanks again.

John.

Hi dkmc.

What type of fees are you paying?

Just wondering if you may have been better served with a couple of LIC's, an ETF and possibly 1 or 2 LPT's .

You obviously know your stuff and have been putting in the hours with the research, but I would imagine that you may be losing a bit on fees.


**The above is not advice, just throwing up something for discussion.**

Exactly!!!

People get so caught up and in love with one asset class, then it doesn't perform and they think it's punishing them...It's not, that's the market!

Cheers,

Dan

fees roughly from memory
I pay - average MER of 0.35
wrap fee of 0.2
advisor fee 0.44 - tho this reduces the more I have * yes I thought about this very hard - and its worth it even tho I could have gone for a strict fee for service planner.
so total is 1% - and that includes MER and advisor and wrap

The great thing about a discounted wrap - is full reporting -
I get up to date reports on profit
an advisor that keeps me on track, that I can throw ideas against him - and he stops me from doing stupid things

With LICs - the hard thing is dollar cost averaging as you pay $30 each time to buy
with the wrap you get automatic rebalancing

You can bpay into the cash account - and have it setup so that all money above $4000 gets allocated to shares in the allocation percentages specified

so if the aus market has been down 5% and property 2%
and I transfer money in - it will automatically add to the australian market
and property for very minimal cost - to make my allocation percentages back to what I had them

LICs and ETFs- mean u have to monitor everything in etrade or comsec, more statements,paperwork , and hard to add to long term
Yes I do still hold them in my 2nd portfolio - but will eventually move away because of this disadvantage

What do you mean by "wiped out"? If CFS have a bad quarter or two, their unit prices will be down. You could argue that would be a good time to purchase more. As a higher risk fund you would have to take a view that perhaps 1 year in 4 could give a negative return, and plan to have cash buffers in place if you were relying on distributions from the fund.
So the unit price might start heading toward zero, but at some stage it will head up again. It just the nature of the market. Hold on long enough and you will be rewarded.

Someone will have to explain (with examples) of a fund being "wiped out"

The problem with an internally geared fund is that they need to maintain a conservative level of gearing - so if the market drops dramatically (ie 20%+), then they will find themselves with a very high LVR (higher than they are allowed to have) - and they effectively give themselves a margin call.

Most geared funds have a clause that states that they can stop redemptions if the value drops by too much - and it is possible that they will have to sell large amounts of assets internally (at or near the bottom of the market) to bring their internal LVR back to an acceptable level ... thus wiping out a large portion of the gains made in previous years.

It is theoretically possible (although unlikely) for a market crash to be large enough to cause the geared share fund to basically have to sell the majority of its assets to pay back the debt it holds to bring borrowing levels back into line with what it is allowed.

As always - gearing increases risk ... and an internally geared fund is no exception.

dkmc,

How often do you rebalance? My understanding is that once a year is often considered to avoid excessive CGT, fees and buy/sell split events.

On my wrap I dont rebalance at the moment, but I do take distributions in cash and reallocate them wherever I see fit.

MJK

if that happened you would still be holding the same number of units, but the units would be a very low figure. Would people jump on board hoping for growth (ie buy more units while they're cheap), or shy away because of perceived mismanagement?

Hi,

Great post.

There's no doubt about it, DFA is reputed to be an excellent fund manager. I haven't looked into them for some time but from memory I thought it was only possible to invest with them through a financial advisor. Although I vaguely recall that Mcquarie Wrap may have included them in their list of fund managers. But being somewhat anti-advisor (based on negative past experiences) and not keen on wraps I shyed away from them.

I think one's investing strategy will often vary depending on the stage of your life you are at. For instance where income is important (eg dividends & LPT distributions) wrap, mer and advisor fees can start to eat into the income. This is not so noticable when the market is doing well but in bad years these fees can have a significant negative impact on the income component.

There may be a little extra paperwork with LICs and EFTs but the work required is still very minimal and there are no wrap and advisor fees. And brokerage is miminal if you trade in decent size parcels. When I say LICs I am generally referring to the older ones with extremely low MER equivilent and proven track records.

Although one could argue that only investing in Australian LICs and LPT indexes etc lacks diversification I have a number of acquaintances who have been doing this for decades and couldn't care less about market highs and lows. However the income component which is very important to them from these investments on average has continued to grow at an incredible rate.

If I was somewhat younger I would definately be looking at doing something similar to what you have done with DFA etc.

Cheers - Gordon