Sunday, 17 December 2017

Part 2 - Easy DIY Investment Portfolio






Hi Folks

We started Part 1 of this topic previously here where we discussed the beginnings of building a simple investment portfolio ourselves.  To recap, we had bought up low cost LIC's that pay 100% franked dividends and also added some important on-call cash (never any more than 10% of our portfolio).

In a pie graph, this basic portfolio of cash and LIC's paying us juicy dividends looks like this:


10% Cash on-call and 90% dividend rich LIC's


So, carrying right on from where we left off the shall we?......


Step 4: Adding Growth Stocks

Although Australian shares have a reasonable record of growing as well as giving us yield (income from dividends), Australia only represents a small percentage of the global share market.  This means that if we have all our eggs in one basket and something happens to that basket, then we are .....in trouble. So, observationally, we see USA in particular and other continents' share markets doing very well over the long term. The USA share market is huge and well established and it would be remiss not to tap into that for part of our portfolio. Besides, we often see international shares doing well when Australian shares are not.

By prudently buying shares in an ETF (Exchange Traded Fund) we can literally tap into many hundreds of well known and robust international companies' shares via a single ETF. I use VGS which is Vanguard's Global Securities ETF which has 60% of its holdings in USA and then the rest over Europe and developed countries. ETF's are the modern version of LIC's (an over simplification I admit). ETF's buy into many hundreds or even thousands of companies' shares under a certain theme, thus when we buy one ETF share we are actually buying a wide diversified part of many, many companies.

Now, buying international stocks is usually complicated with all sorts of rules about tax between each country and laws and forms that we would normally need to fill out and keep track of.  The beauty of Vanguard's VGS ETF is that it is domiciled in Australia, so Vanguard Australia takes care of all the international tax, forms, licenses etc instead of us, whilst we sit back and enjoy the benefits of owning international stocks. Also, built into this particular ETF is a DRP which happens automatically.

We would use the same dollar cost averaging (DCA) buying method as stated in the first post and start purchasing VGS shares in minimum $5000 lots until our portfolio balanced itself into the following percentages of holding:


  •  10% at-call cash
  •  45% LIC's
  •  45% International ETF.  

It would then eventually look like this:


10% Cash at call and equal amounts of Australian LIC and International ETF shares


So by adding in the  International ETF, we have now achieved the following:

  •  Diversified our holdings outside Australia's tiny share market
  •  Tapped into the growth of big robust international markets
  •  Still retained our Australian LIC dividend income
  •  Still retained our at-call cash for emergencies
  •  We now have both yield AND growth components to our portfolio

Be aware though......

International stocks do not have the same high levels of dividend (yield) as our Australian LIC's, so we are relying on the robust share price growth of these ETF's over time to increase the worth of our portfolio. We will see volatility in this part of our portfolio with the value of these international holdings going up and down daily - it can be scary if you are a worrier. Just treat it like changes in the weather - rarely anything to be worried about.
Essentially, the share market with all its crashes and busts has always rallied without fail and gone onwards and upwards ..... and that's what we are tapping into by buying international equities. If the stock market crashes, the very best thing we can do is sit on our hands whilst everyone else is stupidly selling their shares for a loss in fear. Even better still, if the stock market crashes again (which it most certainly will) we can buy up good quality LIC's and international ETF's for bargain prices. It is just like buying up specials when we food shop - and I know you all do that without having to explain why!



Xmas decorations home made from old book pages.

Keeping Our Portfolio Balanced

A important note about keeping our portfolio balanced to the percentages mentioned above.....don't EVER sell any stocks to achieve this balance.  By selling you will incur possible CGT (capital gains tax), miss out on dividends, accidentally sell at the wrong price and a raft of other mistakes.

The most prudent type of investing is to buy and hold - not buy and sell.

INSTEAD, the best way to re-balance our portfolio is to BUY the stock that is sitting the most under our required percentage. So, for example in this phase, we would keep buying up lots of VGS until we had as much VGS ETF stock value as we did in LIC's.  It will take a while, but that's OK and normal.  The portfolio percentages are an ideal guide to aim for when buying stock.  Once we are sitting at our desire percentages of holdings then we just continue to invest in each equally (or in turn) to keep the percentages generally on track.


We could stop there and this also would be a wonderfully easy DIY Investment Portfolio just as it is with equal amounts of income yield and growth elements to perform well over the long term.

However, in the next post I want to just show an easy little addition to this portfolio that will add some extra safety. (We all like a bit of safety) 


To be continued .......


Take care folks and stay nice.

Mr HM (Phil)


NB: I am not a financial adviser so please do your own research. I love to write about money, frugality, budgeting and living a simpler life to encourage others to do the same in their own way. I hate the stupid taboo of not talking about money and hope to encourage a helpful shifting of that silly silence.





4 comments:

  1. Nicely outlined Phil.

    The 50/50 Oz/International will still throw off close to 4% dividends, which is pretty decent.

    Personally, we're keeping out Early Retirement Portfolio as 100% Oz for income, and the International is in our Super - compounding away in the background for later.

    We do plan on making International Shares part of our regular portfolio over time too, after our Oz income is fully established :)

    I think it's a balance between how much capital one has, and their income needs.

    ReplyDelete
    Replies
    1. A very similar plan to ours too. Once we eventually access Super as a pension, I will convert all the international ETF's to LIC's inside super and that way I will not get whacked with CGT. Choiceplus has confirmed that they will do a once-of in-species transfer of my holdings in accumulation across to a Choiceplus pension free of charge and no CGT in the first instance. 12 months later I will convert them to LIC's as we start to draw down ....but that is another 17 years away yet. We plan to retire in 10 years purely on LIC's outside of super first. Let's hope Super legislation does not mess this plan around too much

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  2. Interesting stuff. My knowledge of super is quite limited since it's a good 30+ years away. Do you have a long-term number in mind for allocation to international? 0%, 30%, other?
    I've noticed huge differences in peoples thoughts on international diversification. It's an interesting topic.

    ReplyDelete
    Replies
    1. My plan is to keep 50% allocation (only within Super) until I change my accumulation account across to a pension account in 17 years. This is all based on assuming Super does not change its tax rules in the net 17 years (I'm skeptical of ATO not changing the tax free laws within pension Super however - it is way too tempting for them!). Ask me again in 17 years :-). The reason I only do it within Super is that the taxation and dividend rules and administration is tiresome outside of super and Choiceplus Super does all that for me. Also the taxation is a better rate for me inside of Super due to my salary tax band. I only hold LIC's that do 100% franking outside of Super.

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