Boglehead/Vanguard way to retire

I've just posted this reply to the discussion on cuff links . It's awaiting " moderation " .

Will be interested to see if it goes though .

Hi Chris

A link to this article was posted on a property investing forum I am a long term contributor . ( somesoft.com )

I found the article and the subsequent discussion quite informative and have saved it for future reference .

I'm not in a position to comment in an informed way about the actual topic at hand , however I would like to comment on two aspects of your article and I'm surprised that no one has chosen to comment on at least one of them .

Firstly , your choice of investing in coca cola in 1919 as an example on which to build your arguement around . I would have thought this is a good example of one of the main issues facing anyone seeking to back test an approach to share investing and that is survivorship bias .

How many other companies existed in 1919 ? How many of these no longer exist ? In 1919 how would you have know to buy coca cola ?

My second gripe ( a more personal one ) is the putting down of an alternative approach to investing to promote another . The reality is there are many differing ways to invest and used appropriately most of them can succeed . I have spent considerably more time researching share investing than property investing and am yet to make any significant money from shares , however the use of simple use of gearing , support , resistance and trend following has yielded me several million from the property market.

There are times when the stock market will provide better returns than property and the use of funds would appear to be a good way to approach it for those of us without the time of ability to make informed choices for themselves .

For me , the most important decision is when to get in a particular market . In property , I use the ten year average for capital cities and then look at which ever market is underperformance , hence my decision over the last years to buy in Sydney With our last buy being in 2013 .

I note that the ASX is currently underperforming and given that part of my investment strategy is based on a fundament belief that australia , it's economy , it's property and share market will continue to exist and perform well in historical and global terms , then a period of under performance is for me a sign that a period of overperformance is on its way .

Cliff
 
see_change said:
People like to look at the long term performance of indexes like the Dow jones , but the reality is that the shares constituting the Dow jones have changed dramatically over the last century .
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Just wanted to pass comment on this too, there is some very bad info along these lines in Jan Somers books about index returns (and stock markets in general).

An index fund periodically rebalances its holdings to replicate the index. This means as new companies join the index they are acquired, and as companies leave the index they are sold from the fund. Major indices would have turnover rate of less than 5% pa. Thus, less fees (as low as 15bps for VAS.AX) it is possible to go very, very close indeed to replication of index performance. That the indexes constituents change over time is not material, the index funds holdings change as well.
 
The point of index investing (agree index investing has only been available since 1970s) is passive low cost investing with satisfactory returns. The returns of index investing has been somewhere between 9%-11% compounded annually.

To some people this is not good enough and that's fine you can put in extra effort and make your investing more active. But sometimes being active to chase higher returns comes with extra risk as well.

Property investing has it's risk as well. Without leverage it's probably not worth it and with leverage as long as prices are rising leverage is working in your favour but it can turn against you as well that's the risk.

Cheers,
Oracle.
 
Erko said:
Just wanted to pass comment on this too, there is some very bad info along these lines in Jan Somers books about index returns (and stock markets in general).

An index fund periodically rebalances its holdings to replicate the index. This means as new companies join the index they are acquired, and as companies leave the index they are sold from the fund. Major indices would have turnover rate of less than 5% pa. Thus, less fees (as low as 15bps for VAS.AX) it is possible to go very, very close indeed to replication of index performance. That the indexes constituents change over time is not material, the index funds holdings change as well.
Click to expand...


In terms of index funds what you say is true .

My comments were meant more in terms of an example of survivorship bias .

You will often notice an increase in a shares price when it is added to an index as funds "'rebalance " and buy into the newly added company .

On an intellectual level I'm still interested in mastering share trading , but on a more practical level , if I go back into shares , I'm more interested in selecting a specific sector which I think will out perform , whether it's an industry based sector or a size based sector such as the small ordinaries or " emerging companies " . I think s&p have an emerging companies indices , though when it first came out you had to be a subscriber to find out which shares it consisted of .
Are there funds that reflect most available sectors or indices ?

Cliff
 
see_change said:
I note that the ASX is currently underperforming and given that part of my investment strategy is based on a fundament belief that australia , it's economy , it's property and share market will continue to exist and perform well in historical and global terms , then a period of under performance is for me a sign that a period of overperformance is on its way .
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Cliff, do you reckon shares are undervalued at the moment or are you of the opinion that Australia's economy will turn a corner which will then be reflected in the share market?
 
Hi Cliff, yes the range of ETFs on the ASX these days covers a lot of sector specific offerings ; Consumer Staples, Healthcare, Telecoms, Banks, Resources etc to name a few. All of them will list top 10 holdings in their pds/fact sheets.

Though if you really want to dig down, then the NYSE for example has so many more ETF offerings, country, industry, theme or rules based.
 
Erko said:
PS. AFIC still available at a discount to NTA, I picked up a parcel yesterday at -2.4%. I'd be buying AFI.AX at these levels over any ETF. Not advice, etc.
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Assuming AFI SP is $6.26, the historical dividend cps is 23 cents, yields works out to be 3.7% FF at current prices.

Is it just me or does that seems expensive? Is there a way to forecast what the final dividend payment will be?

Given I'll be purchasing from property equity and the loan interest is ~4.5%, I'm worried I'm overpaying.
 
dajackal said:
Assuming AFI SP is $6.26, the historical dividend cps is 23 cents, yields works out to be 3.7% FF at current prices.

Is it just me or does that seems expensive? Is there a way to forecast what the final dividend payment will be?

Given I'll be purchasing from property equity and the loan interest is ~4.5%, I'm worried I'm overpaying.
Click to expand...

2 things;

- The beauty of franking........3.7% FF is 5.28% grossed up :D
- AFI has a long history of raising dividends, and historically has yielded around 4% FF. I'd expect something like 25cps annualised at current SP.

If you are using borrowed money, then AFI is a great vehicle as they have never missed a dividend payment and did not even cut dividends in the dark days of the GFC, and I am talking on a cps basis, not yield ! They hold a significant amount cash to allow for this dividend reliability and also provide dry powder for market downturns. AFI (as does ARG and MLT) really consider themselves stewards of their shareholders capital and the business is managed very conservatively...they may not shoot the lights out in the short term, but they have proved themselves over the very long term.
 
dajackal said:
Cliff, do you reckon shares are undervalued at the moment or are you of the opinion that Australia's economy will turn a corner which will then be reflected in the share market?
Click to expand...

In terms that the Australian share market has under performed over the last few years compared to OS markets

I'm not informed enough as to whether the ASX is undervalued in terms of its current FA , or whether it indicate an under performance of the economy which is about to change .

I do recall a similar situation many years ago , can remember whether it was late 90's or easily 00's but I do remember that the ASX corrected itself in th years following .

If I didn't have faith in my ability as a property investor I'd be happily researching what shares or funds to invest in ... However I'm happy to gear up to over 100% to buy into property at the moment , borrowing over 1 mill and I wouldn't be prepared to do that in the share market

Cliff
 
The Falcon said:
My broker has an spreadsheet that allows them to get a good handle on intra day NTA of the main LICs, they know top 20 holdings and get a live stock price feed on those and apply in ratio or something like that.

Your crude method probably works just as well overall :)
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So you do use a full service broker? Any chance you can post up or PM me todays readings?

edit: I am interested in AFI/ARG/MLT/BKI
 
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dajackal said:
So you do use a full service broker? Any chance you can post up or PM me todays readings?

edit: I am interested in AFI/ARG/MLT/BKI
Click to expand...

Yeah, I have accounts with two full service brokers. If you flick me a PM with your email address i'll see what I can dig up. I will say though that LIC research is fairly simple stuff really.
 
Depends on the fund / segment of the market. If you are talking 2% per annum and performance fees, then yes large cap managers will struggle to beat the index and this is borne out through plenty of academic research.

There are a few of reasons for this - market efficiency, fear of FUM loss and career hazard. Basically, if in an open ended fund manager takes big bets that either A. don't work, or B. don't work fast enough (typical in value funds), FUM will flee...giving him A. No FUM to earn management fees on and B. as a result, a serious risk to his continued employment ! All of this leads to benchmark hugging....and yeah, if you are doing this, you aren't earning your fees!

The market is not a homogenous thing though, in the small and micro cap space I do believe that active managers who know their stuff will outperform the index, and there is a lot of evidence of this. The market is far less efficient at this end, as these small stocks are often poorly followed, and closely held. Because of their illiquid nature, large funds cannot work in this space, and managing less money is a huge advantage at this end of the market. The problem is that successful managers will have to close funds to new money in order to keep performing, so they are really limited in how big they can get without comprising performance.

Now, when it comes to large LICs, these are very lazy managers, but that's ok when they only charge less than 20bps. They have a very long history of strong performance, usually outperforming by 100-150bps over the very long term. The closed end nature of LICs (as opposed to unlisted funds) means they don't have FUM loss pressure so take a long term view to their holdings. I'd almost consider them a "smart beta" ETF, but at lower MER than the smart beta ETFs like QOZ (40bps).
 
But if outperformance is more to do with the smaller end of the market, how do LICs like AFI/ARG/MLT manage to outperform by 100-150bps if they're just holding the big companies?

I do like the idea of them always increasing dividends, holding cash to ensure dividends get paid, and as dry powder to buy more.
 
JohnMichael said:
But if outperformance is more to do with the smaller end of the market, how do LICs like AFI/ARG/MLT manage to outperform by 100-150bps if they're just holding the big companies?

I do like the idea of them always increasing dividends, holding cash to ensure dividends get paid, and as dry powder to buy more.
Click to expand...

I covered that, the keys are very low fees, and that they don't need to index hug for fear of losing FUM as the fund is close ended. Ie. You sell the stock, they don't sell their positions. You sell stock in an unlisted fund, they need to sell stock to pay you out, hence losing FUM. They buy value where they see it and don't mind short term underperformance and do things like covered calls to enhance income.

You could either go the etf or lic option. I hold both.
 
The Falcon said:
If you are using borrowed money, then AFI is a great vehicle as they have never missed a dividend payment and did not even cut dividends in the dark days of the GFC, and I am talking on a cps basis, not yield !.
Click to expand...

I've been purchasing using borrowed money.

I then turned off dividend reinvestment and chose to get the dividend paid directly into my PPOR offset account to help pay down my non-deductible debt faster.

No issues with this approach i hope?
 
Provided the account is set up correctly with a dedicated sub account for investment purposes so you can seperate deductable and non deductable. I'd be getting advice from one of the forum pros (accountants) to ensure all your Ducks are in a row.
 
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