The end of year is fast approaching, so it’s that time again!
Today, we peel back the curtain as I share what we’ve been doing with our money behind the scenes.
This way you can follow along as I continue building an income-focused portfolio for us to live on and steadily transition from property to shares.
There has been a small change to where our cash is going, but nothing drastic. If you’re a new reader, you can see our last portfolio updates here and here, to get a feel for how we do things. OK, let’s get started!
Below is the breakdown of where our net worth is located, at time of writing. Superannuation has not been included, and I’ve used percentages rather than numbers for privacy – you understand 🙂
As you can see, compared to last time, basically no change. Our peer-to-peer lending allocation has fallen slightly, as we’ve been using the cashflow elsewhere (more on this later). Other than that, it’s rather boring compared to the last update where we sold a property!
Going forward, we will probably look at selling another property in 2-3 years. If you’re wondering why we have so much cash, or why we don’t just sell all the properties now, this post explains.
Once we have a much simpler set of finances (no investment property), our cash holding won’t be very big at all – probably around 5%. I’m very much looking forward to those days!
As most of you know, this year the sharemarket has performed pretty well. In fact, the market has returned around 20% since the start of the year.
Our remaining properties in Perth have likely stayed the same or declined in value by a small amount. But the outlook for Perth continues to improve, with supply shrinking and the economy gaining momentum. Nothing is certain, but at least things are heading in the right direction!
The location of our other property – Brisbane – also seems to have a reasonable outlook over the next few years. Then again, maybe I’m just seeing what I want to see? Time will tell!
And finally, our RateSetter investment continues to provide a handy amount of reliable monthly income. The platform has maintained their track record of investors receiving every dollar of principal and interest owing, with the provision fund covering the small percentage of defaults to date.
So what’s new?
At this point you might be wondering about the change I mentioned. Well, here it is…
We’re now paying principal-and-interest on every single one of our loans!
What does this mean? Well, it hammers our cashflow in the short term, with our loan repayments jumping quite a lot. Obviously this isn’t great when we’re trying to use our cash to build a share portfolio at the same time!
Why are we doing it? Well, because the interest rates for principal-and-interest loans are much more attractive than staying on interest-only loans. We switched most of them over last year, but two loans were on fixed rates, so we had to wait until that expired to switch over to principal-and-interest.
In some cases, the interest rate difference is 1% or more. That means on a $500k loan, we would’ve been forking out $5k more in interest every year just to stay interest-only. Now imagine you’ve got a few of these loans!
Also, we have zero ability to switch banks because we’re not full-time employees with a plain-vanilla home loan. We’re relatively income-poor early retirees, with one part-time job and lots of debt, lol. The banks don’t exactly get excited about that, and nor should they!
What does this mean for our plan?
Well, our share portfolio will be growing much slower than we’d like. And our transition from property to shares will be much lumpier than expected.
But the extra money we’re now spending on loan repayments doesn’t disappear. It reduces the debt on each property. As we sell each property, it will now have less debt attached, so we’ll get more proceeds from each sale. So it’s more of a timing thing. That’s provided our properties don’t fall in value, obviously.
I would’ve much preferred to invest that money sooner and remain interest-only on all of our loans. But hey, you’ve gotta go with the flow.
In practice, the growth of our share portfolio will now be slower. And for the final couple of property sales, we’ll likely get quite large sums of cash due to lower debt. This is another reminder that having debt (especially lots of it), always puts you in a less certain position. It brings in another variable into your plans which you don’t control – something important to consider.
Another interesting phenomenon is that interest rates continue to move lower. And rates may even be reduced a little further in Australia. You can approach this two ways…
You can take advantage of lower loan repayments to pay off your mortgage much faster than planned. Or you can use the savings to invest more in higher-returning assets like shares or property. Staying in cash and term deposits, although it looks safe on the surface, is not a sensible long term plan. I wrote more on that here – Mortgage, Investing or Super – Where Should You Put Your Money?
There are also options kind of in-between, like peer-to-peer lending, which pays monthly interest without price volatility. In the current environment, the 5 year lending market on RateSetter is paying well over 7% per annum, which if you’re in a low-tax situation, is pretty good.
By the way, readers of this blog get a $100 bonus when they sign-up and invest $1,000 in the 3 year or 5 year lending market using this link (full disclosure: this blog also receives a bonus, so thanks in advance). I wrote more about RateSetter and how peer-to-peer lending works here.
A Note on Mortgage Rates
Anyone with a home loan right now must pressure their bank into giving them a better rate. Seriously, there are some great rates out there, and it’s really competitive.
Tell your bank you want a better rate or you’re leaving, and that rates are available under 3%. Ask for their fixed rates too, some of these are very attractive.
Provided you’re in a reasonably good position (decent income, moderate debt), the banks will be very willing to accommodate. This one call will save you many thousands of dollars in interest over time. And if your bank won’t play along, then shop around and switch banks!
Even getting just 0.20% off your rate will save $1,000 per year, for a $500k loan. In many cases, you could save multiples of that. So do it as soon as possible! What’s the worst thing that could happen?
Since the last update, we’ve made a small handful of purchases. We bought more shares of VAS – the ASX 300 index fund. And we’ve also added to our holding in QVE.
QVE has underperformed its benchmark as value investing has not been rewarded. But the company has continued to pay higher dividends and is now trading at a large discount to NTA. We’re still comfortable with QVE as a long term holding and it aligns with our objectives.
Here’s how our portfolio looks right now…
Unlike some in the FI space, our focus is to invest for a growing stream of income through dividends. And overall, I’m pleased with the cashflow our portfolio is producing.
No real changes in holdings from last time. VAS has actually decreased slightly due to the market fall last week, with the LICs holding up a bit better.
Our REITs have increased a bit due to strong capital growth this year. We haven’t added to these as they don’t appear great value at the moment. And our QVE holding has grown as we bought more shares.
Just so you know, there are no major changes planned for the portfolio. We’ll continue to add to holdings that seem attractively priced, and if nothing stands out then we’ll probably just top-up our index fund or large LICs.
As mentioned, purchases every month or two will be pretty small, due to our now large loan repayments. A little frustrating, but that’s okay. Now let’s cheer ourselves up by looking at our dividend income!
My favourite performance metric. This is what really matters to us – increasing cashflow from our investments. Here’s our updated chart for the 2018-19 financial year (I missed a dividend last time).
In the last few months we’ve received a fresh batch of income from our investments. Almost all of our holdings paid higher dividends compared to last year, which was very pleasing. This income will be included in next year’s chart.
VAS paid higher dividends due to many companies in the ASX 300 paying special dividends this year. Both Milton and Argo increased dividends faster than inflation again. Milton increased by 2.1%. And Argo increased its dividend by 4.8%. QVE’s dividend also went up by 4.8%.
BKI’s yearly dividend was flat, but the company paid two special dividends in the last 12 months. All up, income from BKI including franking credits was huge – something like 9%. That likely won’t be repeated, but given our situation of near-zero tax and franking refunds remaining, I won’t complain!
Two of our three REIT investments also paid higher dividends and all have forecast for modest growth this year, in the region of 2-4%.
Because of the flurry of special dividends, we received a decent amount of extra income and franking credits which were welcomed, and thankfully, refunded at tax time. All up, it was a pretty good year to be an income-focused investor.
I’m already looking forward to posting next year’s chart. It might be a little irrational, but I love seeing that line creep upwards each year. You’ll probably laugh at this, but I’ll tell you anyway. I’ve translated this approach to another area.
Dividend Growth… Donation Growth?
I’ve started a ‘Charity Donations’ chart, where I’m trying to do the same thing. A little bit nerdy I know lol. It’s early days, but here it is so far…
This one is measured by calendar year, like our household spending. I’m not 100% sure on previous years as we didn’t really track spending much before I started the blog, so I estimated from our tax returns.
The goal is to donate slightly more each year and keep the upwards momentum going. We’ve got a few years in a row so far, which is a good start.
Over time, hopefully it looks like a beautiful dividend growth chart, but extra meaningful, and something we can be proud of!
My Christmas Wish
This is totally selfish. But this year for Christmas I’d like the sharemarket to fall. Not by so much that it freaks people out, like falling 30%. But just enough to cause a bit of a shakeup – say a drop of 10%-20%.
Oh, and ideally this would occur due to increasing uncertainty and fears around a recession, trade wars etc., rather than an actual economic downturn. Essentially, a nice discount from today but without a hit to company earnings or dividends.
Maybe asking a bit much, but it’s not totally unreasonable! What do you guys think? What would you like to happen?
Overall, we’re pleased with the increasing income from our share investments. The property side of things is pretty lacklustre, but hopefully improving from here (I’ve said that before). And we’re now (reluctantly) directing heaps of cash towards paying down debt.
At this point, I’m not sure whether we’ll always keep some debt around, or whether we’ll decide to become completely debt-free. Debt can have its advantages, but I’ve never heard anyone regret being debt-free. Anyway, still plenty of time to think about that.
So that’s what’s happening behind the scenes here at Strong Money. I look forward to bringing you our next portfolio update early next year.
In the meantime, how’s your portfolio going? Share in the comments, and thanks for reading!