August 6, 2019
Welcome to the latest Strong Money Q&A session, where I answer a bunch of questions sent in by readers.
The idea behind these posts, is to share my thoughts with all of you, rather than just one person.
Lots of good topics today – property, international diversification, timing the market, and even an investment idea I’ve never heard of! But before we start, remember…
Nothing on this blog should be taken as personal financial advice. You’re solely responsible for your own choices. As always, do your own research before making investment decisions. OK?
Love the content, very interesting and enlightening. Just one question if you don’t mind; what do you think about global dividend ETFs such as WDIV for some diversification? It has a decent yield although lumpy payments and unfranked.
Currently I have LICs and VAS for income but I’m worried about having it all in the Aussie basket. Especially with talks on trade wars, the housing slow down and dependency on China. Thank you, Daniel
Thanks for the support Daniel!
Some overseas diversification should definitely alleviate your concerns. A dividend-focused fund like the one suggested does seem like an okay choice, but be mindful of the following…
It’ll have higher fees than a broad index fund like VGS, for example. It may also underperform. There will likely be higher turnover in the fund, meaning higher payouts coming from capital gains, making the income even less reliable and less tax efficient.
Bottom line: you could do a lot worse than a fund like this, but I wouldn’t make it a large part of my portfolio. Personally, since international shares are going to be lower yielding, with less reliable income anyway (due to currency), and for me the main appeal of international shares is more diversification, I’d be more inclined to add a broad international index. Anyway, just some random thoughts – hope that assists with your thinking.
Hi SMA. I like your blog and your take on dividend investing.
My question is, how can one really achieve financial independence using this strategy? If I wanted $1 million in 15 years, I can buy two well located properties of $500k each and keep them for 15 years. Due to leverage, if they double in 15 years I can sell both, pay out the mortgage and end up with $1m.
If I try to do this through shares, I need to invest about $3700 a month to have $1m in 15 years. I really can’t afford to save $3700 a month. Is this basic calculation correct or is there another way of reaching a million dollars in 15 years?
This is a common question. The truth is, there’s no way to know the best future result. I’ve invested heavily in property and I totally get the leverage argument, but it doesn’t always work out well. And certainly not as cleanly as those numbers assume! Here are some things to consider…
– For the properties to double, they’d have to grow by around 5% per annum. Broadly speaking, I don’t think this is very likely over the next 15 years. Wages growth is around 2-3% per annum and households are typically not able to increase their borrowing power much more than this. So it’s very hard to see how prices can grow by 5% per annum in the future. Some areas will, but not across the board.
– In your scenario, there are huge costs not being included. To buy the two properties is going to cost close to 5% in stamp duty, fees and settlement costs. Or about $50k. Then on selling in 15 years time you’ll have to pay around 3% or so in agents fees, bank fees and settlement fees, which would probably amount to another $50k. So already you’re looking at $100k of costs built into that scenario before you breakeven.
– There will be ongoing negative cashflow to pay for. It’s very unlikely the properties will be positively geared. The list of expenses for property are incredible. Maintenance, repairs and necessary improvements can really add up over time too, as I mentioned here.
– Upon selling in 15 years time, you’ll be up for a decent amount of capital gains tax. If both properties double like you said, you’d have to pay around $75k of capital gains tax per property. So at least $150k across the 2 properties. Already we’re at least $250k down from the figure you were hoping for, plus the ongoing negative cashflow.
Having invested in both property and shares over the years, I really think that focusing on increasing your savings rate and buying income-producing shares is the simplest and easiest way to become financially independent. The problem is, people don’t want to spend less in order to save enough to retire in 15 years. They want a magic solution, like relying on leverage to get rich.
I don’t want to discourage you here. I’d just like you to think carefully before you make any big decisions. Personally, if I started again today, I would buy no property (except maybe a place to live in), and instead would invest only in shares. But you do what feels right for you.
Hi Dave. This question may be a bit off topic for your audience. But do you have an opinion on investing in music royalties? People like to speculate on the stock market – well, the music industry is seeing growth in streaming music. There are auction markets like Royalty Exchange that allow investors to invest into music royalties.
Essentially if an investor is successful in the auction they essentially takeover the royalty income with payments received on a regular basis for the term (eg. 10 years) or life of rights. What do you think? Cheers, Banjo.
Hi Banjo – wow, what a fascinating idea!
I’ve never even heard of this before, so it’s a pretty crazy concept to me! In general, all I’d say is make sure it’s only a little bit of play money, acknowledging that it is mostly gambling (unless you have genuine music industry knowledge or an ear for talent).
It’s not something I’d do personally, but if it works out for you that’s great! Thanks for the very cool question!
G’day Dave. I’m glad I stumbled across your blog. It’s great. I have a question I’d love to hear your thoughts on. I’ve recently started in the markets, having hammered the mortgage and the first thing I did was to stick some money in one of Six Park’s Balanced Growth portfolio for my kids. I like how they give access to ETFs at a low cost.
My accountant, who is also a lifelong friend, advised me not to reinvest any distributions from the 6 ETFs as he thinks it’s difficult to handle at tax time. I’m a small business owner.
So I’ve received $72.83 in distributions from my initial $10,000 investment in under a month. It seems silly to me that these aren’t immediately reinvested. Would you agree or does my accountant have a point and I should just reinvest manually later? Thank you for your time. Sandy.
Thanks for the question Sandy, and for reading the blog 🙂
To your question – the only difficulty I know of is when you go to sell those holdings, because there’ll be lots of little parcels bought using the DRP – so that’s probably what your accountant is talking about. It might make his job harder, but at the end of the day, it’s your choice. You’re the investor and you’re paying the accountant, so they can suck it up!
If you prefer to use DRP then go for it. But if you’re going to be paying extra accounting costs for that or you have to work out the CGT yourself, then I’d probably hold onto the cash and reinvest in lumps of at least $1k or so.
Hello. Thanks for taking the time to provide the blog, it makes really interesting reading. I’ve recently become aware of and interested in the FIRE movement. Although I’m late to it, I feel better late than never. I have a question regarding company shares.
I work for Caterpillar and have taken advantage of their Employee Share Program – I can purchase shares in the company each month and receive an additional half of my purchase on top from the company.
I’ve been in the plan now for a few years. Since reading about LICs, I’ve been wondering if I should sell these shares (domiciled in the US) and use the funds to purchase Aussie LICs. I’d really appreciate your opinion on this. Kind regards. Jim.
Welcome to the FI space Jim! Definitely better late than never – you’ll find a ton of people that are happy to share whatever they’ve learned with you. The FIRE crowd are usually pretty generous and happy people!
Interesting scenario. I’ve heard of similar company share plans before. The employee share plan is pretty awesome, but that doesn’t mean you want to keep the shares long term. So I’d simply get the bonus and meet the criteria then cash out whenever you can (there’s probably rules to this).
Then I’d start buying more diversified set-and-forget investments, like LICs or index funds. Reason being, you’ve already got quite a lot riding on this one company since your salary is coming from there. That’ll probably give you the most benefits without the risk. All the best on your new path!
Hi SMA. I just started the debt recycling strategy and was wondering if you had any excel spreadsheets you use or apps to track how well it is or isn’t working? Cheers, Mike.
Hey Mike. No mate, I don’t have any apps or spreadsheets for stuff like that.
The best way to tell if your strategy is working will be in about 10 years time, when you look back and see your overall debt is the same or lower, and your investment income is much, much higher, due to growing dividends and regularly topping up your portfolio, while your personal mortgage continues to shrink in comparison.
But from year to year I wouldn’t even worry about it, just keep saving, paying off the personal mortgage, investing whatever cash is available, and watch the income grow. Remember, you’re building a passive income snowball. It takes time.
Just wondering if there is a good time of the month and/or year to buy ETFs or LICs? Thanks, Damon.
Hi Damon. Yep there is a best time to invest…
When you have the money!
Seriously, I don’t worry about it at all. Just keep investing regularly as much as you can – that’s where the progress is made 🙂
Hi StrongMoney. Great website mate, been reading your articles for a couple of months. So I have $75k-$100k saved up sitting stagnate. I’m sold on investing shares, comfortable with riding the highs and lows, and sticking it out for the long term.
My only hesitation is the daily articles and Aussie reddit chatter painting bleak narrative pointing towards a big recession. Whether it is sensible to pay any attention, I don’t know. And I do agree that no one has a crystal ball. But it has made me very cautious. You’ve pretty clear opinions on getting started the sooner the better, and you don’t sweat the speculation on share prices.
But… if you were in a position where you had yet to invest any money and a stack of it sitting idly by… would you be holding off at the minute to see if a storm is indeed coming? Or would you be all in tomorrow without a second thought? If my money were already all tied up in shares I would not even be bothered, but I am hesitant to pull the trigger at the moment and wondering if I should wait it out and see if there is any truth to these doomsday prophecies. Thanks, Ricky.
First, thanks for reading the blog!
Personally, I’d try not to pay too much attention to the media or chat forums – where everyone seems to be an expert on, well, everything 🙂
The truth is, the future is unknowable. There’s always something to worry about – whether it’s China, debt, the US, rates too high, rates too low, politics etc. It never ends. If you wait until ‘the dust settles’ you’ll never invest, because it never does.
People seem to be either worried because the market is falling, or worried because the market is rising (assuming it must be due to fall). It’s a permanent state of worry when you think about it! Anyway…
Given we’re talking about a decent chunk of savings, there’s nothing wrong with averaging in. Buy $10k of shares for the next 10 months or so. Something like that. Prices might be higher or lower in a year. We just don’t know.
If prices fall 20% before you get started, you won’t buy shares, I can almost guarantee that. Because you’ll feel like they could fall another 20% – and they could. But this is the problem with trying to time the market or wait for better opportunities. It’s just so damn hard and only obvious in hindsight.
Mathematically you’re usually (not always of course) better to put it all in ASAP, but emotionally averaging in tends to be more comfortable. Either way, pick one and get started!
In short, no, I would not wait to see whether a storm does or does not hit. I’d invest the cash as soon as comfortably possible, and continue adding savings regularly. Remember, if you have other savings each month to invest, you can naturally get plenty more shares if lower prices do come around. And don’t forget, you’ll be able earning dividends which you can reinvest at lower prices.
Have you thought about possibly buying options to insure against losses in the share market? A market downturn on a $1m share portfolio could reduce that $1m to $800k or even $700k for months or years…
I realise diversification among different LICs and index funds can help reduce the risk, and you are slowly buying in over time.
Like we are paying fees to LIC managers to manage the LIC. Surely we could insure part of the portfolio for another 0.2%pa and sleep easier at night? Dylan.
Another interesting question! I haven’t considered buying options to offset a sharemarket fall, and I have no interest in doing so. Reason being, the price volatility means little to me as we’re investing for a growing income stream.
The money I’m investing is going to be exposed to this risk and I accept that. If I want to take less risk, I’ll hold more cash. A simpler way to achieve the same thing.
Like most insurance, it can probably be expected to have a negative benefit over time, so it does come at a direct cost as well as complicating the process and creating extra work. But don’t let me stop you from looking into it if that’s what you’re interested in.
Hi Dave. I agree that renting is cheaper than owning a property and so I’m considering renting out my apartment and then renting a nicer apartment. This avoids all the selling/buying fees in upgrading to a nicer property and I can’t afford the extra $500k it’d take to upgrade!
So I might earn $500 per week rent on my property, and pay $700 per week to rent the new place. But it doesn’t work out tax-wise because I’m fully taxed on the $500 income, yet I’d get no tax deduction on the $700 I’m paying in rent. Hence (after-tax) my resulting rental income is roughly $280 per week, if I’m on the top tax bracket but I’m still paying $700 to rent.
Can I ask how do you make it work by paying rent and also renting out your home? Because it seems more tax-effective to live in the property as opposed to renting it out. Thanks.
Good question! The thing here is, you’re trying to upgrade housing while making it cheaper somehow. That’s unlikely to work. Renting is cheaper than owning, for a comparable property, not for one that’s far more expensive (you said $500k more!)
You’d have to rent something equal or lesser value to your current place for it to make sense. If you want a flash property, that’s going to cost you more money, period.
For high taxpayers in your situation that have already paid off their house (which it sounds like maybe you have), owning a home is pretty tax efficient, though still comes with hefty ownership costs.
If you were to sell and invest the proceeds into shares you’d pay tax on the dividends right now, so it may be more effective to wait until you’ve reached FI. Then if you’re still keen, you’ll be in a low tax environment so you can sell your home and invest the proceeds into shares paying a decent income. This would likely cover your (reasonable) rent comfortably plus provide growth over time, without the costs associated with owning.
Seems worrying about the market is becoming the norm lately. And this is at a time when the market has had a good run. How on earth are people going to cope when the market has a few bad years? We’ll find out at some point!
One good piece of advice that I didn’t mention is to stop being sucked into the gloomy headlines. The media’s job is not to create balanced, well thought-out articles, with the long term in mind. It’s to create eye-catching, short-term focused scary shit, because we’re wired to seek that out. So please, for the sake of your happiness, sanity and wealth, please get into the habit of ignoring it…
The long term is what matters, and if anything, a falling sharemarket is your best friend when you’re regularly investing money for FI!
Anyway I hope you found this Q&A interesting. As always, you can send me a question through my Contact Page, and I’ll do my best to answer it. Thanks so much for reading!
Over to you – how would you answer these reader questions? Please share your thoughts in the comments…