Sitting Down with Strong Money – Your Questions Answered #6

Welcome to the newest edition of Strong Money Q&A, where I answer questions sent in by readers and share my thinking with all of you, rather than just one person.

As always, we’ve got a nice range of questions, such as borrowing to buy shares, my thoughts on REITs, an under-the-radar LIC and much more!

Remember, nothing on this blog should be taken as personal financial advice.  You’re solely responsible for your own choices, so please do your own research before making investment decisions. 

Question #1

A quick question regarding the Vanguard VAS ETF.  Do you buy it via an online broker or through Vanguard directly?  I read somewhere there’s a minimum investment of $5000, but that doesn’t add up to me if it can be bought on the exchange.

Being an exchange-traded fund I assumed it was bought through an online broker but now I’m unsure. Your help would be appreciated.  Thanks and keep up the great content.  Geoff.

Strong Money’s Answer:

Hey Geoff.  There are two versions of index funds that Vanguard offers – listed (which are ETFs) and unlisted (which are like traditional managed funds).

You can buy index fund ETFs with an online brokerage account.  Minimum purchase is $500, and index management fees are very low.  (0.10% in the case of VAS)

Or you can setup an account directly with Vanguard where you can Bpay money directly.  Minimum is $5000, and management fees are quite a bit higher (starting at 0.75% per annum for VAS equivalent).

Most people choose the first option due to lower fees.  But the second option is handy since you can just Bpay money to Vanguard and never look at the market, ever.  If you have over $100k to invest, Vanguard offer ‘wholesale’ accounts which have much lower fees, similar to the ETFs.

Related post: My Changing Thoughts on Index Funds in Australia.

Question #2

I’ve read various posts on a Facebook group from people who don’t think it’s a good idea to borrow and invest in shares.  Essentially debt recycling.

They’ve said the strategy was popular in the 2000s and then it blew up in the GFC and people lost their homes.  And people were getting margin calls when the market fell, were forced to sell and lost lots of money.

Also that the benefit might not be worth the risk?  What are your thoughts on that?  Travis

Strong Money’s Answer:

Hey Travis.  I think what they’re talking about is that people often used double-leverage and were heavily geared.  Markets were booming and greed took over.

Some people borrowed heavily against their house to buy lots of shares.  Then they borrowed against the shares to buy more shares.  Then when markets fell their SHARES loan (margin loan) got called and they had to tip in more money.  But they thought the market would go up forever and didn’t keep any cash on hand I guess.  So the bank wanted to take the equity in their house to repay the margin loan.

To be clear, I’ve never said borrowing heavily or using margin loans is a good idea.  I’ve said debt recycling, if done prudently, can be a sensible way to pay down your mortgage, while retaining the loan for investment purposes and building a portfolio faster than you otherwise could.

But I also said it’s not a magic bullet and comes with behavioural challenges to be aware of!  Like when shares fall, if you’re likely to worry, that strategy is not for you!

In other cases, using a home loan to invest in shares is perfectly fine, and margin calls won’t happen.  But being prudent with debt is still a good idea.  There’s a risk of people panicking when the market falls and selling with large losses, then having lots of debt left and no shares to show for it.

Other than that, people may be trading stocks looking at charts, trying to pick the next Afterpay or doing other dumb shit to get rich quick.

As long as debt is kept moderate and cashflow is managed well, there is nothing wrong with debt recycling.  Simple numbers tells us that.  It’s the behaviour (panic selling) and getting carried away with leverage that trips people up.

It’s no different to just investing with cash and paying down your mortgage – you’re just redirecting the cashflow first and chopping it into separate tax-deductible parts.

Question #3

Hi.  I’ve got a question about who’s name to invest in.  With a couple, would you invest $5k in one partners name one month, then $5k in the other partners name the following month, so you each have separate portfolios?

Or is there a way to have a combined account?  Bit confused by the mechanics of it.  What do you and your partner do?  Jamie

Strong Money’s Answer:

Hi Jamie.  Yes, you can create a joint account if you like.  This is done at the time of signing up, with a low-cost broker of course!  Instead of individual, click joint (something like that).  Investing in separate accounts is fine too.

We have a joint account, but I also have a separate account, as I’m the lowest income earner and likely will be for a while, due to still owning multiple negative cashflow properties.

Generally, whoever is expected to be the lower earner for the longest amount of time, it makes sense to put more shares in their name, if there’s much of a difference.  If not, either option is fine.

Question #4

Given the current financial situation in Australia and with talks about a recession and a crash, do you think investing in index funds is a wise idea right now?

What do you think of REITs instead?  And how often and how much do you think is a sensible amount to put into an index fund for regular investing?

Strong Money’s Answer:

A recession will come, but we don’t know when, how long for, and how bad it’ll be.  I’ve written about this topic a bit recently here and here and in our last Strong Money Q&A.

But the only sensible thing to do is to keep investing regularly.  That way, we’re consistently increasing our ownership of income producing assets.  At low prices, at high prices, and average prices.

We grow wealthier by saving and investing over time, not by trying to figure out when something bad will happen and avoiding it.

Bottom line: yes, I do think continuing to invest is wise right now (and index funds are a perfectly good option).

Real estate investment trusts (REITs) can be a solid investment too.  But this comes with the risk of individual stock picking, unless you invest in the REIT index which itself is very concentrated.  I own a couple of REITs myself, but they’ve gone up quite a lot in recent times, and many currently look overvalued.

Also, REITs are already included in the Aussie index.  Owning index funds or large LICs is vastly more diversified, and includes lots of quality businesses, where I’m happy to invest most of our savings for the long term..

Question #5

Hello.  I love your blog – so inspiring.

We had a discussion last weekend at the pub next to our work place.  A colleague has $100K to invest in shares (he’s thinking ETFs), house is paid off, and partner is not working.  Our discussion was related to a previous post about dollar averaging/timing the market.

Should the funds be invested in a lump sum or should be averaged in, like over 6-12 months at $7k per month?  Under his name or his partner?  We were divided on this.

The second question is about insurance (life, TPD), I read many recommendations to see an adviser, so what kind of professionals do I need to see?  Financial planners or insurance brokers?  Curious to get your thoughts.  Eddie

Strong Money’s Answer:

Thanks Eddie, glad you like the blog!

Generally, if one partner is not going to work for the foreseeable future, then investing in their name is more tax efficient.

On timing, studies show investing all at once is likely to deliver the highest return as the market goes up most years.  But there’s the off chance that it doesn’t work out that way.

Psychologically, it’s much easier to invest over time rather than all at once.  So it’s really about what one feels comfortable with.  You could even choose both.  Invest half now, and the rest over a year or so.  No right answer for everyone.

On insurance, I can’t recommend anyone, but I’d look into getting those insurances inside super, as that will mean more cashflow leftover to invest outside super for early retirement!

Question #6

Hi Dave.  Have been adding LICs to my investment portfolio and found your reviews very helpful (thanks heaps for doing them).

One attraction of the FIRE philosophy was to focus on costs when investing – great way to strip out the noise.  When doing research on LICs I came across Carlton Investments (CIN).  It has an MER of 0.10%, the lowest in LIC sector.  It’s also trading at a discount to NTA of 15%.

Have you considered doing a review on them given the low cost?  Or do you know anything about them?  Darren

Strong Money’s Answer:

Glad you’ve enjoyed the reviews, thanks!

Carlton is a bit different to the others.  As you’ll see from their portfolio, around 40% is in one holding – Event Entertainment.  https://www.carltoninvestments.com.au/Investments.aspx

The company is really an investment vehicle mostly owned and managed by the Event chairman Alan Rydge.  Nothing wrong with that, but good to be aware of before going in.  These factors are likely why it trades at a substantial NTA discount.

So, you’d have to decide whether you really like Event Entertainment & Hospitality as an investment (they own cinemas, hotels, Thredbo resort and other property).  If that’s the case, then Carlton could be a great way to get access to that at a lower price as well as a bunch of other companies.

It’s been managed relatively well over the years.  Very reliable and solid dividend growth over time at very low cost.  So it’s not a bad LIC, just a very concentrated one!  Not quite diversified and set-and-forget like others.  Hope that helps.

 

Question #7

Hi Dave.  How should someone balance investing while trying to save for a home at the same time?

My partner and I are living in Sydney earning reasonable incomes, $190,000 combined.  We have $60,000 in a Vanguard Managed Fund and $60,000 in cash.  I would like to own a home at some stage in my life, more for emotional reasons rather than financial.

However the likelihood of that occurring in Sydney is quite slim given the prices.  So we may be renting for the next 3-5 years, and then may move out of the inner suburbs and go interstate.  I’ve been considering investing into the Managed Fund with each pay cycle for the next 3-5 years.

We can then assess our position and maybe draw down to fund a purchase.  Would you recommend this plan of attack?  I realise index funds shouldn’t be viewed with a short time-frame, however I want a way to maximise returns on our cash.  Thanks.

Strong Money’s Answer:

Things actually look pretty good from where I sit.  You have a large household income and over $100k which you could quite easily use as a deposit right now if desired.  So to say you don’t think it’ll happen because it’s expensive is not true at all.

You’re right that shares are not the place for money you want to access in a few years.  There’s no guarantee share prices won’t tank by 30% in that time, ruining those plans.

If staying in Sydney, then I’d buckle down and save some more (in cash).  And I’d then use the cash and managed fund as a deposit on a (modest!) property.  If you’re going to get a million-dollar mortgage, or anything close to it, then you probably won’t be able to invest afterwards, leaving you stuck on a treadmill like most people.

Given your tax brackets I think putting the cash towards the house makes sense.  But if you’re thinking of moving then I would definitely not buy a house, otherwise you’ll be up for huge costs to buy and sell for no good reason.  Or worse, you’re left with an expensive investment property which is an ongoing drain on your cashflow, limiting future options.

If renting and going interstate in a few years with plans to buy a place soon after, I would simply keep building your savings.  I’d only invest it if you’re happy to wait an extra 5-10 years should the market take a tumble.  So if you’re flexible on time-frames, then investing can work out fine too.

Question #8

Hi there.  Curious to know your thoughts on the Vanguard High Growth ETF – the code is VDHG.

Thanks, Derek.

Strong Money’s Answer:

Hi Derek.

Overall, I think the Vanguard High Growth fund is a great choice for set and forget investing.  It has tons of diversification built-in and comes at low cost (0.27% p.a).

Whether it fits depends on a persons goals.  Most of the funds it’s invested in are low yielding assets (international shares and bonds), which is totally fine, but good to remember.  The fund will also have some turnover and re-balancing making the distributions very lumpy, as well as currency fluctuations.

So it’s an excellent investment, if one is looking mostly for growth and set and forget.  But if someone is interested in a reliable stream of dividend income, it might not be the best fit.

Question #9

Hi Dave!  Thanks for the great information you always provide.

I have a savings account earning 2.7% per annum.  Can I ask your thoughts on where you would invest these funds to get a better return?  Would you consider a Vanguard wholesale fund etc?

Appreciate your knowledgeable thoughts on this topic.  Thanks…as always.  Bevin

Strong Money’s Answer:

Hey Bevin,

Well, it depends what the money is for.  If you’re planning to buy a house in say the next 5 years then I’d definitely keep it in savings.  But if the money is for long term investing and you plan to add to it over time, then it’s worth looking at your options.

Vanguard wholesale accounts require $100k to open I believe.  If you have this much then that’s a fine choice, and you can Bpay savings across to this account regularly.  But if you’re working with a smaller amount, then opening a brokerage account and buying the ETF version of the Vanguard fund you want is probably the way to go.

Question #10

Hi Dave.  I enjoyed your interview with Aussie Firebug which led me here.  I have been looking at LICs after hearing that interview.  But when I look at the capital growth of the older LICs you mention over the last 5 years, they don’t seem to have the same capital growth as the index.

Am I missing something?  Gary.

Strong Money’s Answer:

Hi Gary and welcome!

It’s true, the old LICs have underperformed in recent years.  Their strategy is generally to buy dividend-paying companies with good fundamentals at a reasonable price.  So performance will differ from the index.  And at times when high growth stocks are performing strongly (as they have been), they are sure to underperform.

Nobody can say whether that will continue or not.  Over the long run (10-20 years) performance is closer to the market overall, when dividends, franking credits and fees are accounted for.

If underperformance is a strong concern for you then probably stick with the index.  Or if the more dependable dividend stream for early retirement is important to you, then you mightn’t care so much.  But that’s the risk.

For what it’s worth, I do think the odds are in favour of the index achieving higher overall returns (as I looked at here), but the LICs will no doubt provide a more reliable growing income stream, which to me is pretty important when the shit hits the fan and I’m using dividends to pay my bills!  For the record, I like and hold both as you’ll see in my portfolio update.