Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.
Question (2:00)
Hi Aussie Firebug,
Since it’s Friday I thought I’d ask you a question:
How do you feel about REITs? VAP has fairly stable growth and something around a 7-8% yield and would provide diversification across different types of property (commercial etc) and across the whole country. I think there are some tax implications in that distributions don’t qualify for franking credits, but since they may be gone soon anyway, does this really matter?
I have also read that REITs are only loosely correlated to shares, which could be beneficial during market crashes.
Thanks,
Liam
Firebug’s Answer
Hi Liam,
I’m not a real big fan of A-REIT’s because I think if you’re going to invest in real estate you might as well invest directly and take advantage of all the things that come with direct ownership vs using a structure like A-REIT’s. Even if you’re technically investing in real estate, by using an A-REIT you lose the ability to leverage at a low-interest rate, physically add value to the investment, use your skills and experience to solve problems and cut out the middlemen during transactions etc. etc..
I would much rather invest in shares if I’m a passive investor and real estate if I’m an active one. I also think the management fee on A-REIT’s is too high. VAP is decent amoungst A-REIT’s but even that is sitting at 0.23% which is more than double my most expensive ETF/LIC.
You do make an excellent point with the franking credits, however!
I’ve actually started to lean away from fully franked dividends since the ALP went after the refund. I know they didn’t get in and the changes won’t go through but my naive ass didn’t actually think such a dramatic effect that would have severely altered our retirement plans, was even on the cards!
I’m still buying Aussie stocks but the legislation risks associated with fully franked credits has me altering my strategy a bit (currently in the middle of an article about this).
So, in this case, I can definitely see an argument to use A-REIT’s unfranked income to soak up franking credits from Aussie stocks. I don’t currently have them in the portfolio but I’d consider a small amount (5%-10%) in the future if talks about franking credit refund flare up again.
-AFB
Question (8:33)
Hey Aussie Firebug,
Love the blog! Thanks for providing great content!
I have a question about helping family to invest. My family are clueless about investing. Their idea of building wealth is to hide money under the mattress, they barely even trust their super and when they do make ‘’investment’ decisions, I don’t think they’re based on a sound understanding of the market.
My parents are approaching retirement and luckily have a bit of cash sitting around that could be put to better use. The problem is I don’t feel comfortable telling them what to do with it. I’m new to this myself and don’t want to be responsible in case things go wrong.
I’m even scared to suggest possible options (eg, Vanguard) in case they take my word for it, don’t do their own due diligence and then things go belly up.
How would you handle this? Give them the info I have and let them decide, or don’t get involved at all?
Appreciate your response!
-Girl On Fire
Firebug’s Answer
Hi Girl On Fire,
This is a great question and something I have personal experience with so let me walk you through what happened with me and my parents first and then I’ll get into my take on your situation.
I owe nearly everything I’ve learnt about discipline, value of the dollar, hard work, and investing to my parents. They didn’t teach me about ETFs and the stock market, but the lessons I learnt from an early age set the foundations for a healthy savings rate, financial discipline and what constitutes getting ‘ripped off’. These are astronomically more important to learn than simply understanding how the stock market works. There’s plenty of people out there that know all the principals of FIRE like the back of their hand, but don’t have the discipline or can’t accept the delay gratification it takes to reach the end goal.
My folks are now both retired and financially independent. Not bad considering they were modest earners with three kids who all went to Uni too! They achieved this through hard work, saving a decent amount of their disposable income and eventually investing in real estate.
And let me just jump in now before any conclusions are made, like…
‘Ahhh no, not another Boomer couple who rode the property boom! Give me a break’
They missed the 2000-2004 boom and actually started relatively late in life (by FIRE standards) around their mid to late 40’s I believe. Which is why I always laugh when someone writes in asking if they’ve missed the boat because they’re now the ancient age of 37 and have just found out about FIRE lol!
Long story short, Mum and Dad reach FI through property and were in a position later in life where they were equity rich but cash flow poor. Dave at SMA wrote about this common situation Aussies find themselves in here which is worth a read.
They had a bit of Super and other assets but the bulk was in property.
So when the time came to retire, I was curious to see if they had enough and was well into my FIRE journey too (which they know about) so it only made sense to sit down with them and go through it all. Using some very conservative math we worked out that they were well in the clear and could realistically retire now and never have to work another day in their lives to live the lifestyle they were currently living.
That was the easy part though. The hard part was actually setting up a plan and putting it into motion that would enable them to live off their portfolio to fund their retirement.
I was now facing a situation that many do, where they know what they would do but get extremely scared to say anything just in case something happens and they are blamed!
I knew that if I were them, I would sell all the properties and put the profits into my super where I could invest it in the sharemarket and live off the passive income.
But the thing is, I’m not them, and what way too many people forget is that sometimes it’s not about the total return. Sometimes peace of mind and being comfortable with a strategy pays psychological dividends that can’t be measured in dollars. Nearly all mistakes people make with investing come from an emotional response rather than a calculated one.
So with that said, I recommended a financial advisor because I simply didn’t have the knowledge of the Supersystem at the time to comfortably steer them in the optimal direction. But I wanted to stay involved to make sure I understood the plan and everyone was on the same page.
The plan of attack was a pretty common one I guess for this type of situation. They were to sell off some properties and pay off the debt for the ones they had in the town they live in. The rent minus expenses alone for the remaining properties would be enough to fund their lifestyle. There was some other stuff done with super and pension phase but the main strategy was to sell down and live off the rent.
This was a perfect plan for my parents, especially my dad. He’s the sort of guy who can’t sit still and is always working on something. We have a family joke about giving him a ball of cotton and a toothpick and he’ll fix/make anything you want haha.
So basically dad spends most of his time improving the remaining properties that are all in town within a 5-minute drive and fixing them up if things break. It keeps him occupied and if you know him personally, you’d know that his idea of a perfect day is getting everyone together to work on a project like building a deck or ripping out a tree or building a new fence. All while the radio would be blasting in the background and him probably yelling at me for doing something wrong. That’s basically a snapshot of my childhood growing up and helping him with stuff haha.
So wrapping up this long-winded story, the retirement strategy my parents went down is completely different than the one I’m going down but it’s tailor-made for them and even comes with added benefits of meaningful work that brings joy and sleep at night factor.
Now back to your question.
Do you have a strategy for retirement?
Assuming yes, how comfortable do you feel about your strategy?
Could you easily explain it to someone you’ve just met and most likely answer all their questions they might have?
Are your parents open to learning about the market?
What is their risk tolerance?
You’re going to know them better than most, do they have the psychological mettle to keep cool calm and collected when the market crashes?
What you’re asking has a hell of a lot more to do with what type of people your parents are than it does about giving them bad advice.
FIRE or any retirement strategy, really, has been figured out a long, long time ago. The codes been cracked and it’s out there for everyone to use.
1. Save more than you earn
2. Invest in assets
3. Wait
Everyone has become obsessed about number 2 and what to invest in, but the truth is that it doesn’t particularly matter what you invest in, as long as it’s a good asset is the key. It could be gold, shares, bonds, property etc. but the really important step is number 1.
If I were in your position, I would offer as much education on the market as possible and it might even be worth booking in an appointment with a financial advisor. Boomers tend to trust professionals over financial blogs anyway and you’ll probably learn something about super along the way. It also takes heat off you in case there is a huge bear market and your parents freak out… But you’ll be there, of course, explaining that these things happen and should be expected and that the markets always bounce back!
I believe the key to a good retirement strategy really comes down being comfortable with it and full understanding of how it works. You’ll need to figure out what this is with your parents which can be done through an open conversation of the topic. If you get stuck, suggest they see a professional.
Hope that helps and good luck!
-AFB
Question (21:25)
What is your view on bonds in your portfolio asset allocation?
All the traditional advice is that 100% shares is not the best approach, yet I see over and over again people saying go 100% shares while you are young. Older, wiser heads that have gone through bear markets suggest a 60/40, 70/30 type split as a more responsible allocation.
What are your thoughts on this?
Do you plan to include bonds in your portfolio at one stage? Do you think a cash emergency fund or offset account for a mortgage is a substitute for the bond portion of a portfolio?
-Matt
Firebug’s Answer
Hi Matt,
Bonds have a place in some portfolios for sure.
It comes down to what risk tolerance and investing horizon. Would I go 100% shares if I were retiring at 65 with $1M? Probably not! I might want to smooth out the ride with some bonds and mitigate my risk against a bear market straight after retirement which would be my biggest issue.
You don’t usually see bonds in a FIRE portfolio because our investment horizon is decades and we usually have more options up our sleeve like returning to work which might not be possible for someone at 65+. Share historically outperform bonds but are more volatile.
There’s no right answer really and if you feel more comfortable with some bonds it ain’t gonna hurt.
Cheers,
AFB
Just look at the Australian share and other returns for the past 100 years and that will answer it all.
Great pod again mate but a few things first.
Listed REITs are shares. They are shares in property trusts. Property trusts that are run by professional managers. The share holder buys units in these trusts. Listed REITs enjoy the ups and downs of the markets.
Comparing residential investments properties to REITs is comparing apples to oranges. There are no residential property REITs. REITs are agricultural, industrial, retail and commercial properties and rely on the tenant to pay rent.
VAP for example, holds a huge diversifed REIT portfolio. Completely opposite to owning a residential investment property (eggs and basket come to mind)
You say that .23 basis points is too much to pay for VAP but to put things into perspective that is $1380 per year for a $600,000 investment. Would you pay more to maintain a residential property?
Also, a $600,000 investment in VAP would have yielded over $30,000 in dividends the past year. That is an approx yield of 5%. What would you get for renting your residential property?
Also to note that since 2011 VAP share price has risen 125%.
A major advantage for REITs is the long lease agreements, usually around 7 years and occupancy rates of around 95% on average. Tenants of commercial and industrial properties pay for all repairs, upkeep, water and rates. This is not the same for residential property as you know.
REITs are a great option in a diversifed investment portfolio.
Hi Dingo,
Great points.
I meant to say that REITs are not shares in the sense that the underlying assets are in real estate, not companies. I should have specifically said that.
VAP has done well lately but there are no guarantees that it will continue to do so.
If I’m investing passively, I want to own companies, not real estate. I think that companies are superior for a number of reasons vs real estate. The coin flips though if I’m investing actively, there are certain advantages that real estate offer that you can’t get with owning companies through shares.
But REITs don’t offer these advantages.
I’m being picky with the MER but I just feel like companies are better and the MER for owning these companies are cheaper so it makes sense to me to go with the cheaper option.
Great comment mate.
Cheers
I don’t think it is ever too late to think about investing. Better late than never, although starting early certainly has the benefits of compounding.
I was always careful with money from an early age & had parents born in the 1920s who were bought up in poverty. Their attitude to being careful with money certainly impacted me. So I only bought property I could afford without a mortgage. This means no rent paying or mortgage payments over my lifetime. I love to hear about the tiny house stories in the US, as I think that people go so much into debt with properties they think they need.
I only started in sharemarket investing when I reached 40 (other than super) & shortly after there was the GFC. I was worried watching my investments fall a lot over many years, but I was told to not panic & sell in a down market. I continued to dollar cost average in the falling market. Looking back, I am certainly glad that I did not panic sell & my investments have made money since.
Regarding the old folk, I would educate them in whatever way I could, but they obviously need to feel comfortable with their investment decisions & sleep at night.
Great points mate.
On the topic of REITs, it’s also worth noting that they make up 9% of the ASX300 and 3% of the MSCI World ex-Australia indices. So even without introducing a separate REIT fund into your portfolio, you still have significant exposure to them.
For me, this is reason enough not to add a REIT-specific fund to my portfolio. I don’t see any reason to overweight them beyond their market-cap weighting.
This is a great point I forgot about James!
I’m already invested in REITs through VAS and A200.
First off @AFB stellar content once again mate!
Cheers for bringing back Ask Firebug Fridays. We ask and you deliver! I love that you’ve even created a hashtag for it – #AFF for the win. This question and answer format is fantastic, and I learn quite a lot from your point of view on peoples’ situations and questions, especially when it comes to Aussie specific content.
Absolutely *love* this quote from you: “what way too many people forget is that sometimes it’s not about the total return. Sometimes peace of mind and being comfortable with a strategy pays psychological dividends that can’t be measured in dollars. Nearly all mistakes people make with investing come from an emotional response rather than a calculated one.”
Entire books have been written on this subject – a couple which I’ve read and fell asleep half way through. You’ve brilliantly summarised these books in a couple sentences. Even Mr Money Mustache talks about paying off his mortgage, and readily admits that was more of a psychological advantage for his sense of security, versus the mathematically better move in the long run (which would’ve been to invest in the markets instead, and pay off the low interest mortgage more slowly).
Also, awesome to hear stories about your folks. Amazing how your upbringing, and your parents’ views on money, frugality, hard work and spending seem to rub off on you disproportionately over other factors in your life and education. My wife and I talk a lot about how we’d love to instill good money habits on our two kids.
For REITs, there’s also an excellent blog post and explanation from JL Collins about why he originally had it in his asset allocation, and then moved away from it. Now he’s a proponent of a more ‘traditional’ stocks and bonds allocation using primarily Vanguard index funds. https://jlcollinsnh.com/2014/05/27/stocks-part-xxii-stepping-away-from-reits/
Hope you and the missus are loving it in Euroland mate! Keep up the awesome blogging. Looking forward to your future posts!
Woah Papa Jaypes what an energetic comment mate!
I love that you’re enjoying the content dude and reading this comment this morning put a big smile across my face.
I hadn’t seen that article before, I’m ganna check it out now bud.
Thanks for the pump up this morning. I’ll continue to do my best with the content I put out 🙂
Cheers
Hi Matt, I am looking at ways to make some savings on way of life so that I can use those funds to invest in ETFs, one item is Private Health, I have basic hospital and basic extras, about $180 per month, do you think it is worth having private health in Australia?
Hi Adam,
There so many factors that go into this that’s it’s impossible for me to give an accurate answer as to what I’d do. All I can say is that we both don’t have private health and I know plenty of people that have gone through the public system and never had an issue.
Sorry if this wasn’t much help 🙁
Cheers
Great content! Do you have any view on new ETF IIND by betashares which opens up opportunity to invest into India – one of the fastest growing economy in the world?
Hi Dream Chaser,
I’m glad you’re liking the content 🙂
Ahhh never heard of that one sorry 🙁
Hopefully the MER is low and it’s plenty diversified! That’s what I always look for in an ETF anyway.
Cheers
Where is the link to the fire calculator/simulator thing that you mentioned? I want to try it out.
Thanks
Here you go dude
https://www.firecalc.com/