Aussie Firebug

Financial Independence Retire Early

SEP19 Net Worth $733,346 (+$10,970)

SEP19 Net Worth $733,346 (+$10,970)

Our Euro adventure has finally come to an end in September 😔.

We ended up travelling around for just a tad over 2 months and I’ve come to the realisation that our sweet spot is around 6 weeks. Anything over that and I start to get a bit ‘over’ it because I’m a creature of habit who follows an unvarying routine most of the time.

We also spent the entire two months travelling with other people which was a total blast but you end up ‘going with the flow’ a lot more which can mean doing certain thing you’d otherwise have been happy to skip. Eating out every single day comes to mind 💸

Here are some of the spots we hit in September.

 

Split, Sail Croatia

Colosseum

Gondola AKA worlds most overpriced 7-minute boat ride through a smelly river

Isle of Capri

Portofino

Leaning Tower of Pisa- Tourist trap but ya have to see it!

Positano

Pork Knuckle at Oktoberfest

Champions League match, Bayern Munich vs Crvena Zvezda

Riding in Amsterdam

A lot of people have asked me what my favourite place was when I got back.

And this is a really hard question because I liked some places for holidaying like Spain and Croatia, and others where I would be happy to live like Munich, Germany. The Middle East was the biggest culture shock with incredible history so it’s very hard to pick!

My top 3 overall countries for the trip would be:

  1. Germany
  2. Croatia
  3. Netherlands

I would recommend a Sail Croatia to anyone, but you need to book for the type of trip you’re after. Since we’re a bit older, the four of us went on the more expensive cruise and while we had some great nights partying, it was comforting to come back to your own cabin with ensuite and A/C.

We went past some of the ‘younger’ pirate cruises and it looked pretty intense with the drinking and whatnot, which to be fair, is what most people are probably chasing at 18-21 right haha.

Munich was a super clean and impressive city, that I could easily live in. The public transport was efficient and inexpensive. We were able to get a group ticket for 4 adults for 4 days of unlimited travel for only €29. The food was a major highlight for me, especially the pork knuckle, bratwurst and potato pancakes with sauerkraut, yum! They also had nice drinking water from the tap which is something I took for granted in Australia. Clean drinkable water that taste nice is not common throughout the world apparently (as I’ve discovered this year). I understand that taste is subjective, but a lot of places have shitty pipes and it can be disguising. London, for example, has horrible water. Drinkable, but gross H2O. Oh, and most importantly, the Germans have god-tier beer 🍻 🤤🤤

Amsterdam has the best bike infrastructure I’ve ever seen and it’s not even close! It’s hard to explain why it’s so good but the whole city is basically designed for bikes and you can get around so much easier on a bike vs a car. They have their own little highways and the way the roundabouts and roads are weaved into the bike tracks is incredible and so cool! I really wish Australia and other counties for that matter would invest heavily into a biking network like Amsterdam. It would make commutes so much easier and safer.

One country that was a bit disappointing for me was Italy 🙁

I had very high hopes as I have family ties to the country and actually have an Italian passport!

The thing that annoyed me most about Italy was everywhere we went was overpriced and mostly average quality/quantity. This was especially true for food but even the sightseeing was a bit underwhelming.

Like yeah, the Amalfi coast is stunning and beautiful… but it doesn’t justify charging €20 for literally a piece of cooked chicken on a plate with nothing else. No sauce, no sides, no nothing 😤.

Tourist traps everywhere was another annoyance.

We were in Venice and this dude told us on the street about this 3-course meals for €15.

Great! That’s so cheap we thought (fools!)

We get to the desserts and the waiter just casually says something along the lines of

‘So we have four options for dessert…blah blah blah…’

We ordered, thinking this was included in the price only to have a big surprise when we looked at the bill that the dessert was not included and almost cost as much as the three-course meal… which by the way was an entree, main and the side dish of chips and salad FFS 😤😤.

Little sneaky shit like this pissed me right off for the majority of the time we were there. They just straight-up trick you which makes me not want to go back.

I did have the best ravioli of my life in the Isle of Capri though so there were some positives.

The other thing that made Italy a bit rough was completely my own fault lol.

So I had this grand plan of renting a camper van and travelling around Italy with Mrs FB and another couple we were with. I researched it and followed the Indie Campers Instagram page. They made it look like so much fun! I mean, just look at this:

That’s some great marketing because let me warn you right now… do not.. and I repeat… do not… rent a camper in Italy during summer with four people!

I can’t believe people didn’t talk me out of this beforehand.

The first issue was the roads! The roads are so small that driving a camper through the likes of the Amalfi coast was the equivalent of trying to maneuver a semi through Chapel St in peak hour. It didn’t help that I was driving on the wrong side of the road and it was a manual 🙃🔫.

The other big problem that I did not anticipate was the heat that 4 people can generate within a confined space. It’s really hard to sleep with minimal airflow.

I was glad to see the end of that camper in Austria that’s for sure! It makes for funny stories now but there were some sleepless night 😅

 

 

Net Worth Update

The share market did the heavy lifting for this months increase (as you can see on the Sharesight graph below).

For the second straight month, we only really spent money on day to day spendings as we’d pre-booked most of our accommodation and activities.

The last consulting invoice was paid in September which means no income for a while now. Even if I get back on with my old mob, they take a month to process invoices which means work done in October will not be paid until the end of November 😭 so the old net worth updates could be looking grim in the next few instalments.

Mrs. FB is heading back to work and gets paid weekly which helps. We’ve also got our other income sources like dividends, rent and money made on this blog which all adds up.

This year has exceeded every expectation of how much I thought we’d be able to save so I’m not in the slightest bit mad at all. I expected us to delay our FIRE goal by going on this trip and had made peace with the notion that our NW may decline and end up smaller by years end then it was at the start!

What I did not expect was how lucrative the day rates were in London for data developers and how quick I managed to nab one! The consulting checks really made it an even playing field when I factor in the more than double rent we’re paying here compared to country Victoria.

The power of compound interest is really starting to kick in now too.

Properties

No changes in the properties this month.

Property 1 was sold in August 2018

 

*DISCLAIMER*
Various data sources (RP data, Domain.com etc.) are used in combination of what similar surrounding properties were sold for to calculate an estimate. This is an official Commonwealth bank estimate and one which they use to approve loans.

ETFs/LICs

The above graph is created by Sharesight

Epic month all around!

Following the recently updated Strategy 2.5, we purchased our first international ETF (VEU – world ex-US) in over 18 months!

VEU had the lowest weighting in terms of our desired portfolio split allocations so bought around $15K worth 😁

I recently read The Barefoot Investor’s Idiot Grandson Portfolio which, reassuringly, had a combo of 75% VAS, 10% VTS and 15% VEU. Which were the same three funds I originally started out with back in 2016 for Strategy 2. But what struck me more from reading that detailed report was the idea that Scott was considering going 100% VAS (100% Aussie equities).

After finishing the report I’m almost inclined to bump up our Aussie allocation to 70%. It’s not a hard or set rule so you could see the portfolio’s Aussie exposure drift anywhere from 60%-70%.

Oh and one last thing… ETFs/LICs officially make up more than 50% of our portfolio now!

Networth

 

Ask Firebug Fridays 21

Ask Firebug Fridays 21

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 (1:50)


Thanks for the great content!

I was just wondering what your thoughts are on gold? Is owning some gold a part of your financial plan?

Thanks a lot for your time,

Julia

Firebug’s Answer


Hi Julia,

Gold to me is a hedge against inflation and something I’d consider if I wanted to reduce volatility within the portfolio.

I don’t really consider it an investment per se because it doesn’t generate any cash flow. You have to rely 100% on capital gains for it to work which I don’t like and was one of the biggest reasons I moved away from real estate. To me, it’s more of a store of wealth which historically has had an inverse relationship with the stock and property markets (good for volatility).

Historically, shares have absolutely smashed gold over the long term.

Take a look at the total return stock index (S&P 500) vs Gold and Silver over the last 50 years

Source: www.longtermtrends.net

And if you go back 100 years the gap is even wider.

Take a look for yourself here at long term trends.

You can basically ignore the first graph on that page because it doesn’t include reinvesting dividends which is ridiculous. We want to compare the total return from an index, not just the share price.

I only want to invest in assets that pay me. This may change in the future when maybe I’m not as concerned about the cash flow and perhaps caution on the side of diversifying and maintaining my wealth. Precious metals could come into play at that stage.

But right now, golds not on my radar.

-AFB

Question (7:28)


Hi AFB,

Congratulations to you for what you have achieved & continue to achieve on your FIRE journey.

Thank you for your incredible generosity in sharing your knowledge, passion & enthusiasm. Inspirational!

Up until about 6 months ago, I exclusively purchased ASX listed shares directly but in the last 6 months decided to start purchasing ETFs.

Now that I have the ability to compare apples with apples, I have to say that my annualised returns for direct share purchases are at least twice that for the ETF benchmark of VAS (over the entire 6 years).

I am not writing to boast – in fact, my purchases have been largely recommended by 2 share sites I subscribe to (intelligent investor & barefoot investor) so I can hardly take any credit.

I know that the FIRE community is so bullish on indexes but I am not sure that you are not missing out on some reasonable returns.

I know the theory that most people don’t beat the index & probs that is true in context. Little of what Buffet says in regards to share investing is wrong. but I think with a little bit of ‘expert’ advice & by that, I don’t mean full-service brokers who only work for themselves.

I reckon that solely investing in indexes might be limiting your returns.

Anyway, I guess I just write to you to raise the issue with you & share my thoughts.

Once again – congratulations. I wish I had had your insight at your age.

Thank you, take care

Tanya

Firebug’s Answer


Hi Tanya,

Thanks so much for the kind words 🙂

I love receiving emails like this, it’s a real motivator that I must be doing something right and it helps me make more content, much appreciated!

I’ve often grappled with this question myself. There were times during the GFC where some of the big 4 banks were trading so low that you could have had a ridiculous yield of 13% plus franking credits! We know now that they recovered but at the time there was a real concern that some of the banks could have gone under which is why the prices fell so much but still. It would have been extremely tempting to swoop in on some of those cheap shares and clean up.

However!

As you’ve mentioned, the FIRE community loves indexing because we don’t need to pick the winners and losers, we just buy (nearly) everything.

Could we be missing out on better returns?

Yes.

Do I care?

Nope!

I’m more than happy with the idea of a 7-9% return over the long term using ETFs and LICs. I personally don’t think the extra risk is worth trying to beat the market but everyone is different. It’s also a bit of fun trying to pick winners here and there and I wouldn’t completely rule out the idea of allocating a small percentage of the portfolio (5-10%) to individual stocks. I personally don’t feel the need to do that at this stage but when the next crash comes it could be tempting to jump on some companies as everyone is panicking and heading for the exit.

I will say this though. As indexing becomes more mainstream, the likelihood of active investors outperforming the index increases.

Think about it. Back in the day, everyone was trying to outperform everyone and charging big fees along the way. But that game is always going to have winners and losers by its very nature. And if you factor in the management fee, there was a very high chance you’d underperform the market.

Index investing solved this issue IMO.

But let’s say that the majority of the market is made up of passive index investors. In theory, the market would become inefficient and there should be a lot more opportunities for active investors to snag a bargain especially within the small-cap and emerging market sector. If the market reaches a point where the majority of investors are not doing research or looking at anything other than the top 200 companies by market cap (for example), active management (professional or amateur) could feast on the inefficiencies of the market and you’d see and swing back in favour for active management. This is until the opportunities start to decline as more and more active investor gobble them up and the extra in fees once more becomes not worth it.

This see-saw between passive and active would continue forever in my opinion but no one (especially me) really knows what would happen. That’s my take anyway.

The other thing I want to mention is that while you have done well over the last 6 years, it’s not a long enough time frame to conclude that your individual stocks have outperformed the index. Come back in 15-20 years and once a recession has come and gone 😜.

-AFB

Question (15:38)


Hi mate,

I’m so happy to find our Australian fire blog. I’ve been reading and listening to people like Mustache, fientist etc for quite some time.

One thing that has always annoyed me is seeing how little they live off and not understanding how they can possibly make that work. I would love to see a breakdown of your yearly spending habits. I’ve had a look through your blog and can’t find anything that matches this. I noticed you seem to live off only 50k a year with you and your partner, which also seems too bloody good to me haha.

I look forward to seeing what sort of expenses you count.

Thanks, Cameron.

Closet F.I addict

Firebug’s Answer


Hi Cameron,

Take a squizz at our last saving review article which detailed exactly how much we spent during from July 2017 to June 2018.

I need to publish our current review from the last financial year (18/19) but it’s gonna be a hard one because we moved counties and have another set of banks over here in the UK. I’ll get around to eventually.

From my experience, you need to nip the big four in the bud.

90% of people will spend their hard-earned dollars in these areas in order of the most expensive (usually).

  1. Housing
  2. Food
  3. Transport
  4. Holidays

Look at these areas first, the other smaller things do add up over time but they can wait for now.

I’m not gonna sugarcoat it, if you want to buy a house in either Melbourne or Sydney, you’re going to pay a big price for that privilege and delay your FIRE date. Renting in the city can actually speed it up if you can take advantage of the job market and snag a high paying job (depends on the industry you’re in). But there’s plenty of jobs that are available in the country where housing affordability is a lot better.

I’m not the best person to ask about food advice because there’s still heaps we could shave off our grocery bill but we enjoy our snacks and buy high-quality produce. It’s something I’ve never been too frugal about, and that’s the quality of food you put in your body. But buying this stuff can be expensive. There are the obvious wins like always packing you lunch and not going out too much. But I’m calling the kettle black a little with that one because we have been social butterflies since being in London and I’d hate to look at our food and drinks category for the last 6 months. Buuuuuut this trips a bit of an exception because part of experiencing the world for me is to enjoy the different cuisines and restaurants.

Cutting down on meat can also halve your food bill.

Being sensible with your car (if you even need one!) and holidays is such a personal choice that it’s hard to comment on. You need to strike a balance between saving for your freedom and enjoying your life. We delayed our FIRE date to live out a dream and I wouldn’t change anything about that decision.

The first step in all this is to track your expenses.

Do you know exactly where your dollars go? Feel free to flick me your breakdown and I can provide a more detailed comment if you’d like.

Cheers,

-AFB

Election Results & Strategy… 2.5?

Election Results & Strategy… 2.5?

In case ya missed it, earlier this year I published what turned out to be my most controversial article of all time (and it’s not even close). The Curious Case of Franking Credits and the FIRE Community of course.

The thing is, I actually really don’t like talking about politicians and what they say and plan to do at all. That piece was never meant to be political but after reflecting for some time now, it was always going to be that way due to the nature of the subject matter.

So why the hell would I ever go near it again?

Because even though I don’t like those 🤡, politicians do affect us in the journey to FIRE and I need to set the scene first in order to talk about how we come to the conclusion at the end and where we’re heading moving forward.

And the beauty of having your own blog is you get to write and publish whatever you want. I create content from my point of view and never claimed my writing was balanced. This site isn’t the ABC or some neutral FIRE outlet. I presented facts in that article with my opinion which I understand everyone isn’t going to agree with.

However, that topic was interesting to me (and a bunch of others) so if I’m offending you or you don’t like what I’m writing, maybe you should follow another FIRE blogger ✌

 

Franking Refunds Survived…For Now

Like Steven Bradbury before him, ScoMo and the Coalition skated past the ALP for a come from behind victory and with it, the franking credit refunds will remain for the foreseeable future.

This was a hot topic amongst the FIRE community and now that the election has passed, it seems like things should proceed as per normal right?

I mean, franking credit refunds didn’t get the chop so fully franked dividends are safe to retire on yeah…?

Well… about that

Whilst I think that the result of the election speaks volumes to where the majority of Australians priorities lie, I strongly believe that a lot of the policies the ALP were trying to win votes on will not be touched for a very, very long time. They were aggressive with their tax reforms, franking credit refunds being one of the smaller changes (CGT and trust distributions being a lot bigger).

This was supposedly the unlosable election for the ALP. Every poll in the country had them winning by a landslide. Sportbet even paid out on them winning two days early to the tune of 1.3M 😮

For them to lose in the fashion they did, especially after all the shit the Coalition has done during its previous term tells me that the majority of Australians did not agree with the policies they were proposing.

And it’s my opinion that aggressive tax reforms played a huge part!

Now I’m definitely not an expert on this subject and don’t know for sure (no one really does) but I doubt we will see such aggressive policies proposed by any party for some time. I’d almost bank on it that scraping franking credit refunds will not even be thought about in the next election. They’ll go after something else, that’s a given. But it won’t be the same policies that contributed to them losing the election this year.

Sidebar: I’m not here to talk about the policies or politics so for the love of God don’t @ me in the comments about it.

But that’s enough about the election.

Again, I really don’t like politicians in general and try to avoid talking about them as much as possible. I only bring them up because it’s important to set the scene for the decisions we’re making in regards to investing for financial independence which is what this blog is all about.

Which brings me back to the point about the franking credit refunds.

Whilst I truly don’t think any political party will go near them for a very long time. I also learnt something very valuable from that campaign policy.

The legislation risk associated with franking credits in general.

I was completely naive in thinking the government would not pull the rug out from underneath us and the refunds would be here to stay.

What a fool I am!

I’m just thankful we’re still in the accumulation phase and have a chance to mitigate this risk a bit moving forward (more on this below).

But wouldn’t it have absolutely sucked if you’d worked your whole life and built up a retirement fund utilizing franking credit refunds only for the government to turn around and change the rules on you!

The refunds are safe for now. But I plan to be retired for 50+ years. That’s a long time for people to forget what happened in 2019 and if I were a betting man, I’d wager that sooner or later, franking credit refunds will be back on the chopping block!

 

Are Aussie Shares Worth It Without Franking Credits?

The thing about franking credits for those who are chasing FIRE in Australia is that without the refund, they are worth a hell of a lot less and in some cases, will mean that you don’t receive any benefit from the franking credits at all.

Let me give you an example.

Mrs FB and I know that to fund our current lifestyle in Australia, we spend around $48K over the course of 12 months.

We plan to own a house one day, so if we remove our rent and add on a bit to cover rates, maintenance on the property, insurance etc, we get to around ~$42K at a guess.

The plan before the election was for us to split our dividend income 50-50 and pay ourselves the $18,200 (tax-free income threshold) each from Aussie franked dividends. Let’s assume that the dividends are fully franked.

We each would receive $18,200 in cash throughout the year plus $7,800 in franking credits each. This means that the ATO would look at us having a taxable income of $26,000 for that year (dividend plus the FC).

Here’s the math behind the grossed-up dividend.

Dividend % Franking Franking Credit Tax Before FC Tax After FC Grossed up dividend
$18,200 100% $7,800.00 $1,482 -$6,318 $24,518.00

The franking credits soaked up the owed tax of $1,482. This will still happen if the refunds were ever removed.

But more importantly, the franking credits refunded us $6,318!

Because we, as the shareholder, have already pre-paid tax @ 30% that was removed from the dividend before it hit our accounts. It’s only fair that this is recorded (the franking credit) and the ATO is aware of us pre-paying the tax so we can be refunded later if we paid too much tax for that year which in this example, we did.

This was always the intention of imputation credits. Not to only stop double taxation (which consequently it also does), but to ensure that income is taxed once by those obliged to pay it.

So the end result is around $24.5K each to fund our life after retirement.

That’s almost $50K! More than enough for us to live comfortably forever whilst factoring in inflation.

But if we remove the refund. We only end up with $36K between us.

That’s a whopping $13,036 dollars difference and means we need to head back to work. 

Or let me put it to you another way. You’re losing 28% of your return 💸

 

Tipping Point

I was on the fence for a long time before moving towards an Aussie dividend approach with Strategy 3.

A lot of people out there don’t realise that a major part of the dividend approach for me was not about total return. In fact, I even mentioned it in Strategy 3 that if I were to guess, I’d wager that Strategy 3 would slightly delay my FIRE date because of the less efficient tax method of income (dividends are less efficient vs capital gains) and less diversification.

We moved to Strategy 3 predominately because of the psychological aspect of receiving income that was not affected as greatly by human emotion (share prices) and is more anchored to business fundamentals (income of a profitable business that is passed to the shareholder via a dividend).

There have been great Australian based articles written that objectively looks at retiring on dividends vs capital growth and I constantly receive messages that link to studies showing superior returns for an internationally diversified low-cost ETF portfolio.

Guys, I’m a die-hard FIRE fanatic,

I’ve come across most of these theories and articles before! What’s missing here is the human element. We’re not investing robots. I’m not too fussed between minor differences in returns and place great value in simplicity and sleep at night factor.

I thought the trade-off of less international diversification and a slightly delayed FIRE date was worth retiring on dividends vs dividends + capital gains.

But everyone has their tipping point.

Without the franking credit refund, Aussie shares just don’t cut the mustard IMO.

The difference is just not worth it for us. But everyone’s circumstances are different.

For instance, those looking to retire on FATFIRE will not be as greatly affected by this change since they will have more of an income to soak up those credits.

And many people have rightly suggested to me that there are a lot of alternative strategies to generate unfranked income such as REITs, Bonds, P2P lending etc.

These are viable alternatives for some, but we want to continue investing in companies for now.

 

Mitigating Risks

Let me be quite clear.

I’m still a massive fan of the dividend approach.

But placing such an enormous amount of faith that politicians won’t change the rules around franking credits over the next 50 years just doesn’t seem logical to me.

I want to mitigate the legislation risk of a potential franking credit refund axing as much as possible but at the same time, continue our overarching investment philosophy of investing in great companies.

We want to reduce our portfolios franked dividends and take advantage of a more diversified portfolio again. Which means…

I kept the international part of our portfolio when we decided to focus on Aussie shares. And when the very real news of potential changes in franking refunds was mentioned, I felt such a huge sigh of relief knowing we still had some international exposure. I guess this just goes to show the power of international diversification. If one country stuffs something up, there’s plenty more out there so you’re covered… doesn’t really work if you’re all in on the one country though 😅

Given that I don’t think franking credits refunds will be there over the next 50 years (no refund for us basically means no credits at all). I would like to receive some income from international companies along the way. It’s not going to be as good as the Aussie yield, but it helps the situation and my sleep at night factor.

Also, with the help of capital gains, an internationally diversified portfolio according to almost every major study done of the subject, will reduce risk, volatility and increase safer withdrawal rates!

 

To LIC or Not To LIC?

This one’s quite straightforward. A LIC has to pay a fully franked dividend. An ETF does not. VAS, for example, has a franking % of around 70-80 % which means that part of the income is not franked.

As I detailed in my ETFs vs LICS article, they are so similar that we are basically splitting hairs when comparing the two. As such, the greater legislation risk associated with LICs to me has shifted my favour towards ETFs.

I want to make myself clear again. I’m still a fan of LICs. I love the dividends they produce and the two companies I’m invested in (Milton and AFIC) have goals that align with my own (to grow their income over time).

It’s just that A200/VAS are so incredibly similar but have the key difference in utilizing a trust structure and not a company. The legislation risk has tipped the scales in favour of ETFs for me moving forward.

This is purely a tax minimisation decision. It has nothing to do with changing the overarching investment principles (investing in great companies) or a shift away from Aussie dividends.

The FI Explorer wrote a great piece on a sceptical view of LICs which some of you out there have emailed me about. I agree with what is written in that article, always have. I never invested in LICs expecting a superior return. What I go back to is the mental aspect of investing. A lot of people who retiree will feel more comfortable living on a relatively stable smooth flow of dividends vs more volatility but a slightly higher return.

 

Strategy 2.5

Okie Dokie.

So here she is. The new…ish strategy moving forward.

It’s called 2.5 because it’s extremely similar to strategy 2 just with a few tweaks. It’s almost like we’re going back to strategy 2 and I didn’t think enough has changed to honour it with strategy 4.

Change 1

Firstly, with the addition of buying more international shares back in the plan, we will move back to a ‘split’ approach.

Our splits have changed slightly from strategy 2 with more of an emphasis on Aussie shares as the dividends are still attractive regardless of franking credits refunds.

We will be looking to maintain a split of

60% A200/VAS/LICs (Aussie)

20% IVV/VTS (US)

20% VEU (world ex US)

We’ll keep our two LICs in the portfolio but won’t buy any more units moving forward.

The plan when buying new shares is a lot easier than looking at when LICs are trading at a premium or not.

Before we buy each month, we will look at the current splits in the portfolio and purchase the shares which have the lowest targeted weighting.

For example, this is what our portfolio currently looks like.

So next time we buy, it will be to ‘top-up’ the lowest split, which in this case will be World ex US or VEU. The splits are all out of wack because we focussed on Aussie equities during the last 12 months. Ideally, you want to be as close to your splits as much as possible. When your portfolio reaches a certain point however, the market movements will be so great that you might find it hard to maintain your splits even by buying the lowest weighting split. But this will be a good problem to have since your portfolio at that stage will be in the 7 figures.

Something really cool about this strategy is that you’re always buying the split that is down. If one split booms but the others don’t, you won’t be purchasing more of that booming split.

Change 2

The second change we will be making is switching from VTS to IVV.

iShares Core S&P 500 ETF is extremely similar to VTS with a few differences but no major ones we’re concerned about. VTS is more diversified and 0.01% cheaper but is not domiciled in Australia and does not offer DRP. This means that we need to fill in the W-8BEN-E form every three years or so.

The W-8BEN-E form is literally 10 minutes of your time every 3 years and is often overblown in terms of effort, but nonetheless, the two funds are so similar that it’s worth saving the extra admin plus having the DRP option available which I’ve been looking to use as of late.

Here are their 10-year returns to just show how similar they are.

Change 3

The third part of the plan is a hybrid approach between relying only on dividends vs dividends and selling parts of the portfolio. IVV and VEU don’t pay a lot of dividends, but they still pay them.

IVV has returned 3.27% over the last decade and VEU has done 2.85%. Not great, but still cash flowing into the account. And more importantly, those dividends are unfranked income!

We will aim to not touch the portfolio and use the dividends from both Aussie and international shares to live on. If it’s a bad year, however, we will look to sell-off some units to cover the shortfall.

I’ve already gone into why selling parts of the portfolio is perfectly ok if you allow for it to recover in strategy 2. In fact, from a rational market point of view, there’s really little difference between selling units for income and having the company pay you via a dividend. In theory, both should have the exact same consequences. But markets are not rational so they vary to some degree and is a prime reason why we like the dividend approach more.

How It Works

Let’s look at how the newly allocated portfolio would have done during the last 12 months. Here, I have created a dummy portfolio with all trades done exactly one year ago with the total of the portfolio’s value being a cool $1M which is what we’re aiming for.

Aussie equities (I had to use VAS to go back far enough) @ 60%
US (IVV) @ 20%
World ex US (VEU) @ 20%

$46,809 worth of dividends ain’t bad and is more than of FI number of ~$42K!

Bumping up the weighting of Aussie shares to 60% (it was 40% for strategy 2), plus the lower dividend payments of our international shares have actually generated enough income for us to live off during the last 12 months.

But this was a particularly good year for Aussie shares and it won’t be this good all the time. We will save any extra income during those good years to create a cash buffer in preparation for the bad ones that will no doubt come.

If it’s a particularly bad year for dividends, we will look at selling off some units to cover our expenses.

The other thing is that the likelihood of us not earning any money in retirement is extremely low. I’ve covered this in what retire early means to us in the context of FIRE.

I’m extremely confident that the dividends from a $1M portfolio that is weighted to 60% Aussie shares plus any additional income will be more than enough for us.

Selling off units is there as an option but I don’t think we’ll need it tbh!

Time will tell.

To summarise strategy 2.5

  1. An internationally diversified portfolio consisting of 60% Aussie shares and 40% international
  2. Buying IVV instead of VTS moving forward for DRP and Australian domiciled.
  3. Buying Aussie ETFs and not LICs due to risks associated with franking credits. ETFs don’t pay fully franked dividends and are impacted slightly less in the event of legislation passing.

 

 

Stop Changing Strategies Dude!

This is you

“Man, you flip flop more than my thongs! Stick to one strategy mate and stay the course. If the axing of the franking credit refund caused you to change strategies, you were never in it for the right reasons.”

And this is me

“Yo! The overarching strategy of investing in great companies has never changed. There was definitely a major difference between strategy 1 and strategy 2. But the fundamentals from strategy 2 to 3 and now to 2.5 are exactly the same”

The thing is, investing in great companies should always be the number 1 goal. All this other shit comes later.

The issue with picking the good companies from the duds is that it’s really hard to do. Which is why index investing is so cool.

The tweaks between our strategies are really fine-tuning our portfolio to meet our specific needs in the following areas:

  1. Mindset/sleep at night factor
  2. Simplicity
  3. Tax minimisation
  4. Mitigating legislation risk (something I hadn’t considered before)

I think everyone should be a bit flexible with how they invest to a certain degree. Picking one strategy and literally not changing anything during your whole life seems unlikely. Franking credit refunds are a great example of this.

And what’s to say the government won’t impose some stupid tax on other asset classes or something else within our life?

It would be ridiculous to suggest that if the government turned around and started taxing Aussie shares an additional 30% that everyone should just ‘stay the course’ and not look at alternative methods.

Everyone has their tipping point when enough is enough. And even though the refund remains, for now, I’m looking at protecting against this potential rule change without drastically upheaving everything.

I think strategy 2.5 is a nice balance between everything that’s important to us in an investing strategy.

 

Conclusion

I’m still learning as I go.

Judging by some of the emails I get, you’d think that I’m some sort of investing guru which couldn’t be further from the truth.

This years election taught me a valuable lesson that I hadn’t considered as much as I should have before.

The legislation risks for investing in general but particularly the very real possibility of no more franking credit refunds one day.

For us and I assume a lot of people chasing FIRE, franking credits without the refund in retirement won’t be worth the concentration risk or the ~4% yield (still pretty good) when you consider that you’re losing up to 30% of your return due to the additional tax that you otherwise wouldn’t be paying had you invested in something other than franked dividends.

Although not completely, Strategy 2.5 mitigates this potential change by re-introducing international shares back in the portfolio which reduces our reliance on Aussie dividends. It also makes other small changes as mentioned above.

When we made the shift away from property to focus on shares, the number 1 goal was to invest in great companies. None of this other stuff is as important as that. Index investing means we don’t have to research which companies are going to be good or bad. It filters that stuff out for us.

Because we don’t have to worry about choosing the good companies from the bad, we can instead spend our time to tweak our strategies so they align with what’s most important to us.

Mrs FB and I optimise the portfolio to improve these areas:

  1. Mindset/sleep at night factor
  2. Simplicity
  3. Tax minimisation
  4. Mitigating legislation risk (new)

Strategy 2.5 improves on all of these areas whilst not uprooting our investing fundamentals which is what any good tweak should do!

That’s it for now.

Let me know what you think in the comment section below 🤙

 

Spark that 🔥

SEP19 Net Worth $733,346 (+$10,970)

AUG19 Net Worth $722,375 (+$17,484)

We’ve been on the road now for over 6 weeks and honestly, it feels like this year has just been one enormous adventure.

They say a change is as good as a holiday and ain’t that the truth!

I did enjoy my job back home but just like your favourite game or movie, you eventually get sick of them and loading in a new disk every once in a while can be therapeutic.

Even though I managed to find work in London this year, the novelty of a career change made it exciting. Yeah, there were a few late nights here and there and I had to figure how this game worked at the start. But it’s been a lot of fun so far and I’m looking forward to booting it back up when we get back to London at the start of October.

We continue our European summer trip finishing up in Spain and heading over The Middle East.

Here are some of the spots we hit up in August.

La Sagrada Familia, Barcelona

The Great Pyramids of Giza

Diving in the Red Sea

Petra

Travelling through the Middle East was one of the coolest experiences I’ve ever had. Going in the middle of summer was a big mistake in hindsight. It pretty much worked out that we had to do it in summer but wowee she was steaming!

I’m talking 46°C in the middle of the desert with humidity 😅🌡🔥☀

Seeing the Pyramids and Petra was truly mind-blowing and the culture shock was one I’ll never forget.

Being a finance and economic junkie, it was extremely interesting hearing first hand from the people of Egypt and Jordan about jobs, future prospects, education, health care and all the other topics I managed to chew their ears off about.

Both countries rely heavily on tourism. And if you can remember the 2011 Egyptian Revolution, it may shock you to know that the country has still not recovered from it all these years later. Some industries that relied on tourist were completely destroyed overnight apparently and the Nile cruises, for example, are only back to about 60% capacity. I would highly recommend them too if you’re down that way. The people didn’t lack education either. Maybe not all, but a hell of a lot of taxi drivers, tourist group leaders and even the dudes that looked after the camels had university educations! I can’t tell you how legit they were but it seemed that the issues were not education, but rather job opportunities that paid a decent wage.

Jordan also was hit hard when they took in refugees from Syria in the last couple of years too. I couldn’t get to the bottom of it but apparently inflation had eroded the local currency with prices for goods and services going up but wages staying stagnant. This is what I was told anyway and I’m definitely not an expert in this area but I found it interesting to listen to.

I continue to have a newfound appreciation of what Australia has and offers as we continue our journey around the globe. I can see quite clearly now why so many people want to migrate to our neck of the woods and sometimes cringe whenever I come across a story about a 20-something millennial who can’t afford a 3 bedroom house in Sydney’s CBD.

Like, yeah, housing and living costs in Melbourne and Sydney are bloody expensive, probably overpriced. But fm dead, if you’d have seen some of the living conditions, opportunities and wages of some of these countries, I feel as though a lot of the first world struggles would seem minuscule. I also believe that it’s a major reason why Sydney and Melbourne will never ever be cheap to buy. Australia would have to go way downhill for bargains to start appearing in the biggest two cities.

Anyway, that’s enough ranting for now. The Middle East was kick-ass and I’d highly recommend. If you do Petra, try to go to the night show before you see it in the day. It’s completely different at night and was an unforgettable experience.

Net Worth Update

As impressive as August’s update seems to be (especially considering the how far the markets fell), there is a looming tax burden that’s about to hit.

I’ve been raising invoices for my contracting work and each invoice has an additional 20% tax added to them called the VAT tax (similar to our GST I believe).

I get to keep around 5% of that 20% tax apparently as sort of a ‘collection payment’ from HMRC which is the UK’s version of the ATO.

I’ll go through this for the first time very soon so I’ll have a much better understanding of how it all works by next month.

I only have one invoice left too which means no flowing income until I start working again. And even if I do get work asap when we’re back in October. It won’t be paid until the last Friday of the next month! So it’s almost a certainty that the update for October will be negative unless the markets have an upswing.

We also haven’t spent a lot of money this month believe it or not. This is mostly due to pre-booking nearly everything and subletting our London flat. So we only really have spent money on food and activities which have been pretty cheap for August thankfully.

Properties

No changes in the properties this month.

Property 1 was sold in August 2018

 

*DISCLAIMER*
Various data sources (RP data, Domain.com etc.) are used in combination of what similar surrounding properties were sold for to calculate an estimate. This is an official Commonwealth bank estimate and one which they use to approve loans.

ETFs/LICs

A few divvies but mostly red across the board with Aussie shares taking the biggest hit.

I’ve been expecting this for some time now considering just how much the ASX has gained over the last couple of months. What’s also interesting to see is how much the LICs drop in value as they pay out their dividends. A popular strategy I’ve seen out there is to wait until ETFs or LICs go past their ex-div date and buy on the drop. This theoretically means you can buy more units of the same fund and slightly delay being taxed on the dividends until the next payout.

I don’t do this but I can see how it makes sense.

Also…

We ended up buying another lot of A200 again this month and for everyone out there that keeps asking about our strategy, I promise to have published the newly tweaked strategy before the end of this month!

I have some things I want to cover that requires it’s own article. Nothing too drastic but my thoughts and opinions nonetheless that a few have been asking for. Sorry it’s taking forever. It’s really hard to find time atm but I’ll finish it off in the next couple of weeks.

Networth

 

Ask Firebug Fridays 21

Ask Firebug Fridays 20

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

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