Aussie Firebug

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Ask Firebug Fridays 16

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 (3:00)


Hi Firebug!

Loving the content and hearing all the great questions from listeners on Friday’s, keep up the great work. I’m hoping to hear your opinion or what you would do in my shoes if possible 🙂

My husband and I are 36 with a 2 &1/2-year-old and thinking about expanding our family because you know by this point sleep is a distant memory anyway!

We’ve got a nice emergency fund, zero debt and have just started to invest in ETFs. Super is currently sitting at about $150k. Right now we’re really fortunate to have free housing but are keen to get into a place of our own as we can’t stay here forever.

We keep going back and forth between what’s best to do which is where I’m curious to hear what you have to say.

We’re currently saving towards a house deposit and looking to have about $100,000 saved before we buy in SA. Until we reach that goal in approx 2 years our plan was only to invest about $5k a year into ETFs. But we’re not sure if we should beef up that amount we’re investing instead of saving so aggressively for the house because we’ve had investing on pause for 2 years while we cleaned up debt and got an emergency fund together.

One of the things that drives me nuts is the brokerage fee with such a small quarterly trade, but hey what can you do (I plan to get on to using self wealth this month!)

What do you think you would do in our position, and why?

-Amy

Firebug’s Answer


Hi Amy,

Ahhh kids… As aspiring parents (one day) Mrs FB and I are really taking advantage of weekend sleep-ins. I’m not sure how she’s going to cope tbh, she regularly puts away 9-10 a night 😂.

Now to your query.

Firstly, you’re in a really good position for a couple in their 30s:

  • No debt ✅
  • Emergency fund ✅
  • Super balance over $100K ✅
  • Reads aussiefirebug.com ✅✅

I have no idea how you’re getting free housing but milk that bad boy for as long as possible. Housing is one of if not the most expensive item anyone will pay for in their entire life. Living at home until 26 was probably the biggest advantage I had to increase my net worth so young.

It depends what you’re after, but from what you’ve written in, it appears that you want to start investing outside of Super whilst also saving for a house deposit. If I were in your position, I would concentrate on the house deposit and not worry about investing until you’re in your next home.

The other question you need to ask yourself is do you plan to retire before 60? If the answer is no, Super is the best vehicle to invest in because of the tax advantages. You can swap Super providers and invest in ETFs directly through them. A popular choice in Hostplus Superfund.

If you really want to start building that snowball outside of your Super you could either trade through a broker such as SelfWealth as you’ve mentioned. Or you could sign up with Vanguard directly and invest smaller amounts without paying the brokerage cost. You will be paying higher management fees though…

Hope this was of some help and good luck on your journey 👊

-AFB

 

Question (11:33)


Hi Aussie Firebug,

I just came across your blog as I was searching on how to buy Vanguard Index funds (VAS, VGS) Thank you so much for your blog, you made it very easy for me to understand.

Just 2 quick questions:

1) I am single, no kids or dependents. Would u recommend buying EFTs through a trust or just under my name? Is there any tax benefit when buying EFT’S thru trust in my situation?

2) From what I’ve read on your blogs, VGS is domiciled in Australia so I don’t have to pay taxes outside Australia. Is this correct? Based on your strategy, I might invest VAS 40% and VGS 60%

Looking forward to hearing from you.

Thanks a bunch!

Jonathan

Firebug’s Answer


Hi Jonathan,

I’m glad you’ve found my content easy to digest. Simplicity and ease of use have become a bigger part of my decision making in recent times which also reflect my answers to your questions.

  1. There can be. But the most realistic tax minimization strategy from trusts for most people will be when their wife isn’t working if they have kids and income can be distributed to her. That and distributing to other family members who don’t have an income. If I were in your situation I wouldn’t bother to set one up. You don’t need it.
  2. You’re correct. You also get the added benefit of not having to fill out a  W-8BEN-E form. VAS and VGS, in my opinion, is a great diversified portfolio.

Cheers,

-AFB

 

Question (20:07)


Hey Aussie,

I made an observation today which I thought was interesting. All the main indices were down (ASX200, All Ords, ASX200 Financials, ASX200 Materials, ASX200 Industrials) yet all the larger LICS I track were up (or in the case of AFIC, was flat).

Thoughts on this?

Regards,

Michael

Firebug’s Answer


Hi Mick,

I noticed this the other day as well which intrigued me so I started to do some investigating.

The larger LICs like AFI, MLT and Argo have a heap of crossover from the ASX300 which should, in theory, mean that their price is closely linked.

If we compare VAS to AFI over the last 10 years or so we get this graph.

VASvsAFI

I’d say that looks pretty much how I thought it would. There’s definitely some correlation between the two. They rise and dip mostly the same.

One reason I have read that would explain why ETFs can drop further than LICs in a bear market is because LICs seemed to attract more long term investors who don’t get spooked by the market. This is reflected in the share price and could explain why the LICs didn’t suffer as much during last month.

Just a guess though. Maybe someone smarter than me could comment down below.

-AFB

Ask Firebug Fridays 15

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 (2:10)


Hi AFB,

Love the site and podcast!

Quick question around Trusts. My understanding, which may be wrong, is that the costs to set up and manage one, out way the benefits unless you have a sizeable portfolio ~$500k+.

I’m keen to buy some ETFs for the long term with a goal of having a portfolio in excess of $1.5mil however that likely won’t be for ~15years. With that in mind should I buy now under my own name, or set up the trust with the future in mind even if the costs outway the benefits during the early stages?

If tax bracket matters I’m in the 37c per $1 and also know the government are proposing changes to trusts and franking credits. How does that impact the decision?

Thanks
BillyBob

Firebug’s Answer


Hi BillyBob,

I’m glad you’re enjoying the content mate 🙂

Trusts can technically save you money but as you’ve mentioned, they cost a bit to set up and manage.

I don’t think the Bill Shorten’s proposed trust tax reform will get through if I’m being honest. The simple reason is that the vast majority of the rich and powerful hold their assets in a trust and all the big political players up the top never change laws that would make them and their lobbyists poorer.

It’s never good to base your investing strategy around tax laws (as they are always changing), you always want to invest predominately in great companies first and foremost. The tax efficiencies are less important.

Having said that. What I’ve come to realise during my 5-6 years on the path to FIRE is the power of simplicity. Creating and running a trust creates a complexity.

Can it say your money…Yes.

Is it necessary?… Nope.

-AFB

 

Question (11:12)


Hi AFB,

Love your work and the podcasts.

Like many of us, you started in property because of the high amount of leverage you can use. As your goals changed due to changes in lending and increased sharemarket knowledge you’ve mentioned divestment of your investment properties.

1. What is your strategy for the divestment and what do you have as key considerations for this?

2. If you had a PPOR and one property paid off and another 2 (duplex) well underway (7 years to go) would you simply stick with property as many of the entry costs have already been incurred?

Thanks

Seamus

Firebug’s Answer


Hi Seamus,

It’s true, I started with Australia’s favourite asset class. Good old, never fails, always goes up… bricks n mortar.

In a weird way, I’m almost glad I hit my landing wall so early in my journey. I may never have had to find an alternative path to financial freedom and ultimately discovered the sharemarket.

To answer your questions:

  1. The biggest consideration is that we don’t want to sell low or in a bad market. And right now is a terrible time to sell because nobody can get loans! We might be waiting many years before the banks loosen lending again but the two properties are cash flow positive so there’s no reason to rush.
  2. No I wouldn’t. Property can be a good wealth builder. But its cash flow is terrible compared to shares. It depends what you want and where you are in your journey. But if you’re closer to the end and want to start living off passive income, shares are superior to property IMO.

Cheers,

-AFB

 

Question (18:30)


Hello AFB!

So Vanguard has a new ETF that has caught my eye… the VESG, apparently its ethically focused and doesn’t invest in stuff like weapons, tobacco and fossil fuel.

I have had concerns from time to time about investing in products that I would otherwise avoid buying as a consumer but I had put that one on the self an gone down the VTS/VEU route anyway.

Do ethics play into your investments strategies? How so? What do you think of the VESG as a core holding?

Happy Monday!

Thanks Kindly,

Emma

Firebug’s Answer


Hi Emma,

Ethically focussed investments are a relatively new product. I always thought of them as paying a premium to invest in something that aligns with your values. But they are actually picking up steam and more and more younger investors are prioritizing companies that are not related to fossil fuels, gambling, pornography, tobacco, animal testing for cosmetics etc.

Check out the rise of ethical investing in Australia

EthicalInvesting

Source: Responsible Investment Association Australasia (https://tinyurl.com/y8bgy8ye)

It’s not dissimilar to free range eggs. Consumers have proven with their wallets that they are willing to pay more for a product based on ethics.

Having said all that, ethical investing is not something that is at the forefront of my mind when I buy assets. But I must admit when I went down the rabbit hole and starting Googling ethical investing, I was pleasantly surprised with the overwhelming data that this is a growing area and maybe it’s something I should look at more seriously in the future.

VESG for a core holding isn’t too bad actually. It has over 1,500 holdings from all over the world (a bit heavy in the states at 61%) but it’s a lot more diversified with an acceptable management fee of just 0.18%. Not bad Vanguard, not bad at all.

It’s not quite hitting the mark for me just yet but if ethical investing is important to you, VESG looks to be a fine choice.

-AFB

Ask Firebug Fridays 14

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 (2:19)


Hi AFB,

Wondering if you could explain your thoughts re: dividend approach to investing.

My understanding is that when a dividend is paid to investors, the company’s assets are reduced by the same amount. This in turn reduces the share price by the same amount as the dividend.

If this is correct, what is the value of focusing on dividends? The only logic I can see is that once one hits FIRE, they can receive an income without the need to sell shares. Seems ok, but not a particularly compelling reason to concentrate assets to a particular market – in this case, Australia.

Love your website and podcast, and hope to hear your thoughts on this.

Cheers,

Clinton

Firebug’s Answer


Hi Clinton,

Your understanding of dividends and their relation to share prices are somewhat correct. In simplistic term, if a company makes $100 from their asset their share price should reflect this cash asset. If they pass on this cash to the shareholders in the form of a dividend then you would think the share price would drop accordingly. This does happen after most ex-dividend dates. But share prices are always affected (good and bad) from human emotion.

Our switch to strategy 3 was mainly due to the nature of dividends and their link to intrinsic value.

The thing is… when you are relying on selling any part of your portfolio in retirement to survive, you are at the mercy of the market.

The main reason that strategy 3 ultimately won us over was the fundamentals of a business is less affected in a crash than the share price.

A business and its share price are largely tied to its ability to produce a growing income. There were many businesses back in 2008 that were not affected greatly by the GFC in terms of the bottom line. But the ass fell out of the share price because human emotion got involved. Sure the dividends may have dipped, but nowhere near the same level (in terms of percentages) as the share price. This is because the dividends are tied back to fundamentals and how much income the company is able to produce, not based on how many inexperienced and ill-informed investors are rushing for the exits after reading a doom and gloom article in the Herald Sun.

I feel a lot more confident that Strategy 3 will hold up through thick and thin vs Strategy 2 even though Strategy 3 could delay our fire date. This is because even in a recession, good income producing companies will still do just that, produce an income. And seeing those dividends hit the account each quarter will help immensely.

-AFB

 

Question (11:34)


Hi Aussie Firebug,

I’m in my 30’s, and I’m looking to begin investing my money for future long-term growth.

I’ve read on the internet about ‘ready-made portfolio’s’ (my super company BT offers this).

Do you know how they differ from managed funds? Both appear to invest in assets like eft’s, shares etc, but just a bit unsure how they differ.
If you know of any information that you can share, please let me know.

From Matt, an Aussie Firebug follower, and FIRE aspirant.

Firebug’s Answer


Hi Matt,

While there’s no real definition of a ‘ready-made’ portfolio, they usually are a managed and diversified portfolio that has levels of risk that the investor can choose depending on their needs and risk profile.

They are basically managed funds within your Super.

The ‘managed’ part usually refers to the fund managers ability to balance the portfolio how they see fit depending on what the goals of the portfolio. If you invest in a globally diversified ETF portfolio yourself such as A200, VEU and VTS. You would, of course, be in charge of the weighting and rebalancing.

A management portfolio takes care of this for you and your only job is to pick which fund is right for you.

It’s not a bad option, but like most things, the devil is in the detail. Your Super Fund BT charges a management fee of 0.42% on top of the underlying fund’s management fee. They also charge 0.22% in transactional and operational costs. So you’re looking at a management fee of around 0.64% plus the underlying fund’s fee.

Vanguard offers a diversified index ETF for a management fee of just 0.27%. This includes professional management of a diversified portfolio and rebalancing is taken care for you.

Vanguard Diversified ETFs

But you’re always going to have to pay a bit extra because it costs money to run a Superfund.

My question to you would be when are you planning to stop working? Super is the most tax efficient vehicle in Australia but it comes at the cost of not being able to access it until later in life and thus ruling out early retirement.

-AFB

 

Question (20:17)


Hi AFB,

Thanks for your informative blogs and podcast. I’ve been following you for a year now and you’ve been such an inspiration! Keep up your content!

I’ve just recently purchased my first investment property and was just wondering although it’s too late but what are some of the key points that you look for when purchasing a property and which suburbs are your properties located in?

Thank you!

Edmund

Firebug’s Answer


Hi Edmund,

It depends on what sort of property investor you are. I have been to many property seminars and met countless investors. But a trend I continually see is that most successful property investors have a niche that they are really good at and get better over time.

The most common investor is a buy and hold investor. They are hoping that the market will outperform inflation and through the power of leverage amplify their gains.

Other types of property investing include:

  • Subdivision
  • Development
  • Renovation
  • Commercial
  • Vendor Financing
  • Flipping

Each has their own pros and cons and we could be here for hours explaining what is needed for each to be successful.

The most important things to look out for when it comes to investing in real estate IMO are:

  • Getting a bargain when you buy. Super important because it gives you an instant buffer and equity straight away
  • Cash flow. The lifeblood of the investment.
  • Economy around the area. Where are the jobs coming from and is this industry growing or shrinking? Population is also part of this equation
  • Opportunity for growth. Are there upcoming projects scheduled? Is the population forecasted to increase, decrease or stay the same? Why?
  • What is your exit plan? Who are you going to sell to in the end and why are they going to want to buy your investment

Those were the basic things I looked at when buying to invest.

Our two properties are located in SE Queensland.

-AFB

Podcast – Investment Bonds – GenLife

Podcast – Investment Bonds – GenLife

listen-on-soundcloudListen-on-Apple-Podcasts-badge

 

 

Summary

Have you ever heard of an investment/insurance bond?

I probably did somewhere along the journey and most likely disregarded them as soon as I heard the word ‘bond’. But don’t be fooled by the name (like I was), there are a lot of advantages that these investments offer and in my opinion, are the best way to invest for children (your own or others).

But it doesn’t stop there. Investment bond can offer a legitimate tax effective alternative to the traditional ETF/LIC route that most Aussies adopt in the pursuit towards FIRE.

There are a few specific rules that need to be followed

In today’s episode, I chat to Catherine Van Deer Veen who is the CEO of Generation Life, an Australian investment and insurance company that’s been around for 15 years currently managing 1.3 Billion dollars for investors.

If you’re thinking about investing for your kids, nieces or nephews or are looking for a tax-efficient alternative investment product, this is the podcast for you!

In this episode, we talk about:

  • What exactly is an Investment Bond
  • What Generation Life can offer to investors
  • The specific rules that you must follow in order to reap the full tax benefits

and much more

 

Show Notes

Ask Firebug Fridays 13

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 (3:10)


Hi AFB,

First of all, love your work and Ask Firebug Fridays episodes. So thank you.

I understand your stance on Super as you cannot access any of it until you’re in your 60s, however as potential a first home buyer, I cannot help to consider First home super saver scheme where you can access up to 30k of the pre-tax (salary sacrificed) voluntary contributions you’ve made.

To me, it sounds like a no brainier but please let me know if this sounds like a good deal from the Government from your end or if I am missing anything that may cause me to reconsider.

Thanks,

-Derek

Firebug’s Answer


Hi Dereck,

The FHSSS (woah that’s an ugly acronym) is a great way to save for your first deposit.
My only concern would be that you make sure you check with your employer that your salary sacrifice does not contribute to their Super guarantee. Technically if you SS it can be counted towards the super guarantee and means that your employer doesn’t have to contribute as much. Check this out
Assuming that’s all sweet, just make sure you understand all the obligations and checks you need to get the money out when you need it 👌

-AFB

 

Question (8:54)


Hey AFB,

What is going on with the market atm? LICS and ETFs are way down, are you going to wait for them to drop more or buy now?

Andee

Firebug’s Answer


Hi Andee,

We did buy when the market was down the other month. But the plan has always been to invest consistently each month. We want to stick to this plan no matter what the markets are doing.
I have no idea what’s going on. It’s fun to try to decipher all the worlds economies and predict what’s going to happen next, but I’ve got better stuff to be spending my time on.
I know it’s hard and it’s something I struggle with every day, but try to stay away from market predictions. Stick with the facts and new/changed laws that will have an impact on your wealth.

-AFB

 

Question (12:45)


Hi Mate,

Would love to get your thoughts on debt recycling. Feels like a faster way to get to FI by leveraging equity in a property, but I haven’t heard you talk about it. Would love your thoughts.

Keep up the good work my man. Loving it.

Cheers,

Ryan

Firebug’s Answer


Hi Ryan,

I’m a fan of DR and it’s something I will be utilizing in the future when we eventually buy a PPOR.
If you have a PPOR loan and also have cash that you’re going to invest anyway, I don’t really see a reason not to use DR to turn part of your PPOR debt into an investment debt and therefore tax deductible. It’s a tax minimization strategy first for me.
For example.
Investor A has the following:
  • $200K PPOR Loan
  • $100K lump sum cash from selling an investment property.

If investor A is not interested in paying off any of the loan from the PPOR ($200K) and instead wants to invest that money into ETFs/LICs, DR can be used to reduce tax with no extra risk,

Investor A can use the $100K to pay off part of the PPOR loan. Open a line of credit (LOC) of $100K and use that LOC to invest in the ETFs/LICs.

Investor A has the same amount of debt of $200K and still has $100K invested. The difference being is that they have saved $1,480 in tax (assuming 4% interest rate of LOC and 37% tax rate) because now half of their loans are tax deductible.

Dave at StrongMoney.com wrote a great piece about DR which you can read here.

-AFB

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