Sitting Down with Strong Money – Your Questions Answered #8

Welcome to the latest round of Strong Money Q&A, where I answer a bunch of reader questions and provide more thoughts on topics that YOU are wondering about.

Today, we cover:  How currency affects your international shares.  Moving overseas for FI.  The ticking time-bomb of interest-only loans (?).  How to get your partner on board with investing.  Stock picking.  And much, much more…  So let’s get on with the show!

(Remember, nothing on this blog is personal advice.  Please do your own research before making financial or investment decisions) 🙂

 

Question #1

G’day.  I’m reading a lot about franking credits, but no mention of exchange rates or dividends earned overseas.

If I earn a $1,000 dividend in USD and have it transferred to AUD, it becomes around $1,400 at today’s rate; a significant amount.  Is this an advantage, or is there something I am missing?  Newbie investor.

 

Strong Money’s Answer:

Hey Newbie – thanks for the question 🙂

The thing is, when you’re buying that overseas investment, the difference in currency shows up there too.  Meaning it costs more in AUD to buy so there’s no advantage when receiving the dividends later.

Shares of an overseas investment, say Vanguard International index fund (VGS), fluctuates daily depending on the underlying investment’s performance (in this case, the developed world index) and currency movements.  So with something like VGS, the currency movement is already factored into the price.

 

Question #2

Hi there,

Been reading the blog for a bit, really enjoy it.  I have one question about the housing market that not many people seem to be talking about.

Personally, I think that if a housing market crash were to happen, it may come from the amount of people being forced off Interest Only loans onto P&I, being unable to refinance or afford the repayments, and then defaulting.

The majority of 5 year IO loans are due to expire in 2020.  There hasn’t been much noise about it in the  media, and not much noise is often a red flag for something coming.

I’ve wondered if recent rate drops and changes to serviceability have meant these people can refinance more easily, but that just seems to me like it is prolonging the inevitable.

So I just wanted to get your opinion on it, and what you think the impact of IO loan expiry is likely to be?  I’m just asking out of curiosity and to learn something new 🙂

Thanks in advance!
Elly

 

Strong Money’s Answer:

Great, thoughtful question Elly.  The transition from interest-only to P&I has mostly already taken place.  Most investors (myself included) switched over early due to the large difference in interest rates (P&I now being lots cheaper than IO). 

I read a few articles about this a while ago by Pete Wargent, as he was watching this closely.  See here, and here.  By the way, his personal blog is worth reading for economic news (without the media drama!)

Basically, I’m not worried about this at all, as it seems there are less interest-only loans now than there were a few years ago.  But it has likely contributed to less spending in the economy and the slowdown we’re experiencing at the moment.  Hope that’s helpful!

 

Question #3

Just listened to your interview on the Aussie firebug podcast episode, it was awesome!

I’m looking for ways to gently coax my partner into seriously considering buying LICs/ETFs as an early retirement strategy.  He’s not completely opposed to the idea, but has fears of the stock market and believes his money is safer in the bank, where it’s making little to no return.

We’re in a unique position right now where our gross income exceeds $220k combined.  So I want to get this money working for us.

Perhaps I will ask him to listen to the podcast episode you feature in, and then maybe we can start small with a $5k investment.  Once he sees dividends coming in, that may encourage him to continue investing more.

We have $100k behind us currently, rent cheaply, and are debt free with no children and no plans to have any.  We live well within our means (spending maybe $60k per year), which means we could save close to $100k per year.  Using the early retirement calculator, this means about 10 years (to retirement), but I’d hope to speed that up somehow along the way.

 

Strong Money’s Answer:

Sounds like you’re in a fantastic position so far – well done!  The best way to bring that FI date forward is by investing as soon as possible, and as your incomes go up over time, simply aim to keep your spending the same and your savings rate should increase automatically.

Show him anything you can find about long term investing, showing the returns from the sharemarket over time, including the growing income you can expect. 

The value and dividends of shares increase over time.  Cash, on the other hand, is guaranteed to go backwards, after tax and inflation.  Therefore, it’s insane to think putting money in the bank is a safe or intelligent place to store long-term savings!

Also, explain that the only way to stop working is to have your expenses paid for by investments.  That’s not going to happen with money sitting in the bank.

As a starting point, you’re going to earn say 4% dividends (plus franking credits), versus a measly 1-2% interest on cash.  So that’s a pretty good incentive already!  PLUS growth over time!

Hopefully you’re right and when he sees income coming in (dividends instead of interest), shares might not seem so crazy.  That’s the way it is for many people.  By the way, I also wrote a special article for beginners:  An Open Letter to Property Investors and Sharemarket Newbies.

 

Question #4

Hey Dave.  Firstly, a big thanks.  I’ve been enjoying your blog.

Here’s my question.  What are your thoughts on living in another country, or investing in another country if it enabled reaching FIRE earlier?

Whether that be in Asia, Latin America, Eastern Europe – it seems there are many other places with lower costs of living and/or potentially higher rates of return if investing in shares or even just bank deposits.

Of course it raises some issues around taxation, exchange rates, visas, etc.  So it can get complicated, but would be interested in your thoughts on this.

 

Strong Money’s Answer:

Interesting question!  The topic you’ve raised is enormous – so many variables at play.  It’s totally possible to live elsewhere and reach FI faster.  And I’m sure there are opportunities to invest profitably elsewhere too.

But one thing often missed is that countries with high interest rates on term deposits have high inflation, so it’s not actually a high return you’re receiving – it only looks high.  And of course there are other complexities to consider like currencies, tax and risk of overseas institutions.

It’s really a personal choice whether someone wants to live or retire to a cheaper country to reach FI quicker.  I wouldn’t do it personally.  I love living in Australia and have no desire to leave.

For others, it could work out incredibly well.  Sorry I can’t provide more info, but honestly, it’s not something I know much about!

 

Question #5

Hey Dave,

I’ve seen you mention several times that over time you’d expect Aussie ETFs to reduce their management costs to zero like in the US.

My question is how do the funds make money without fees?  Cheers.  Liam

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Strong Money’s Answer:

Hey Liam.  Good question.

Well, so far there is only 1 (or 2) US funds doing it.  Another one is PAYING investors to invest (for the first 3 years, then a fee applies).  But basically, they get you into their low cost funds on their platform and they’ll try and sell you higher cost funds or services alongside it.

Vanguard are doing their US index fund for 3 basis points (0.03%), which keeps reducing as they scale up and can afford to drop fees.  Also, they do securities lending which brings in a small amount of income, so net fees for investors are already zero, or less.

It might take a while to happen here, but eventually it will.  Either the for-profit funds will use near-zero cost index funds to get you in and hope you invest in their other funds too.

Or, the likes of Vanguard will keep reducing fees towards zero when they can afford to.  Combined with securities lending, the net fee to index holders will end up being zero.

That’s why If I’m buying an index fund, I’d rather choose the broadest fund, or the highest quality provider etc., rather than simply the cheapest fund today.  Because in time, they’ll all be the same price 🙂

 

Question #6

Hi Dave.  Just letting you know your blogs are awesome.  I enjoy your common sense attitude and approach to investing.

Whats your view on using the Direct option in Super (like Hostplus Choiceplus) to buy an index fund and a few older LICs like BKI, AFIC, etc?

I often hear it’s a waste of time, as you’d only be trying to out-perform the Super fund’s standard option like Indexed Balanced fund etc.  Just looking for your logical as usual viewpoint mate.
Cheers, Dwayne, over in sunny Cairns.

 

Strong Money’s Answer:

Thanks mate, great to hear you like the blog!  Good question you raise, and a common one.

Basically, rather than stick with the balanced funds that most super funds have as their default option, I think most long term investors are better off with 90-100% in shares or a ‘high growth’ option.

After all, this is typically money we won’t be using for 20-40 years, so we don’t really want much cash and bonds with their current ultra-low expected returns.

You can simply choose your spread between Oz and International indexes with most Super funds.  And in my view, there’s no need to add LICs as you’d already have broad exposure to Aussie shares and it will be very low cost (and the reliable income from LICs obviously doesn’t mean much inside Super).

Going the direct route and choosing your own funds will come with higher cost for basically the same thing.  So I’d keep it simple and cheap with a high growth or 90-100% indexed shares option (maybe I lean towards that because I’m simple and cheap, lol).

 

Question #7

Hi Dave.  I’m 37, and my wife and I are currently paying off a mortgage.  We have $210k available for redraw.  We’re currently paying double the amount and it’ll be paid off in 1.5 years.

My original plan was to pay off the mortgage completely, then invest all spare cash (including what I’d usually be shovelling into the mortgage), into shares.

After reading your blogs and reading Peter Thornhill’s book, I’m considering redrawing $100k and throwing it into a few LICs.  Then, instead of paying off the loan, use the extra to re-invest as I want to get the ball rolling with compounding dividends.

This will however push the mortgage out another 10 years with minimum repayments.  The shares will go in the wife’s name and she’s paying 18% tax, so can take full advantage of franking credits.

Unfortunately, I’m having trouble taking the plunge and buying such a large amount up front.  So I’ve found myself asking if I should be waiting for a lower price, even though I know I probably shouldn’t be and should just get started.

The long term plan is to continue working until mid to late 50s, then retire on a more than comfortable dividend stream.  These shares will never be sold and I can pass them onto my daughter for her financial security when I kick the bucket.

Here’s hoping she’s financially literate enough to continue the same path and the wealth will continue for infinite generations.  Does this sound reasonable?  Thanks for taking the time to read my message.

 

Strong Money’s Answer:

First, fantastic job getting to the position you’re in.

As for the plan to redraw or not – I guess it depends.  Is your overall plan to be debt free?

If yes, I would probably keep smashing the loan and you’ll be debt free in no time.  Then you can direct all spare cash towards investing and your portfolio will grow quite quickly since you won’t have a mortgage to pay for!

But if you’re happy to keep some debt for a while, then you could definitely grow your portfolio quicker this way.  Really, it’s a personal choice.

Maybe having the debt will stress you out, if share prices take a tumble?  Something to think about.

Unless you know the future, you probably shouldn’t be waiting for lower prices.  Since you’re going to be putting money in anyway, if prices do go down you’ll be scooping up plenty of shares at lower prices.  You’ll have to get used to prices going up and down as you’ll be investing for many years.

If your goal is to continue to accumulate shares for dividend income, you should be pleased if prices are flat or fall for a while.  If prices go up, usually the income stream you’re buying is costing more.

The main point is to ensure you’re buying regularly, which increases your future dividend stream with every purchase.

You’re on the right track.  No need to be worried.  Imagine how much share prices will go up and down over the next few generations.  But your family will still own those shares and still earning dividends every year – just that those dividend payments will be a lot larger!

 

Question #8

Hi Dave.  I really enjoy the concepts in your blog.  Thanks for the time and effort you put into them.

I particularly liked the article on timing the market.  This concept is exactly the concept I have been trying to work out recently.  I think the world is on the precipice of a MASSIVE recession – which will be similar in size to the GFC.

As such, I’m reluctant to put funds into the market at these highs.  I’ve struggled with the exact concepts you outlined – what if the market falls 29.8% rather than 30%?

If you invest in LICs, do you consider some sort of NTA comparison within your criteria?

The other concept I have found strange in the FIRE community is that everyone seems hell bent on just using low cost index trackers.  Have you spent anytime either listening to Invested podcast or reading the new Rule #1 book by Phil Town and his daughter Danielle?

Their concepts are really easy to understand, logical – and allow an investor to significantly outperform the market.  The FIRE community appear to be a very smart community who would easily apply the logic discussed (modelled on the approach of Buffett and Munger).

Sorry about the length of my note, but you have really sparked some thoughts going inside my head.

 

Strong Money’s Answer:

Firstly, thanks – great to hear you enjoy the blog!

Yes I do consider NTA when I’m investing in LICs.  I aim to not buy if they’re trading at a premium, and ideally a decent discount.  Related post:  A Complete Guide to LIC Premiums and Discounts.

The reason the FI community likes low-cost index funds is, it’s the simplest, most effective and most proven way to invest for long term returns.  Simply put, it’s a great passive investment choice.

Active investing for most people, including pros, doesn’t work out that well for many reasons.  That’s not to say you can’t do it, it’s just not as easy as some suggest.

And for those of us trying to retire early, there’s no need to spend our spare time trying to juice returns.  Because ultimately, your savings rate is the largest factor that determines how quickly you can reach Financial Independence, as I wrote about in the following posts.

Saving vs Investing – Where Should You Focus?
It’s All About the Increments Baby!

It should be noted even Warren Buffett has under-performed for the last 15 years.  One major reason is because his style of investing – value investing – has under-performed.  There’s no easy road to consistent and permanent out-performance.

So, for the time involved with index funds (essentially zero), it’s a more efficient way to earn attractive long term returns, than trying to beat the market.  Those are my views anyway!

 

Notes

Well, that’s it for today.  I hope you guys enjoyed this post and it helped explain my thinking on a few things.  There are so many questions we couldn’t fit in, so we’ll save those for next time!

I don’t do these Q&A segments because I’m some all-knowing guru.  Rather, I do this segment because readers keep sending in questions!  And many of them are similar in nature, so why not share the answers with everyone in our little community here?

Speaking of which, for my Perth readers, I’m having a local meetup soon!

Come along and have a casual chat with like-minded people on the same path as you.  Plus, you’ll be able to ask me anything you want in person!  Here’s the details…

Date:  Sunday, 23rd Feb.
Time:  3pm-5pm.
Venue:  Flame 400, Wanneroo Central Shopping Centre.

Yes, I know it’s selfish making it close to my house 😉  But there are no meetups happening North of the river (despite there seemingly being a few of us).  Plus, it’s quieter and there is plenty of parking.

Please be aware, I have no idea on numbers, so if it turns out there’s more than a handful of us, next time we can look at a bigger venue or open area like a park.  Hope to see you there!

If you’d like to be notified of future Strong Money Meetups in Perth (North of the river), enter your email below.  Note: this mailing list is for meetups/events only, not blog posts.

26 comments

  1. Enjoyed this one Dave. Thanks for taking the time to put it together. Always get something from these Q&A’s. I often feel like all the Questions could be mine.
    Ps. The Ratesetter bonus came through, so happy days 🙂

    1. Haha that’s great to hear mate, thanks. My hope is that people are getting value from these posts, but sometimes I’m sitting here wondering and not really sure!

  2. With regard to redrawing from your home loan,it is generally much better approach to refinance a second loan for investment purposes. The interest from the second loan is then tax deductible. This avoids having to apportion everything and opens up the possibility of directing your repayments towards non deductible debt first. Apportioning quickly becomes very complex and a record keeping burden.

    1. Yes that’s a good point, I totally forgot about to mention that (an embarrassing oversight on my part lol). Apportioning can be done, but yes separating the loans is definitely the way to do it. Thanks Simon.

    2. Our loan allows us to have several separate “portions”, so we applied to split the loan into two portions – the main home loan and associated offset account (as before), and a line of credit which will be used for investing only. The interest on the line of credit portion will be tax deductible. It was a LOT simpler (and cheaper, and quicker) than refinancing. There was no change in the total debt so no need to prove income etc. It was processed in just a couple of days.
      Not all lenders/loan products allow this, but it is worth investigating before trying to take out a new loan or refinancing.

  3. Hi Dave, thank you so much for the blog.
    I’ve only recently jumped in to the FIRE, and it’s brilliant to have such an informative Australian blog. I’m also in Perth and north of the river, so see you at the meetup!

  4. Thanks, Dave.
    My Home Loan will be getting paid off 2 days before your meet up so I will include a drink with you as part of my celebration weekend.
    See you there.
    Steven.

  5. G’day Dave

    I’m sorry if this has been asked and answered somewhere else, but there’s just so much content to get through, and I’m kinda impatient.

    My question: in many places, prevailing advice is NOT to buy different LICs if you are sticking to the main big ones, but I’ve been reading your reviews on these and notice they all have their own “idiosyncrasies”. I hold WHF at yheoment, and love it, but I am also keen to buy into some of these others (MLT, ARG, etc). Do you have any advice one way or another on whether this is a good idea or not?

    PS – Fellow Perth Northern Suburbs resident, here!

    Thanks for all the info!

    1. Hey Dylan, no worries – there is a lot of content on the site now so I totally understand!

      I think buying more than one even tho they’re similar, is a perfectly fine idea (I hold a few myself). It also helps diversify you between managers in case something funny happened at one of the LICs and they changed strategy or something unusual you didn’t like (highly unlikely given they’ve been operating for 50+ years in most cases). Hope that helps.

    1. Cheers Samurai! I’m sure there’ll be more in the future so who knows, maybe it will line up one day 🙂

  6. Hi Dave, I’m originally from Perth but living in London atm, or I’d be keen to come to the meetup.
    Wondering as you have hit FI, if you have a record of how much actual cash you put in before your portfolio reached your FIRE number?

    1. Hey Tom. Absolutely no clue as our situation is very messy, with multiple investment properties that we had to pay ongoing expenses for each year, and up-front costs I would have to track down, so there’s no way of working it out.

      Going by rough averages of incomes, expenses and years worked, I think at a wild guess we probably put in around $500k-$700k of cash savings, and the rest came from investment returns and existing equity my partner had in her property when we met.

      I didn’t really do a detailed track of anything, as I was simply focused on heading in the right direction by saving and investing. Had no clue I’d later start a blog and be asked about it lol.

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