ETF Index funds for long term

[blbarclay]

What portfolio of ETF’s would you recommend for someone 30 years old, wanting to invest a regular amount with a minimum of fuss, seeking maximum return over the long haul?

 

[So_Cynical]

Problem is that knowing what i know now (not when i was 30) there is no way i would set and forget everything into 3 or 4 ETF's, at 30 you want franking credits and you need a higher return - risk, you need some aggressive capital growth.

 

[Darc Knight]

Without going into Market predictions you can design an Index Fund portfolio based on Blackrock portfolios while choosing any other fund.

Here's how to design an Index Fund portfolio. You don't need to use Blackrock just the equivalent of another fund (like Vanguard or whatever):

https://www.blackrock.com/au/indivi...es-core-model-portfolios-individual-en-au.pdf

 

[Darc Knight]

If @systematic were around I suspect he might suggest Vanguard's Lifestrategy funds which are diversified Funds with varying Bond, Fixed Interest, Aus Share, Global Share, Emerging Market Index Funds already bundled into varying degrees of risk/return. Just follow the link and scroll down to "Diversified":

https://www.vanguardinvestments.com.au/retail/ret/investments/product.html

 

[Sharkman]

have a look here:

https://www.stockspot.com.au/what-are-etfs/etfs-compared/

in my opinion if you want a decent return for minimum fuss, you'll want to pick low MER, broad based ETFs. i'd stay away from the sector specific, "flavoured" or "themed" ETFs, they usually come with a higher MER (like 0.50%+) and there is no guarantee that they will outperform the broad based ones over the long term anyway. any of the broad market offerings from Blackrock or Vanguard will be solid choices.

as far as ETFs go, i just invest in IVV (0.04% MER) and VEU (0.09%). that's all i need. gives me global exposure with just about the lowest MERs on offer. the only (very minor) downside is having to fill in a W-8 BEN form every year for VEU. no longer needed for IVV as that's now Aust domiciled.

don't have any Aust exposure thru ETFs (apart from the 4% or so weighting of VEU) as i trade Aust stocks directly. if you're not interested in doing that but you want some Aust exposure, you might want to add a third ETF to the mix. something like VAS or A200 would fit the bill there.

but you should have a read thru what's available out there first (you could use the above site as a starting point) before deciding for yourself what to go for. what works best for me might not necessarily be to your taste.

 

[systematic]

Thanks @Darc Knight

You're right, I would suggest that way (or something in a similar vein) as my default answer to the OP's request for 'minimum fuss'. Obviously at 30 I'd suggest nothing less than the high-growth option (90% equities), but they've got options to change the amount allocated to cash/bonds all the way out to only 20% equities.

Retail fund is cheap (obviously, because it's Vanguard!) and you're with a firm who wrote the book on index investing. Minimum investment is only 5k and it lets you add as little as $100 at a time via BPAY at no cost.

As you said - you get a great equity market diversification, with Australian, International, International Hedged and a little to International Small Companies and Emerging Markets all covered...a good mixture!

The OP said maximum return, but I'm simply assuming they mean equity like returns, and I'm weighting more emphasis to the 'minimum of fuss' - after all, as soon as someone says that, I take it they mean that literally. You can't get much more minimum fuss, because with this (or something like it) you're not even juggling multiple funds, no rebalancing etc. Just pick one and invest the regular amount, knowing that you're more diversified than a heck of a lot of equity investors.

 

[DayDreamer1]

What portfolio of ETF’s would you recommend for someone 30 years old, wanting to invest a regular amount with a minimum of fuss, seeking maximum return over the long haul?

I’m in the same boat!!!

 

[DayDreamer1]

Problem is that knowing what i know now (not when i was 30) there is no way i would set and forget everything into 3 or 4 ETF's, at 30 you want franking credits and you need a higher return - risk, you need some aggressive capital growth.

What’s franking credits?

 

[Bill M]

What’s franking credits?

I think you need to have a quick read of this, cheers.

http://frankingcredits.com.au/

 

[Sharkman]

What’s franking credits?

pick up the political section of any Aussie newspaper from the last couple of months or so - stuff about franking credits will be splashed all over it!

here's one that gives a pretty good explanation:
https://www.smh.com.au/business/con...s-about-franking-credits-20190206-p50w0p.html

 

[blbarclay]

i just invest in IVV (0.04% MER) and VEU (0.09%)

Great strategy and great post Sharkman.

What was your thought process behind not getting higher exposure into Australian market, and thoughts on hedged vs non hedged?

 

[Sharkman]

Great strategy and great post Sharkman.

What was your thought process behind not getting higher exposure into Australian market, and thoughts on hedged vs non hedged?

i actually have quite a large exposure to the Aust market at the moment (thru direct shareholdings rather than ETFs), but in the long term i'm aiming for that to be no more than a third of my portfolio. it's currently higher than that (probably around 50%), as i started investing in the 90s as a teenager, and my portfolio was 100% Aust for many years after that, so i can't really re-weight quickly (due to the huge amounts of CGT i'd have to pay). i've been slowly getting that weighting down by reinvesting all new funds into IVV and VEU equally.

Aust is too concentrated in banking and mining these days. very little weighting towards high tech, manufacturing, consumer goods. i don't have the historical sector weightings readily available, but i'm pretty sure it wasn't this concentrated when i was growing up 20 years ago. this is not a good thing in my opinion if one is looking for an index ETF to invest in for the long term. IVV and VEU have much better sector diversification.

whilst the Aust dividend yield is good, the downside is that by paying out more earnings as dividends, companies tend to retain less for reinvesting in future growth. global stocks (particularly the US) tend to be heavier on capital growth and lighter on dividends.

you don't pay tax on capital growth until you sell, which for a long term ETF investment, shouldn't be for a very long time (possibly even never). since my goal is a ~2.5% drawdown (unlike the majority of the FIRE movement, a 4% drawdown is way too risky for my taste, i think it leaves too little margin for error), the lower yield of an IVV+VEU portfolio suits me just fine (and happens to be around about that 2.5% figure if weighted 50:50). paying out less in dividends should in theory mean that international shares attain higher capital growth in the long run, offsetting the effects of inflation more effectively.

a lot of FIRE followers in Aust seem to favour a portfolio of mostly (or even entirely) Aust ETFs/LICs for the dividend yield, and that's fine too. it's a good fit for the mainstream FIRE approach of going for a 4% drawdown. there's no right or wrong approach here, everyone should do what they feel is right for their own situation.

i'm unhedged (IHVV is the hedged equivalent) and am ok with that. but i would be the first to admit that i don't know with any level of certainty which way AUD/USD will move in the long run. not sure that anyone does. that said, i'm leaning towards AUD/USD depreciating. despite being a developed nation, our currency and equities behave more like an emerging market economy ie. they are very much correlated with risk-on sentiment. and my general impression is that global sentiment mainly seems to fluctuate between various degrees of risk-off these days, as it has done ever since the GFC. whilst currencies like USD (and especially JPY) are risk-off currencies, and Japan happens to be the largest weighting of VEU.

 

[Zaxon]

since my goal is a ~2.5% drawdown (unlike the majority of the FIRE movement, a 4% drawdown is way too risky for my taste

2.5% is super conservative. The 4% rule does have a small, possible failure rate, so I can understand people who want ironclad guarantees to drop that number. The most conservative I've heard, which was spoken about in a Morningstar interview, was 3%, so 2.5% I'd call ultra, ultra conservative.

The other way to approach this is to move from an amount anchored on your year 1 balance, to a percentage of your current balance. So a 4% anchored on year 1 approach, may be similar to a 5% drawdown on the actual current balance, which fluctuates with real market value.

 

[Sharkman]

2.5% is super conservative. The 4% rule does have a small, possible failure rate, so I can understand people who want ironclad guarantees to drop that number. The most conservative I've heard, which was spoken about in a Morningstar interview, was 3%, so 2.5% I'd call ultra, ultra conservative.

The other way to approach this is to move from an amount anchored on your year 1 balance, to a percentage of your current balance. So a 4% anchored on year 1 approach, may be similar to a 5% drawdown on the actual current balance, which fluctuates with real market value.

i know it is. but a lot of the time when that 4% drawdown is quoted in the context of FIRE, people usually also mention something along the lines of "if things happen to get a bit hairy, i'll just go back to work for a bit, or maybe do a bit of part time work" or something like that.

that's a no go for me. my philosophy is probably most closely aligned to that of "epicurean hedonism" - pursuing a fairly simple/modest, though not totally minimalist, lifestyle focused entirely on recreational activities. all play and no work. so i want to be as sure as i can be that once i'm done, i'm hanging up my boots for good.

the other thing is that the last few years before you go FIRE will most likely be your peak earning years. if your 4% drawdown fails a few years into your retirement and you need to hustle up some extra income, you are unlikely to earn anywhere near what you did before you went FIRE, because your skills and knowledge will have atrophied in the meantime. that's a major concern for me.

i've thought about all this a fair bit and arrived at the conclusion that i'll only truly feel at peace with a 2.5% drawdown. maybe i could do 3%, but i'd still feel slightly uneasy. even if it delays FIRE (i would have retired at 36 or 37 if i was ok with a 4% drawdown), enduring a few more years of the rat race to virtually guarantee that i'm set for life is an acceptable tradeoff. those few years will be peak earning years, and if the extra capital turns out to have been overkill, i can always live a little more extravagantly than i had originally planned. can't go in the opposite direction if one is too aggressive with their FIRE target.

 

[Zaxon]

"if things happen to get a bit hairy, i'll just go back to work for a bit, or maybe do a bit of part time work" or something like that.

I totally agree with your approach of making sure you're 100% financially secure before you retiree. These day, once you're over 50, you're washed up and nobody wants you (unless you're in a rare, speciality profession).

my philosophy is probably most closely aligned to that of "epicurean hedonism" - pursuing a fairly simple/modest, though not totally minimalist, lifestyle focused entirely on recreational activities. all play and no work

I heartily endorse that philosophy

 

[IFocus]

Thanks for your posts Sharkman they are a good read Cheers.

 

[Sharkman]

I totally agree with your approach of making sure you're 100% financially secure before you retiree. These day, once you're over 50, you're washed up and nobody wants you (unless you're in a rare, speciality profession).

precisely. this is the sort of thing i mean when i urge people who are perhaps near the beginning of their FIRE journey to take the widely touted 4% drawdown with a grain of salt:

"At absolute worst, I’ll pick up some part-time work. @#$&, even 200-300 bucks extra a week would dramatically reduce our reliance on ETFs. $300 a week for a year is over $15K which is 40% of our expenses!"
https://www.aussiefirebug.com/our-investing-strategy-explained/

i don't know the guy myself, but i have a lot of respect for what he has to say, and i often read thru his posts and use them as food for thought when mulling over my own situation.

however i just can't agree with that line of thinking. particularly if you work in a technical/specialised field like i do. after being retired for a few years, if you have to return to work, you will be making peanuts compared to what you did before due to skills atrophy. and as you rightly point out, you'll probably run into obstacles due to ageism and time spent away from the workforce.

both of those things, and having to deal with the fact that your FIRE attempt broke down, will undoubtedly contribute to a bruised ego. some people will be better at dealing with that than others. i know i'd probably take it pretty badly, and that's part of the reason i'm leaning towards a more conservative FIRE. others might be ok with it, so for them a 4% drawdown may well be realistic. i'd much rather make hay while the sun shines, to have near total peace of mind once i go FIRE.

Thanks for your posts Sharkman they are a good read Cheers.

no problem, thanks for taking the time to read thru all of my ramblings!