This is a quick rundown of how we are set up financially. This is not necessarily how you should set it up or think about it, this is just my thoughts.
Our assets, in order of gross value, are:
1. Our principle place of residence (PPOR)
I'm not a big fan of individual houses as "investments"; however I do appreciate the emotional aspects that come with them. When we moved to the Sunshine Coast we did not know how long we would be here for, but we had a 1yr old daughter and thought it could be a nice place for her to grow up. At the time (2016) the Sunshine Coast was still recovering from the large drawdowns in housing value after the combination of the GFC, reduction in coal mining and 2011-2012 floods. While prices had started to go back up they were showing no signs of FOMO. I inspected 30+ houses in person and hundreds more online, and after going over the numbers of all of them we managed to buy a place that we believed was selling for land value yet had a house that had "good bones". To put it in perspective - and show why houses scare me as an asset - we paid $115,000 LESS than the prior owners paid for it 9 years before, and they had spent hundreds of thousands on it during that time period. It was the definition of a money pit for them. While at the time of writing it has gone up in value quite a lot since then anything could happen. You just have to look a few hours up the road to Gladstone to see how carnage can play out in the housing market - house prices there went down around 60% from 2012 to 2018. A house in West Gladstone went from $429K to $170K in that time period. Had you bought in 2012 you would likely have taken on a large amount of debt that you have been trapped with, paying off a large mortgage on an asset dropping in value that you have struggled to rent out and had to pay for maintenance etc. This ruins lives and is my nightmare. Having so much of our financial security trapped in the one asset is always concerning to me, hence why we have the shares inside and outside of super.
2. Our superannuation
I did a lot of dumb stuff when I was young, but thankfully I put way more than I needed to into superannuation from a young age. It is in 100% internationally diversified shares, or as close as I can get to it. We have enough here that once we turn 60 we should have enough to live a very comfortable retirement and look after any health issues that will inevitably arise. We make sure to take advantage of a number of key benefits of super:
a) Spousal splits. Each year I transfer money out of my account into my partners. That makes sure our balances are relatively even. There are a number of thresholds that it is good to stay under, for example the $500K threshold for the 'carry-forward' concessional super contributions. Staying under this threshold means that if I take a couple of years off work or part-time and contribute little to super I can catch up when I come back. Simply, whatever part of the concessional cap you don't spend each year adds up over 3 years. So if I only contribute a small amount and have a large part of the cap I don't use, let's say $20k per year for 3 years, on the third year if I return to work and will have a large tax bill I can put that $60k into super at the concessional rate of 15% tax. That would save more than $13k in tax that year.
b) Spousal contribution. If I put $3k into her super from my after tax money I get a $500 tax rebate.
c) Government co-contribution for low income earners. If my partner puts in $500 of after tax money the government matches it.
Superannuation is brilliant, it has so many tax advantages but also asset protection benefits that people don't think of. The only reason to not take advantage of it is if you are expecting a large inheritance from parents who are likely to pass on when you are around that age. When choosing a superannuation provider go with one that is reasonably low fees, has been around for a long time, and offers the ability to be heavily invested in diversified global shares. We are with Unisuper and are invested in a split between the "High Growth" and "Global Companies in Asia" options that brings the International Shares component to around 50% and the Australian Shares component to around 40%, with the remaining in property and income. We leave it like this, and every year I check to see if the fees are changed. If not then I leave it as is.
3. Shares outside of superannuation. We have much less of this compared to shares in superannuation, purely because of the tax advantages. Obviously we can use a discretionary trust outside super to gain tax benefits, but for our situation it doesn't make that much sense given how we plan to live our lives over the next couple of decades. If we both become low incomes earners, which we probably will as I transition from full-time work, the benefits of a trust become small and the costs outweigh it other than asset protection. However with much of our assets in super there is not much need for it (hopefully - trying not to jinx myself!). Our shares outside of super are setup very simply. I know it is not tax efficient, which I can live with, or as "optimal" as it could be based on back-testing, factor investing or efficient frontiers (I am being sarcastic here - I have serious issues with these methods). What it is though is bloody difficult to guess if its gone up or down based on news headlines. Here is the strategy I use which consists of four index funds:
25% VGAD (An index containing the largest companies in the world, with the value in Australian dollars)
- This is a core part of my portfolio, and is the Australian dollar equivalent of VGS. This means that in addition to the value of the companies in the index, if the Australian dollar goes up it also goes up in value, but if the Australian dollar drops it goes down.
25% VAS (An index containing the largest companies in Australia)
- A simple index containing the largest companies in Australia such as our miners, banks and industrial companies.
25% DJRE (International Real Estate Investment Trusts).
- This is where I differ from many people, in that I am a fan of Real Estate Investment Trusts (REITs). You already own some of them when you have other index funds, as REITs are included in many indexes, however I overweight REITs in my portfolio as they offer some diversification and potential for wild swings (both positive and negative). Global REITs are pretty cool in my opinion, as they encompass everything from beautiful, classic apartment buildings on Wall Street in Manhattan through to industrial workshops in Slovakia (literally, I've checked). I just love the idea of owning not just businesses but thousands of bits of land and buildings around the world. When prices go down I can just bring up a picture of my apartment tower and remember that I'm happy to own a small sliver of it along with thousands of other buildings around the world.
25% IJH (USA midcap index containing 400 middle size USA companies)
- USA midcaps have a long history of doing very well, similar to large cap companies such as Amazon etc. that are in VGAD but offering a little bit of diversity. It's a cheap index that I'm very confident in, so why not?
I buy shares quarterly, the first Friday of March, June, September and December. I debt recycle money out of a split in our home loan and invest it into whichever of these 4 has the lowest value in our portfolio on that day. I then don't check the value until the next investment day. I invest the same amount each quarter, which is based on the plan I wrote. We keep about 3 years of "cash" in offset against our mortgage for peace of mind, the rest goes into shares. I chose 3 years as that means I could leave work that long without selling anything, or could use a big chunk of it to pay for a course and then still have at least 2 years of money to live on while doing the course. It's that simple.
The only debt we have is our house mortgage, which is equivalent to about 1/3rd of our assets outside of super. We could gear up more and take on more debt, and will do that if/when our assets go up enough that our ratio is down to 1/4, but why add on the risk if you don't need to?
"Three things ruin people: drugs, liquor and leverage." Charlie Munger