From this video. Growth is relatively low currently. This explains why the Fed is cutting rates. The most bullish region for stocks is low inflation and moderate growth. Will the fund cut too much and reignite inflation more? Hard to be that bearish here.
In October, the Australian Dollar rose very slightly from USD 0.6542 to USD 0.6550 meaning that USD investment returns are slightly better than AUD investment returns. Stock markets were flat or fell with a lot of intramonth volatility (total returns including dividends):
US Dollar Indices
MSCI World Index (gross): 0.02%
S&P 500: 0.25%
HFRI Hedge Fund Index: 0.01% (forecast)
Australian Dollar Benchmarks
ASX 200: -2.51%
Target Portfolio: -0.34% (forecast - depends on HFRI result)
Australian 60/40 benchmark: -0.42%
We lost 1.93% in Australian Dollar terms or 1.88% in US Dollar terms. So the only benchmark we beat was the ASX 200. Our performance was hit by the crash in the price of 3i (see below). After underperforming last month, the SMSF returned 0.16% beating Unisuper (-1.06%) and PSS(AP) (-0.61%).
Here is a report on the performance of investments by asset class:
Things that worked well this month:
What really didn't work:
Here are the investment performance statistics for the last five years:
Our alpha relative to the ASX200 is 2.9% with a beta of only 0.51. We have much lower volatility, resulting in a information ratio of 1.30 vs. 0.99. We capture much less of the downside moves than the upside moves in the market. We also have very good performance relative to the Vanguard 60/40 portfolio with similar volatility but 3.5% p.a. more return. We captured 104% of the upside of this portfolio but only 69% of the downside. But as we optimize for Australian Dollar performance, our USD statistics are much worse. We do beat the HFRI hedge fund index in terms of return, but at the expense of far higher volatility. Our USD volatility is at least less than that of the MSCI index, but our return is almost five percentage points lower!
We moved a bit away our target allocation due to investments and investment performance. Our actual allocation currently looks like this:
About 65% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily liquidity, so our portfolio is not as illiquid as you might think.
We receive employer superannuation contributions every two weeks. We make monthly concessional contributions to Moominmama's superannuation to reach the annual cap on contributions. There is one remaining USD 10k contribution to make to the Unpopular Ventures Rolling Fund and there will be capital calls from Aura Venture Fund II and III. I am now receiving TTR (soon to be retirement) pension payments from both Unisuper and our SMSF and contributing more than the total of these back to my superannuation accounts for the remainder of this financial year.
I was quite busy making the following additional moves this month:
On the whole it is a shift from speculative investments to income investments, though the extra 3i shares are speculative. The last day of the month was my retirement date. This month's net worth (not including our house) together with the redundancy payment I should get this week constitutes our "retirement number". It should be approximately AUD 6.8 million. Using the 4% rule means we could spend AUD 272k per annum. Our spending is a lot below that. Total net worth at the end of November is at AUD 7.78 million.
Time to tweak the target portfolio we use for benchmarking and asset class allocation. I am lowering the allocation to futures from 7.5% to 5% and increasing the allocation to hedge funds from 15% to 17.5%. This better reflects current reality.
Moominmama is a Chinese Mum who stereotypically thinks you should sacrifice anything for your children's education. Her friend from uni days also lives in our city and sends her children to the most expensive private school. So, we have been sending both children to a private school that is in walking distance of our home. I think that public schools are fine, at least where we live. Fees at the private school have increased by 8% in each of the last two years. Then a couple of weeks ago they announced 2026 fees. They are up for the school years relevant to us by almost 23%. The school is suggesting that fees will increase by 9-12% for 2027 and after that by smaller numbers, but it would likely be 7% per year I think. The school community is shocked and outraged by this. The school has taken some financial missteps, but we can't see how more than say 10% is justified. We have gotten a lot of education on school finances in the last fortnight, both on a huge parent WhatsApp group and from the school's own presentation in reaction to the outrage. On Monday there will be a live parent-organized town hall.
So, I have modelled the effect of these on our finances and in theory we could cope with it, though by Little My's final year the school would be as expensive in real terms as some of the more expensive schools in Melbourne and Sydney now. Trinity Grammar at AUD 44k matches what this school would cost in his final year. Our school has 2,200 students. It grew so big by offering a private education at a reasonable price. Lots of parents are talking about leaving. If students numbers fell but costs remain high they could go into a death spiral, in my opinion, where they have to raise fees more and choke off more and more demand.
So, we are starting to think about public schools seriously again. Moomintroll will be in Year 5 next year. High School starts in Year 7 here. We are locked into next year pretty much, and it doesn't make sense, I think, to move him to a public primary school for just one year. So, maybe he would move to our local public high school in Year 7. That school has reasonable NAPLAN test scores. 47% of students are from the top socio-economic quartile compared to 80% at the current school. This will depend on what we think the future trajectory of school fees will be how are finances are holding up.*
In another negative shock, Moominmama's employer announced another restructuring. They will make 5% of research staff redundant and maybe a much higher share of her division. So far, she has managed to survive all the previous restructurings, but maybe her luck will finally run out. Again, we could handle this, but all of this is adding stress.
* The public high school is a bit awkward to get to. You need to change buses in our local "town centre". I don't think Moominmama should have to drive him there and back every day. After the first year, I think it would be reasonable for him to cycle there and back if the weather is OK. It is actually only 2.5km away. There are bike paths, but also big highways to cross, though there are traffic lights on the crossings. But I did a thought experiment where he took Uber back and forth every day. That would cost about AUD 5k per year, which is a sixth maybe of the private school fees!
Masterworks sold the Hockney painting I invested in. Profit after fees is 23% and the IRR was 6%. They are giving the option to reinvest in another paper or receive the cash. Overall, my Masterworks investments only have a 2% IRR.
Art has been in a slump while stockmarkets have rallied in the last 3 years. Who knows if it is going to recover now? I'm not inclined to tie up the money again for an unknown period. This is especially given that I am retiring now. So, for now, I am going to withdraw any money I can from this portfolio. I have investments in nine paintings remaining.
I have been saying no to investing in Aura's new venture capital fund when I have been asked. My reason was that I am retiring and don't want to lock capital up. With lower taxes going forward, the negative tax status of Australian venture capital investments isn't so important any more. Also, I am an investor in both their previous funds and the parent company, so that feels risky. Also, I didn't have a current wholesale investor certificate.
But then I saw an email that now is the "last call" before the "first close" and I sent them an email asking if I could invest AUD 100k instead of the usual AUD 250k minimum. They approved right away and I just completed the application form. This is an investment of about 1.5% of net worth, which will be called over several years, so with this lower number it doesn't seem as risky or impose as large cash flow requirements. The fund plans to invest in 25 companies if the target amount is raised. So, this would only be AUD 4k per start-up. At Aura VF 2 I have around AUD 25k exposure to each start-up. And I now have a wholesale certificate again. Also, I have been thinking recently that we can cover our current cash flow requirements with just AUD 1.5 million (8% yield) to AUD 3 million (4% yield) income-oriented investments and invest the other half or more of our net worth in long term growth investments to compensate for inflation and maybe actually grow our net worth.
But in the end, it's really FOMO.
In October, the Australian Dollar fell from USD 0.6613 to USD 0.6542 meaning that USD investment returns are worse than AUD investment returns. Stock markets continued to rise (total returns including dividends):
US Dollar Indices
MSCI World Index (gross): 2.26%
S&P 500: 2.34%
HFRI Hedge Fund Index: 0.55% (forecast)
Australian Dollar Benchmarks
ASX 200: 0.39%
Target Portfolio: 1.36% (forecast - depends on HFRI result)
Australian 60/40 benchmark: 1.55%
We gained 1.78% in Australian Dollar terms or 0.69% in US Dollar terms. So we beat three of the benchmarks.
Here is a report on the performance of investments by asset class:
Things that worked well this month:
What really didn't work:
Here are the investment performance statistics for the last five years:
Our alpha relative to the ASX200 is 3.0% with a beta of only 0.48. We have much lower volatility, resulting in a information ratio of 1.47 vs. 1.17. We capture much less of the downside moves than the upside moves in the market. We also have very good performance relative to the Vanguard 60/40 portfolio with the same volatility but 3.5% p.a. more return. We captured 102% of the upside of this portfolio but only 62% of the downside. But as we optimize for Australian Dollar performance, our USD statistics are much worse. We do beat the HFRI hedge fund index in terms of return, but at the expense of far higher volatility. Our USD volatility is at least less than that of the MSCI index, but our return is more than five percentage points lower!
We moved a bit away our target allocation due to investments and investment performance. Our actual allocation currently looks like this:
About 65% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily liquidity, so our portfolio is not as illiquid as you might think.
We receive employer superannuation contributions every two weeks. We make monthly concessional contributions to Moominmama's superannuation to reach the annual cap on contributions. We contribute USD 10k each quarter to the Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. I am now receiving TTR pension payments from both Unisuper and our SMSF and contributing more than the total of these back to my superannuation accounts. During the month I worked on finalizing my redundancy and renewing my wholesale investor certification.
I was quite busy making the following additional moves this month:
As part of participating in the Aura Group capital raise, I had to get a new wholesale investor certificate. You have to do this every 2 years to remain current. There are two main ways to qualify: Show you have more than AUD 250k in income per year in the last two years or show you have more than AUD 2.5 million in net worth. You need an accountant to certify this. The test is on an individual not household basis. I am using the net worth approach.
I was certified in 2020, but when I tried to renew in 2022, the accountant I used said I didn't qualify, as she wouldn't count my superannuation including my SMSF towards the amount as I was under 60. This didn't stop me from continuing to meet capital calls for my existing Australian venture capital investments.
Now I meet the required level with or without superannuation. I also argued that I am receiving a TTR pension from each of my superannuation accounts and am over 60 and about to retire. Anyway, I qualified. It cost AUD 550.
It is much easier to qualify as an accredited investor in the US. You only need USD 1 million net worth and you don't need an accountant to prove it, so it is free. A couple can qualify with just USD 1 million between them. However, primary residences are excluded, which is not the case in Australia. Moominmama qualifies as an accredited investor for our investments via Angellist and the Unpopular Ventures syndicate.
Following up from the discussion on the safe withdrawal rate here is the history of our required withdrawal rate. This is the past twelve months spending divided by net worth minus housing equity, assuming that we have no other sources of income:
Retirement first looked possible in 2018 when we received the inheritance. Without that, we would likely be only just on the cusp of the 4% SWR currently. But then expenditure rose around the birth of our second child and the stock market fell in the pandemic and we went back above the 4% level. There was a voluntary redundancy scheme at my workplace in 2020, but I decided I couldn't afford to do it.
Since then, we dropped back to a fairly consistent 3% till recently. I was waiting for another voluntary redundancy scheme though I thought about going part-time from age 60. Early this year there was a new scheme and I submitted my application. Then I panicked and didn't take it up. Meanwhile, markets rebounded and we are now near 2%. My employer reopened the scheme and this time I am doing it.
My forward projections assume that real expenditure will continue to grow linearly, though actually it looks like it has flattened out:
I do assume step downs in spending when each of my children reach age 21. In my worst case scenario, if we only made zero real investment returns after 2026, then our net worth would about halve in real terms by 2050. Our required withdrawal at that point would be 5.5%. That assumes that we don't downsize our house or cut spending.
In the best case scenario–historic rates of return of 8.4% nominal per year–we would have 4 times our current net worth in real terms in 2050.
Something people in the FI community don't talk about is that if you annuitise your wealth you can then withdraw much more than 4%. Maybe 6-7%. This is because you pool longevity risk with other people.
So, I now have a copy of the contract for my retirement and severance package, following it previously being approved. I will hand in the document in person on Monday. I will still be employed for the next six weeks. The severance package follows a standard formula and amounts to about AUD 255k after tax. That would be similar to working another two years full time. I think Financial Samurai would approve:
My life won't change that much, actually. I won't have to teach or go to meetings I don't want to go to. I won't feel guilty about doing other stuff when I am supposed to be doing my job. Like right now 😀 But I wasn't scheduled to teach again till next July, once I finish this year's teaching in late November. I was actually scheduled for 2 months leave in December and January, to use up my "leave balance". But I will still be supervising PhD students, doing journal editing for the next year, and doing some research stuff.
What will change at Moomin Valley? I will probably going back to tracking net worth regularly, as this will be an important number. Obviously, I have been tracking it, but I haven't been reporting on it in the blog except on the NetworthShare widget. The "retirement number" - net worth at the end of November, plus the severance that I will get in December will also be important to keep in mind.
P.S.
Interesting discussion with Karsten Jeske, where he admits that he hasn't sold any shares and would find it difficult to do, despite all his research on safe withdrawal rates:
I am trying to get in on this capital raise. Some details still need ironing out. I have investments in two of their venture capital funds. Valuation relative to revenue and EBITDA seems similar to Regal Partners, which I am a shareholder of.
In September, the Australian Dollar rose from USD 0.6540 to USD 0.6613 meaning that USD investment returns are better than AUD investment returns. International stock markets rose yet again, though the Australian market was down (total returns including dividends):
US Dollar Indices
MSCI World Index (gross): 3.66%
S&P 500: 3.65%
HFRI Hedge Fund Index: 0.83% (forecast)
Australian Dollar Benchmarks
ASX 200: -0.52%
Target Portfolio: 2.70% (forecast - depends on HFRI result)
Australian 60/40 benchmark: 0.83%
We gained 3.63% in Australian Dollar terms or 4.79% in US Dollar terms. So we beat all benchmarks!
Our SMSF returned 3.42% beating both Unisuper (0.60%) and PSS(AP) (0.81%).
Here is a report on the performance of investments by asset class:
Things that worked well this month:
What really didn't work:
Here are the investment performance statistics for the last five years:
Our alpha relative to the ASX200 is 3.0% with a beta of only 0.49. We have much lower volatility, resulting in a information ratio of 1.49 vs. 1.19. We capture much less of the downside moves than the upside moves in the market. We also have very good performance relative to the Vanguard 60/40 portfolio with the same volatility but 4% p.a. more return. We captured 100% of the upside of this portfolio but only 60% of the downside. But as we optimize for Australian Dollar performance, our USD statistics are much worse. We do beat the HFRI hedge fund index in terms of return, but at the expense of far higher volatility. Our USD volatility is at least less than that of the MSCI index, but our return is more than four percentage points lower.
We moved a little bit away our target allocation. Our actual allocation currently looks like this:
About 65% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily liquidity, so our portfolio is not as illiquid as you might think.
We receive employer superannuation contributions every two weeks. We make monthly concessional contributions to Moominmama's superannuation to reach the annual cap on contributions. We contribute USD 10k each quarter to the Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. I am now receiving TTR pension payments from both Unisuper and our SMSF and contributing more than the total of these back to my superannuation accounts. I made the following additional moves this month:
In Australia, if you are between the ages of 60 and 67 and you are retired, you can make concessional retirement contributions even if you aren't working at all.* Why would you want to do that?
A concessional contribution is one you can deduct from your income on your tax return. However, the superannuation fund does have to pay 15% tax on the contribution. If your marginal income tax rate is in the 16% bracket–18% including the Medicare Levy–or above, you will save on total tax paid. For example, if you have a paid-off investment property, you might be earning $30k a year in rent. If you make a $12k contribution to super, you will wipe out your income tax bill. Obviously, this saves a lot more tax if you are in a higher income tax bracket.
Now here is the no-brainer bit. As you are retired, if you want, you can turn around the next day and take the money out of super again!
Assuming I retire later this year, I am planning to make a concessional retirement contribution to top my concessional contributions for the year up to $30k. As I will probably be in the 30% tax bracket this tax year, the savings will be worthwhile. But I probably won't take it out again right away, unless I have already hit the transfer balance cap.
* After age 67 you need to meet the "work test" to make concessional contributions. You can continue to make concessional contributions even if you have more than $2 million in superannuation. You can't make non-concessional contributions after you reach that level.
A year ago, I wrote a post about whether you should initially keep your superannuation in accumulation mode when you retire. I thought that if you don't need to spend the money in your superannuation accounts right away, it doesn't make sense to pay out that money to sit in regular taxed investments. But I missed one key point. Dividends from what Americans call "taxable accounts" are taxable whether you spend them or not, but capital gains are only taxed if you sell. The more capital gains you realise, the higher tax bracket you are going to be in. Unless you are lucky enough to be able to live on dividends from the "taxable accounts" alone, you are going to have to realise capital gains if you don't have a superannuation pension.
In my case, I might be able to stay in the 16% tax bracket if I don't need to realize capital gains. So, with tax free superannuation, I will pay very little tax. If I kept my superannuation in accumulation mode, I would be paying an average of 12.5% tax on earnings in superannuation and I would have to realise $80k of capital gains in "taxable accounts" instead of receiving a superannuation pension. That would push a lot of my earnings into the 30% tax bracket.* So, I am planning to put my superannuation accounts into tax-free pension mode and pay out the minimum distribution of 4% a year until I am 65.
With my wife still earning around $45k a year in salary for now, I might not need to do much in the way of realising capital gains outside superannuation.
What about just spending the redundancy payment for the first couple of years? Some of that is going to go into superannuation and the rest will sit in our offset account. The more we spend it, the more mortgage interest we are going to have to pay. Despite that, it might actually make sense to spend that first, but psychologically I prefer a big cash buffer, low mortgage interest, and a steady pension coming in. I can just set and forget the pension from Unisuper.
* Of course, long-term capital gains are only taxed at half the headline tax rate, so the effective marginal rate would be 16% including the Medicare levy.
I heard yesterday that my employer approved my redundancy under this round of the voluntary redundancy scheme. So, if everything goes smoothly, I will retire 30 November, just before my 61st birthday. I would have gone on leave from 1 December anyway, in order to reduce my surplus leave entitlements.
I am already changing my accounting spreadsheets to reflect this. I have also set all my investments to pay out dividends rather than re-invest them in order to maximize cashflow.
There is lots of talk about equities being in a bubble and that a stock-market crash is coming given that unemployment in the US is edging up (though still low) and the Fed is cutting interest rates. From the bullish camp, Anthony Pompliano posted this chart, yesterday:
%20FRED%20St.%20Louis%20Fed.png)
This shows the difference between the 10 year and 2 year yield. We are in a normal positive yield curve. If the previous yield curve inversion predicted a recession, we should already be in it. On the other hand, maturities shorter than 1 year are higher than the two year yield:
Note that in 1998, the yield curve briefly inverted and then went positive again. It was back into the negative in February 2000. Going negative again now would be a bad sign.
I previously posted that 2025 felt like 1997. Maybe it's 1998. In either case, the base case scenario is that the market will likely rise for a while longer.
Report from Morningstar on investors' returns vs. fund returns. Due to badly timed trading, investors made 1.2% less per year than the funds they invested in. My return in USD terms for the relevant period was 6.83%, which is roughly what the average investor made. My AUD return was 9.81% over the same period!
In August, the Australian Dollar rose from USD 0.6433 to USD 0.6540 meaning that USD investment returns are better than AUD investment returns. It was our second highest spending (in nominal terms, January 2015 was the highest) month ever at AUD 27k. School fees and airfares booking coincided. Stock markets rose again (total returns including dividends):
US Dollar Indices
MSCI World Index (gross): 2.51%
S&P 500: 2.03%
HFRI Hedge Fund Index: 0.54% (forecast)
Australian Dollar Benchmarks
ASX 200: 3.30%
Target Portfolio: 0.86% (forecast - depends on HFRI result)
Australian 60/40 benchmark: 1.37%
We gained 1.07% in Australian Dollar terms or 2.76% in US Dollar terms. So we beat all the US Dollar benchmarks but under-performed relative to two of the Australian Dollar benchmarks.
Our SMSF returned 1.31% beating Unisuper (0.75%) but not PSS(AP) (1.35%).
Here is a report on the performance of investments by asset class:
The asset class returns are in currency neutral terms as the rate of return on gross assets and do not include investment expenses such as margin interest, and so the total differs from the Australian Dollar returns on net assets mentioned above. All asset classes apart from private equity had positive returns. US stocks had the greatest return and hedge funds made the largest contribution to total return.
Things that worked well this month:
What really didn't work:
Here are the investment performance statistics for the last five years:
The top three lines give our performance in USD and AUD terms, while the last three lines give the same statistics for four benchmarks. The middle block gives our performance relative to the indices.
Our alpha relative to the ASX200 is 2.9% with a beta of only 0.48. We still have much lower volatility, resulting in a information ratio of 1.42 vs. 1.12. We capture much less of the downside moves than the upside moves in the market. We also have very good performance relative to the Vanguard 60/40 portfolio with the same volatility but 4% p.a. more return. We captured 100% of the upside of this portfolio but only 60% of the downside. But as we optimize for Australian Dollar performance, our USD statistics are much worse. We do beat the HFRI hedge fund index in terms of return, but at the expense of far higher volatility. Our USD volatility is at least less than that of the MSCI index, but our return is more than four percentage points lower.
We moved a little bit away our target allocation. Our actual allocation currently looks like this:
About 65% of our portfolio is in what are often considered to be alternative assets: real estate, art, hedge funds, private equity, gold, and futures. A lot of these are listed investments or investments with daily liquidity, so our portfolio is not as illiquid as you might think.
We receive employer superannuation contributions every two weeks. We make monthly concessional contributions to Moominmama's superannuation to reach the annual cap on contributions. We contribute USD 10k each quarter to the Unpopular Ventures Rolling Fund and less frequently there will be capital calls from Aura Venture Fund II. I am now receiving TTR pension payments from both Unisuper and our SMSF and contributing more than the total of these back to my superannuation accounts. I made the following additional moves this month:
The university has reopened the voluntary redundancy scheme after saying that there will be no further forced redundancies. It looks like they have increased the payout to 3 weeks pay per year or service instead of two. My simulation shows that it would be a breakeven until the end of 2028 under the assumption I work full time in 2026 and half time in 2027 and 2028. In addition, I now know that I will get a UK state pension. Using the 4% rule, that means I need to save AUD 1/2 million less than I would otherwise need to.
We don't need to reapply if we applied previously. My previous application was approved. But I said no. So, maybe I can say yes now. Technically, I would be retiring early as I am younger than 67, even though I can get a tax free pension from my superannuation.
