Childcare and Education Spending

Spending on childcare and education is by far our largest spending category now and has gone up steeply. We are now at AUD 47k for the last 12 months, which is 30% of spending. So, I was wondering where all that money was going:

Turns out that we are spending twice as much on daycare for the 3 year old as on private school for the 6 year old. We get little childcare subsidy. We also spent $4k on deposits for the two children to start at a new private school in 2024. We shouldn't have that expenditure again and the government wants to increase childcare subsidies. So, perhaps this is peak expenditure on this category in real terms until they are both in high school? School fees first fall and then increase again with age.

Some Updates

Today I met on Zoom the accountant who has agreed to certify me as a wholesale investor. There are two reasons I want this certification. First, Interactive Brokers will only lend me AUD 25k as a retail investor. Second, I want to invest in a new Aura Venture Fund. The accounting firm is Nexia.

Before the Great Financial Crisis I invested in the ill-fated Everest Babcock and Brown fund of hedge funds. We finally got the final payout from this fund last week. In the end we lost AUD 12,348 from this and related investments.

Employees at my university narrowly voted in favor of freezing pay, which was scheduled to rise 2% next month. I won't be surprised if they soon try to get me to retire, though at this stage we don't have a good idea of what will happen to student demand going forward. Clearly, fewer people will want to study abroad for a long time. But one hypothesis is that Australia will rise in preference relative to the US and UK as a destination. Moominmama decided to not go back to work for another 3 months. On the spending side we decided to send Moomin to a private school. He has been going 2 days a week to their pre-school this year (and 2.5 days to the local public school). So, spending on childcare and  education is only going to ramp up....

March 2020 Report

This month the financial crisis following the COVID-19 pandemic intensified. Up to around the 20th of the month there was chaos in financial markets. Many bonds fell as much or more than stocks and gold fell too as everything was liquidated. Then there began to be some stability with gold and many corporate bonds rallying again. I am now thinking that Australia might come out of this better than countries like the US and so betting a bit on Australian recovery makes sense. I am only doing that though in terms of moving towards our long-run allocation. Not over-allocating to Australian assets yet.

I expect HSBC are now happy they didn't give us a mortgage. It's not worth chasing them any more I think. We are keeping our children out of daycare and school, though technically they are still open. There was some miscommunication about applying for the subsidy and only this weekend I completed the application. Now the government announced today that childcare will be free to parents during the pandemic. I was thinking about cancelling the service, but if it is free, of course I won't. It's not 100% clear yet whether it will be free.

I think I will keep paying for my 4 year old's private preschool as we are considering the school as a long term schooling option (it goes through to year 10). Also, we are receiving a government subsidy. It's unclear yet whether this pre-school qualifies for the free childcare deal. We want to have a school for him when this crisis hopefully ends later this year. He goes to that school 2 days a week and 2.5 days to the public preschool.

All stock markets fell sharply in response to the Coronavirus pandemic. The Australian Dollar fell from USD 0.6499 to USD 0.6115 and at one point reached USD 0.55. The MSCI World Index fell 13.44%, the S&P 500 12.35%, and the ASX 200 20.42%. All these are total returns including dividends. We lost 8.95% in Australian Dollar terms and 14.33% in US Dollar terms. This was the worst monthly investment return ever in terms of absolute Australian Dollars lost (AUD 319k). The target portfolio lost 5.05% in Australian Dollar terms and the HFRI hedge fund index is expected to lose 5.88% in US Dollar terms. So, we under-performed these benchmarks though did better than the ASX 200. The value of our house, which is not included in this investment return, increased. Well, the price of houses in our city went up. Updating the monthly AUD returns chart:

Here is a report on the performance of investments by asset class:

The returns reported here are in currency neutral terms. All asset classes lost money. Australian small cap stocks was the worst performer and gold the least bad. The biggest detractors from my overall return were bonds and hedge funds. These supposed diversifiers didn't work to mitigate losses in stocks. Hedge funds in general both lost from fund performance and from the fall in the price of listed closed end funds relative to their net asset value.

Things that worked well this month:

• Pershing Square Holdings - this hedge fund did perform as intended, with the share price rising. The manager Bill Ackman made a big bet on credit default swaps that hedged the losses in the stock portfolio. Subsequently, he has closed those positions and bought more stocks. I bought more shares in PSH, which are trading around 65% of NAV.
• Treasury futures - my bet on a steepening yield curve worked and I closed half the position. The remaining position has backtracked since then.
• China Fund - I bought back our position, which has since performed well.

What really didn't work:

• Regal Funds - this was our worst performing investment this month in dollar terms. It lost 45% for the month.
• The Unisuper and PSS(AP) superannuation funds were the next biggest losers in dollar terms. They lost 13% and 9%, respectively, which is about what would be expected given a 20% fall in the Australian stock market.
• Junkier bonds like Virgin Australia. The value of Virgin Australia bonds halved. It's not our only distressed bond at this point, but just the worst. I don't know what I was thinking, buying this in the first place.
• Domacom (DCL.AX) shares fell by 2/3.

There are plenty more losing investments... We moved a little towards from our new long-run asset allocation. The shares of gold, private equity, and rest of the world stocks rose most:

On a regular basis, we invest AUD 2k monthly in a set of managed funds, and there are also retirement contributions. Other moves this month:

• Washington Gaslight and Lexmark bonds matured, releasing USD 60k plus interest. We didn't buy any new corporate bonds, so our exposure fell.
• We bought AUD 104k by selling US Dollars.
• I bought 25k Pengana Private Equity (PE1.AX) shares after the rights issue was cancelled. My timing could have been better as the shares then dipped before rebounding.
• I bought back our position in the China Fund (CHN). I figured that China is now rebounding. So far, that was good timing.
• I bought 25k Cadence Capital shares (CDM.AX). This fund has been a disaster, but the shares were trading at the value of cash that the fund has per share. So far, a good move.
• I bought 10k Tribeca Global Resources (TGF.AX) shares. Another disastrous investment in the long run, but the new shares have risen since buying them.
• I bought 25k Bluesky Alternatives shares (BAF.AX). They were trading at about 50% of NAV. I expect some of the fund's investments will be written down, but not that much overall.
• I shifted USD 4k from the TIAA Real Estate Fund to the CREF Social Choice Fund.
• I shifted about AUD 36k from the CFS Conservative Fund to the CFS Diversified Fund that has a higher risk allocation.

Started to Code the Decision Tree

After a couple of hours of coding and debugging I got the first little bit of the model decision tree to work and spit out buy and sell decisions. The output looks like this:

4895    6584.58008 1       0.00000 Stay long
4896    6653.29004 0       1.00000 R Sell Confirmed by pdD
4897    6676.62988 0       1.00000 Go long
4898    6677.93994 0       0.00000 Stay short
4899    6662.66016 0       0.00000 Stay short
4900    6708.49023 0       0.00000 Stay short

As the decision tree is far from complete, only the first two orders – long and then short – make any sense. The first number is a code for the date, the second is the closing value of the NASDAQ 100 index on the previous day (so that it's easier for me to work out where I am than the obscure date codes). Then there are codes for buy and sell and then a verbal description of the decision and why it was taken.

Luckily, writing computer code is a core practical skill for professional economists (or you should have these skills if you don't!) we took programming courses as part of our first year undergrad study.

The Importance of Going to a Good University

If you think it is not important to go to a good university then read this first. Some PF Bloggers recommend to just go to a cheap school.

There are some caveats though. I commented recently on Enoughwealth's post on high schools saying that if you are going to go to university then mostly it doesn't make sense to pay a lot of money to go to the most prestigious high school. But you do need to go to a good one. One that could get you into University of Sydney or UNSW in the Australian case or into one of the top US universities (any of those mentioned in this article). If you definitely plan on going to grad school then it's not necessary to get into the top US universities as an undergrad if it means shelling out big fees. But you do want to go to a good school. Somewhere like UCLA or NYU or Boston University or even Ohio State (Columbus campus). If you do well in places like that you can have a shot at top grad schools. But if you get an undergrad degree from Southern Cross U. or UCQ in Australia say or Cal State U. or somewhere in the US it will be a struggle to get into a good grad school. Likely they will just toss your application unless there is some compelling evidence of your brilliance. And if you get a grad degree from some low ranked university it might not help your employment prospects much at all.

Of course, all this depends on how ambitious you are. I didn't really understand the game fully when I was a student. I knew you needed to go to good universities and went to three good universities. The first two were top-ranked in their country. The third one was good but not in the top-rank. Now I regret somewhat * not trying for the top-ranked place that one of my professors at school #2 suggested. I just thought there was no way they'd consider me or give me any funding. But I could have tried for $50 or whatever the application fee was back then.

I had a job interview on Friday. The head of the department said to me: "I don't know why anyone would come do a PhD here if they could go to that other university across town". I agree with him on that. In economics at least, the name of the school matters.

* Only somewhat because if I had gone there (in the picture) rather than across the river I doubt I would have ever met Snork Maiden. And after all I have done pretty well in my academic career so far.

Take an Economics Test

U.S. High School "Advanced Placement Economics Test courtesy of the New York Times. I got 18/18 but for a couple of questions that was because I knew all the other answers had to be wrong rather than I knew the one I selected was right. It's all macro-economics questions.

World's Top 200 Universities

All the universities I've studied or worked at are on this list. There's some luck in that. I've interviewed for jobs at some that are not on the list such as Clark University, New Jersey Institute of Technology, and Scottish Agricultural College (unless you reckon it's part of the University of Aberdeen) but none made me an offer. And then there are some on the list I interviewed at but wasn't made an offer. Most prominent among those is the University of Cambridge. My presentation at the end of the month is also at a top 200 university.

Why Doesn't Australia Give More Incentives to Give to Charity?

We made some donations to help with the recovery from the Sichuan Earthquake. Half the money we gave through San Diego Zoo to help the Wolong Panda Reserve (both of us have been at different times to San Diego Zoo where there are both pandas and koalas). The other half we gave to the Australian Red Cross. We thought about giving money to this charity but contributions to it are not tax deductible while those to the Australian Red Cross are. Americans are used to being able to claim a tax deduction for a contribution to any non-profit. Here, charities must either be named in the Act of Parliament or meet very strict criteria. The Charles Foundation has chosen not to pursue tax deductible status even though it is an Australia based charity. Needless to say pretty much all foreign charities, including San Diego Zoo, are not eligible for tax deductibility in Australia.

I first became aware of these complications when I ran a small Australian non-profit - an academic society - we explored getting tax-deductible status - but it was just a non-starter. I think this discriminates in favor of large established charities - you can take a deduction for a contribution to an Australian university, but not to the educational efforts of our fledging academic society.

There are other strange restrictions on the tax deductibility of giving. In the US, giving appreciated assets to charities is really big. Buy a house for $1,000,000 and let its value rise to say $3,000,000. Leave it in your will to charity and your estate takes a $3,000,000 deduction against the value of the estate for estate tax purposes. In Australia, you can't donate property to charity if you've owned it for more than 12 months! We don't have an inheritance tax here either which also discourages giving (though I'm not a fan of inheritance taxes :) - though requiring people to give 10% of an inheritance to charity or pay an equivalent tax might be a good idea). Actually if the heirs donate the house within 12 months they'll be able to claim a $3,000,000 deduction in Australia but if they wait too long, they'll have to sell it, pay 23.25% tax on the $2 million gain (the top long-term CGT rate - unless they go and live in the house which will make the sale tax free) and then donate the remaining cash to charity, which they will be able to claim a deduction for. In the case of shares, you must hold them for 12 months or more (how weird is that?)... so a Warren Buffett could donate shares to charity and claim a massive deduction against his other income but not real estate or art works etc.

So it's not surprising that the U.S. has the highest level of charitable giving per capita in the world (which somewhat mitigates its low level of official foreign aid) and Australia a much lower level, though still ahead of many other developed economies.

Well, I don't know the answer to the question in the title, except that the government seems to trust people less on this here than the U.S. government does. Maybe it's due to the more secular nature of Australian society? After reviewing the tax deductions available for charitable giving in other countries, Australia is actually pretty generous compared to many.

A tip, donate in the name of the partner with the highest marginal tax rate if you are part of a couple. Don't donate as a couple if your tax rates differ.

Paying for Grad School

A good article about whether to pay for a graduate degree. My usual advice is if you aren't going to do a degree in a lucrative and/or high demand professional area (business, law, medicine, physical therapy etc.) don't pay to go to grad school. Even if you are rich, if the school or some other sponsor doesn't want to pay for you then that should be a warning sign that maybe this isn't a good idea. Of course, if you really just want to do it for fun and you have the money, go ahead...

Even some of the students whose PhDs we pay for (I am director of graduate studies for my department) turn out to have been bad investments. Perhaps a quarter of them really shouldn't have done a PhD. If you count those who ended with a masters (while they planned on getting a PhD) maybe up to half of admits are a bad investment. Now maybe some people we refused funding to would have been good investments. But I like to think we do know a little when we make these decisions and that most of the people we don't fund shouldn't go to grad school.