Almost 40 Years of Spending

I am helping a friend make a move from New York to Texas with financial advice and a small loan. Talking about budgeting got me to go look at the longest term spending data I have electronically. This is in Pounds Sterling and I can't be bothered to convert to dollars because I would have to research exchange rates from the 1980s. It goes back to September 1988. I probably could extend it further from handwritten records. But, anyway, this is what I have readily to hand:

It's also not inflation adjusted (see below). Apart from the upward trend, it is noticeable how much more volatile the series gets recently. You can see the peak when we bought our house (stamp duty) and the trough at the start of the Pandemic. There are previous peaks usually associated with moves, like in 2007 when we moved to Australia. Currently, school fees are the most volatile element in our budget. Actually, in percent terms, spending got more volatile recently, but it's not more volatile than it was in the earlier years of the series:

So, the first version of this post used non-inflation adjusted data. I easily found almost uptodate data on the UK Retail Price Index. This is not ideal as for most of this period I was spending in Australian or US Dollars. The exchange rate and then the use of a foreign price index will distort things. But if you want to know what our spending was in today's pounds, it is correct:

 

I also added a two year moving average. Spending does rise 4 to 5-fold. This is not surprising. We now have four people rather than one. Real spending fell after rising to a new level following my first move to Australia and my last move to the US. And this is also true since we moved into our current house, despite going from two to four people during that period. Real spending has been drifting lower over the last decade. On the other hand, it continued higher after other moves.

Where the Money Came From

I just updated this graph, which breaks net worth down into savings, inheritance, and investment profits. 

Savings are from salaries etc and tax returns as well as employer superannuation returns. Inheritance is self explanatory. Investment returns include franking credits and an estimate of the taxes paid by industry and public sector superannuation funds. Here I also include the increase in the value of our house. To get actual net worth, we need to subtract from the total tax paid by the SMSF, franking credits received by non-superannuation investments, and taxes paid by those large superannuation funds. These taxes currently sum to AUD 400k.'

Roughly one quarter of net worth is from savings, one quarter from inheritance, and half from investment returns. You can see the recent effect of the redundancy payment on savings on the bottom right.

It would make more sense to place profits as the bottom layer on the graph as they were negative during the dot-com crash and the GFC. But I think it is more instructive to see the steady rise in savings over time. Now of course, I expect it to go slowly down again as we dissave.

 

Required Withdrawal Rate

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. 

 

All Time Contributions of Asset Classes

I was wondering how much each asset class has contributed to our total profits to date. It was easy to compute this number using the spreadsheet I use to compute monthly gains on individual investments and asset classes. The numbers are only estimates. For multi-asset class funds, I assume that each asset class in the fund has the same rate of return. So I multiply each asset class share by the total profit for the fund to get the contributions of that fund to total returns for that asset class. This is also how I compute asset class returns each month. Here are the results:

Private equity has contributed the most followed by Australian large cap and gold. Contributions of bonds and real assets are surprisingly large. They may be an artifact of how I compute the contributions from multi-asset funds like our employers' superannuation funds. Also, Commonwealth Bank is all attributed to bonds, when about half my return was from my investment in the Colonial IPO rather than my later investments in CBA hybrids. Finally, 17% of Regal Investment Fund (RF1.AX) is currently in private credit but most of my returns were made before they even invested in private credit! So, this is biased upwards.

Coincidentally, I am changing the name of the Bonds asset class to Credit. Private credit isn't bonds. It isn't even "fixed income". The category covers both private credit and bonds.

UK Pension Update

Back in April, I got a letter from the UK pension authority laying out the voluntary contributions I could make to get a UK pension. They sent this via snail mail and there were only a few days left to the deadline to make the contributions. I transferred money to their Barclays account from Commonwealth Bank. I thought this would be more reliable than OFX. But turns out that OFX may have been better because CBA only allowed me to put the relevant reference code in the "message" field rather than a standard "reference field". 

I soon got another letter asking for 2023-24 contributions, which I made. I waited a couple of months, as the website said it could take up to 8 weeks for my National Insurance record to be adjusted. It was still the same when I checked. I phoned the help number at HMRC and after waiting for ages and starting to talk with someone with a heavy foreign accent on a bad line, got cut off. I tried to send a letter with copies of my transfer receipts by express mail. But the Australian Post Office computer system couldn't handle non-geographic UK postcodes! So, I resorted to sending the letter by regular airmail in a hand addressed envelope. 

In the process, I managed to drop my wallet in the shopping mall. I got it back the next day from the mall concierge desk with all the cash intact! I think the last time I lost my wallet was almost exactly 30 years before in Albertville in France on an epic bike trip from London to Nice. I didn't get it back that time, but a nice policeman found a hotel that was prepared to host me until I received a spare credit card I got my parents to send me from London. 

A month later, I just checked the HMRC website and see this:

Previously, I think it forecast around £400 per month. So, it looks like they updated my record! It's all pretty confusing because the website still says most contribution years are incomplete but doesn't say how much I did contribute! It also says I am short about £17 for 2023-24, despite me sending the amount they requested. I will send it with next year's contribution.

This forecast includes the effect of contributions in the years up to 2031. In my accounts, I value this pension as the value of contributions I made - around AUD 9k. But using the 4% rule it is equivalent to needing AUD 538k less money in the 4% portfolio to get a given expected income stream! The net present value is a lot less than that.

 

Switching from Generation Global to Acadian Global Long-Short

Generation Global Fund is one of our longest held investments. I first invested in April 2008. It was a good fund but has been weaker recently. I also invested in the Acadian Global Long-Short Fund back in April 2008. But I exited in 2012 because it had underperformed and we needed the cash for our house-buying fund.

It turns out that that was about when the fund started to outperform. Its overall track record since inception has now been very good with a beta of 0.3 to the MSCI All Country World Index and an alpha of 7.7%. In the last 5 years it has done even better:

Beta has been 0.3 over the last five years too, while alpha has been even higher. I noticed because of an article in The Australian. I then went and downloaded the data from Colonial First State (CFS) and did the analysis. So, I am switching from Generation to Acadian. This will tilt the portfolio away from an overweight on US stocks and back towards hedge funds. Though this hedge fund has a strong weight on US stocks itself.

P.S. 14 June 2025

I have also decided to switch from Aspect Diversified Futures to this Acadian Fund in our SMSF. Aspect was flagged as an underperformer in our Investments Review.

I haven't managed to do either transaction yet. I found that the manager still has Moominmama's old mobile number and to change your phone number you need to use your existing phone as authentication. You can log into the account using email for authentication. So I placed a secure request inside the account to change the number. They are just refusing to do the switch at "this time" in the SMSF account. Will try again on Monday and phone them if it doesn't work.

P.P.S. 17 June 2025 

I phoned CFS and they called me back. It turns out that CFS's "mezzanine" investments each have separate PDSs (prospectuses) for each fund manager. So, I had to make a new application for the Acadian Fund rather than a switch. I have now done that. So, we are halfway there. By the way, this new hedge fund investment means I am again tweaking the target portfolio to make sure it remains a good benchmark. I am raising hedge funds to 15%, reducing RoW stocks to 4%, Australian large cap to 9% and Australian small cap to 4%.

The Banana Zone

So I wore this shirt to lunch with a couple of friends today:

After the first friend left, I was saying how I hated buying clothes (because it is hard to get stuff that fits), but the shirt I was wearing was new. So, he asked me about the Banana Zone. After I explained, he asked whether he should invest some of the extra money he wanted to put into superannuation earlier or wait for the end of the financial year. I told him that it really mostly applied to cryptocurrency. He mentioned that he was trying to reach the transfer balance cap. I said: "I've gone over that". He was surprised as I had only had $1.6 million when we had recently discussed this.* "What did you do?" "Cryptocurrency!" Then he was like: "You need to sell now, Warren Buffett would never do that." (I'm paraphrasing). I said that I did plan to sell this year... "Why are you making such risky late moves?" "To buy a $4 million house".

The $4 million house is an inside joke. We recently visited our friends' newly built house that was mentioned in the linked blogpost. It cost them a total of $4 million in the end, but probably isn't worth as much now. Buying and knocking down an existing house destroys value and property prices at the high end here have softened.

* At that time, I said I didn't want to make much more in non-concessional contributions, as I'd probably hit the transfer balance cap by investment gains anyway, and Labor's plan to tax balances over $3 million was looming.

Who to Follow on Crypto?

I've managed to build some confidence in investing in bitcoin and the larger crypto ecosystem by following a few key people:

Oscar Carboni: Technical analyst and futures trader. His analysis of bitcoin prompted me to first get into bitcoin.

Didi Taihuttu: Digital nomad who went all in on bitcoin after previously mining bitcoin. Very skilled at technical analysis of bitcoin.

Anthony Pompliano: Entrepreneur in crypto space. He sold his company Reflexivity Research to Defi Technologies. His analysis of DEFI.NE prompted me to invest.

Raoul Pal: Former hedge fund manager who provides macro-investing services as well as crypto commentary. He links crypto trends to broader macro and especially "liquidity".

The Baseline Matters When Computing Long-run Investment Performance

I am expecting my rate of return over the last 20 years to look bad this year because 2004 was such a good year. In 2004 I gained 42.4% compared to a 13.7% gain for the MSCI World Index (in AUD terms). It was my best year ever in terms of investment performance. The ASX 200 gained 30.3%. You can already see this in this chart:

In 2023 my performance over the last 20 years almost matched the MSCI World Index's performance over the previous 20 years. But this year I am lagging a lot. Why did I do so well in 2004? It was mainly due to leveraging Australian shares. This table shows the AUD gains in 2004 for each investment:

The CFS Geared Share Fund is a levered Australian share fund. It provided the majority of gains. Nowadays I feel that I can't handle that much volatility. The fund is still available. Of these investments I am currently, 20 years later, invested in CFS Developing Companies, Platinum Capital, CREF Social Choice, and TIAA Real Estate.

I started 2004 with a net worth of AUD 170k and ended with AUD 298k.

My Aunt's Legacy

My aunt died in 2020. She was single all her life. My father and her did not get on well. They fought each other in court over their mother's will. We wondered who she left her money to. Turns out she set up a foundation with about £5 million in assets. Most of the value came from her house and a company that seems to rent properties. The charities commission in the UK is already investigating the foundation for donating money to things that she didn't specify and maybe benefiting the trustees.... I wonder what happened to the art she inherited that they fought over? Either she had already sold it or she must have given it to someone else. 

One of my cousin's children found out about this charity when they were looking for grants for education, which did fall within one of the approved purposes of the foundation.

Lost Money Found

Got an email from Commonwealth Bank that mentions their "Benefits Finder" button in the CommBank App. This can help you find missing money. Turns out I have about $650 with ASIC in liquidator dividends from the collapse of HIH Insurance. I owned 7,500 shares when it collapsed. Need to have a document with my name and address on at that time. I even have the ASX holding statement for my shares! Get a certified copy, a certified copy of my passport, and a statutory declaration and send it all to ASIC.... Will be paying a visit to the Post Office tomorrow to do all this...

A 60/40 Australia-Oriented Passive Benchmark

If we create a portfolio invested 50% in VDBA and 50% in VDGR we can simulate a 60/40 passive benchmark:

This requires monthly rebalancing of the portfolio. We ignore the costs of this rebalancing. Over this period, the benchmark portfolio had a compound annual return of 5.60% with a monthly standard deviation of 2.55% compared to Moom's compound return of 7.77% with a monthly standard deviation of 2.32%. Moom's beta to this portfolio was 0.8 with an annual alpha of 2.9%.

Note that our portfolio goes through three different "regimes" during this period. Up to October 2018 we had a portfolio that was about 60% long public equity. Then we received a large amount of cash, which we converted to bonds and then gradually invested in other assets. This phase lasted up to the end of 2020. Since then we have been close to the target portfolio.

Superannuation Returns in the Long-Run

Following up from my post on how our SMSF is performing compared to our managed superannuation funds, here is how our superannuation in general has done over time:

Note that the y-axis is a log scale! Our superannuation has outperformed the MSCI index in AUD terms in the long-run. The big win was in the couple of years after 2002 when I rolled over my Unisuper fund to Colonial First State and invested in geared funds. Then I got too conservative leading up to the GFC - the flat top you can see on the red line. Superannuation returns crashed in the GFC because I got aggressive again too early. After that, we have followed the market more closely until after 2018 when we have gone into a bit more of a capital preservation mode again. This reduced the volatility in 2022 but returns in 2023 are a bit disappointing so far.

On the other hand, our non-superannuation assets had catastrophic performance up to 2009. After that, I got my act together, which eventually gave me the confidence to set up an SMSF. But you can see the value of handing control to an external manager early on.

Superannuation returns are pre-tax but after fees. My method of imputing tax paid for public superannuation funds probably exaggerates their performance a bit. These time based returns are quite different from dollar based returns. All the early volatility wasn't that important because total assets were small. Performing well now is much more important.

Enough Wealth followed up on my original post by comparing his SMSF over a longer period to a basket of industry funds.

Real Salary

 

I was wondering whether we were getting worse off over time at my employer and so plotted my real and nominal pre-tax salary for the time I have been in my current position. Halfway along there was a blip where I was department head and got paid more. In real terms I am now about $2000 below where I started in 2011. The union is asking for a 15% increase in the latest bargaining round. After tax that is a about an 11% increase (because of progressive tax rates).

2019-20 Australian Income and Wealth Distribution

 

I didn't notice when the Australian Bureau of Statistics released the 2019-20 data on Australian household income and wealth distribution. I previously reported on the 2015-16 and 2017-18 data.

Mean gross household income was $121k per year in 2019-20 (all $ are Australian Dollars). The median was $93k. These are not adjusted for household size. ABS provides data adjusted for household size in terms of the income a single person would need to achieve the economic well-being of the average household. To adjust these to the required income of a household with 2 adults and 2 children requires multiplying by 2.1. I seriously doubt that adding a child only increases costs by 0.3 of the first adult! 

Mean gross household income in the ACT was $150k and the median $124k.

To be in the top 10% of households requires a gross income of at least $235k. To get information on the breakdown inside the top 10% you have to use their data on the number of households within each of different bands of weekly income. 4.7% of households have an annual income above $312k and another 3% between $260k and $312k. Our gross income was $264k (taxable income), so we just fall within this group and, therefore, in the top 7.7%.

Mean household net worth was $1.04 million and the median was $579k. To be in the top 10% you needed a net worth of $2.26 million. We were at $4.44 million at the end of June 2020. To be in the top 3.9% you needed a net worth of $4 million. So I estimate we were at the edge of the top 3.3%. I guess it makes sense given my age that we higher in the wealth distribution than in the income distribution.

1.2% of households had a net worth above $7 million and 0.6% above $10 million.

There is a lot more data on breakdown of assets etc. which I might report on another time.

To be in the US top 1% by net worth required USD 11 million ($17.75 million) in the same period. A top 1% US household income is around USD 600k and above.

History of Franking Credits

This year's tax returns include large amounts of franking credits connected to Australian dividends. I almost managed to wipe out Moominmama's tax bill with them. The franking credits are added to income and then deducted from the tax bill. As the corporate tax rate for large companies is 30%, if you are in the 34.5% marginal tax bracket (including the Medicare Levy) like she is, it would seem that franked dividends will slightly increase your tax bill. Say you got a $1,000 dividend including the franking credit. Your tax on the dividend as a whole is $345 and you deduct the $300 franking credit from that, paying $45 in tax on the dividend. The magic of franking credits is that if you have investment deductions like margin interest, you will end up with surplus credits. Let's say you have $500 in margin interest in this example. Then your tax on the net $500 in income is $172.50. After deducting the franking credit from this, you have $127.50 in tax credits, which you can apply against the tax on your salary etc. 

Foreign source income tax offsets work in a similar way. These are tax paid to foreign governments on dividends etc. Finally, there are also Early Stage Venture Capital Limited Partnership tax offsets. If you invest in an ESVCLP you can get a credit worth up to 10% of your investment. This totally offsets tax on other income even without any deductions!

Over time, the amount of franking credits and foreign source income tax offsets we have received has increased, as you would expect, though this year's credits are off the scale:

This doesn't include any tax credits received by our SMSF or any other superannuation fund for that matter.

A Tale of Two Bloggers

Enough Wealth has a new post comparing our two NetWorthShare net worth curves titled a Tale of Two Bloggers. He took out the step changes due to inheritance in both our histories. But the two curves are in different currencies - mine in USD and his in AUD despite us both living in Australia. I wanted my track record to be comparable to the majority of other members who are US based. The volatility of my net worth is much lower in AUD than in USD. This is by design. The Australian Dollar tends to fall during "risk-off" periods reducing losses in AUD terms and increasing them in USD terms.

So, I thought I'd post a comparison of my net worth curve in both AUD and USD terms:

These go back way before the record on NetWorthShare. Back to September 1990, the month I started my PhD in the US... In addition to bigger moves during bear markets, the US series has a number of flat periods compared to the AUD series - around 2015, 2018-19 and in 2021. Overall, the AUD curve ascends more smoothly. We can also reminisce about that time after the GFC when the Australian Dollar was worth more than the US Dollar!

Save, Inherit, and Invest

I love reading the Millionaire Interviews at the Earn, Save, and Invest Blog. One of the questions they get asked is "What would you say is your greatest strength in the ESI wealth-building model (Earn, Save or Invest) and why would you say it’s tops?" Compared to many of his interviewees, our earning has not been that strong. Despite my salary putting me in the top 5% of Australian earners, it's only nominally about USD 125k per year. On the other hand, our household income including superannuation contributions and net investment income is nearer USD 250k per year. Historically, I would have said that our strength was in saving. Before we bought the house and had children, we had a very high saving rate. But, in the last few years, our investment profits have really taken off. Now the sources of our net worth are roughly 25% saving, 30% inheritance, and 45% investment returns.

I've posted earlier versions of this crazy chart before:

It separates net worth into saving and investment returns in superannuation and non-superannuation accounts, inheritance, and housing equity. Part of housing equity is saving and part gains. Maybe, in the future I will split that up in the graph. Only recently is that difference becoming significant.

Up till the end of 2014, we saved a lot apart from the meltdown following the dot.com crash. Since then we moved savings into housing equity and superannuation, resulting in negative current savings. More interesting is that after the first transfer to housing equity the growth rate of savings (i.e. the slope in the segments without a transfer) is much lower than before 2015. On the other hand, retirement contributions remain strong.

P.S. 25 November

So, I made a chart showing just total savings, inherited money, and investment returns:

Investment returns are the gap between net worth and the other two categories. As investment returns went negative a few times, plotting them in the same way as the other two sources would be confusing. This graph shows that savings continue to increase but at a slower pace than they did in the first part of the previous decade.

Next Steps

We have now executed a major part of the financial plans I developed in 2018. We deployed almost all the inherited capital - we still have some Ford bonds, which were intended as a short term investment, we have completed the initial set up of the SMSF and set up accounts for our two children. We have a much more diversified portfolio. So, on the investment front it will now be more business as usual going forward. I explored trading and made a little money but haven't got to the stage of setting up a proper system. This is something I will need to revisit very soon. To decide once and for all if that is a direction I want to take. If I do it, it would be in collaboration with some other people I know. The other major thing we haven't done is estate planning. I wanted to get the SMSF done first. So, we should really look at that seriously soon too.

Time-weighted Versus Dollar-weighted Returns

There was an interesting comment in the latest Millionaire Interview at the ESI Blog:

"I find it a bit silly how most people focus on their time-weighted returns instead of their asset-weighted returns... Your financial freedom is affected by your asset weighted returns, not your time weighted returns."

I have thought about this before, but not exactly in these terms. This is an interesting way of putting this idea. 

The way I thought about it is: When you start investing you will probably make mistakes. But you will have less money and so they matter less. What matters more is what your returns are when you have a lot of money.  So, you can afford to pay some tuition fees. I really paid too much tuition...

This graph shows an index of my returns in Australian Dollar terms starting at 1000 in 1996:

Initially, I did well. But then the dot.com crash came and I started losing, ending up below where I started. Then I rode the next bull market. I started getting out as the financial crisis began to appear. But I got back in again too early and crashed. I wasn't quite back to square one, but not far from it. Not much happened in the next few years following the crisis and then things took off from 2012 on. These are my time-weighted returns.

In the last 10 years, my rate of return has been 11.1% vs. 12.0% for the ASX 200. In the last 20 years it was 4.8% vs. 10.6% for the ASX 200. Since "inception" the numbers are 6.2% and 11.2%. I got through the COVID-19 crash a lot better than the previous bear markets. Hopefully, that improvement will be maintained in the future.

The following graph shows relative out-performance compared to the ASX 200 over every time horizon:

The way to interpret this is: If you invested with me in 1996 then you would have under-performed the ASX 200 by 4-5% p.a. since then. However, if you invested with me in some months in 2012 you would have matched or just beaten the ASX 200 since then. Similarly, investing in the year before the COVID-19 crash you would now be ahead of the ASX. Investing with me in the year after the COVID-19 crash you would be behind the ASX and so forth.

This graph shows my absolute profits in Australian Dollars:

A simple way of showing dollar-weighted returns. Basically, things went nowhere till 2012. All the gains have happened since then. So, I "wasted" 15 years learning to invest while saving.