Didi Taihuttu on Youtube

I am following this dude closely on Youtube:

IWT Conscious Spending Plan

I like to watch Ramit Sethi's podcasts where he has an in depth discussion with a couple about their finances. These sessions usually involve the "Conscious Spending Plan", which is basically a type of budget. You can get a copy of the spreadsheet here. I was curious how our numbers compared to the guests on the show and so filled in the template myself.

My main issue was deciding what income number to use. At first, I tried using our income as reported in our tax returns plus employer superannuation contributions. That includes net investment income outside of superannuation. But then it was pretty tricky working out what amounts to put in for investment flows. I switched to using just our salaries plus employer superannuation contributions and it all made much more sense. I added a childcare and education category as that is our largest expense. For the "clothes" category I used our spending on mail order and groceries is what we spend in the supermarkets category. Transportation includes all our transportation spending including petrol, car repair, buses, taxis, e-scooters etc. Saving is our employer superannuation contribution plus the concessional contributions we make for Moominmama to our SMSF. All the numbers in the following are in Australian Dollars:

What do I notice in the results? One is that we don't really do "savings" both in terms of saving towards goals and having savings. Our savings are basically money in "checking" accounts. If we need more money we take it out of an investment account or borrow money. I am thinking I probably should get the savings buffer up more in case something happens to me. Otherwise, the family will quickly have payments bouncing without someone to make sure there is always enough money to cover bills. We used to keep about 1% of net worth in our offset account.

Our total "fixed costs" are at 76%, which Ramit considers too high. On the other hand, our investment contributions are at double the recommended level and I think they are now very low.

The amount left over in the "guilt-free spending" category is only 4%, which Ramit considers to be very low. There is a lot of flexibility here in what should fall into the fixed cost and this category. Is subscribing to e-scooters, which saves me a lot of time and is fun, something I should consider a fixed cost or "guilt-free spending"? Should private school and music lessons be considered a "fixed cost"? I have included some hobby-related subscriptions in the subscription fixed cost...  But moving those would only change things by $100 a month at most.

What is in the guilt-free spending is in practice spending on eating out (mostly lunch these days) and travel - mostly the money we spent on renting a house for our vacation. The recommended 20-35% of spending is really a lot!

What I Get Out of Tracking Spending Categories

Ramit Sethi advocates only tracking about four categories of spending and is critical of couples who do more fine-grained tracking. For the last few years I have been tracking 15 top level spending categories and 27 more detailed spending categories. So, what do I get out of this. I think the following:

• I can track which items have grown fast and maybe we should cut back on. This has resulted in saving money on car insurance, health insurance, and mortgage interest.
• Some things that I think we are spending a lot on, and should cut back on are actually not that big. For example, our current spending on restaurants is AUD 3k per year or 1.7%. My spending on bus, Uber, taxis etc. is AUD 4.5k per year or 2.5%, which is less than half our spending on transport. These are two of my three areas of "luxury" or personal spending. The other is spending money on subscriptions online etc So, being able to see these numbers makes me feel more comfortable about my spending in these areas.
• Perhaps some things seem small and we can consider raising them, like our spending on charity at only 0.4%.
  
• Well, yes it's neat to see what we are spending money on and comparing to other people :)
  

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.

Sam Dogen Interview

Sam Dogen of Financial Samurai has first video interview. Finally, you can get to see him, even if you still don't know his real name 😀

New I Will Teach You to be Rich Podcast

 

 

Ramit Sethi has started a podcast titled of course: "I Will Teach You to be Rich" and subtitled: "Real money stories from behind closed doors".  It's like a couples therapy session with Ramit as counsellor. It's great, but often the numbers don't seem to add up. For example, this couple makes USD 250k between them. Let's take off 1/3 for taxes etc. They say they spend just over 10% on housing and save 20%. They have "very low expenses". The guy scrimps and saves on everything. But, apart from what I listed, they would have to have another USD 90k in expenses. That's near what our family of four spends on everything including housing and private school and daycare. So, what is really going on here? Does the woman spend a lot of that on her own outside the household budget stuff? So this doesn't sound like "very low expenses" to me.

The Best Portfolio for Australia

The portfolio charts website, I wrote about before, now lets you do analysis using Australian assets, inflation etc! It turns out that the best portfolio for Australia isn't the same as the best for the US... The following table shows the average and standard deviation of real returns, the maximum drawdown, and the safe and permanent withdrawal rates (preserves capital) for a 30 year retirement horizon:

This is based on data since 1970. Based on the permanent withdrawal rate the Ivy Portfolio developed by Meb Faber is best. The 100% Aussie stocks portfolio (TSM) has a slightly higher return, but the lowest permanent withdrawal rate. So, I think Aussie investors should start to think about portfolio design from something similar to the Ivy Portfolio. It's no surprise that I have been a fan of Meb Faber and endowment style portfolios...

Using ETFs, this portfolio recommends putting 20% into each of Australian stocks, international stocks, intermediate term bonds, commodities, and REITs.

Using the build your own portfolio tool you can see what tweaking this beginning portfolio can do. For example, replacing half the commodities allocation with gold and half the bond allocation with extra international stocks, increases the return to 6.1% and the SWR and PWR to 5.2% and 4.4% with almost no increase in drawdowns.

Going to 60% stocks divided equally between Australia and the rest of the world and 10% in each of bonds, gold, commodities, and REITs, is actually quite similar in return profile to the Ivy Portfolio. The key thing is to hedge Australian stocks with international and real assets. This latter portfolio is probably going to tbe basis of my own new target portfolio.

Capitalise

Capitalise is an automated trading platform that uses commands written in near natural English at a very high level. I heard about it when Interactive Brokers told us that we now have access to it. At the moment the service is free. You can put in commands where buy/sell levels and stops depend on functions of past prices and also various technical indicators. There is no need to learn a formal programming language like Python or understand any of the intricacies of actually executing strategies. They are based in Israel.

This would be great for me except at the moment it doesn't allow position sizing based on functions of prices. You have to give it a numerical position size. I chatted with Arica on their platform and she said that they might develop that functionality in the future. For now I can handle updating my orders each morning (Australian time) as I am only systematically trading in 3 markets (Bitcoin, palladium, and oil). Maybe they will have this functionality by the time I can't handle trading manually anymore and I won't need to learn Python etc or collaborate with someone who does know that stuff.

Distribution of Income and Wealth in Australia in 2017-18

The latest survey results have been released by ABS. To be in the top 1% in Australia you need to have a household net worth of about AUD 7.5 million (USD 5.25 million). We're in the top 4% according to the data. The mean household has a net worth of AUD 1.022 million and the median AUD 559k.

We're also in roughly the top 4% by household income if we'd earned 2018-19 income in 2017-18... Median household earns AUD 1,700 per week (AUD 88k per year) and mean 2,242 (AUD 117k). Of course, households with children average a lot more than this as the data include pensioners, students, singles etc. These data don't let you compute the income of the top 1% directly.

David Svensen Lecture at Yale

Svensen is the manager of Yale's endowment. He also gives occasional lectures at Yale.

My investment strategy is strongly influenced by endowment investors like Svensen.

Portfolio Charts

Portfolio Charts is a really interesting website where you can do simulations of safe and permanent withdrawal rates and many other things for a range of investment portfolios. These include predefined portfolios and you can also build your own portfolio using a range of ETFs. Here for example is Tony Robbins' version of Ray Dalio's All Weather portfolio:

The orange line gives the withdrawal rate which means that you wouldn't have run out of money if you retired in any year since 1970 and retired for the length of time on the x-axis. The green line is the withdrawal rate that means that you will have at least as much money as you started with in real terms. It's interesting how these go in opposite directions as the length of retirement increases. If you retired for 30 years the permanent withdrawal rate is 3.8%. This portfolio had an average real return of 5.5%. The best performing portfolio in terms of withdrawal rates is the site creator's own "Golden Butterfly" which has 40% stocks, 40% bonds, and 20% gold:

This portfolio had a real return of 6.5%.

An interesting point is that safe and permanent withdrawal rates vary a lot by country. The site allows you to choose the US, UK, Canada, and Germany as home countries. The linked article also includes Australia, but unfortunately the site itself doesn't allow you to do analysis for Australia. A big caveat is, of course, that all this depends on historical returns. If bonds, for example, don't do as well going forward as they did from 1980 till recently then, withdrawal rates are going to be lower. Choice of alternative investments is also limited to gold, a commodities ETF, and a REIT ETF.

Self Managed Superannuation

I am exploring setting up a self managed superannuation fund (SMSF). I want to do this so that I can implement our target portfolio investment strategy and so I can put higher tax investments into the lower tax superannuation environment. Managed futures are a tax ineffective investment outside super when your marginal tax rate is 47%. Inside superannuation they will be taxed at 15%.

Setting up an SMSF is very complicated in Australia compared to the US where you can just open an IRA account with a broker like any other brokerage account and the only issue is limits on contributions and later on minimum withdrawals. For standard IRAs you pay tax on withdrawals only, on your regular tax return. The main reason Australian SMSFs are complex is taxation but some of the bureaucracy just seems to be for the sake of it... In Australia, pretax or concessional contributions are taxed at 15% (or 30% for high income levels) going in, and you can also make after tax contributions. Its necessary to keep track of which were taxed how. Then earnings are taxed at 15% (10% for capital gains) and can be offset by franking credits and foreign tax paid. When you finally withdraw your money, no tax is due and earnings of the account are untaxed if you set up a pension, though now there is a cap of $1.6 million on the amount of assets whose earnings are untaxed. So funds need to submit tax returns separate from their members. And they need to be audited annually and there are lots of ways they could become non-compliant with the rules. And an SMSF is a trust which is set up as a separate legal entity. You might also want to set up a company to act as trustee!

You could go to a lawyer to set up the trust and to a local accountant to help audit the fund and do everything else yourself. But there are many providers who streamline the set up and administration of SMSFs. You can get "year-end" administration which just helps get everything in order for the tax return and audit, or you can get a full daily service. Though I do our own tax returns, I have decided to go for the full daily service as I want to outsource this as much as possible (looks like I am going to have to do tax returns for my son too and am also looking at setting up a company...) and want to be confident that I am compliant with the rules, because the penalties for non-compliance are very severe.

This is a great site with information about different providers of services for self-managed superannuation funds. I visited the websites of all the providers that offer a daily service. Some sites have a lot information and some have next to none. The latter want you to phone them to give you the details. I have a strong preference for financial services that are as transparent as possible. I also investigated Commonwealth Securities and Dixon Advisory, which are not on this list.

Dixon are based in Canberra and I often go past their offices on Northbourne Avenue. Years ago, I used to read Daryl Dixon's column in the Canberra Times. Their service combines admin and investment advice and costs from $3,000 for a $333k account to a maximum of $6,000 for accounts above $666k. To make investments, you have to call their broker and the commissions for shares are 1.1%, which is capped at $400 for Australian shares and uncapped for foreign shares. I don't need investment advice and trading is way too expensive.

Commonwealth Securities is a more realistic option. Including audit fees, they charge a flat $3,000 a year. On a $900k account that is 1/3%, which is reasonable. Trading fees are 0.12% for Australian stocks, which is good though not the lowest, and 0.31% for US stocks and 0.41% for shares in the UK and many other countries, which is expensive but not as outrageous as Dixon. You can't trade CfDs (which are offered by CommSec for other accounts) or futures (which aren't offered by CommSec).

You can set up a trading account for an SMSF with Interactive Brokers, which can trade anything you like for low fees, and then find an administration provider who is prepared to work with them. Determining who can work with IB is what I need to do next. You can trade futures in an SMSF as long as it fits within the written investment strategy (yes, you are required to write one) and other risk related rules.

Two providers on my list, who have won awards and who I am going to investigate next, are Heffron and Super Guardian. I am impressed with the transparent information on Super Guardian's site. They also have an endorsement from Chris Cuffe. Super Guardian charge more the more investments you have. If we have up to 20 investments then they are a similar price to CommSec. Heffron charge a flat fee of $3,300 for their top level service.

NetWorthShare

NetWorthIQ seems to have died. So, following up on EnoughWealth's blogpost, I have opened an account with NetWorthShare. It's surprising that NetWorthIQ didn't make more of their website. I would have thought they could have got a lot of advertising from the financial industry.

Gold 2048: The Future of Gold

This report seems bullish for the price of gold over the next 30 years. Continued growth in India and limited gold discoveries recently seem bullish. On the other hand, some regions haven't been explored much and technology could enhance extraction, though the latter likely balanced by increased environmental restrictions.

Cracking Horse-Racing, the Lottery, and the Stockmarket?

Articles about Bill Benter who "cracked" gambling on horse-racing by using a model to predict which horses would win and Eddie Tipton who cracked the state lottery, illegally. I'm testing whether I've cracked the stock market :) So far, so good this month, but it is early days.  

P.S.
More on quant betting on horse-racing. Model remains long stocks (NDX and SPX) and switches to long oil for Monday. Yes, I added a model for predicting oil, so far I only did very quick trades in oil.

P.P.S.
More on Zeljko Ranogajec.

Get Your Credit Score

You can now get your credit score for free in Australia, something that has long been taken for granted in the US. My score was 998 which is in the excellent band, which ranges from 833 to 1200.

Blog List

I finally upgrade Moomin Valley to a new Blogger template but in the process lost my previous blog list. A lot of the links were dead anyway. I've added a few back. If you would like your personal finance or investment blog added, let me know and if I like it, I'll add it. I'm more interested in the investing/business direction and less in frugality/getting out of debt.

Also, what's up with the NetWorthIQ badges? I re-added the code to the blog but nothing shows up :( If you know a hack, please let me know too.

Australia is the Richest Country in the World by Far

When measured in terms of median wealth per individual in US Dollars at $220,000. Switzerland is richest in terms of mean wealth per individual. Both facts are in the Credit Suisse Wealth Report.

(HT: Enoughwealth)

How Much Money Should You Give as a Present if You are Invited to a Wedding?

If you ever wondered how much money to give as a gift at a wedding, there is an "app" for that if the wedding happens to be in Israel. Unfortunately the link is in Hebrew (I can read it...). I wonder if there are similar sites for other countries?

Snork Maiden said that in China RMB 1000-2000 would be expected, which sounds like a lot of money to me as RMB 2000 could be a month's wages for a factory worker or even a new graduate.

Maps to Show Where You Have Been in the World

Revanche posted a link to a website where you can produce maps of the countries and states you have visited. Here is my world map:


visited 24 states (10.6%)
Create your own visited map of The World

The problem is that borders between countries are marked with white lines. This isn't a problem for the borders between the US, Canada, and Mexico. But it is a really big problem in Europe. So there looks like there is a white space in the middle of Europe on my map where there shouldn't be one as I've been to France, Belgium, Netherlands, Germany, Denmark, Switzerland, Austria, Italy etc. around that gap.

The map of US states turns out better:


visited 23 states (46%)
Create your own visited map of The United States

I excluded those states where I've only ever been at the airport (Texas, Missouri, Minnesota, Utah, Indiana, and maybe some others). Here's my map of Canada:


visited 1 states (7.69%)
Create your own visited map of Canada

I've only been to Quebec. As I haven't been to India and Brazil I couldn't do those ones. Why aren't there maps for Australia and China? That would be a good addition to the site.