New Investment: U.S. Treasury Bills

Interactive Brokers currently pays 1.7% interest on U.S. Dollars. But U.S. government bonds pay more than that and are supposedly risk free, so I thought I would give it a try. I am concerned that U.S. interest rates could still rise and so I don't want longer term bonds. So, I just bought a U.S. Treasury Bill expiring on 12 February. My idea is when that matures, I'll put part of the proceeds towards buying Australian Dollars. I plan to build a ladder of these and so force myself to buy Australian Dollars slowly.

At IB the commission for buying bonds is $5 and it turns out that the minimum trade size for treasuries is $100k. This isn't stated anywhere, but when I tried buying $50k last week, I got a message that my trade size was too small, whereas this trade went through. I'm gradually moving U.S. Dollars to my IB account - I can move up to $100k every 7 business days using the ACH method.

I've thought about municipal and corporate bonds too, but these can be illiquid. For example, for the nearest term Berkshire Hathaway bond, only $1000 is currently being offered.

Investment Policy for Trust Accounts

My brother is opening the trust accounts. They will be invested in local mutual funds. Unlike Australian or US managed or mutual funds these do not make distributions but like an Australian listed investment company (closed end fund) they pay tax on their earnings. The tax though is the relevant investment rate not the corporation tax. This is 25% of the inflation adjusted gain. Also, if you sell a mutual fund in Falafelland 25% capital gains tax is withheld. Looks like we can't really avoid this tax. Foreign tax paid is not refundable as cash in Australia – it can only be deducted against Australian tax liable.* Because my son's earnings would be way below the tax free threshold (initially each of these accounts will have about AUD 44k in them) he wouldn't need to pay tax if the investment funds were based in Australia.

My brother suggested investing 70% in bonds and 30% in stocks. As a long-term investment policy – we will be investing for the next 20 years for my son – I think this is too conservative.

This is both because in the long run stocks have performed better than bonds in most countries but also because interest rates are now low. This chart shows the real returns on US investments over the last century:

Since 1980, bonds did well as interest rates fell from historic highs. But in the 40 years up to 1980 bonds lost money in real terms as interest rates rose. So, I told him if we are adopting a "set and forget" investment policy then we should go for 60% stocks and 40% bonds. The mix between local and international investments should be 50/50. The local market is one of the cheaper ones globally.
OTOH the local currency is quite strong currently. If we can revisit investment policy periodically then 70% bonds is OK for now. If there is a future larger decline in stock markets we would then switch to a more aggressive stance.

My brother's children are much older and so their trust accounts will exist for less time. If they intend to spend the money when they get it then I guess a more conservative stance might make sense. The youngest though will still need to wait 9 years to get her money so I think she can be more aggressive.

* Labor wants to make franking credits from Australian companies non-refundable as well. This would bring back symmetry in the way these credits are treated. Of course, I think we should go in the other direction and make foreign tax refundable :)

Target Portfoilo Performance December 2018

In AUD terms the target portfolio lost 1.85% in December, gaining 0.3% for 2018 as a whole. The MSCI gained 0.9% for the year and I gained 2.3%. The graph shows the returns for the each month in 2018 for the target portfolio, the MSCI World Index in AUD terms, and the target portfolio:

The target has lower volatility but is more correlated to the MSCI than I was. So the target portfolio wouldn't have provided very useful diversification in 2018.