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FINANCIAL INDEPENDENCE

November Investing Q&A with Strong Money Australia

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By Dave Gow, Strong Money Australia

2024-10-288 min read

In the immortal and slightly rephrased words of Montell Jordan: "This is Gow we do it". And by "it", we mean "a much-loved investing Q&A from Strong Money Australia".

blog cover photo

The journey to Financial Independence comes with many things to learn along the way.

To help simplify tricky questions and clear away confusion, we’re running an ongoing Q&A series.

We hope these little discussions and case studies provide you with insights to further your thinking as you progress towards your goals :)

Just so you know, in many cases there’s often not a “right” answer, so be sure to think carefully how to adapt any information to your own circumstances.

In this Q&A session, we’re tackling:

  • Tax bills from investing
  • Debt recycling questions
  • Boosting super by $800k
  • Finding the best ETFs
  • Maximising capital growth over 20 years
  • Rentvesting

Remember that in the situations below, it may be best to talk to a financial professional, such as a financial adviser, tax accountant, or mortgage broker before making any financial decisions.

Tax bills during the year

Question: “This year I have been automatically opted into quarterly activity statements due to my investment income (ETFs + bank interest). I was not aware such a scheme existed and haven’t heard it mentioned in the community/podcasts before.

“The tax due on our most recent notice of assessment was more than $1,000. I was wondering how others navigate this quarterly bill and their approach. Do others budget or put aside for this each week?”

Most people would simply use their ongoing savings to pay for the bill, since it should only equate to a portion of investment income over the period.

So most often, it means the investor just has less to invest when a bill is due. I don’t personally “put aside” money for that, but rather it just means less is able to be invested, similar to if there was a different household bill that needed paying.

Keep in mind: this is in an environment where the investor is receiving quarterly income (ETFs), or monthly income (bank interest). So the tax will represent only a portion of the income you should have received over that period. This suggests the money should be readily available to pay any tax owing.

However, it depends on how you like to plan/account for things. You could, for example, set aside $100 per week to plan for a $1,200 quarterly bill. Some people simply prefer doing things that way.

If you happen to be enrolled in a Dividend Reinvestment Plan (DRP) , you obviously won’t be able to use the investment income to pay instalments. In this case, you’ll need to use your surplus cashflow. That may cause it to feel more like a surprise.

In the end, it really makes little difference, so just find a way that works best for how you manage your money.

Debt recycling Questions

Question: “I’ve been thinking about Debt Recycling and have a few questions. I’m weighing four options:

1. Invest 100% in ETFs.

2. Invest 100% in my mortgage offset.

3. Split 50/50 between ETFs and offset.

4, Start debt recycling and invest recycled funds in ETFs.

“Given that I plan to upsize my home in 3-5 years, is debt recycling worth it? Can recycled debt be transferred to a new mortgage? Also, is dollar-cost averaging practical for debt recycling?”

Based on my understanding, it is possible for recycled debt to be transferred to a new property – but only if the loan accounts remain open.

If the loan accounts get closed when the current property is sold, then the new loan for the new property is basically fresh borrowings and so you would have to start the “recycling” again.

Banks will sometimes let you keep a loan account open even after you sell a property if you let them hold cash as security (the proceeds from selling the home). They will also sometimes let you transfer a loan from one property to another. But it’s worth speaking with a mortgage broker about which banks will let you do that and how to go about it, since it’s not very common.

As for deciding between your offset and investing the money, that’s a personal choice. It basically comes down to whether you ultimately want to get rid of your mortgage payment or you’d rather invest for potential higher returns.

I wrote an article about this decision here, which you might find helpful.

As for dollar-cost averaging, yes, you can still do that with debt recycling. I explain this in my article on debt recycling, under the “Monthly debt recycling” section, here.

Can I boost my super by $800k just by switching?

Question: “I was recently approached by a Super Adviser and accepted an offer of a free report to compare my super. It ended up that I would be more than $800k better off moving to the suggested fund. The new fund is more expensive on fees, but this is included in the projected outcome. There is also a $5,500 fee if I accept. Thoughts?”

This sounds like a gigantic red flag for several reasons!

1) Huge upfront fee (for no valid reason)

2) Contacted randomly

3) A “free report” that will be biassed to serve their interests

4) Huge promise of massive returns

5) High fee fund involved (high-fee funds generally do not outperform; they are using made up numbers that they can't guarantee)

6) Adviser is involved (you don't need an advisor for super. It's all very simple and low-cost investing that generally leads to better outcomes).

I would absolutely NOT follow this advice. Please block these people. They're selling you a dream to serve their own interests.

Keep your super in a low-cost industry fund. To boost long-term returns, one option is to set up your fund to invest in all-shares (ideally indexed), or high-growth, with very little in cash or bonds.

Picking “good quality” ETFs + finding outperformers…

Question: “I know there’s no such thing as the “best” portfolio. But it would be nice to know whether the investment vehicles selected are “good” quality. The type of professional I have in mind is aware of all the different ETFs and can comment on which ones have been solid performers. As far as I can deduce, the whole investing thing doesn’t differ much from going to the track – it’s all a gamble.

Great question. It’d be difficult to find such a person, though an “hourly rate” type of adviser might work.

In most cases, whether an investment is “good quality” will be determined by investment philosophy; what a person believes about long-term performance; and what is likely to be the most sensible approach.

That can differ among the FIRE community, and even among professionals.

To be honest, you’re likely to end up more confused if you get opinions from more than one person.

Investing, to my mind, is wildly different from gambling. But that doesn’t stop people approaching it like gambling (by picking random stocks and hoping one of them goes to the moon).

That said, you want to put the probabilities on your side as much as possible. In the sharemarket that often means…

  • Low-cost funds. Lower fee funds typically outperform those with higher fees.
  • Indexing. Index funds are incredibly hard to beat for long-term investing. As Warren Buffett famously proved in a US$1 million bet , most professionals fail to outperform over 10+ yrs.
  • Wide diversification. Funds with more companies are more likely to hold the companies which outperform over the long run (hard to pick in advance).

It’s not so much about finding ETFs that have been solid past performers. It’s about understanding the fundamental way markets work and how to capture the most upside possible.

As boring and intellectually unsatisfying as it is, historically the highest probability way to do that for the average person has been via index funds.

Investing for my kids with a 20 year timeframe

Question: “I plan to invest for my children when they are young until they’re 21 when they can take over the account. Any suggestions for a 15-20 years timeframe to get maximum capital growth? I’m thinking about NDQ or IVV. I’m not sure about VAS as its five-year capital growth is not very impressive.

This somewhat ties into the previous question.

Firstly, with a 20-year timeframe, looking at the last 5 years (or even 10 years) is not useful whatsoever. This is still a very short-term window to compare the quality of an investment.

In general, if the focus is capital growth, then it would make sense to look at ETFs which can be expected to have lower dividends and higher growth. This could mean ETFs like the ones you've mentioned, such as NDQ or IVV.

Keep in mind, NDQ is also a sizeable bet on US technology. It's possible technology underperforms at some point (as it did in the 2000s), so keep that in mind.

That's an additional risk compared to choosing a more diversified fund such as IVV or even VGS (which has other countries besides the US yet is still relatively low dividend/higher growth).

It's possible that, given such strong performance in recent decades, US shares underperform the rest of the world for a time. So a broader ETF, or even an all-in-one type ETF such as DHHF, could be another option.

Ultimately, you'll have to think about how much diversification you want or whether you're happy to bet on tech/US continuing to do better.

Either way, nice work investing for your kids, and you're definitely on the right track. Hopefully they appreciate it!



“I’m 40. Is it better to just invest and rent?”

Question: “I'm a 40-year-old, single dad with one child. I live in Brisbane and own a home back in Ireland with my brother (which will be paid off in 12 years). I currently earn $80k, soon to be increased. I don’t have a house here, but if I save for one I can’t invest.

“My question: financially, is it better to just invest and rent to build my wealth at this later stage? I’m planning on selling the house in Ireland by the time I'm 53 years old and will get the payout for that. Not sure which path to take.”

It can be easier financially to rent while investing, but only if you're able to keep your costs down and be disciplined.

You can always use your future Ireland house proceeds and investments to buy a home later if you wish.

The other thing to consider is whether you'll retire in Australia and get the pension/super. If so, owning a home later in life can be beneficial as it doesn't count towards your assets test.

Meaning, you may be better off owning a home and getting a full pension vs owning investments and paying rent and maybe only getting a part pension.

It depends on the numbers, though, so it’s tricky to say what the “best” option would be. As long as you're good with your money and use it productively – whether investing or towards a house – then you should be in a decent position later regardless.

A final consideration is how important home ownership is to you and/or how much flexibility you want in life.

To some people, that security is important, so they lean towards home ownership. To others, they'd rather just invest and have more flexibility over their location and expenses.

Final thoughts

I hope you enjoyed this Q&A session, and these answers gave you food for thought.

Remember, if you have a question on a topic you’d like some more information on, feel free to post it on the Pearler Exchange. They’ll be answered by fellow investors in the community – like myself, someone more knowledgeable, or one of the Pearler team.

You can also post a question down in the comments selection and we’ll cover it in a future Q&A article.

Until next time, happy long-term investing!

Dave



Dave’s best-selling book Strong Money Australia is available on Amazon. Listen to the audiobook on Spotify or Audible.

WRITTEN BY
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Dave Gow, Strong Money Australia

About Dave Gow | strongmoneyaustralia.com Dave reached financial independence at the age of 28. Originally from country Victoria, Dave moved to Perth at 18 for job opportunities. But after a year or two at work, Dave became dismayed at the thought of full-time work for 40+ years, with very little freedom. To escape the rat race, Dave began saving and investing aggressively into property and later shares. After another 8 years of work, he and his partner had reached financial independence.

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