The Slack Way | Slack Investor

Financial Year 2021 Slack Results

“In the business world, the rear view mirror is always clearer than the windshield.”
Warren Buffett

Slack Investor has a proven track record in not being able to predict where speculative assets (such as Bitcoin or precious metals) are going. I would also add to the “speculative list” some companies whose share price have become divorced from the link to their actual earnings. As a rough guide, I try not to invest in companies that have a forward P/E ratio of greater than 50. I get these forward P/E ratios from the excellent Market Screener site.

This means that I have missed out on the great gains of being by in companies like Afterpay (APT – 2023 P/E ratio 190) or TESLA (TSLA – 2023 P/E ratio 193). Some folk have made a lot of money with these companies …. but they are just too speculative for me. Slack Investor tries to “stick to his knitting” with growing companies that have an established earnings record and forward P/E ratios <50.

After an eventful FY 2020 and the COVID-19 dip in the markets around the world. FY 2021, has seen very good gains for most global markets. In the UK, the FTSE 100 Total Return Index is up 18.1% (last FY 20 down 13.8%). Dividends helped the Australian Accumulation Index to be up 27.8% for the financial year (last FY down 7.7%). These Americans remain stupendously optimistic … the S&P 500 Total Return Index was UP 36.4% (last FY up 12.0%) for the same period. All of these Total Return Indexes include any accumulated dividends, wheras the chart below of the ASX 200 for FY 2021, just shows stock prices.

ASX 2oo Weekly chart for FY 2021 – started at 5897 and finished at 7313 (30 June 2020 – 30 June 2021) – Incredible Charts – Click for better resolution.

Slack Portfolio Results FY 2021

All Performance results are before tax. The Slack Portfolio had a cracking year with annual FY 2020 performance of +21.7%. Full yearly results with benchmarks are shown in the table below. It was also a top year for all benchmarks (Median Balance Fund +13.0%, Vanguard Growth Fund +20.3%, ASX 200 Accumulation +27.8%).

Against all Slack Investor predictions … Real Estate turned out to be a great investment in the Brisbane and Melbourne markets for FY 2021 (+17.9% and +10.7%) – Perhaps I should also give up on the “looking ahead” in the residential property market – I just don’t get it!

YEAR	SLACK FUND	MEDIAN BAL	VGARD GROWTH	ASX200Acc	RES BRIS	RES MELB	CASH	CPI
2010	6.6	9.8	12.3	13.1	10.8	26.9	4.2	3.1
2011	2.5	8.7	9.1	11.7	-2.4	0.9	4.4	3.7
2012	8.3	0.4	1.3	-6.7	1.3	-0.9	4.3	1.2
2013	26.5	14.7	18.6	22.8	7.7	8.3	3.2	2.4
2014	23.6	12.7	14.5	17.4	11.5	12.8	2.6	3.0
2015	2.4	9.6	11.8	5.7	7.7	15.6	2.5	1.5
2016	14.2	3.1	4.2	0.6	8.4	9.5	2.2	1.3
2017	19.5	8.1	8.8	14.1	6.5	17.7	1.9	1.9
2018	37.6	7.2	10.0	13.0	5.2	3.9	3.9	2.1
2019	19.7	6.2	9.8	11.5	1.7	-6.0	2.0	1.3
2020	9.4	0.3	0.6	-7.7	8.4	13.8	1.1	-0.3
2021	21.7	13.0	20.3	27.8	17.9	10.7	0.2	3.8

The Slack Fund yearly progress vs BENCHMARKS. The Median Balanced Fund (41-60% Growth Assets), Vanguard Growth Fund, ASX 200 Accumulation Index, Corelogic Residential Property total return in both Brisbane and Melbourne, and Cash (Australian Super Cash Fund) and Consumer Price Index (CPI)

The five-year compound annual performance gives me a much better idea about how things are going and will smooth out any dud (or remarkable!) results.

Slack Investor 5-year compound annual rate of return – compared to benchmarks *– Click for better resolution.*

The beauty of compounding with a succession of good performance results can be seen in the chart below showing the growth of an initial investment in June 2009 of $10000.

The rate of growth of $10000 invested by *Slack Investor in FY 2009 – compared to benchmarks – Click for better resolution.*

The lessons of long term investing

Every year Vanguard publish their performance data on each asset class. Slack Investor looks forward to this – as it reminds him of the power of the appreciating asset classes of Shares and Property. Vanguard highlights the volatility of asset values in the short term – but also emphasizes the joys of holding and accumulating shares or property for long periods of time. These asset classes have steadily increased in value over the last 30 years. $10000 invested in Australian Shares in 1990 would have compounded to $160 498. Staying in Cash would have yielded $38 938.

2021 Vanguard Index Chart

Financial year total returns (%) for the major asset classes

In the chart below, for each asset class the total annual returns are given and the best performing class for each year is marked in green … and the worst in gold. What stands out to Slack Investor is that is rare for and asset class to lead in annual returns (green) for two years in a row – and there are years where the leading asset class (green) becomes the worst performer (gold) in the next year. This drives home the often repeated sentence in the finance world.

Past performance is not a guarantee of future results.

Total returns for each asset class for the 30 years since 1991 – Check out the full glory of the Vanguard 2021 PDF *– Click for better resolution.*

This table highlights the benefits of diversification across asset classes for the long term investor.

Sitting on the couch, Slack Investor is quietly pleased with his 2021 results – Roll on Financial year 2022. However, when comparing this year’s bumper returns with the long term average returns for Australian and International shares of around 10% – Slack Investor can’t help but be a little nervous.

July 2021 – 5 Years of Slack Investor

Extract from Rembrandt van Rijn “Self-Portrait, 1659” – From the Museo Collection. Enjoy the full image at the National Gallery of Art, Washington

“Rembrandt … says things for which there are no words in any language.”
Vincent Van Gogh

Slack Investor doesn’t put himself in the class of Rembrandt but he admires the honesty of this self portrait at age 53. It is time well spent to look a little further into his amazing catalogue.

Rembrandt, despite incredible talent and artistic output, was known to have lived beyond his means and, he sadly died in 1669 at age 63 as a poor man. He was known to have done over 40 self portraits in his life. Perhaps after 5 years of Slack Investor, it is also a time for self reflection.

Slack Investor doesn’t possess any great financial skills. My financial talents pale in significance with the great investors. I didn’t go to a private school but my government school was one of the better ones and I scraped into a science degree at university. My Physics and Maths marks didn’t put me on the honour board – but I passed. One thing I am grateful for is that my parents instilled a desire to make the most of any opportunities that life presents. Skills that I do have are a willingness to learn and the “stubborness” to complete a task.

Although Slack Investor has been very fortunate in his life with opportunities to travel and work in many interesting countries in his twenties. My own financial story is not really one to emulate. I had a delayed journey to financial independence by returning to Australia at 29 broke, no superannuation, and owing money. My limited skill set was lucky to include the ability to learn from others and to be single minded in pursuit of a goal – that was, to be financially secure.

My journey was greatly helped by going to an investing class by Robbie Fuller, He had selflessly contributed his investing knowledge to a U3A class in Townsville for over 20 years and also ran an evening class for investors. I learned a lot from Robbie. He showed me how to look at a companies sales, debt levels, future earnings and potential growth and to try and assess its real value (fundamental investing). He also opened up the world of charting to me. Looking at a price chart of a company – trends, breakouts and stop losses (technical investing) – and I am grateful. A basic knowledge of the fundamental and technical aspects of investing is so important – and not many people have this knowledge.

However, not everyone can have a convenient investment class in their town. I originally started this blog as a means to show those interested in investing that, by gaining a few skills, you can become a better investor and manage your own financial affairs at a minimum cost – knowledge is power.

Never depend on a single income. Make Investments to create a second source.
Warren Buffet

Slack Investor hopes to keep going. I am sure that Rembrandt had a good life -an enormous creative talent, a love for his wife Saskia, other relationships after his wife’s sad death, a son and a daughter. However, Rembrandt earned much, and he lost much. He was forced to sell his house and most of his art collection for a pittance to avoid bankruptcy in the late 1650’s. A bit of financial self reflection is often required if you want to achieve financial independence – Take control.

Slack Investor’s Favourite Charts

There are lots of great charts on the web. I look forward the release of the Vanguard Index chart every year – and this will be the subject of another post when they release the 2021 chart. However, the chart below drives home the benefits of consistent investing over time – and I like that.

*Returns on an Australian Index fund 1990 – 2020 –* Vanguard Australia – click for better resolution.

This chart shows the beautiful connection of constant investing and time. Over 30 years since 1990, the chart shows the 2008 GFC crash and last year’s Covid-19 crash. Despite these major downturns. given time, their is always a recovery. An investor who starts with nothing but invests in a US index fund by contributing $250 per month would have compounded $443 205 by the end of 2020. If the investor had increased the monthly contribution to $1000, then the rewards would be $1 772 819.

Another way of showing the benefits of time and compounding investing is to look at the average returns on a single investment of $10 000 in various asset classes over 30 years.

Returns on $10 000 after 30 years of Investing in various asset classes 1990-2020 – Vanguard Chart found at Canstar.com.au

3 Most Popular Slack Investor Posts

Ride your own bike

Retirement sweet spot

Chance would be a fine thing

Ride Your Own Bike

Like Sally, one day the realization will come that your best interests rely on you steering your own bike – in the direction that you want to go!

The ultimate goal is to get your three substantial piles going – house, income and investments. But before any of this happens you have to develop a mindset … I want to be in control of my financial life.

You must gain control over your money or the lack of it will forever control you. —
Dave Ramsey – Author of The Total Money Makeover

If you don’t take control, perhaps you’re plan is to take all your affairs to a financial adviser one day. Most people will feel the need for financial advice at some stage but only 20% of Australians have a financial advisor. The current structure makes getting advice a difficult step – and it’s not the financial advisors fault.

The pricing problem of Financial Advice in Australia

64% of survey participants agreed that financial advisers were too expensive.
ASIC Survey August 2019 – Financial advice: What consumers really think

The Australian Government passed a piece of legislation known as the Future of Financial Advice (FoFA) in 2012. FoFA was a series of laws that were supposed to improve the quality and transparency of financial advice. One of the main purposes was banning conflicted remuneration – where advisers were recommending products that gave them good commissions. While FoFA and the Hayne Royal Commission were well intended and vital in restoring some trust in the sector – there have been some unintended consequences.

(The Financial Services Royal Commission) identified the problem of conflicted remuneration without providing a mass market solution.
Graham Hand, Firstlinks – FoFA, the Failure of Financial Advice

There has been a huge rise in regulatory red tape and the associated compliance costs for financial planners. A combination of these costs, the big banks dumping their financial advice arms, and the need for upgraded qualifications has put this sector in crisis. The total number of licenced advisers is set to drop by a third in the next few years.

There is broad recognition that financial advisors have expertise that the normal punter does not have. However, the biggest barrier to getting financial advice is the expense. One of the big problems is that when you engage a financial advisor, they are obligated to present you with a full Statement of Advice (SOA). On the surface this makes sense, the client would want a document that takes into account your own circumstances and outlines the fees and risks of each strategy. However, according to one planner, the SOA has turned into pages of jargon, repeated disclosure and boring generic graphs. These statements are weighty tomes that take many hours to prepare. Sadly, they seem to confuse the actual advice and provide no real value to the client.

A full Statement of Advice (SOA) runs over 100 pages and the need to review all circumstances and develop a plan takes 10 to 15 hours and costs between $3,000 and $5,000 depending on complexity.
Graham Hand, Firstlinks – FoFA, the Failure of Financial Advice

From FirstLinks – FoFA, the Failure of Financial Advice, Take 2

James Kirby from The Australian uses the example of paying annual adviser fees fees of $3000 and he supposes that the structured advice that you receive will match the 4.3% pa return of the new Magellan retirement income product Magellan FuturePay (FPAY). He points out that for an investment of $500 000 and an expected FPAY return of $21 500, your advice fees would be 14% of your earnings. This does not make sense to him … or Slack Investor.

James Kirby suggests that a better model for the regulators to adopt would be that you could approach a financial adviser for advice that you need at the time … and pay the financial adviser for this “niche” advice. This is not possible under current legislation.

Take charge

So, with full service financial advice gravitating towards high net wealth clients, what is the average punter supposed to do? Robo-advisors such as Stockspot could be part of the solution. This automated service can provide help with allocation of assets other services that will suit your age and risk profile. But there are so many more financial questions you might want to handball to your financial adviser if you could afford one. Well, if you can’t … it’s up to you.

Decide what you want to achieve in the finance sense. Go through the savings basics and get your savings rate up. Take charge on where your money goes, get your superannuation set, reduce any unnecessary fees that you are paying, set a target on your financial piles.

Educate yourself on things financial. There are some great books. The Barefoot Investor is an excellent start. Some fabulous podcasts The Australian Finance Podcast will get you going and there are heaps of other Slack Investor favourites. Get involved and start to enjoy the immense freedom and satisfaction of riding your own bike.

Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.
Franklin D. Roosevelt

A Further look at three pile theory … and May 2021 – End of Month Update

Slack Investor presented his version of a bucket strategy – The “Three Pile Theory”. It is the three pillars of a House, Stable Income, and Investments that have supported me through most of my working life and now the three piles are still supporting me in early retirement.

These piles have been continually interacting with each other as I was trying to build them all up. At the start, the Prince of all piles was a good income and, as I have very poor entrepreneurial skills, the key for me to get a good income was to have a good education. I was lucky enough to have parents that encouraged me to go as far as my wit would take me.

Without education you’re not going anywhere in this world
Malcolm X

When originally talking about three pile theory, I glossed over the retirement phase and how the investment and stable income piles can keep you going … hopefully, for a long time. By retirement, if possible your house will be paid off – and this will be left as a dormant house pile which keeps giving back in lots of ways … but only as a last resort will you use it to fund your lifestyle in retirement!

Lets do the sums on just two piles – Your Retirement Fund

Consider a retirement fund with just two piles – Stable Income and Investments. In order to generate 4% of income per year, you need have most of your retirement fund in investments rather than stable income. According to his two pile theory, Rob Berger from Forbes Magazine recommends that you should have between 50% and 75% of the retirement fund in the investments pile 0f equities (stocks). Decide on a ratio of stable income to investments that you can sleep well with – a higher amount investments will mean potentially more growth … but definitely more volatility.

A bit of mathematics here … my original ratio of house:stable income:investments was 30%:20%:50%f Net Worth. When taking my house out of the calculations, my ratio of Stable Income: Investments is about 30%:70% – this is just the numbers that I am comfortable with.

My original plan was to use dividends and interest from the two piles of my retirement fund to give me income. That means taking out money from both piles every year – even when stock markets have fallen. Rob Bergen points out that this is exactly the wrong approach. Taking dividends out reduces the investments pile – it has the same effect on your investments pile as if you sold some of your stocks. In a down-trending stock market, for your long-term investments pile, you want to use those dividends to reinvest in a stock market that is undervalued.

(Using the traditional bucket strategy), assets are taken from (Investments) when market prices have fallen, which is exactly when dividends should be reinvested.
Rob Berger – outlining the folly of taking money out of your Investments account when the market is falling.

How to make your piles last in retirement phase – Rebalancing the Retirement Fund

This heading has Slack Investor lapsing into what my mother called “Plumber’s Humour”. Using the Rob Berger simple strategy, you maintain your piles. Even though you have the competing interests of wanting to withdraw annual amounts for a great lifestyle, and yet, keeping enough in your retirement fund to generate future income for many many years. There are lots of articles on buckets to fund your retirement but, it can get complicated – I really like the clarity of Rob Berger’s approach. He explains in detail how the traditional bucket strategy is flawed.

By the time you retire, you will have a good idea of your expenses, While you are healthy and fit, add a good chunk of income to fund some travel. At the start of the financial year, this amount gets withdrawn to your cash account to fund yearly living expenses. The remainder is your retirement fund comprising of Stable Income pile (Annuities/Bonds/Term Deposits/Fixed Interest) and Investments pile. Slack Investor is happy with 70% of his Retirement Fund in Investments (Equities/Stocks).

Set up a ratio of Stable income: Investments in Your Retirement Fund that you are happy with and take your annual expenses out of the pile that is over allocated at the end of the year. In the above case, Investments.

In a good year for investments (outlined above) your next years annual income requirements can be withdrawn from the investments pile. If you get a bad year for investments, then dip into the stable income pile. Take out enough from each pile so that after your yearly expenses withdrawal, the initial allocations are roughly intact – I should do some algebra here to make this easier … but you can do it for your homework!

Using this method, you are always selling from your investments pile when the market is high and buying when the market is low – masterful investing, Warren Buffet would approve!

May 2021 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

There were modest rises in all followed overseas markets (S&P 500 +0.6%, and the FTSE 100 +0.8%). The Australian stock market is powering on (ASX 200 +1. 9%) despite Slack Investor and the state of Victoria being in a (hopefully only one week!) COVID inspired lock down. All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Always Watching

Slack Investor is not known for his fast work … and have often taken the couch when action was probably needed. There are some stocks that I will hold for the long run, and their weekly charts are not of big concern to me. However, about half of my portfolio is on a weekly watch – I review the charts on a weekend and cast the Slack Investor jaundiced gaze over each stock that I own (Thanks Incredible Charts!)

“You can observe a lot by watching”
Yogi Berra – American Baseball Legend and Master of Tautology

I do have some routines though …

Daily

This is the least satisfying timescale and, if I could successfully train myself to ignore this daily oscillation of my investments – I would. The reason to avoid daily swings of the share price is that I have absolutely no idea about whether the price of a stock or index will go up or down on the next day – the share price is determined by others! In the chart below, in the first 7 days shown, the daily index went down, down, up, down, down, up, up, etc – monitoring daily prices can be frustrating!

I have to admit that I follow my investments every few days through a portfolio in Yahoo Finance and will download prices to my accounting software – the free Microsoft Money Sunset International Edition available at the most excellent Ameridan’s Blog. I download share prices into Microsoft Money with MS Money Quotes with a 10 USD lifetime licence. In the USA, Personal Capital is recommended.

I am happy to say that, when on holiday, or busy, I have no need to monitor on the daily timescale. Regardless, no decisions are made on this daily basis.

Weekly

Weekly is where the “rubber hits the road” for Slack Investor – and I look forward to my weekly sessions with my portfolio. I set aside an hour on the weekend to make sure my portfolio prices are updated and the charts are reviewed. The weekly time scale smooths out a bit of the volatility and I then open up Incredible Charts to scroll through my portfolio.

Incredible charts offer a free month sign up and then $9.95 per month for access to worldwide updated delayed charts daily from 6pm Australian time. This package is not in “real time” and does not suit a day trader. But for an investor on my slower time scale, it is very good value. These charts open up the whole world of technical analysis as it allows you to monitor trends in your stocks and mark in trend lines and stop losses.

I have always used the weekly charts to make decisions on buying a company – looking for a momentum shift in the trading using the Directional Movement System. I also like to trade a “breakout”, or a “wedgie”

Monthly

This is the timescale when I am most happiest and would like to make decisions just every month. After a life of work where decisions were a constant grind – It is a gift not to make decisions!

It is still my aim to make selling decisions monthly – but things seem a little precarious lately and, for now, I am on a weekly decisions cycle for selling. The sell happens when a stock price finishes below my stop loss at the end of the week/month (see Technical Sell below).

Yearly

This is the “Look at yourself in the mirror” period where Slack Investor does the evaluation of his portfolio performance against benchmarks at the end of each financial year. Although the financial year ends at June 30, it usually takes until the middle of August for me to get my final results and benchmarks together. I present my results at the annual Financial Year Results post.

Special Occasions Selling

Slack Investor is in one of those right now and he has to free up some cash to by selling some shares. I like to do things a bit methodically and here is my process for a sell.

Technical Sell

This is my first port of call. Technical Analysis uses charts and trends and I have been watching the charts for the past 4 weeks for a technical sell signal in my portfolio. For me, this happens when the stock price falls below the pre-determined stop loss that I have set. I will then try to sell at the start of the next week/month. My rules are not rigid here, if the stock starts to rebound after I have made my sell decision, I might stick with it for a little while longer.

Another technical signal is when a stock loses its momentum – but this is a more subjective signal than when a stock simply moves below a line.

Slack Investor bought into ESPO in October 2020 at $10.39 and sold this week at a small loss $10.19. The stock didn’t grow like I thought it would – but that’s fine. I like the concept of this ETF but I am happy to be out for now and look forward to be getting back in when a strong upward trend establishes itself.

I was also able to exit on a technical sell for the Betashares ASIA ETF and I am not sure what is going on here as I thought the tailwinds for this sector were good. Small profit this time and will get back in if the trend changes.

Weekly chart for the VanEck ESPO ETF showing a breach of the stop loss – Incredible Charts.

Fundamental Sell

Fundamental Analysis revolves around trying to determine the real value of a stock by looking at its financial data (e.g, Price/Earnings ratio, Return on Equity, Debt, etc) over time and, in reference to its competitors. This is a much more complicated process.

If Slack Investor can’t find a technical sell, I look for a fundamental sign. I will list all of my sellable stocks (Shares that I don’t hold for “the long run“). The first step is to get some financial data on each company from the very good Market Screener then put them in a table and hope that something stands out as a sell. A sell signal might be a trend of falling earnings, increasing debt, or decreasing Return on Equity (ROE). I also get nervous about a stock if its predicted (+ 2 years) Price Earnings (PE) ratio goes over 50. Fortunately, I didn’t have to resort to any fundamental analysis this this time … and this approach probably needs a post in itself.

In the meantime, like my pumpkin friend … always watching …

Two Very Important Numbers

There are many numbers to note in finance world – Fees, Investment returns, etc. However, there are two extremely important numbers when it comes to financial independence. Both are percentages and the first one is the 4% “rule of thumb” and the second is your savings rate.

The 4% Rule

All followers of finance blogs would have heard of this often quoted “rule” Slack Investor acknowledges that this magic number is arguable and depends on individual circumstances but, it is an excellent way to estimate how much you will need to retire. The 4% rule is a way to “roughly” link assets with income. For example, as an estimate, if you would like to generate a $40 000 yearly income, you would need to have investments assets of $1 000 000 to earn this income using the 4% rule (4% of $1 000 000 = $40 000).

Another way of looking at this 4% rule is that you need to save 25 x your annual spending for your retirement fund so it can generate an income to cover your spending. So, if you spend $30 000 a year, you need a portfolio of $750 000 (25 x $30 000). To get an idea about what your expenses are it is important that you track them over a year using a spreadsheet or finance software. If necessary, this investment income can always be supplemented by a government pension or a part-time job.

Bill Bengen originally came up with this “4% safe withdrawal rate” in 1994. He developed it by backtesting a conservative US portfolio with data dating back to 1920 and tried to get a safe withdrawal rate that would generate an income for at least 30 years. He is the first to admit that the 4% number was always treated too simplistically and has since updated the rate to be closer to 4.5%.

Slack Investor is a bit old fashioned in liking to hold on to most of the capital that is earning the money and has a flexible approach to how much to extract from investments each year. In a good year for the stock markets, I am happy to dig deep into the investments pile – using dividends, distributions and even some capital gains as income. When the market performs poorly, it is more complicated and I have to dip into my stable income pile. Most of the Slack fund is in Australian Investments and in 2021, the Australian Index has a 12-month forward dividend yield of 3.5% . Hopefully, the shares will also increase in value over time. Over the past 10 years, Australian shares had a total return of almost 7% – with growth shares you can aim higher, but prepare for volatility. In the good years, I will also take out a bit of capital gain for extra spending. All of this is in addition to the stable income component of my investments.

Your Savings Rate

“Wealth consists not in having great possessions but in having few wants.”
Epicetus

Using the 4% rule we estimate how much will give us a sustainable retirement. But there is another number to add to our arsenal.

Just as in Lord of the Rings there is ” one ring to rule them all…”, there is also one “percentage” to rule them all in the Financial Independence world – and that is the Savings Rate percentage.

The annual expenses is critical here as this is the figure you are trying to generate out of investment income. Lets have a look at the effect that savings rate has on the number of years that you have to work until you can sustainably generate your expenses from your investments. The table below is from the great financial blogger Mr Money Mustache. There are a few assumptions used to generate this table

Your investments earn 5% after inflation
You can live from the “4% safe withdrawal rate” after retirement.

Here’s how many years you will have to work for a range of possible savings rates, starting from a net worth of zero:

Table from “The Shockingly Simple Math Behind Early Retirement” – From the one, the only, Mr Money Mustache

At a saving rate of 10% you will have to work for over 50 years – we have to do better than that! There are some pretty heroic savings rates amongst financial bloggers e.g Aussie Firebug 61%; Dividends Down Under 61%; I have admiration for these savings rates and note that these bloggers are in a hurry to get to financial independence – and retire early. At 60% savings you can retire after 12.5 years of working and saving – but that sounds pretty hard.

Slack Investor was on a much slower train and lucky that he quite enjoyed his job – and didn’t mind spending 30 years saving for his retirement. I have always been a good saver but, when looking at my past savings rates, it was usually around the 30-40% level and, some years had dropped down to 20%. Raising a family and holidays are a delightful interference with savings and you just have to find a balance. In Australia, we have compulsory superannuation which currently adds a welcome 9.5 % to your savings rate.

A beautifully presented calculator at Networthify shows how the savings rate works and gives a yearly breakdown. It also shows some interesting OECD statistics for average National savings rates (e.g. The US 6%, and India 32%). The aim is to eventually save enough money to invest in a way that you average (at least) 5% return on your investments after infation. If you withdraw from this retirement pool at the rate of 4% and have enough to cover 100% of your expenses – you become financially independent – the retirement pool keeps on giving!

Automate your savings

One of the best financial habits that I formed was to take the thinking out of saving and set up automatic recurring transfers from my work money to my savings or investment accounts – Pay Yourself First. I also took full advantage of “concessional contributions” to my super account which were taxed at 15% rather than my then marginal rate of 37%.

So, automate your savings. Investment returns are important and we hope that we can exceed the 5% after inflation returns that the above table and 4% rule are based on. However, the number you have most control over is your savings rate – and that is most important.

R&B? … No, R&D!

James Brown Performing At The Apollo by New York Daily News Archive — Mr James Brown (1933 – 2006) – an R&B, funk, and soul music legend – “**The hardest thing about being James Brown is I have to live. I don’t have no down time**” – Image from Rolling Stone

Slack Investor might be showing his age here … but when I think of R&B (Rhythm & Blues), it’s not Drake or The Weeknd that I think of, its “The Hardest Working Man in Show Business” that comes to mind. James Brown had a bit of a trouble in his life but there is no denying his talent and influence – 4 minutes of his genius can be seen here.

The one thing that can solve most of our problems is dancing
James Brown

But I digress, when the dancing is finished, R&D (Research and Development) is another thing that gets Slack Investor attention – especially when it comes to finding a company to invest in. Lets have a look at the world top ten spenders on Research and Development. This quality list of companies is peppered with representation from the tech, pharmaceutical and (electric) car sectors. One of the ways that a company can keep growing is to develop an upstream pipeline of products through research, patenting, and testing. It may take many years before they are released so the companies must be patient and long sighted – not all products in the pipeline will be a success.

Ranking of the 20 companies with the highest spending on R & D in 2018 *(in billion U.S. dollars)* – From Statista.com

I don’t often read company annual reports as I lack forensic accounting skills and they are usually thick and masterpieces of obfuscation. But, I am usually very impressed when, in the overview, a decent slab of profits are going back into R&D. Slack Investor would rather invest in companies that are constantly innovating, and investing in future products. Only some of these products will yield fruit, but you would hope that these high spending R&D companies would generate bigger profits than those that don’t. Although, this is not always the case! In some cases, the world of R&D can be full of questionable spending, uncertain results.

Even though R&D spending does not guarantee profitability and ever increasing stock prices, there is a correlation- future earnings are positively associated with current R&D.

Commonwealth Serum Laboratories (CSL)

Despite a 20% price fall in the CSL share price in the past 6 months, there is no thought of Slack investor selling this great company. It is one of my “Long Run” stocks. I have often written about share prices fluctuating above and below a “fair value” for a stock . This is just a characteristic of share investing – depending on the mood of the market.

A weekly chart of the CSL share price showing a 20% fall in the last 6 mth -From incrediblecharts.com

CSL is not in the world R&D big spending league in dollar terms. But, in Australia, it is one of our best R&D spenders with almost a billion dollars (US) per year. This amount is very high as a percentage of its revenue, in an environment where a typical manufacturer will spend 1-2%, CSL spending on Research and Development is between 10 to 11 per cent of turnover. Slack Investor thinks this is a good thing and is happy that CSL is occupying a big chunk of his portfolio.

CSL have many products in the R&D pipeline and have a good track record of converting at least some of these products into successful earners. Some other analysts agree and have a target price of $310 on the stock. With current pricing at $253.26 (12 Mar 21) – this smells good!

I taught them everything they know, but not everything I know
James Brown

That’s right James … “Hit it”

Colin Nicholson – A Great Australian Investor … and February 2021 – End of Month Update

I have a few people that have greatly influenced my investing life – One such figure is Colin Nicholson. I have never met him, but he has taught me a vast amount through his long running website “Building Wealth Through Shares” (bwts.com.au).

This great Australian investor Colin Nicholson, has been investing for over 50 years and documenting his adventures with shares since 2001 on his site. Colin has only stopped actively contributing at the end of 2019. Fortunately, this website is still running and his knowledge and experience keeps on giving. As well as education material on technical and fundamental analysis, he often discusses the psychology necessary to be a successful investor.

We tend to have an impulse to snatch profits quickly and to let losses run, hoping things will come good if we hold on. This natural impulse is the exact opposite to what a successful investor must do.
Colin Nicholson

Colin started bwts.com.au when financial blogs were in their infancy and Australian contributors were rare. Colin is a private investor, an author, and educator. He has been contributing to his site for over 20 years and answered hundreds of questions from other investors. His site is an incredibly detailed knowledge base covering all aspects of owning a share portfolio. His Investing – Twelve Key Lessons is essential reading to anyone thinking of entering this fascinating world. His results over a 20-yr period are very impressive. Colin has retired from active contributions to his website but has hinted that he would maintain his website for the education of future investors.

There are countless bits of wisdom as Colin relentlessly tackles investment according to a defined, well-tested, and logical plan. No matter what the investing subject, search his site, and Colin Nicholson will offer some useful and reasoned discussion.

The source of most frustration in investors is that they are expecting the impossible. They want to sell at the top. I repeat that it simply cannot be done except by sheer luck.
Colin Nicholson – Take Profits or Wait for the Stop-Loss?

My first introduction to his site was through his meticulous documentation on how he calculated his end of financial year performance returns. Year after year he would list his portfolio and investment returns.

This image has an empty alt attribute; its file name is ColNichReturn.png — Colin Nicholson’s documented returns over 20 years comparing his returns(red) and the ASX 200 accumulation index (green). A 12.01% Compound Annual Growth Rate (CAGR) is very impressive over a 20-yr period and has enabled Colin to have a hopefully financially carefree retirement.

… I do not wish to advise people or to manage their money. Rather, my focus is on my own investments and passing on what I have learned to others.
Colin Nicholson

In addition to his website and public speaking, Colin has also authored Building Wealth in the Stock Market and Think Like the Great Investors. Like another of Slack Investor heroes, Warren Buffet, Colin has a plan for “retirement mode” and intends to become more passive with his investments and half of his portfolio is now in LICs and index funds.

I am not retired – I am a full-time investor
Colin Nicholson

Colin Nicholson, Slack Investor salutes you for your enormous contribution to my investment life and for helping countless others with your education materials and your disciplined and methodical approach to investing in shares. Dive deep and long into bwts.com.au and you will be a better investor.

February 2021 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

When having a look at the end of month charts, I noticed that all index trackers were well above their stop losses (>16%). My Mum (and Kath and Kim) would say that she could “feel it in her waters” when she had a premonition about something. My index rules allow the end of month stock price to be up to 20% above the stop loss. However, in a tip of the hat to Mr Nicholson, who is far more disciplined than Slack Investor in the investing arts, some action this month. As “new highs” have been established, I decided that now wouldn’t be a bad time to adjust the stop loss levels upwards.

I place my stops below the low of the last trough in the uptrend and move it up to just under the next trough every time a new high is made for the trend.
Colin Nicholson

Weekly Chart of the ASX 200 Index – incrediblecharts.com

For February 2021, there were falls in the growth oriented Slack Portfolio due to rising long-term bond yields. But stock prices have always fluctuated above or below a “fair price” – for one reason or another. Slack Investor is still on the couch.

Tech stocks are susceptible to rising yields because their value rests most heavily on future earnings, which get discounted more negatively when bond yields go up.
From The Bull

Despite the end of month sell off, there were modest rises in all followed index funds (ASX 200 +1. 0%, S&P 500 +2.6%, and the FTSE 100 +1.2%). All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Three Pile Theory

– Adapted from ‘Three Mounds’ by Yoko Ono is displayed at the Serpentine Gallery on June 18, 2012 in London, England – From Getty Images.

With apologies to Yoko for interfering with her art, but Slack Investor first thought of his own “Three Pile Theory” back in 1989 when I had got myself a “Proper Job” and enough stability in my life to make the big plunge into Real Estate. At that time, I owned a few grains of dirt in my House pile (the Bank owned the rest), My income was OK, and my investments (which would later morph into the Slack Fund) contained a few thousand dollars in shares.

Now, 32 years later, Slack Investor still has these three financial pillars to keep himself steady.

House – Home ownership gives me great security and pleasure. The bank owned most of this 30 years ago – but now I have the upper hand! (~30% of Net Worth)
Stable Income – This used to be my job, but in retirement I have some stable income annuity style investment (~20% of Net Worth) that would pay my bills and maintain a basic Slack Lifestyle should Armageddon befall the stock markets for a few years. This income is supplemented by income from the Slack Portfolio.
Slack Portfolio Investments – (~50% of Net Worth) – Now currently in my Self Managed Super fund (SMSF) which is almost exclusively invested in growth companies. These are great businesses to be invested in if you have a long term horizon – however, stock prices can be volatile in these high Return on Equity (ROE) companies. I am currently retired and do not rely on the Slack Portfolio for stable income. Because of the stability of my other two pillars, I can be quite aggressive in the allocation of my investments in the Slack Portfolio – as I know I will not have to panic sell (for income) during any downturn.

Slack Investor didn’t really invent “Pile theory” – it has been around for a while in various guises – Three Buckets is a tried and true way to manage your retirement expenses by dividing your retirement stash into buckets of cash, conservative investments and more risky, growth investments.

House

My home may not feel like a palace to you, but to me, it is a whole Kingdom.
Prerona Chatterjee

There are some who argue that you are financially better off by renting over a 10-year period rather than buying. But for Slack Investor, the tax advantages – no capital gains tax on your own home in Australia; the leverage – banks are usually willing to lend at least 80% of the house value; the forced saving – your mortgage payment is a big monthly portion of your income which you set aside for a long period; and, the stability provided by home ownership make this a clear winner for me. “The Serenity” is just a bonus.

Stable Income

To cover living expenses and to give yourself “peace of mind” it is so important to have a slab of money that is not subject to the vagaries of the sharemarket. In Australia, if you haven’t enough super to go independently, you might qualify for a full or part pension.

If going the fully self-funded route, many advisors recommend your stable income should be in two parts. You should work out your living expenses for a year and then keep between 2 and 5 years worth of expenses in stable cash deposits – Let’s start with 3 years of expenses in accessible cash. The rest of you stable income pile can be in longer term cash deposits, bonds or REITS. Because the investments pile (Slack Portfolio) is in growth shares that can be very volatile, my stable income must be something that is not highly correlated to to the sharemarket.

Term Deposits– although interest rates are woefully low now on bank term deposits, it is still possible to get ~1% p.a. from some of the minor banks that still have the Government Guarantee for the first $250 000.

Vanguard Australian Fixed Interest Index ETF (VAF)

MER (0.20%) – Annual performance over 1/5 years – (3.81%/4.41%)

Vanguard Australian Government Bond Index ETF (VGB)

MER (0.20%) – Annual performance over 1/5 years – (4.08%/4.49%)

Challenger Fixed Term Annuity – Rates are pretty low at the moment, locking away a deposit for 5 years will earn a measly 1.65%.

Real Estate or Real Estate Investment Trusts (REIT) – these are a bit higher up the risk curve but as they produce income (rent) and can be associated with longer term leases – are usually less volatile than the share market. For example, Vanguard Australian Property Securities Index ETF (VAP) – MER (0.23%) – Annual performance over 1/5 years – (-13.3%/6.23%)

Investments – The Slack Fund

Because the Slack Portfolio is mostly in growth shares, I have steeled myself that this particular pile is volatile and changes value every day. I am prepared for a few low performing (or even negative) years in a row for this pile. Even great investors that have much more knowledge than Slack Investor have the occasional bad year – during some periods, share investments just perform poorly. I am accepting of this truth.

Because this Investment pile is mostly in my Self Managed Super Fund (SMSF), I am usually obliged to withdraw 4% of its total value each year – this percentage increases with age – but this payment is currently tax free for those over 60. I can use this income in a discretionary way. My living expenses should be covered by income from the Stable Income pile – and any other income is gravy.

Pile Rebalancing

Once you are in a house that you are happy in and hopefully will be near paying off any outstanding loans as you get into retirement – other than maintenance, you can leave this pile alone.

The Stable Income cash pile might occasionally need a bit of topping up from the longer term stable Income or Investments fund. Any dividend or interest income from your investments is fair game. The investment Slack Fund usually produces 2 -3% income.

Hopefully, with 3-years worth of living expenses in the stable income pile, you can ride out a few bad years in the share market and only sell shares to top up the stable income pile when the share market has had a good run. Ideally, you would only sell share assets out of this pile when the share market is above the long term trend line. However, realistically, from the chart below (in red) there are long periods when the market is below trend. Have no fear, your basic expenses are always covered by a mixture of stable income, interest and dividends.

The long term chart of the US S&P 500 with the dotted inflation-adjusted long term trend line – from seeitmarket.com

There are other piles worthy of attention such as Health and Relationships but the finance stuff is necessary too. So get the shovel out … and start working on those piles!

SMSF is it a superpower OR Kryptonite? … and January 2021 – End of Month Update

Slack Investor hasn’t written much about Self Managed Super Funds (SMSF’s) despite his love affair with his own fund. SMSF’s are only found in Australia and represent a “hands on” way to accumulate, nurture, and eventually release your super funds as a pension or lump sum. They have the same status as a normal retail or industry super fund (e.g. Australian Super) but they are “self managed” and give the trustees (members of the fund) power over where the fund is invested. This control is a double edged sword, as it is also possible to destroy your super wealth with a SMSF by making unwise investments.

SMSF’s offer

Control
Flexibility in investments – But this can be dangerous!
Estate Planning and Taxation advantages

There are nearly 600,000 SMSFs in Australia with over a million member (March 2020). Although this represents less than 5% of Australia’s population, about 25% of the $2.7 trillion invested in superannuation is invested in SMSF’s. The average member balance for an SMSF was a whopping $678,621 (ATO Data 2018).

It is possible to structure an SMSF so that the investment fees are very low. A surprising finding from a SuperConcepts study was that the average annual expense ratio for SMSF’s was 2.8% for the over 20000 funds surveyed. This seems particularly high when compared to the Slack Investor SMSF portfolio expense ratio of 0.12% through a “no advice” online SMSF services provider like e-superfund. This suggests that most of the funds surveyed used the relatively high cost route of engaging an accountant to administer the fund. There are many SMSF providers – Slack Investor uses e-superfund which provides the legal structure and web-based audits and education. The yearly operating expenses are an amazingly low $999. The SMSF is so integral to Slack Investor’s strategy that I have set aside an SMSF page on the Slack Investor site – Alas, there is not much on there yet … but it will come!

Rainmaker are producing monthly comparisons of SMSF’s with the larger low cost My Super products offered by Industry and Retail Super Funds. The analysis can be found on their Superguard360 site.

SG360Jun17_2 — A comparison of the Asset mix of SMSF funds (left column) with MySuper funds – From Superguard360

SMSF funds (above left) traditionally hold more cash, property and less international shares than the larger Industry/Retail funds (My Super – above right). SMSF’s have outperformed MySuper since the GFC (see below, SMSF’s Blue line, My Super Red block). However, with the recovery of equities, the MySuper funds have been catching up and as at June 2017, 10-year returns from both types of funds are near identical at 4.2%. Under current asset allocations, the more diversified Industry and retail funds should overtake SMSF performance – on average.

SG360Jun17_1 — Comparison of how SMSF’s (Blue Line) have done , on average, against the default My Super Fund Index (Red Block) – From Superguard360

Self Managed Super is NOT for Everyone

“… That a little knowledge is apt to puff up, and make men giddy, but a greater share of it will set them right, and bring them to low and humble thoughts of themselves.”
From an anonymous author, published in 1698 as “The Mystery of Phanaticism”

Running a SMSF takes time and I wouldn’t recommend it to anyone that doesn’t want to be fully engaged with their financial future. Luckily, Slack Investor finds the whole finance and ATO compliance scene most interesting. Trustees of SMSF’s are held responsible for compliance with super and tax laws and there are many other risks in running a SMSF fund. A long term study of SMSF data by SuperConcepts, “When Size Matters” found that that SMSF’s below $200000 in total funds generally underperformed. However, the larger SMSF’s were comparable in performance with industry funds.

Over 10 years, there’s hardly any difference between the performance of not-for-profit funds, such as industry funds, and DIY (SMSF) funds.
SMH article (2017) summarising Rainmaker data from the ATO

Despite how well an SMSF style really suits Slack Investor – The large majority of people should not get into an SMSF – but stick with a good performing Industry Fund. Unless you are justifiably confident in your investing abilities, most people will be better of with a well diversified industry fund for long-term Super performance. It is always better to “have low and humble thoughts of ourselves” – it is too easy to destroy the value of your hard earned super.

January 2021 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.

Some tested COVID-19 vaccinations have started to be rolled out internationally – but uncertainty prevails. Slack Investor followed markets all fluctuated but, overall, remained pretty flat this month. For January 2021, the Australian ASX 200 rose 0.3%, the S&P 500 fell 1.1%, and the FTSE 100 down 0.8%.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).