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September investing Q&A with Strong Money Australia

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By Dave Gow, Strong Money Australia

2023-09-113 min read

Behold: Strong Money Australia has arrived with his September investing Q&A! From VDHG to “Aussie vs global shares”, Dave covers it all. Feel free to ask your own questions in the comments below!

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Investing is a broad subject with lots of different things to learn.

To help simplify tricky questions and clear away confusion, we’re running an ongoing Q&A series. We hope these little discussions provide you with helpful 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.

If you have a burning question you’d like answered, feel free to leave it in the comments below, or post it on the Pearler Exchange.

In this Q&A session, we’re tackling:

  • VDHG and its lumpy distributions
  • Investing for a monthly income stream
  • Selling a property to reinvest into shares
  • Torn between growth and income

OK, let’s get into it!

VDHG sometimes pays out lots of capital gains in its distributions. Why does that happen, and is it a problem?


I f you don’t invest in VDHG, you still may be interested to know about how it differs from other funds and what can result from that.

VDHG is what’s known as a ‘fund of funds’. Meaning, it’s one fund with multiple funds inside it. Fairly straightforward. But where VDHG differs from some other funds (like DHHF for example), is that VDHG comprises a group of Vanguard’s managed funds. DHHF, on the other hand, is a portfolio of ETFs.

The underlying exposures in the portfolio are pretty similar, but the tax outcomes can be quite different. Managed funds are forced to sell shares when people want to take money out of the fund. Unfortunately, this creates capital gains events for all investors in the fund , not just those who are selling out. And as you might have seen, this can create unusually large distributions for VDHG, which results in more taxes than normal.

ETFs are able to avoid this outcome (due to some technical workarounds stuff we don’t need to get into), meaning capital gains events are created at the individual level, rather than at the fund level for all involved. As a result, DHHF should be a bit more tax efficient over time, with its distributions being mostly just dividends from the underlying companies, rather than capital gain payouts.

Large payments might sound great at first. But it’s important to know these aren’t coming from the profits and dividends of the underlying companies – it's coming from capital gains due to some forced selling or rebalancing. Now, if someone is retired, they probably won't care about this at all. But if they're in a high tax bracket and mindful of tax efficiency, it could start to annoy them and they won’t be too happy.

None of this to say VDHG isn’t a great long term option for diversified investing. But the optimisation fanatics would likely lose their minds over paying extra taxes unnecessarily.

Should I create a portfolio that provides monthly income?

Most of us pursuing financial independence get into share investing with the idea of creating a passive income. Either to semi-retire and help cover our bills, or a full-blown cashflow stream to live off completely.

Some people take this a step further and think, “how cool would it be to get an income every single month from my shares!”

And I get it – who wants to wait multiple months between payments if you can be receiving income every month. So what’s the problem?

Well, the main issue is this desire ends up causing you to choose investments based on what time of year they pay their dividends, rather than those being the right investments for your situation. Quite often, you could end up choosing a few sub-par investments to ‘fill up the months’. This also makes your portfolio more complicated than it needs to be. Not only that, but you really don’t need to get income every month.

In retirement, you’ll ideally end up with a large portfolio and a decent buffer of cash in the bank. A chunk of cash will comfortably see you from one dividend to the next. And for most people investing in ETFs, that’s usually only a few months. Granted, the distributions will vary in size, but you get the idea.

So despite the goal of a monthly income stream being appealing, I don’t think it’s a great idea overall. It can easily lead us astray and cause us to focus on the wrong thing when building our long-term portfolio.



Does it make sense to sell a property to reinvest?

This type of question often comes from someone who’s been investing for a number of years. Maybe they purchased a property years ago, it’s grown in value quite a bit, but provides no income.

The expenses keep adding up, interest rates are now higher, and despite healthy rent increases, the property never seems to provide anything in the way of extra cashflow. As a result, there’s a sizeable chunk of equity sitting in the property, yet it’s not making any difference to your freedom or flexibility whatsoever.

In the meantime, this investor has discovered shares, started building a portfolio, and is starting to see dividends hit the bank account. They start to wonder whether selling their property to reinvest the money into shares is a good idea.

Now, selling would mean copping a painful hit with capital gains tax (CGT). But reinvesting the money would leave them with a much bigger share portfolio, generating a nice income stream.

So, does this approach make sense?

Well, I’m a little biased as this is exactly what I’ve been doing after realising the same thing many years ago. But it depends on the situation.

If someone is planning to work for another 5-10 years, it could make sense to hold onto the property longer. Especially if they think it’s likely to grow in value over that period. Because there’s really no need for the income right now.

But if the goal is more around semi-retiring or FI sooner, then selling and reinvesting into shares becomes a lot more appealing. Given that equity is providing zero income now, but could generate a nice cashflow if invested in a different asset, it’s definitely something to consider.

At the end of the day, you do need income to break away from the rat race. Having lots of properties and plenty of equity (but no cashflow) just isn’t gonna do the trick. Another idea is to sell a property after cutting down work once in a much lower tax bracket. This will soften the CGT blow, and leave more money to reinvest.

I’m torn between the high growth of global shares and the high income of Aussie shares…

Sometimes when we first begin investing, almost every investment looks attractive in its own way. We aren’t sure which way to go, and like a kid in a candy store, we almost want to buy everything. Or was that just me?

One of the most common ways this manifests itself is trying to decide between Aussie and global shares. We discover the juicy dividends and franking credits paid by Aussie companies and think about the great income stream we could build.

But then we see the high historical growth in the US, and with their ultra-dominant tech companies that seem to just print money , it seems silly not to go that way.

We also have a sense of familiarity with each group of companies. In Australia we have mining giants, banks, supermarkets, retailers, and a whole host of other businesses we’re very familiar with – realestate.com , Seek, Dominos, and so on. But we also use Google, Facebook, Apple, and Microsoft on a regular basis too.

If you haven’t figured it out already, a sensible answer is to choose both. Your portfolio doesn’t need to be stacked one way or another. In fact, a portfolio (just like a diet) with more balance is usually a wise approach. How much you have in each, and the funds you choose to do that is up to you, but having a healthy blend will also alleviate any anxiety around ‘missing out’ and make the choice easier.

As I alluded to above, the two markets have sectors which compliment each other. So not only does this give you a balance of income and growth, it results in greater diversification, making your portfolio stronger overall, with less reliance on any one sector or group of companies.


Final thoughts

I hope you enjoyed this Q&A session, and these answers gave you food for thought as you progress towards your goals.

Remember, if you have a question on a topic you’d like some more information on, feel free to post it in the comments below, or 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.

And by the way, there's no such thing as a silly question. More discussion helps others in the community too because they might be wondering the same thing, and we can also cover it in a future Q&A article.

Until next time, happy long-term investing!

Dave

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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