Portfolio composition

I have a considerable share portfolio containing a mixture of shares, ETFs investment trusts locally and globally. This is my hobby to administer. I have retired and now becoming concerned that if I was not around my wife or daughters will have no interest in administering and maintaining this type of portfolio. Of course I could hand it over to a full broker but the fees I would find hard to justify. The alternative is to simplify the portfolio and have a handful of ETFs. I would be interested to know how others handle this for the long term. Also, is there a point to have investments in a trust?

yes, not interesting in buying specific shares, so will need to keep strategy simple. I would be interested to know how others handle this

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Originally Posted by voltage

I have a considerable share portfolio containing a mixture of shares, ETFs investment trusts locally and globally. This is my hobby to administer. I have retired and now becoming concerned that if I was not around my wife or daughters will have no interest in administering and maintaining this type of portfolio. Of course I could hand it over to a full broker but the fees I would find hard to justify. The alternative is to simplify the portfolio and have a handful of ETFs. I would be interested to know how others handle this for the long term.

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Voltage, brokers will charge different fees depending on what service they offer you. You don't have to go the whole hog and have a full quarterly rebalance every quarter at full service fee level. You could start with an instruction only oversight (i.e. acting on your instruction). That should be much cheaper. If neither your wife or daughters have a particular aptitude for managing investments, then at some stage down the track the portfolio could move to a more 'fully managed' level.

You might start with putting just a small portion of the portfolio of what you own under 'broker management'. Find a broker, more towards your daughters' age group than yours. Then introduce your wife and daughters to them to see if they are comfortable with dealing with that person. Your wife and daughters don't need to be investing experts themselves. But it would be helpful to build up their knowledge to the extent they know what questions to ask. If this broker in tandem with you are able to explain to them why you have structured your portfolio the way you have, then hopefully they will figure out, for example. that panic reacting to every short term itch or TV headline is not the way to manage an investment portfolio.

Once they learn to trust a competent broker, this should take a lot of worry out of their heads in the future, and yours right now.

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Also, is there a point to have investments in a trust?

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If the ETFs you own in your own name are overseas domiciled - possibly. Although NZ has abolished death duty, it still exists in the UK and USA, for example. So you may find your estate gets stung by overseas jurisdictions if the lawyers have to write to a registry overseas and say you have died and can you please transfer those shares to your wife's or daughters' names. By owning overseas shares in the name of a trust all the transfers of ultimate ownership can be done within NZ.

SNOOPY

Thank you Snoopy, very enlightening.

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Originally Posted by Snoopy

Voltage wrote: "Also, is there a point to have investments in a trust?"

If the ETFs you own in your own name are overseas domiciled - possibly. Although NZ has abolished death duty, it still exists in the UK and USA, for example. So you may find your estate gets stung by overseas jurisdictions if the lawyers have to write to a registry overseas and say you have died and can you please transfer those shares to your wife's or daughters' names. By owning overseas shares in the name of a trust all the transfers of ultimate ownership can be done within NZ.

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I should add that if an NZ broker holds shares on your behalf in a UK or USA domiciled share entity, those should be held in a broker nominee company here in NZ. If they are not held in your name, that means the broker should be able to get around any overseas death duty issues. And that means no need to set up your own trust in NZ to get around overseas death duty issues.

In the USA at least, death duties start at quite a high net worth level for US citizens. But for overseas holders owning US based assets, the level where death duties kick in is much lower.

SNOOPY

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Originally Posted by voltage

IAlso, is there a point to have investments in a trust?

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Having your investments in Trust could increase complications but the potential advantages are being able to distribute trust income to beneficiaries in the most tax efficient manner you like. Also depending on how you did your gifting it may be advantageous if you or your wife require long term care and apply for a taxpayer subsidy for long term care. Outrageous that taxpayers would pay to protect your children's inheritance but I believe it does happen.

I have the same problem getting my kids to care about such things and I prefer to not discuss finances too much with my wife as she is more likely to spend now and worry later, terrible not sharing with my significant other, I know but it helps us stay together.

Have you ever considered that property/investments in Trust for most discretionary family trusts the kids are the final beneficiaries with the parents discretionary beneficiaries. Once the kids are old enough to look after themselves there is not much preventing them from asking for their property. As trustee you are only managing it on their behalf. Have only heard of one case where this happened but will be interesting to see if this happens more with the proliferation of Trusts in NZ. Your kids would have to be rotten to destroy a family over money but it is theoretically possible.

Thanks for all the comments, nothing is straight forward. Snoopy, what are acceptable custodial fees?

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Originally Posted by voltage

Snoopy, what are acceptable custodial fees?

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0.5% on the value of the portfolio per annum? I think most brokers have a minimum charge as a dollar amount though.

SNOOPY



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Interesting article
Long term consequences
https://www.investopedia.com/how-ind...ral&yptr=yahoo

I can't see how holding ETFs or US equities directly by a NZ resident IN THEIR OWN NAME would be beneficial from a tax perspective. NZ has that nasty FIF (FDR Comparative Rate etc) calculation to tax paper gains (with no carried forward on years for losses). Furthermore the risk of US's estate death taxes which from what I recall, has no exemption limit that US residents have (ie. $10M). I think it's a flat rate tax of 33% of total value to non-resident account holders.

The structure of NZ's FIF is to deter direct ownership of foreign share investments and allow the Kiwi Saver funds to handle that for NZ investors.

Having the investments in a trust also creates complications ; if in US, registration and reporting may be required to the IRS by the US broker. Furthermore there may be limits what the beneficiaries can do in the trust. The lawyers and accountants love to collect their annual administration fees on trusts. To the small guy, trusts offer no real benefit.

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Originally Posted by kiora

Interesting article
Long term consequences
https://www.investopedia.com/how-ind...ral&yptr=yahoo

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Nothing interesting about it and it's complete hogwash. Article didn't explain the risk of having 3 major funds owning 50% of the market; the risk is a market sell off can easily be manipulated by having few big players that determine the direction of the market (and that's what Jack Bogel was worried that too few big players can have too much manipulation of the market). But it has nothing to do with competition of the individual shares they hold, if the fundamentals hold well, so will the stocks and thus investment returns.

Something to think about if you really want to use an adviser or an investment manager or some personal investment broker:

https://www.quantumamc.com/mailer/20...ep16/Money.pdf
(Link originally from WSJ but requires silly subscription registration to view it wholly)

Basically he says the S&P500 won and the managed funds didn't over the 10 year time frame. Why? because of management fees, something many Kiwi Saver funds are guilty of. Think you can find a good broker in NZ that is that savvy enough to consistently beat the market? They're only riding on luck. The consultant's only interest is to extract fees from their clients, plain and simple.

And to think he was lucky on that bet, he's willing to offer it again:
https://www.cnbc.com/2017/10/03/afte...dex-funds.html

In Buffet's 2017 Annual meeting he also described to his shareholders on the problem between active investing (the "Hyperactives) vs Passive investing. He says by "default" the passive investor gets a whole market share of the US economy (or the S&P500). Whlie the hyperactives are just only trying to guess which stocks (that operate under the US economy model) would do better than the other. So in relation to that article about lack of competitiveness ; by default the S&P500 pool of stocks already hold a majority portion of American stocks, you don't need to question about their competitiveness.

Passive funds might be great in Bull markets BUT not in Bear markets
https://www.ccmmarketmodel.com/passive-in-a-bear-market
In bear markets when retail investors sell out of passive fund,fund needs to liquidate underlying asset causing self perpetuating drop in value of the funds.
Not just my view
https://www.ft.com/content/cdbdd01a-...8-8640db9060a7

Composition of investments are important
https://www.goodreturns.co.nz/articl...or+29+May+2019
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considers how much to deviate from the optimal portfolio to reduce biased decisions, building a portfolio the client can stick with. It includes three criteria:
Relative level of wealth: investors with high levels of wealth compared to their lifestyle can afford to deviate away from the optimal portfolio
Standard of living risk: is the client’s standard of living at risk if their portfolio was sub-optimally allocated. High standard of living risk reduces ability to deviate from the optimal portfolio
Biases: the primary type of biases will also impact the decision. Cognitive biases are easier to moderate, proper education can reduce the need to deviate. Emotional biases are more difficult to deal with and will typically need to be adapted to allowing a larger deviation from the optimal portfolio would help the client stay the course."

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Originally Posted by kiora

Composition of investments are important
https://www.goodreturns.co.nz/articl...or+29+May+2019
"
considers how much to deviate from the optimal portfolio to reduce biased decisions, building a portfolio the client can stick with. It includes three criteria:
Relative level of wealth: investors with high levels of wealth compared to their lifestyle can afford to deviate away from the optimal portfolio
Standard of living risk: is the client’s standard of living at risk if their portfolio was sub-optimally allocated. High standard of living risk reduces ability to deviate from the optimal portfolio
Biases: the primary type of biases will also impact the decision. Cognitive biases are easier to moderate, proper education can reduce the need to deviate. Emotional biases are more difficult to deal with and will typically need to be adapted to allowing a larger deviation from the optimal portfolio would help the client stay the course."

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The same kind of hogwash that Buffet has been ranting on for years so i'll post his quotes instead of spewing my own words:


"There's been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities"


“A lot of very smart people set out to do better than average in securities markets. Call them active investors. Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore, the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of passive investors.”


“If 1,000 managers make a market prediction at the beginning of the year, it’s very likely that the calls of at least one will be correct for nine consecutive years. Of course, 1,000 monkeys would be just as likely to produce a seemingly all-wise prophet. But there would remain a difference: The lucky monkey would not find people standing in line to invest with him.”


“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”


and as an adage for Jack Bogle (may he RIP):


“If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade, he amassed only a tiny percentage of the wealth that has typically flowed to managers who have promised their investors large rewards while delivering them nothing—or, as in our bet, less than nothing—of added value.”


https://www.ifa.com/articles/buffett..._crash_stands/


Do these metrics still apply in NZ? You bet they do! The only problem is in NZ, you have a limited choice of shares to choose and with returns that are very mediocre. It is so bad that the risk tolerances are not even comparable to the investors in N. America. Ie. for the level of risk the NZ risk adverse investor would be exposed to by choosing NZ50 stocks vs S&P500 is on a different plane.

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Originally Posted by kiora

Passive funds might be great in Bull markets BUT not in Bear markets
https://www.ccmmarketmodel.com/passive-in-a-bear-market
In bear markets when retail investors sell out of passive fund,fund needs to liquidate underlying asset causing self perpetuating drop in value of the funds.
Not just my view
https://www.ft.com/content/cdbdd01a-...8-8640db9060a7

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Liquidity is important.For myself personally its not important regarding my own kiwisaver as its only fraction of retirement savings.But for others?
A potential Annus horribilis?
https://www.stuff.co.nz/business/113...ay+5+July+2019
"Milford Diversified Income Fund carries 30 per cent of investments that can't be sold within five days. The Trans-Tasman Bond Fund has 25 per cent and the Balanced Fund 19 per cent. "

https://www.stuff.co.nz/business/113...your-money-out

Thanks for mentioning this and the Stuff article. The main points are that sure a fund may be doing well but when the music stops and it will, you will take a huge haircut in your invested capital.

The funds that are performing above benchmarks need to as the risk is higher than a fully liquid fund with similar performance.

If you have second thoughts and try and withdraw when there is a run on the fund this is when losses will be crystallised.

I think what people need to consider is diversifying their invested capital between a few structures and also asking themselves how they would react if there is a run on the fund. Ideally you would remain but there is huge uncertainty in the value of the remaining units.

I suggest diversifying between different structures, looking at 10y performances, % held in what companies and being ruthless if the fund is looking average. This is because the risk profile is higher than a more conservative fund.

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Originally Posted by 777

https://www.stuff.co.nz/business/113...your-money-out

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this doesn't really apply to KiwiSaver funds though. They will almost certainly never experience a massive run because people cant withdraw until 65. Or, even if say one particular fund has a huge number of transfer requests outwards it would never be like a full scale run because most people don't take that active an interest in their KS.

Which is kind of a good thing about KiwiSaver for the average person who may well be inclined to liquidate their losses during a financial crisis scenario (if they are able to).

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Originally Posted by peat

this doesn't really apply to KiwiSaver funds though. They will almost certainly never experience a massive run because people cant withdraw until 65. Or, even if say one particular fund has a huge number of transfer requests outwards it would never be like a full scale run because most people don't take that active an interest in their KS.

Which is kind of a good thing about KiwiSaver for the average person who may well be inclined to liquidate their losses during a financial crisis scenario (if they are able to).

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My understanding is funds like Milford Growth Fund that are 'mirror' images of Kiwisaver growth fund with a higher proportion of unlisted investments then it could affect their returns?

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Originally Posted by kiora

My understanding is funds like Milford Growth Fund that are 'mirror' images of Kiwisaver growth fund with a higher proportion of unlisted investments then it could affect their returns?

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well my point is that liquidity requirements are less likely to affect a KS fund.
Any non KS mutual fund will potentially have returns affected by liquidity in the usual way which is : being able to accept lower liquidity can potentially increase returns (as long as you're not forced to liquidate at a bad time).

I understand this is called a liquidity premium.

And the converse is true that if you require high liquidity your investments will likely have lower returns.

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Originally Posted by Schrodinger

Thanks for mentioning this and the Stuff article. The main points are that sure a fund may be doing well but when the music stops and it will, you will take a huge haircut in your invested capital.

The funds that are performing above benchmarks need to as the risk is higher than a fully liquid fund with similar performance.

If you have second thoughts and try and withdraw when there is a run on the fund this is when losses will be crystallised.

I think what people need to consider is diversifying their invested capital between a few structures and also asking themselves how they would react if there is a run on the fund. Ideally you would remain but there is huge uncertainty in the value of the remaining units.

I suggest diversifying between different structures, looking at 10y performances, % held in what companies and being ruthless if the fund is looking average. This is because the risk profile is higher than a more conservative fund.

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Errr.... when its not doing well you want to be buying more... why the F would you withdrawal at the worst possible time? if your'e emotionally driven and will follow the sheep when everything adjusts and want to bail cause your'e scared theres always term deposits.

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Originally Posted by alistar_mid

Errr.... when its not doing well you want to be buying more... why the F would you withdrawal at the worst possible time? if your'e emotionally driven and will follow the sheep when everything adjusts and want to bail cause your'e scared theres always term deposits.

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If you actually read the commentary we are talking about portfolio risk and what happens when the market turns - these funds need to be performing high and you technically have zero liquidity if there is a run. The conversation is about portfolio risk and not about if you favour term deposits v funds.

"Here’s what smart rich people really do with their nest Egg"
//www.marketwatch.com/story/heres-what-smart-rich-people-really-do-with-their-nest-egg-2018-07-11?siteid=yhoof2&yptr=yahoo

Another leg up for stocks?
https://www.marketwatch.com/story/ba...of2&yptr=yahoo

" S&P returns for the coming decade — many suggesting between 0 – 4% average returns per year."
https://finance.yahoo.com/news/not-225720937.html
"there’s going to be a growing discrepancy between tech returns and average market returns."
" But now, there’s potentially 15 iPods coming."
"From Dalio:

The worst thing one can do, especially late in a paradigm, is to build one’s portfolio based on what would have worked well over the prior 10 years, yet that’s typical.

With this in mind, as you look at your portfolio, is it built upon the broad-market gains of yesterday? Or it is primed for the tech-explosion of tomorrow?

Technology will be the single greatest wealth divider in the United States over the next ten years. You can either ride it higher or be run over by it."

@ klora:

Or one could just buy the broad market index ETF. This game for managed fund managers of picking the right stocks is for the dogs. Some may beat the index return in the short term but well over 99% of the 10,000 funds globally never do. But what am I to say? We have the NZ gov't and the financial institution rearing for max commission and fees (not to mention the amount of tax IRD makes from Kiwi Saver) which is all at a loss to the investor when compared to other investments.

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Originally Posted by kiora

" S&P returns for the coming decade — many suggesting between 0 – 4% average returns per year."
https://finance.yahoo.com/news/not-225720937.html
"there’s going to be a growing discrepancy between tech returns and average market returns."
" But now, there’s potentially 15 iPods coming."
"From Dalio:

The worst thing one can do, especially late in a paradigm, is to build one’s portfolio based on what would have worked well over the prior 10 years, yet that’s typical.

With this in mind, as you look at your portfolio, is it built upon the broad-market gains of yesterday? Or it is primed for the tech-explosion of tomorrow?

Technology will be the single greatest wealth divider in the United States over the next ten years. You can either ride it higher or be run over by it."

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The message here is that you should, abandon your previous balanced portfolio allocation and go all in on tech? Those you survived the 'dot com' boom of the early 2000s would probably have something to say about that strategy. I can say with certainty that selling up and buying into the up and coming tech companies now would almost certainly lead to complete financial disaster for the portfolio of any investor for the following reasons:

1/ No-one knows which of the leading tech companies today will be the market makers of tomorrow. Twenty years ago the leading search engine on the net was something called 'Altavista'. If you had poured all your savings into that 'back then', you would have nothing now. Yes there are those who have done well by picking today's winners in advance. But this is success measured in hindsight, which means the investment risk has been eliminated. It gives a false picture because you can't eliminate investment risk at the start of the investment process.

2/ Popular tech shares are often priced at premium prices by the market. Many may never even make a profit. The one rule of investment that stands the test of time is that any share is valued at the present value of its future cashflows. If a share cannot see a way to generate positive cashflows, then in the long term it is worthless. Because tech is the flavour of the moment, that means some investors are prepared to wait years for cashflows to turn positive. But during those years these up and coming companies are subject to execution risk and competitive pressures. Many don't make it.

3/ The popular belief that to benefit from tech you have to invest in tech is false. There are many old school companies like banks and airlines who have used tech to reinvent their work practices and greatly reduce their cost base. Tech can benefit the old school companies too!

Yes S&P returns may only average 0-4% for the next few years. But that will be far better than embarking on some hair brained tech chase that will more than likely destroy 80% of your capital.

SNOOPY

" S&P returns for the coming decade — many suggesting between 0 – 4% average returns per year."

and what is the trend on interest rates for cash deposits? In a place where interests are doing to 0 (with some places around the world with negative interest rates) there really isn't much option to choose?

and this is the fundamental flaw with Kiwi Saver (or pools of managed funds within the same family). They promote investment risk in terms of 3 categories (conservative / balanced / aggressive) and the measure of the risk level is based on a % proportion of the funds in cash (bonds) / equity ratio. That is 'aggressive growth' has most of the assets held in equities with little cash TD or bonds. While a risk adverse 'very conservative' approach has assets mostly invested in cash TD with little exposure to shares. Why are NZ investment advisors not advising clients on the growing global trend of lower interest rates? Perhaps they don't care and sell on the assumption that it doesn't matter because either way, they collect commissions. Never i've seen investment advisors complain and fault themselves of the poor decisions they've made, when a client sits in their office asking for an explanation. They have very good excuses based on hindsight 20/20, but never fault a mistake directly on themselves. This is very different to the CFP in N. America where they're more accountable to their clients. The CFP has to not only know about all different asset classes for investment, but also need extensive knowledge for taxation. In NZ, the advisor separates taxation with investment because as they've told me time and time again "you'll need to seek a tax specialist for that question". When you're talking investments in any way, taxation MUST be part of the equation and therefore a criteria when looking at any portfolio composition.

I have a balanced portfolio.
When one stock goes up the other goes down. Sometimes I think I'd rather have one stock so at least then I get some good days where the portfolio jumps up!
This balanced thing is definitely an exercise in patience!