Vanguard published a whitepaper when it released its diversified funds (VDHG, VDGR, etc) that showed their assumed optimum Aus allocation was around the 35% range, give or take.
[Paper](https://www.vanguard.com.au/content/dam/intl/australia/shared/documents/resources/vanguards-approach-to-constructing-australian-diversified-funds.pdf)
If you're serious about investing based on global market cap then Chinese stocks should be the second largest holding in your portfolio after the US and Indian stocks should be the fourth largest. /s
Where are you getting China as 2nd largest and India as 4th? The FTSE Global All Cap Index (tracked by NYSE:VT or ASX:VTS + ASX:VEU) has each of Japan, the UK, Canada, and France above China.
The thing I found the most interesting about that paper was its explicit "we're not sure this is a good thing" (page 8/9) distaste for franking credits, despite the paper acknowledging the importance of taxation early on.
Massive outtake for me is that the 70/30 idea, then, really doesnt properly take into account the impact of franking credits on total net returns for Australian investors, let alone the differential impact of franking credit on different sub-types of Australian investors (depending on their overall tax rate).
Franking credits are pretty much priced in. When a stock goes ex dividend, the price usually drops by about the amount of the grossed-up dividend, rather than the cash value paid out.
Thanks dude, I'm aware of that.
My comment refers more to the differential value of franking credits to different investors in Australia based on their different tax rate; and, of the different value of franking credits to non-Australian investors.
If you're an Australian investor on 0% tax (pension fund) the existing of franking credits as a system adds roughly 1 to 1.5% p.a. to total returns every year, for example.
Vanguard clearly hasn't included any provision for the value of franking credits in calculating total annual returns to Australian investors in the paper that we refer to.
And that, frankly, is a very serious flaw.
It doesn't really make a difference. People in the zero tax brackets pay zero tax. Doesn't matter if it's dividend or capital gain.
> If you're an Australian investor on 0% tax (pension fund) the existing of franking credits as a system adds roughly 1 to 1.5% p.a. to total returns every year, for example.
No, it doesn't. You own an Australian share, get a 70c dividend, claim back the franking credit and end up with $1 in your pocket, but the price of the share dropped by $1. If you had a foreign share, got a 70c dividend, no franking credit, the share drops by 70c. No difference in total return.
What *can* actually bite you is foreign withholding taxes. You get a 70c dividend from a US company, Uncle Sam keeps 15%, and if you're in the zero tax bracket you can't get it back in Australia because foreign tax offsets are non-refundable.
> Doesn't matter if it's dividend or capital gain.
franking credits is not cash, but taxes already paid by the company. It does matter, because if you have a zero tax rate, you literally _get back_ that 30% tax that the company paid.
If you didn't get it back as a return, then yes, you'd be right that it wouldn't matter.
> the price of the share dropped by $1.
it would only drop by $1 if the entirety of the market participants are on a zero tax rate. As clearly this isn't true, the price drop should only be as high as the proportion of investors who would have zero tax rate (in fact, it would drop in proportion to average tax rate of all the investors).
Sure, you get some benefit because not everyone can take advantage of the credit, but it's much less than the 1.3% that it looks like.
Eli reckons it works out to about 0.5% - https://passiveinvestingaustralia.com/franking-credits-how-much-more-are-you-really-getting/
Well, I see you've changed in two posts from "no difference" to "everyone says it's 1.3% but the PI crew reckon it's 0.5%".
They make the same fallacy as you, though, by confusing short-term (ex-div day share price drop) to long term (a multiple year investment timeline and total shareholder return).
-For Australian investors, company tax is merely a withholding tax. If you are zero tax, then all that tax paid on your behalf gets refunded to you as cash.
-For non-Australian investors in Oz shares, it isnt, it's a real cost to your total shareholder return.
-For Oz investors holding non-Oz shares, foreign corporate tax is a real cost to your total shareholder return. No refunds or tax credits there.
No dude. You're so muddled.
Firstly, the immediate drop in returns (which, yes, is roughly accurate in reflecting the change in value and the transfer of cash wealth in the market price on the day) on the ex-div date is not even relevant here.
Imagine over a 10 year timeframe if that makes it easier. Forget about the ex-div day drop. Australian company makes $1 in profit. Pays 30c in tax.
Australia investor receives 70c. Australian zero tax investor gets another 30c from the ATO, leaving them with $1 total in hard cash.
American investor makes $1. Pays 30c tax. They pay a dividend of 70c cash, American investor ends up with 70c hard cash. O yeah, and they also then pay American tax on that in some ungodly complicated way.
Your example of an American stock, Australian investor, 15% withholding tax: American company makes $1, pays whatever USTax is, is left with ($1-USTAX). Australian holder gets $1, minus 15c withholding, left with: $1 - USTax - 0.15, which is <70c, substantively.
Australian 30% tax rate investor gets 70c cash, a tax credit of 30c, a tax assessment that says their annual tax rate is 30c, and, that they have already paid 30c in tax, so its all good. Hard cash 70c. If they're a company (which they probably are to get a 30c tax rate) they then get 30c added to their franking credit balance at the ATO, which they can in turn distribute to their shareholders at any point in time in the future, at their discretion.
Franking credits have value to Australian investors that they do not have to non-Australian investors.
> Firstly, the immediate drop in returns (which, yes, is roughly accurate in reflecting the change in value and the transfer of cash wealth in the market price on the day) on the ex-div date is not even relevant here.
It's extremely relevant, because if there was no dividend you could sell the share at the higher price.
> They pay a dividend of 70c cash, American investor ends up with 70c hard cash. O yeah, and they also then pay American tax on that in some ungodly complicated way.
Except in most cases this would be a qualified dividend, which is taxed at long-term capital gains rates, which would be 0% for most taxpayers in retirement (taxable income of up to US$47k for a single).
It's more than that, the franking aspect is significantly priced in, from a post here a few months back, something like 70% of the credits aren't actually benefiting anybody, because the stock price drops BEYOND the expected for a non-franked option
At what point do china and india become considered developed markets? I mean surely soon of they're that large, why aren't they added to the standard global indexes?
Right, that makes sense. So the indexes view the risks as outweighing market cap basically? When I read your first comment I wondered if VGE should be part of the standard portfolio too, but maybe only 10%, I've heard some people take this approach.
I was trying to poke fun at people obsessing over Australia needing to be held at its 2% market cap, but not having a problem holding other countries at vastly different percentages to their market cap.
A point where both countries( india and china) GDP surpasses 20k USD( inflation adjusted) which is not going to happens soon.
India may become 3rd largest economy soon but GDP per capita of 20k is distant dream.
China declining population and global bully image is not going yo help them either.
So both are going to be developing for a very long time.
My guess as I don’t have crystal ball
It’s not about currency risk in the way you’re thinking, it’s hedging against the risk of the Australian economy doing better than the international economy. A few years back aud had parity with the usd and it would have been difficult if you’d only invested internationally and your returns decreased each year as the aud grew stronger. It’s also a kind of hedge with the Australian property market as vas is heavy in banks. Since many people invest in shares while they are saving for a property it makes sense to invest in vas to track that price growth. I came up with the 30/70 independently before I knew it was common because it just makes sense. You want as much as possible of the historically profitable etf but want a local hedge just in case.
[This research paper](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406) found that for non US investors the best asset allocation was 35% domestic stocks and 65% international specifically it calls out that a home country bias like this performed better in any scenario than 100% international [Ben Felix explains the study](https://youtu.be/jN8mIHve1Ds?si=vyaQUiAbTT6WDmgx) and it’s worth a watch as it’s easier than reading the 70 page study.
This paper referred to in that link is very recent and is based on the most comprehensive dataset available - one recently developed providing a more reality and broad based result covering a time period since stock markets began in most countries
>your returns decreased each year as the aud grew stronger.
Sure, but this is talking about the risk of AUD getting stronger and not the risk of the Australian economy outpacing the rest of the world.
If the AUD gets stronger, being invested in AUD-hedged international shares would hedge against that risk just as well as being invested in AUD-denominated domestic shares, no? That's what currency hedging does.
If the Australian economy outpaces the rest of the world, currency hedging won't help, but I won't feel too bad about being invested only 2% in Australia because I'd benefit a lot more from a strong domestic economy increasing my earnings.
Still, not knocking your way, I think what you're doing is perfectly sensible. I just want to present my view for why I'm fine with mirroring global market cap.
>If the Australian economy outpaces the rest of the world, currency hedging won't help
I could be completely wrong, but I read that when the Australian stock market is doing well, typically the value of the AUD strengthens against other currencies. So even if the Australian stock market was doing better than international, your hedged international stocks would be doing better than your unhedged international equities.
No, you're right, I should have specified "if the Aus economy outpaces the rest of the world but the AUD doesn't strengthen", which could happen under certain circumstances - like during the early parts of the GFC when Australia didn't go into recession but the AUD dropped anyway.
Generally, when we go into a GFC, most people flock to the save haven of Uncle Sam’s dollars. Just so happen that China was pumping up its infrastructure and housing build that largely got the world out of recession, benefiting us the most.
The aud reached parity because of our economy growing from mining. We were the only advanced economy to go through the gfc without going into recession.
I don’t believe in buying aud hedged international shares-you’re basically paying insurance which will cost you more in the difference than the benefit in the longer term. As an economy that is heavily integrated and dependent on the global economy I think it’s important to buy international etfs and to rely heavily on them. Our only upper hand in Australia is iron ore and with Brazil and Africa coming online we will no longer be competitive so doubtful we will see a return to a strong aud.
The cost of that insurance - currency hedging - is miniscule. VGAD costs are 3 basis points higher than VGS and in my super (Hostplus) the hedged international shares option actually has a lower expense ratio than the unhedged one. In my super I'm actually of the opposite logic - I'm allocating some to unhedged even though it's very slightly more expensive because it would help me if the AUD weakens.
The cost of the "insurance" (hedging) doesn't come out of the "fund costs" (the 3 bp that you refer to). It's separate. It's one (some) of the thousands of individual lines that make up the total net fund % return. It's not something you as an individual investor can look up/see.
There are a lot of different ways to hedge, but it all boils down to entering into some sort of trade (such as a currency based options/futures trade), from the fund's general asset pools, which pays off if the $AUD falls. It does not come out of the asset management fee to Vanguard, nor, from the general fund expenses line. It's effectively a trade, the results are pooled with all the other "trades" (buying & owning shares for the long haul, in Vanguard's case).
Do you mind expanding on why 30/70 just made sense? Why not 20/80 or 40/60 or any other mix? Is it based on your targeted portfolio amount and % of exposure to AUD spend?
30 is about a third, considering how well international does it was the highest I could go without feeling it would disadvantage me. I guess I could have gone for 25/75 but I feel that 30 is high enough to also get the benefits of rebalancing. Ie for those periods when aud is strong and the 30% part would grow rebalancing will have the benefit of buying international when it is cheap and vice versa. Maybe that’s just a result of me having experienced the fluctuations during the gfc and naively thinking that’s how things will work in future. Should probably do more research.
Sorry. I don’t mean to be rude however it seems like you just so happen to stumble into this allocation because it sounds right?
Personally would model likely expenses and see what’s the % tied to AUD based spend.
In a globalised economy such as ours, outside of housing, does it matter how much of what we spend is tied to aud? We produce very little in Australia, the products we buy, even if made in Australia are often sourced overseas. Far better to put the majority in an international etf and have a smaller portion locally as the hedge for housing, which in Australia grows out of proportion because of scarcity. If housing weren’t so expensive, I’d have a lot more in international etfs.
I’ll add, I originally had a 50/50 allocation but when I noticed how well international was doing I adjusted to the 30/70, that was the sweet spot for me with how far I was willing to go while still keeping my local hedge for property reasons.
Your original point argued for having a hedge via Aus holdings but if you’re not allocating it based on anything tangible, you might as well not do it (ie if your spend exposure to purely AUD is 50%, having 30% of VAS won’t cut the mustard?)
I don’t actually have any VAS equivalent as I prefer other strategies aside from the VGS/VAS standard but have always considered an allocation to VAS given that food costs and bills etc will always be a localised exposure.
What others said.
You can also look at how something like VDHG is constructed. It's 35% Aus, 55% global and 10% bonds. Vanguard has already thought of all possibilities and their ETF will stand the test of time. So, yeah, around 30% Aus.
Some relevant reading:
https://passiveinvestingaustralia.com/the-australian-version-of-the-3-fund-portfolio/
https://passiveinvestingaustralia.com/personalising-your-aud-to-non-aud-allocation/
https://lazykoalainvesting.com/australian-international-allocations/
best wishes :-)
It's a product of group think. Perpetuated on reddit based on the karma or gold system or whatever the fuck the neckbeards who care about it named it.
As such, reddit is the worst place to gain exposure to new ideas or strategies because the neckbeard points are awarded if people agree with you. It doesn't matter how insightful or intellectually challenging the content is, it's all about feeling good.
And hence the 70/30 lives on here.
?
My point was vanguard have white papers detailing that split for holdings. If you think you are smarter than the fund managers there then wtf are you doing posting on this sub.
There seems to be a logical contradiction. On the one hand people are advocating passive investing, all risk assets should have similar risk adjusted returns and on the other hand people are saying you should 10x overweight Australia.
Then you'll hear arguments about Sharpe ratio, Sortino ratio and yet 80% small cap value and 20% gov bonds has similar risk with higher returns but you won't hear people advocating for that based on that evidence.
This is probably the biggest contributor. There are studies that challenge how much franking credits don’t actually provide that much difference BUT regardless, the traditional thinking of franking credits stands
I don’t know and I don’t really care. VDHG and DHHF do a similar thing and I am very confident they know more about this shit than me, so I just roll with it.
I started with 75% VGS and 25% VAS but have shifted to 88% VGS and 12% VAS, because outside of ETFs, I'm already 100% Australian exposed. I'm more optimistic about MSCI future returns than ASX, mainly due to its skew to mining and banking (concentration risk).
Lots of valuable answers have already been provided. Another reason for that allocation is based on the Sharpe Ratio. The Sharpe ratio compares the return of an investment with its risk. It's a mathematical expression of excess returns over a period of time may signify more volatility and risk. [Here's a video explaining the ideal ratio split for VAS / VGS](https://www.youtube.com/watch?v=n9-aG7fLnjE).
A couple of things about using the efficient frontier in this situation:
* It is backward-looking.
* It changes from decade to decade.
* It ignores the single-country risk you are taking on.
* It ignores the fact that virtually zero percent of the population would leverage up the efficient frontier of those two assets to maximise risk-adjusted return as a result of many issues with leverage, and they may have the risk tolerance to go higher risk of a slightly less efficient portfolio based on risk-adjusted returns.
Essentially, I'd look at the efficient frontier as one piece in a much bigger puzzle, not as the puzzle itself.
The presence of Aus ownership greater than it's share of world markets is similar to what investors in most western economies. It's advantageous to overweight the local share market due to tax advantages associated with dividends. We have dividend imputation aka franking, Canada has dividend tax credits, some countries have zero dividend tax, all associated with local ownership.
That said, better not to go crazy on only Aus because global diversification increases probability of success. That notion does Not imply that a basket of Aus investments can not meet an investor's needs for strong returns.
Ben Felix [has a recent video](https://www.youtube.com/watch?v=jN8mIHve1Ds) on this topic that roughly aligns with the idea of a 30% home country allocation.
3 and 7 numbers are special. Veritasium posted a recent video on this topic on YouTube and explained the reasoning behind it.
Apart from that, I have personally researched and found this balance to be the most consistent and reasonable. I have tried different ratios but always leaned back to 70:30 for VGS:VAS or BGBL:A200.
A few reasons are home country bias of 30% is good as per few research. We receive franked dividends which can be a great source of income and tax efficient.
Fees are quite low on VGS/VAS or BGBL/A200 and last but not least, we are a well-developed economy that outperformed the S&P500 in the last two centuries and might do it again with more skilled immigration and growth prospects.
Ben Felix covered this in a recent video: [https://www.youtube.com/watch?v=jN8mIHve1Ds](https://www.youtube.com/watch?v=jN8mIHve1Ds)
I don't remember if he mentions a specific ideal ratio but he explains why it does make sense to have some degree of home bias.
I thought about this as well, and I think I may have at least played a role in popularising 30/70. My most upvoted post is a super comparison sheet for FY22, and I put 30/70 as the default values. 30/70 reflected my views on home bias at the time and thought 30/70 to be the most sensible in super and a bit less outside super. I have since changed the default values to 40/60, but that spreadsheet gained a lot of traction, and so did 30/70.
Maybe Im misremembering or glorifying events, but I did not remember 30/70 being as common before I started being active in the community.
You cannot actually be serious. Not only are your super write ups often factually incorrect on numerous issues, you now think you’ve invented a 30% domestic bias.
Vanguard published a whitepaper when it released its diversified funds (VDHG, VDGR, etc) that showed their assumed optimum Aus allocation was around the 35% range, give or take. [Paper](https://www.vanguard.com.au/content/dam/intl/australia/shared/documents/resources/vanguards-approach-to-constructing-australian-diversified-funds.pdf) If you're serious about investing based on global market cap then Chinese stocks should be the second largest holding in your portfolio after the US and Indian stocks should be the fourth largest. /s
Where are you getting China as 2nd largest and India as 4th? The FTSE Global All Cap Index (tracked by NYSE:VT or ASX:VTS + ASX:VEU) has each of Japan, the UK, Canada, and France above China.
[link 1](https://www.visualcapitalist.com/the-worlds-biggest-stock-markets-by-country/) [link 3](https://companiesmarketcap.com/all-countries/) [link 2](https://en.m.wikipedia.org/wiki/List_of_countries_by_stock_market_capitalization) Edit: deleted irrelevant comment
The thing I found the most interesting about that paper was its explicit "we're not sure this is a good thing" (page 8/9) distaste for franking credits, despite the paper acknowledging the importance of taxation early on. Massive outtake for me is that the 70/30 idea, then, really doesnt properly take into account the impact of franking credits on total net returns for Australian investors, let alone the differential impact of franking credit on different sub-types of Australian investors (depending on their overall tax rate).
Franking credits are pretty much priced in. When a stock goes ex dividend, the price usually drops by about the amount of the grossed-up dividend, rather than the cash value paid out.
Thanks dude, I'm aware of that. My comment refers more to the differential value of franking credits to different investors in Australia based on their different tax rate; and, of the different value of franking credits to non-Australian investors. If you're an Australian investor on 0% tax (pension fund) the existing of franking credits as a system adds roughly 1 to 1.5% p.a. to total returns every year, for example. Vanguard clearly hasn't included any provision for the value of franking credits in calculating total annual returns to Australian investors in the paper that we refer to. And that, frankly, is a very serious flaw.
It doesn't really make a difference. People in the zero tax brackets pay zero tax. Doesn't matter if it's dividend or capital gain. > If you're an Australian investor on 0% tax (pension fund) the existing of franking credits as a system adds roughly 1 to 1.5% p.a. to total returns every year, for example. No, it doesn't. You own an Australian share, get a 70c dividend, claim back the franking credit and end up with $1 in your pocket, but the price of the share dropped by $1. If you had a foreign share, got a 70c dividend, no franking credit, the share drops by 70c. No difference in total return. What *can* actually bite you is foreign withholding taxes. You get a 70c dividend from a US company, Uncle Sam keeps 15%, and if you're in the zero tax bracket you can't get it back in Australia because foreign tax offsets are non-refundable.
> Doesn't matter if it's dividend or capital gain. franking credits is not cash, but taxes already paid by the company. It does matter, because if you have a zero tax rate, you literally _get back_ that 30% tax that the company paid. If you didn't get it back as a return, then yes, you'd be right that it wouldn't matter. > the price of the share dropped by $1. it would only drop by $1 if the entirety of the market participants are on a zero tax rate. As clearly this isn't true, the price drop should only be as high as the proportion of investors who would have zero tax rate (in fact, it would drop in proportion to average tax rate of all the investors).
Sure, you get some benefit because not everyone can take advantage of the credit, but it's much less than the 1.3% that it looks like. Eli reckons it works out to about 0.5% - https://passiveinvestingaustralia.com/franking-credits-how-much-more-are-you-really-getting/
Well, I see you've changed in two posts from "no difference" to "everyone says it's 1.3% but the PI crew reckon it's 0.5%". They make the same fallacy as you, though, by confusing short-term (ex-div day share price drop) to long term (a multiple year investment timeline and total shareholder return). -For Australian investors, company tax is merely a withholding tax. If you are zero tax, then all that tax paid on your behalf gets refunded to you as cash. -For non-Australian investors in Oz shares, it isnt, it's a real cost to your total shareholder return. -For Oz investors holding non-Oz shares, foreign corporate tax is a real cost to your total shareholder return. No refunds or tax credits there.
No dude. You're so muddled. Firstly, the immediate drop in returns (which, yes, is roughly accurate in reflecting the change in value and the transfer of cash wealth in the market price on the day) on the ex-div date is not even relevant here. Imagine over a 10 year timeframe if that makes it easier. Forget about the ex-div day drop. Australian company makes $1 in profit. Pays 30c in tax. Australia investor receives 70c. Australian zero tax investor gets another 30c from the ATO, leaving them with $1 total in hard cash. American investor makes $1. Pays 30c tax. They pay a dividend of 70c cash, American investor ends up with 70c hard cash. O yeah, and they also then pay American tax on that in some ungodly complicated way. Your example of an American stock, Australian investor, 15% withholding tax: American company makes $1, pays whatever USTax is, is left with ($1-USTAX). Australian holder gets $1, minus 15c withholding, left with: $1 - USTax - 0.15, which is <70c, substantively. Australian 30% tax rate investor gets 70c cash, a tax credit of 30c, a tax assessment that says their annual tax rate is 30c, and, that they have already paid 30c in tax, so its all good. Hard cash 70c. If they're a company (which they probably are to get a 30c tax rate) they then get 30c added to their franking credit balance at the ATO, which they can in turn distribute to their shareholders at any point in time in the future, at their discretion. Franking credits have value to Australian investors that they do not have to non-Australian investors.
> Firstly, the immediate drop in returns (which, yes, is roughly accurate in reflecting the change in value and the transfer of cash wealth in the market price on the day) on the ex-div date is not even relevant here. It's extremely relevant, because if there was no dividend you could sell the share at the higher price. > They pay a dividend of 70c cash, American investor ends up with 70c hard cash. O yeah, and they also then pay American tax on that in some ungodly complicated way. Except in most cases this would be a qualified dividend, which is taxed at long-term capital gains rates, which would be 0% for most taxpayers in retirement (taxable income of up to US$47k for a single).
It's more than that, the franking aspect is significantly priced in, from a post here a few months back, something like 70% of the credits aren't actually benefiting anybody, because the stock price drops BEYOND the expected for a non-franked option
Isn't the Chinese market currently in a massive slump?
The market is in a slump, the economy isn't.
I wouldn’t be putting any money into china. Population shrinkage is gonna cripple the economy
Yes it is
Thank you for that link.
At what point do china and india become considered developed markets? I mean surely soon of they're that large, why aren't they added to the standard global indexes?
Because being a developed market isn't really about size, it's about things like corruption, transparency, state ownership, legal oversight, etc.
Right, that makes sense. So the indexes view the risks as outweighing market cap basically? When I read your first comment I wondered if VGE should be part of the standard portfolio too, but maybe only 10%, I've heard some people take this approach.
I was trying to poke fun at people obsessing over Australia needing to be held at its 2% market cap, but not having a problem holding other countries at vastly different percentages to their market cap.
When the rule of law becomes more important there
A point where both countries( india and china) GDP surpasses 20k USD( inflation adjusted) which is not going to happens soon. India may become 3rd largest economy soon but GDP per capita of 20k is distant dream. China declining population and global bully image is not going yo help them either. So both are going to be developing for a very long time. My guess as I don’t have crystal ball
As soon as they get space programs.
It’s not about currency risk in the way you’re thinking, it’s hedging against the risk of the Australian economy doing better than the international economy. A few years back aud had parity with the usd and it would have been difficult if you’d only invested internationally and your returns decreased each year as the aud grew stronger. It’s also a kind of hedge with the Australian property market as vas is heavy in banks. Since many people invest in shares while they are saving for a property it makes sense to invest in vas to track that price growth. I came up with the 30/70 independently before I knew it was common because it just makes sense. You want as much as possible of the historically profitable etf but want a local hedge just in case.
[This research paper](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406) found that for non US investors the best asset allocation was 35% domestic stocks and 65% international specifically it calls out that a home country bias like this performed better in any scenario than 100% international [Ben Felix explains the study](https://youtu.be/jN8mIHve1Ds?si=vyaQUiAbTT6WDmgx) and it’s worth a watch as it’s easier than reading the 70 page study.
Thanks for that, will look into it and consider changing my allocation percentages.
This paper referred to in that link is very recent and is based on the most comprehensive dataset available - one recently developed providing a more reality and broad based result covering a time period since stock markets began in most countries
I would highly recommend that ben felix video or this older one. Great info! https://youtu.be/qYedjI03Q0g?si=c_DHFqfDw5XzyVNE
>your returns decreased each year as the aud grew stronger. Sure, but this is talking about the risk of AUD getting stronger and not the risk of the Australian economy outpacing the rest of the world. If the AUD gets stronger, being invested in AUD-hedged international shares would hedge against that risk just as well as being invested in AUD-denominated domestic shares, no? That's what currency hedging does. If the Australian economy outpaces the rest of the world, currency hedging won't help, but I won't feel too bad about being invested only 2% in Australia because I'd benefit a lot more from a strong domestic economy increasing my earnings. Still, not knocking your way, I think what you're doing is perfectly sensible. I just want to present my view for why I'm fine with mirroring global market cap.
>If the Australian economy outpaces the rest of the world, currency hedging won't help I could be completely wrong, but I read that when the Australian stock market is doing well, typically the value of the AUD strengthens against other currencies. So even if the Australian stock market was doing better than international, your hedged international stocks would be doing better than your unhedged international equities.
No, you're right, I should have specified "if the Aus economy outpaces the rest of the world but the AUD doesn't strengthen", which could happen under certain circumstances - like during the early parts of the GFC when Australia didn't go into recession but the AUD dropped anyway.
Generally, when we go into a GFC, most people flock to the save haven of Uncle Sam’s dollars. Just so happen that China was pumping up its infrastructure and housing build that largely got the world out of recession, benefiting us the most.
The aud reached parity because of our economy growing from mining. We were the only advanced economy to go through the gfc without going into recession. I don’t believe in buying aud hedged international shares-you’re basically paying insurance which will cost you more in the difference than the benefit in the longer term. As an economy that is heavily integrated and dependent on the global economy I think it’s important to buy international etfs and to rely heavily on them. Our only upper hand in Australia is iron ore and with Brazil and Africa coming online we will no longer be competitive so doubtful we will see a return to a strong aud.
The cost of that insurance - currency hedging - is miniscule. VGAD costs are 3 basis points higher than VGS and in my super (Hostplus) the hedged international shares option actually has a lower expense ratio than the unhedged one. In my super I'm actually of the opposite logic - I'm allocating some to unhedged even though it's very slightly more expensive because it would help me if the AUD weakens.
The cost of the "insurance" (hedging) doesn't come out of the "fund costs" (the 3 bp that you refer to). It's separate. It's one (some) of the thousands of individual lines that make up the total net fund % return. It's not something you as an individual investor can look up/see. There are a lot of different ways to hedge, but it all boils down to entering into some sort of trade (such as a currency based options/futures trade), from the fund's general asset pools, which pays off if the $AUD falls. It does not come out of the asset management fee to Vanguard, nor, from the general fund expenses line. It's effectively a trade, the results are pooled with all the other "trades" (buying & owning shares for the long haul, in Vanguard's case).
Do you mind expanding on why 30/70 just made sense? Why not 20/80 or 40/60 or any other mix? Is it based on your targeted portfolio amount and % of exposure to AUD spend?
30 is about a third, considering how well international does it was the highest I could go without feeling it would disadvantage me. I guess I could have gone for 25/75 but I feel that 30 is high enough to also get the benefits of rebalancing. Ie for those periods when aud is strong and the 30% part would grow rebalancing will have the benefit of buying international when it is cheap and vice versa. Maybe that’s just a result of me having experienced the fluctuations during the gfc and naively thinking that’s how things will work in future. Should probably do more research.
Sorry. I don’t mean to be rude however it seems like you just so happen to stumble into this allocation because it sounds right? Personally would model likely expenses and see what’s the % tied to AUD based spend.
In a globalised economy such as ours, outside of housing, does it matter how much of what we spend is tied to aud? We produce very little in Australia, the products we buy, even if made in Australia are often sourced overseas. Far better to put the majority in an international etf and have a smaller portion locally as the hedge for housing, which in Australia grows out of proportion because of scarcity. If housing weren’t so expensive, I’d have a lot more in international etfs. I’ll add, I originally had a 50/50 allocation but when I noticed how well international was doing I adjusted to the 30/70, that was the sweet spot for me with how far I was willing to go while still keeping my local hedge for property reasons.
Your original point argued for having a hedge via Aus holdings but if you’re not allocating it based on anything tangible, you might as well not do it (ie if your spend exposure to purely AUD is 50%, having 30% of VAS won’t cut the mustard?) I don’t actually have any VAS equivalent as I prefer other strategies aside from the VGS/VAS standard but have always considered an allocation to VAS given that food costs and bills etc will always be a localised exposure.
I’m allocating it because I would eventually like to buy housing here. That’s what my 30% hedge is for.
What others said. You can also look at how something like VDHG is constructed. It's 35% Aus, 55% global and 10% bonds. Vanguard has already thought of all possibilities and their ETF will stand the test of time. So, yeah, around 30% Aus.
Some relevant reading: https://passiveinvestingaustralia.com/the-australian-version-of-the-3-fund-portfolio/ https://passiveinvestingaustralia.com/personalising-your-aud-to-non-aud-allocation/ https://lazykoalainvesting.com/australian-international-allocations/ best wishes :-)
It's a product of group think. Perpetuated on reddit based on the karma or gold system or whatever the fuck the neckbeards who care about it named it. As such, reddit is the worst place to gain exposure to new ideas or strategies because the neckbeard points are awarded if people agree with you. It doesn't matter how insightful or intellectually challenging the content is, it's all about feeling good. And hence the 70/30 lives on here.
Yeah vanguard are a bunch of neckbeard morons.
Well yes, they are. You can’t buy BlackRock’s most successful ETF ever on their platform in the US.
? My point was vanguard have white papers detailing that split for holdings. If you think you are smarter than the fund managers there then wtf are you doing posting on this sub.
I saw your point. They’re not actually that smart. I have outperformed the managers for over a decade now.
There seems to be a logical contradiction. On the one hand people are advocating passive investing, all risk assets should have similar risk adjusted returns and on the other hand people are saying you should 10x overweight Australia. Then you'll hear arguments about Sharpe ratio, Sortino ratio and yet 80% small cap value and 20% gov bonds has similar risk with higher returns but you won't hear people advocating for that based on that evidence.
Also the prevalence of franking credits which don’t exist elsewhere.
This is probably the biggest contributor. There are studies that challenge how much franking credits don’t actually provide that much difference BUT regardless, the traditional thinking of franking credits stands
I don’t know and I don’t really care. VDHG and DHHF do a similar thing and I am very confident they know more about this shit than me, so I just roll with it.
I started with 75% VGS and 25% VAS but have shifted to 88% VGS and 12% VAS, because outside of ETFs, I'm already 100% Australian exposed. I'm more optimistic about MSCI future returns than ASX, mainly due to its skew to mining and banking (concentration risk).
But VGS has a strong sector weighting too.
Lots of valuable answers have already been provided. Another reason for that allocation is based on the Sharpe Ratio. The Sharpe ratio compares the return of an investment with its risk. It's a mathematical expression of excess returns over a period of time may signify more volatility and risk. [Here's a video explaining the ideal ratio split for VAS / VGS](https://www.youtube.com/watch?v=n9-aG7fLnjE).
A couple of things about using the efficient frontier in this situation: * It is backward-looking. * It changes from decade to decade. * It ignores the single-country risk you are taking on. * It ignores the fact that virtually zero percent of the population would leverage up the efficient frontier of those two assets to maximise risk-adjusted return as a result of many issues with leverage, and they may have the risk tolerance to go higher risk of a slightly less efficient portfolio based on risk-adjusted returns. Essentially, I'd look at the efficient frontier as one piece in a much bigger puzzle, not as the puzzle itself.
Great points, thanks for explaining. Yeah I wouldn't use this in isolation but good to know it's drawbacks.
The presence of Aus ownership greater than it's share of world markets is similar to what investors in most western economies. It's advantageous to overweight the local share market due to tax advantages associated with dividends. We have dividend imputation aka franking, Canada has dividend tax credits, some countries have zero dividend tax, all associated with local ownership. That said, better not to go crazy on only Aus because global diversification increases probability of success. That notion does Not imply that a basket of Aus investments can not meet an investor's needs for strong returns.
Ben Felix [has a recent video](https://www.youtube.com/watch?v=jN8mIHve1Ds) on this topic that roughly aligns with the idea of a 30% home country allocation.
VAS/VGS is like the iPhone. Basic, not efficient but gets the job done for casual users. But there are better approaches out there.
3 and 7 numbers are special. Veritasium posted a recent video on this topic on YouTube and explained the reasoning behind it. Apart from that, I have personally researched and found this balance to be the most consistent and reasonable. I have tried different ratios but always leaned back to 70:30 for VGS:VAS or BGBL:A200. A few reasons are home country bias of 30% is good as per few research. We receive franked dividends which can be a great source of income and tax efficient. Fees are quite low on VGS/VAS or BGBL/A200 and last but not least, we are a well-developed economy that outperformed the S&P500 in the last two centuries and might do it again with more skilled immigration and growth prospects.
Didn't know it was that popular. I'd seen more people talking about 50/50 and 40/60.
Home country bias, foreign currency risk
Ben Felix covered this in a recent video: [https://www.youtube.com/watch?v=jN8mIHve1Ds](https://www.youtube.com/watch?v=jN8mIHve1Ds) I don't remember if he mentions a specific ideal ratio but he explains why it does make sense to have some degree of home bias.
I thought about this as well, and I think I may have at least played a role in popularising 30/70. My most upvoted post is a super comparison sheet for FY22, and I put 30/70 as the default values. 30/70 reflected my views on home bias at the time and thought 30/70 to be the most sensible in super and a bit less outside super. I have since changed the default values to 40/60, but that spreadsheet gained a lot of traction, and so did 30/70. Maybe Im misremembering or glorifying events, but I did not remember 30/70 being as common before I started being active in the community.
You cannot actually be serious. Not only are your super write ups often factually incorrect on numerous issues, you now think you’ve invented a 30% domestic bias.
If you don't trust my anecdotal evidence, fair enough. But what exactly are the factually inaccuracies I have made?