The Slack Way | Slack Investor

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

UPDATE 03 November 2025: Colin’s fantastic site that is referred to a lot in this blog is no longer operational. The only way to access it is through the Wayback Machine – an internet archive (Thank you reader Jason for informing Slack Investor about this great resource). Because of the great interest in this post, I have tried to update the links in this blog and Colin’s full archived website can be reached here.

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).

Financial Year 2020 Slack Results

“If you can follow only one bit of data, follow the earnings — assuming the company in question has earnings. … What the stock price does today, tomorrow, or next week is only a distraction.”
Peter Lynch, One Up On Wall Street:

The great investor Peter Lynch had plenty of “solid gold” insights that Slack Investor has tried to incorporate into his investing. I have long extolled the virtues of growing companies with high Return on Equity (ROE). But, before I invest, I look at the earnings and projected earnings of each company at an aggregate site such as the most excellent Market Screener – Registration is free!

For example, the current market darling Afterpay (APT) is an excellent business idea and has performed extremely well for those who own it (Up 163% FY2020). APT may be a very successful company – but it is not expected to have positive earnings till 2022. From the earnings table below, both Slack Investor and Peter Lynch would be reluctant to stump up $66 to earn $0.28 in 2022.

June FY
EPS

2017
–

2018
-$0.04

2019
-$0.18

2020
-$0.16

2021
-$0.01

2022
$0.28

Annual Earnings per Share (EPS) for ASX listed Afterpay (APT) from MarketScreener

Slack Investor tries to get things “mostly right” and fills his portfolio with companies that Peter Lynch would hopefully approve of – There are no Afterpay’s, but many other growing companies that have an established earnings record – There will probably be some temporary downgrades to earnings in the Slack Portfolio this year due to the virus. I could never match Peter Lynch’s legendary performance, where he grew his Magellan Investment Fund from 1977 until 1990, at an average 29.2% annual return – roughly twice the gains of the S&P 500 at the time.

Things were going along swimmingly for FY 2020 till mid-February and the rapid spread of COVID 19 around the world. For FY 2020, the worst performing followed index was the UK, with the FTSE 100 Total Return Index down 13.8%. Dividends helped the Australian Accumulation Index to be down 3.7% for the financial year. These Americans really believe in their stock’s ability to keep earning during this recession (maybe Slack Investor has a twinge of doubt here) … the S&P 500 Total Return Index was 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, just shows stock prices.

ASX 2oo Weekly chart for FY 2020 – started at 6618 and finished at 5897 (30 June 2019 – 30 June 2020) – Incredible Charts

Slack Portfolio Results FY 2020

Slack Investor has three financial pillars to keep himself steady. I will expand on these in a later post.

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)
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 time horizon – as stock prices can be volatile in high Return on Equity (ROE) shares. I am currently retired and would 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.

All Performance results are before tax, given the circumstances, the Slack Portfolio annual FY 2020 performance of +9.4% was a pretty good result. Full yearly results with benchmarks are shown in the table below. A mediocre year for all benchmarks exposed to Australian and UK share markets (Median Balance Fund +0.3%, Vanguard Growth Fund +0.6%, ASX 200 Accumulation -2.7%). Real Estate was a good investment in the Brisbane and Melbourne markets for FY 2020 (+8.4% and +13.8%) – but the winds for these investments are blowing the wrong way now.

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	2.8	4.2	0.6	8.4	9.5	2.2	1.3
2017	19.5	10.4	8.8	14.1	6.5	17.7	1.9	1.9
2018	37.6	9.2	10.0	13.0	1.1	5.2	3.9	2.1
2019	19.7	7.2	9.8	11.2	1.7	-6.0	2.0	1.3
2020	9.4	0.3	0.6	-2.7	8.4	13.8	1.1	-0.3

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.

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.

FY 2021 Resolutions

Image from the perceptive Gary Markstein.

The delusional President Trump provides many lessons to Slack Investor. The absence of these traits in Trump reminds me that humility and compassion are such worthwhile qualities. I will continue to work on these personal attributes this coming financial year and always be grateful for good fortune. I made plenty of mistakes this year and in hindsight sold some shares just before a decent price rise (e.g, IRI, CIP, VGE) – but Slack Investor accepts this as just the “normal path” of investing.

Slack Investor has no form in trying to predict the future … In the last 6 months I have tinkered with the Slack Portfolio and tried to get rid of any companies that would suffer severe setbacks in this COVID-19 led global recession. I have no great faith in my ability to time the exit and entry of exposure to sharemarkets, and I remain fully invested. Slack Investor is prepared to “ride this one out” with cash in the Portfolio at less than 1%.

In the wise words of Peter Lynch …

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”
Peter Lynch, One Up On Wall Street:

Is Market Timing Just Too Hard?

Slack Investor has not too many attributes … but one of his few features is self-awareness and the constant need to review techniques on the way to financial independence.

I have been trying to run a timing strategy with my index funds since 2004. With some success, but I would only give a “try harder” sticker to the results.

The average yearly gain for the Slack Monthly “market timing” method over the alternate strategy of “buy and hold” (leaving funds in the ASX Index, UK Index, and the US Index), is respectively is 2.7%, 2.3% and 0.3% (At March 2020). Check out the charts, trades and the gains at the page links for each index.

Although these figures show outperformance for the Slack “market timing” method. These gains might have been outweighed by share dividends if I had held the shares instead of trading out to cash. At the moment cash returns are very low (0.5 – 1.5%) and, at the current average ASX 200 yield of 5.2%, shares make a lot of sense – But being in stocks is not for the faint-hearted.

The bear market of March of 2020 — Chart showing the historical number of days to reach a Dow Jones market fall of 30% – From a Beth Kindig article in Forbes

2020 has been the financial equivalent of the “Battered Sav” with wild swings in the stock market – and the fastest fall in stock market prices in history. The ASX fell 20.5% in 14 days to enter “Bear Market” territory on March 11. It was down 30% from its peak by March 16. It is the speed of the market falls that is making Slack Investor starting to question his monthly timing strategy. For the US Dow Jones index, the rapid fall of 30% in just 18 days during March 2020 has set new records.

Things are getting freaky!

A visualization of the daily moves for the US Market 2010-2019 shows that usually most daily movements are less than 1% either way – This is Slack Investors comfort zone. But, occasionally, the market moves much more in a day. I think these large moves are getting much more common with the increased prominence of high frequency trading.

A great visualization from 2019 showing the daily percentage movements of the US stock market since 2009. **Most** of the daily moves are between -1% band +1% – but higher fluctuations do occur. – from www.chartr.co

Compare the size of daily movements on the US market in January 2020 with March 2020 – where most days had changes more than 3%.

A comparison of daily percentage change on the US Dow Jones Index in January 2020 with March 2020. From Bloomberg ofdollarsand data.com

Large share brokers and investment firms use trading systems that automatically buy into rising markets and sell into falling markets. These trades are executed by computers that use a defined set of instructions known as an algorithm to place a trade. If the market is moving up or down then these trading systems inflate the movements of the market as they try to get in or out of a trade. These computer trades make it hard for individual investors as their trades happen in microseconds. Algorithmic trading is growing rapidly at 11% per year.

“fundamental discretionary traders” accounted for only 10 percent of stock trading volume
JP Morgan quote from 2017

That means that we individual traders are up against the machines for 9 out of every 10 trades.

“Investors may have to get used to big, sudden moves in the stock market due to fewer institutions pushing equities to attractive valuations while hedge funds reach unprecedented levels of employing computerized momentum-based strategies. The result will be “faster and deeper” corrections.”
JP Morgan

I will keep my market-timing experiment for index funds (Less than 3% of my Portfolio) going for another 4 years (to make it a 20-year trial). My feeling is that by waiting till the end of the month, sometimes the market has corrected too far. However, for the bulk of my stocks, my message is to embrace the volatility of the stock market … it is what it is! The share market is still one of the most convenient way to build wealth for the investor.

Slack Investor cannot beat the computers in a momentum trade. But I do have some advantages over the the machines. I can try to judge what a business is worth. Does it have barriers to entry for other companies? Is it growing? Does it have too much debt? Find yourself some good growing companies with a track record of increasing earnings. Do a little “tweaking” to suit the times … and stay safe in these troubled times.

Financial Year 2019 Slack Results

“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”
Warren Buffet

The art of getting things mostly right is all that Slack Investor wants to do – this is a theme that echoes throughout this blog. Slack Investor does not aim for perfection – good enough is good enough. Along the way will be fantastic opportunities that I missed out on … but that’s OK too.

Though not in Mr Buffet’s league, stock pick failures are something that we both accept – providing that they are not too common! Mr Buffet probably has regrets about his $US14 billion stake in Kraft Heinz … but unlikely to be losing any sleep about it. The Slack stinkers were outlined last post – again, no sleep lost. There will be times when the entire Slack portfolio goes negative – A good example is the first half of last financial year, From July 01 till December 31 2018, things were grim with the Australian Market down 9% and the Slack Portfolio down over 10% and the journey so far this financial year has been “wild and woolly”.

ASX 2oo Weekly chart for FY 2019 (01 July 2018 – 30 June 2019) – Incredible Charts

Slack Performance Results FY 2019

Performance results are before tax and, despite being over 10% down at the end of December, the Slack Portfolio grew a creditable 19.7% for the year. Full yearly results with benchmarks are shown in the table below. I have changed the residential property benchmarks.I am now using Corelogic Total Returns. This benchmark accounts for yearly asset price change as well as the gross rental yield. This provides a better benchmark for me as it reflects total return and answers the question – Would Slack funds be better deployed in Australian real estate?

In a 6 out of 10 years, the median balanced fund has done considerably better than asset growth plus the gross rental return from median Melbourne residential property. In 8 out of 10 years, the Slack fund has done better than Melbourne Property returns.

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	2.8	4.2	0.6	8.4	9.5	2.2	1.3
2017	19.5	10.4	8.8	14.1	6.5	17.7	1.9	1.9
2018	37.6	9.2	10.0	13.0	1.1	5.2	3.9	2.1
2019	19.7	7.2	9.8	11.2	1.7	-6.0	2.0	1.3

The Slack Fund yearly progress vs BENCHMARKS. The Median Balanced Fund, Vanguard Growth Fund, ASX 200 Accumulation Index, Corelogic Residential Property total return in both Brisbane and Melbourne, and Cash (Online bank Interest) 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.

The compounding nature of a succession of good performance results can be seen in this growth of an initial investment of $10000 chart.

Thanks to Vlad Kolarov for a good image that might sum up Slack Investors situation.

Well, so far so good … but trade wars, Trump, China and the constant press about the next recession are starting to make Slack Investor worry whether he has got any concrete shoes on. A momentary lie on the couch and a modest celebration for the good results this year and it might then be time for a review of the portfolio. A clean out of some of the companies that I am a bit doubtful about … and a think about what companies, or ETF’s, might do OK if a recession was to occur in the next 6 months to two years. Slack Investor has poor form in trying to predict the future … so wholesale changes are unlikely, but a tinkering around the edges of the portfolio might just be the right thing. In the wise words of Peter Lynch …

“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”
Peter Lynch, One Up On Wall Street: