Ah, yes. Thank you for correcting me, sometimes forget what year it is
Still, 7.4% is a pretty decent return. Beats out inflation plus the risk free rate for most of the period.
So, my question still stands, does gold take a lot of work to own? Is there a holding cost?
Can I ask what you base your property and ASX numbers on?
Why would you even be bothered about the return that it got during any time in the past? Are you arguing that the return from 2003 to mid-2014 implies something about the return in the future? Does it mean that gold will be worth AUD$2852 in mid-2024?
If you could get in your time machine and go back to 2003 to make an investment, you'd buy AAPL and not gold anyhow. Or even better, go put your money on 8 winners in a row at Randwick.
BTW I do not consider 7.4% p.a. over the long term to be a particularly good return. If you are deluded enough to use past performance as an indicator of future performance, then both property and the share market have historically exceeded that on a total return basis.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Why would you even be bothered about the return that it got during any time in the past? Are you arguing that the return from 2003 to mid-2014 implies something about the return in the future? Does it mean that gold will be worth AUD$2852 in mid-2024?
If you could get in your time machine and go back to 2003 to make an investment, you'd buy AAPL and not gold anyhow. Or even better, go put your money on 8 winners in a row at Randwick.
BTW I do not consider 7.4% p.a. over the long term to be a particularly good return. If you are deluded enough to use past performance as an indicator of future performance, then both property and the share market have historically exceeded that on a total return basis.
Why look at past returns? Why indeed. Are you arguing that property and shares will see the same returns in the next decade that they did in the prior decade? Or is it only gold that needs to meet that criteria, but not other assets?
If I could go back in my time machine, I would go a lot further back than 2003 and give myself a good slap upside the head, but hindsight investments are completely orthogonal to the original discussion of performance of various asset classes since 2003.
7.4% covers the cost of money and price inflation, so I would consider it to be beta. Above that I would consider to be alpha, and very few people get alpha without taking quite a lot of risk, which you need to be very astute and fairly intelligent to manage, and even of those who do generate alpha, even fewer of them do consistently it over a long time period. Since you have personally generated alpha over the course of the last two decades, can you tell me the name of your fund?
I've already shared my thoughts on property market returns, and I think your assertion is hand waving at best. As for the share market,can you tell me the asset that you base your total return on? Is it hypothetical or actually traded? Does it's return depend on the investor's tax environment or marginal rate?
Sydneyite
28 Jun 2014, 03:22 PM
Just to answer this question - yes I did subtract these costs from my calcs.
Also - re super and the possible ever advancing preservation age - I hear you, it's this concern that stops me putting a lot more into my super as well, even though I pay more tax on the investments held outside of super.
Indeed. If only I had been born before 1st of July 1964. I am afraid our cohort may never reach the preservation age, which wouldn't bother me so much if I could purchase a house to live in from my super account. Sadly, it doesn't meet the investment criteria.
There was another thread about tax evasion and buying properties and renting them to one another. This might actually be feasible with self managed super. So each person buys an investment property using their super account and rents it to the other. They rent it at market rates to meet the criteria, but the property is repaid with concessionally taxed dollars. The only problem with this plan is the low concessional cap of 25K. But if the leverage was low enough, let's say 50%, that may not be a problem, and while you pay the rent in after tax dollars, an equivalent amount comes back to your super fund to help pay the mortgage.
I am going to think on this some more. This might be quite tax advantageous, and solve the preservation age problem.
Why look at past returns? Why indeed. Are you arguing that property and shares will see the same returns in the next decade that they did in the prior decade? Or is it only gold that needs to meet that criteria, but not other assets?
No I am not - exactly the opposite in fact. I am arguing that having pissing competitions about how an asset did over the last 10 years is asinine. What matters is how they will do over the next 1 or 5 or 10 or 20 years.
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7.4% covers the cost of money and price inflation, so I would consider it to be beta. Above that I would consider to be alpha, and very few people get alpha without taking quite a lot of risk, which you need to be very astute and fairly intelligent to manage, and even of those who do generate alpha, even fewer of them do consistently it over a long time period. Since you have personally generated alpha over the course of the last two decades, can you tell me the name of your fund?
I've already shared my thoughts on property market returns, and I think your assertion is hand waving at best. As for the share market,can you tell me the asset that you base your total return on? Is it hypothetical or actually traded? Does it's return depend on the investor's tax environment or marginal rate?
Just buy an ASX200 index fund and reinvest dividends. Total return of 11.6% over the 30 years to Jun 30 2013, minus maybe 0.4% fund admin overhead. Once again, past performance is no indicator of what will happen next year, but that period does include some very good years, some so-so years and some very bad years.
If you think gold can outperform over the long term, then go knock yourself out. I am skeptical. One thing I tend to agree with the goldbugs on is that investing in gold is for all intents and purposes investing in money. (It isn't money, but it behaves very much like money so as far as I am concerned, the distinction is moot.) Where I differ from the goldbugs is that I think that investing in money is a contradiction in terms. Investing as far as I am concerned is exchanging money for something that produces a real return. As the Count has pointed out, an ounce of gold bought you a jolly good toga in Roman times and it buys you a fairly decent suit today. Historical real total return approximately zero. (Which is better than a lot of things, of course.)
Or if you want the view of a famous bear, here's what Nouriel Roubini wrote last year: After the Gold Rush
Curious Non-Economist
28 Jun 2014, 07:07 PM
There was another thread about tax evasion and buying properties and renting them to one another. This might actually be feasible with self managed super. So each person buys an investment property using their super account and rents it to the other. They rent it at market rates to meet the criteria, but the property is repaid with concessionally taxed dollars. The only problem with this plan is the low concessional cap of 25K. But if the leverage was low enough, let's say 50%, that may not be a problem, and while you pay the rent in after tax dollars, an equivalent amount comes back to your super fund to help pay the mortgage.
I am going to think on this some more. This might be quite tax advantageous, and solve the preservation age problem.
From a purely financial point of view I reckon it stacks up, although I'm not sure I'd put it in the super fund.
I would be more concerned about the pros and cons of having my tenant being a mate rather than someone I would be prepared to take the gloves off with if necessary. Wouldn't you be better off buying a place for yield (usually not the best place to live in), gritting your teeth and living in it for a year or so, then moving out into a nice family home rented at low yield for 6 years before moving back to the first place, selling it, rinse and repeat?
We keep hearing stories from bears about the terribly low yields on the great places they are renting. While I take some of the stories with a grain of salt, I am pretty sure such deals exist for those prepared to look. Buy a smart RE investment but live in a dumb investment. It is a form of arbitrage that is definitely available.
Why would you even be bothered about the return that it got during any time in the past? Are you arguing that the return from 2003 to mid-2014 implies something about the return in the future? Does it mean that gold will be worth AUD$2852 in mid-2024?
If you could get in your time machine and go back to 2003 to make an investment, you'd buy AAPL and not gold anyhow. Or even better, go put your money on 8 winners in a row at Randwick.
BTW I do not consider 7.4% p.a. over the long term to be a particularly good return. If you are deluded enough to use past performance as an indicator of future performance, then both property and the share market have historically exceeded that on a total return basis.
You seem to think the world will always be as it was. When things go to pot gold has the added bonus of still being valuable. This will be the case when the next world war starts in half a century from now.
Any fool could see gold was too cheap in the early 2000's. Gold obeys simple rational market mechanics, horse races don't.
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BTW I do not consider 7.4% p.a. over the long term to be a particularly good return.
You aren't long enough in the tooth yet MIW to know that that figure is a good return these days. If you think the returns of the bloated credit boom pre GFC are the normal, then you truly haven't around long enough.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
No I am not - exactly the opposite in fact. I am arguing that having pissing competitions about how an asset did over the last 10 years is asinine. What matters is how they will do over the next 1 or 5 or 10 or 20 years.
I agree with you. But even more asinine are arguments where one side makes up returns from whole cloth to claim "mine was better than yours". I think most claims about property returns are fabricated nonsense. Stock market returns are different. Ostensibly, corporations create products and services that improve the lives of their customers, and the wealth and prosperity of society. If share market returns are not on average higher than break even, then the country really has a problem with it's future prosperity. Having said that, I think this should be true of the market as a whole, not the corporations in the index. The companies in the index are usually at the plateau phase of their growth cycle, and attract capital because investors perceive lower risk as opposed to higher returns.
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Just buy an ASX200 index fund and reinvest dividends. Total return of 11.6% over the 30 years to Jun 30 2013, minus maybe 0.4% fund admin overhead. Once again, past performance is no indicator of what will happen next year, but that period does include some very good years, some so-so years and some very bad years.
Sorry, that is just not possible. I pay tax whenever I receive a dividend outside of superannuation. Once that adjustment is taken out the compounding effect is reduced significantly. And since you chose the 30 year tenor, your chart shows cash performing at 8% for the 30 year horizon. In risk adjusted terms, you would have been better off in cash.
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If you think gold can outperform over the long term, then go knock yourself out. I am skeptical. One thing I tend to agree with the goldbugs on is that investing in gold is for all intents and purposes investing in money. (It isn't money, but it behaves very much like money so as far as I am concerned, the distinction is moot.) Where I differ from the goldbugs is that I think that investing in money is a contradiction in terms. Investing as far as I am concerned is exchanging money for something that produces a real return. As the Count has pointed out, an ounce of gold bought you a jolly good toga in Roman times and it buys you a fairly decent suit today. Historical real total return approximately zero. (Which is better than a lot of things, of course.)
No, I don't think gold can outperform over the long term, and if an economy is healthy, I would expect the general sharemarket to outperform. I think that, aside from some shenanigans late in the 20th century, gold should and probably will perform roughly the same as cash, with the exception of periods of extreme monetary profligacy and austerity, in which times it's performance will be the inverse of cash. As for buying things in Roman times. If you bought a nice 4 bedder in Carthage before the Punic wars, it would be worth nothing today, as the Romans sacked the city and burned it to the ground, taking special care to demolish every building. Historical total return -100%. Likewise a luxury villa in the Roman empire would set you back 2 million denarri, or about $5.2 million in today's silver price. Today you can get one of these (http://realestateinrome.com/en/properties-for-sale/rome-surrounding-area/borghetto-rosa-villa) for a mere 900K euro. Talk about deflation!
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Or if you want the view of a famous bear, here's what Nouriel Roubini wrote last year: After the Gold Rush
That was quite interesting, thanks.
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Wouldn't you be better off buying a place for yield (usually not the best place to live in), gritting your teeth and living in it for a year or so, then moving out into a nice family home rented at low yield for 6 years before moving back to the first place, selling it, rinse and repeat?
That option is not available to me, and paying a mortgage with after tax dollars is punitive. The goal is to pay the mortgage with dollars net of 15% tax as opposed to 47% tax. Alternatively, I withdraw my savings in a few years time and emigrate.
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We keep hearing stories from bears about the terribly low yields on the great places they are renting. While I take some of the stories with a grain of salt, I am pretty sure such deals exist for those prepared to look. Buy a smart RE investment but live in a dumb investment. It is a form of arbitrage that is definitely available.
I once rented a really odd house on a massive block of land in a very expensive suburb of Sydney. For many reasons (not least of which being the biological warfare lab in the dilapidated pool in the backyard, or the near constant battle against possum guano), the house was very difficult to rent, but it was perfect for me because of the proximity to a school. Because of the size of the block, it had sold for quite a high price sometime in 2009. Basically it was a knock-down rebuild that the new owner purchased because of the area (landlord had children in local schools also, but lived 20km away), but couldn't afford to begin renovations, so let it out for a year to defray holding costs. Looking at the price the landlord paid, I calculated my rent to be a 2.9% gross yield, but after rates and water, net yield would have been closer to 2.5%. There used to be a lot of these in my area, but pretty much all of the crappy houses in a decent location have already been demolished and rebuilt.
Sorry, that is just not possible. I pay tax whenever I receive a dividend outside of superannuation. Once that adjustment is taken out the compounding effect is reduced significantly. And since you chose the 30 year tenor, your chart shows cash performing at 8% for the 30 year horizon. In risk adjusted terms, you would have been better off in cash.
So you don't pay tax on interest?
On an after-tax basis the share portfolio's outperformance of cash would be even greater because some portion of the dividends will be franked and you pay nothing on capital gain until you realise it, and if it is long-term (as in this case) then you only pay tax on half the capital gain.
Count du Monet
28 Jun 2014, 09:31 PM
You seem to think the world will always be as it was. When things go to pot gold has the added bonus of still being valuable. This will be the case when the next world war starts in half a century from now.
I have no idea of what the world will be like in the future. You seem to be making an argument that nothing will change. What assurance do you have that gold will still be valuable when the shit hits the fan? Maybe canned food and ammo will be the thing to have.
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Any fool could see gold was too cheap in the early 2000's. Gold obeys simple rational market mechanics, horse races don't.
A lot of things were ridiculously cheap in the early 2000s, including Brisbane real estate and shares, and both have done better than 7.5% p.a. on a total return basis since the beginning of 2003, despite the intervening GFC. But that's beside the point. What we are interested in is what is going to happen in the future.
Even if gold obeyed simple rational market mechanics (and I have never seen a description of those mechanics that holds water) you have no idea of what is going to happen with the market over the next 6 months, let alone the next 5 years, so knowing the rules is useless.
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You aren't long enough in the tooth yet MIW to know that that figure is a good return these days. If you think the returns of the bloated credit boom pre GFC are the normal, then you truly haven't around long enough.
I'm talking about right now. If your investments yielded 7.5% for the 12 months ending June 30 2014, then you underperformed badly. If you did 7.5% for the 11.5 years from Jan 1 2003, you underperformed slightly. Next year? Who knows? If you have some cogent arguments about what you think will be the outperforming asset over the next 12 or 24 or 60 months, I am all ears.
I do know that I consider a year where I did 7.5% to be on the bottom half of the good->bad scale. Not disastrous, but definitely not "good".
There will be a time for gold, but it could collapse back to its 2008 lows before it goes up again. The mass deflationary impact of free movement of labour in Europe and now, with Obama opening up the Mexican border (and giving amnesty by the back door) will keep a lid on prices for a long time to come, combined with an absolute boom in labour and time saving applications online and in physical technology.
Bear in mind that the EU is accelerating the process by expanding into Ukraine and Turkey, and USA is expanding its labour pool by allowing in folk from Central America via the mass immigration being allowed right now by the Obama administration.
It is the combined deflationary action of labour mobility, also global networking capabilities via internet plus technology that will keep a lid on consumer prices for a time to come, creating a new normal of low to negative interest rates. Because if there is the hint of wage increases in Britain, hoards of folk will flood across the channel tunnel, into London Victoria Coach Station and its mega airports.
Gold will have its day, but right now it is in a bear market. Unlike housing, the purchase of gold DOES NOT divert existing resources, i.e. if you don't have a house, you must pay rent. With a home purchase, half your payments are paying off the principal. We had a look at our mortgage, and within two years we pay off almost $40K and our repayments right now are less than rent in the area we are buying plus, you can fix your rate for TEN YEARS. We will be doing that soon as we are sure rates have bottomed, because we feel that rates could drift a bit lower yet.
I have come to believe that many of the bearish arguments at this forum are relevant to investors, but the calculations become very different when you are talking about your home, because when you displace renting with a mortgage, capital appreciation is just a cherry on the top. Property prices would have to fall 3% per annum for a purchase to lose money, and the margin for error increases the more of the property you own. Add to that the priceless nature of being able to decorate the place how you want it, extend it, do your own gardening and keep yourself to yourself without having to cow tow to a land lord.
Yes, with a boom, investors beware, but frankly, right now, today's booming market creates a cushion for the coming pull back because if prices rise 60% the next five years and then fall back 40%, I am still quids in, because the price has not budged much over the period but I have paid off $100K+ of the principal.
Indeed, our plan is to pay the market rental into our mortgage, effectively doubling repayments, so I expect we will have paid off $200k within the next five years. We are buffered even in the worst case scenario, andwe can fix as soon as rates start to rise. I don't expect to get the lowest rates, but whatever I fix it at once rates begin to rise, will be low in ten years time, and with our repayment plan, I will have paid off about 75% of the principal within ten years.
Once you have a home, and when you are saving for a deposit, gold can have a role, in the right market conditions, but everybody needs a place to live, so gold cannot replace a home of your own when you are paying money hand over fist in rent.
My advice is, buy the cheapest place you can find, in the most up and coming area, somewhere within your budget so you can do over-payments. Ten years time you can almost own it outright, and then you can plough money into gold if you don't need to extend the house to make way for children.
Some interesting comments on gold above. And I see gold has consolidated above the $1400 mark here in Australia. But as far as gold offering a return that is not really an issue if you consider the fact that gold once bought is completely outside of the global financiall system. Yes it's price may vary due to the paper contracts issued in financial centres but the gold itself is not subject to the other liabilities that shares and even houses have.
A mortgage on a property is fine, as long as you can pay it off. And shares are fine, as long as the company doesn't collapse. I wonder what GMH shares are worth today? No gold has it's place in a balanced portfolio, at least for the wealthy who can store it safely and have the funds to buy into it. For the rest of the population it is super and investment properties and a lot of fingers crossed.
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