Investing in an Emerging Market Index Fund to Help the Poor

I've been thinking about BLM and helping black people. I've seen many black people be victims of discrimination. It has happened throughout history and while I think racism has gone down over time (eg since the eighteenth century) there are still many people who hate blacks and want to hurt them.

The George Floyd incident had highlighted the racism against blacks in the world. Many have called for defunding of the police or donation to black charities or buying from black businesses, but many do not seem to be focused on investments.

Most groups have been empowered by attracting capital. This is how many Asian countries have developed quickly, improving the lives of many Asians very quickly.

So a simple way to help blacks in a sustainable way is to invest in them and to invest where most blacks are ie Africa. Unfortunately where I live, there is no investment fund that invests in Africa. The closest I can find is an ETF that tracks the MSCI Emerging Markets Index (MSCI EM) . This fund invests mostly in China, India, Brazil, Russia etc. The index is maintained by Morgan Stanley Capital International (MSCI) who add countries in there depending on whether they consider these countries "emerging markets." For example, recently Saudi Arabia was added to the MSCI EM Index and after this happened there was a large amount of capital that suddenly flowed into the country. South Africa and Egypt are the two most developed African countries and are already part of the index.

Over time, more and more African countries are likely to be added to the index as they develop and as they do they will have capital flooded in. Furthermore, many African countries not in the index may already do business with countries on the index eg with South African, Egyptian and especially Chinese businesses.

Basically what I am saying is that even though the MSCI EM Index is not a perfect way of investing in blacks, it is probably the closest we have, and the money goes to the world's poor and helps them develop. It is probably the best way we can help the poor.

Five Rules to Live By

1. Work as if it were just something you do. You don't need to work hard. Try to enjoy whatever work you do.

2. Live a minimalist lifestyle. Have your own room. Do your own thing: Netflix, YouTube, writing, etc. Subscribe to Soylent (or Huel, Joylent, or Aussielent) so you don't need to be dependent on a someone else cooking or cleaning for you. Share accommodation with others to save money, but try to minimize socializing with those you live with.

3. Invest in a diverse range of high dividend paying ETFs. As fast as possible, live 100% off dividends from these ETFs so that 100% of your salary goes towards investing rather than living expenses. You live off other people's labor, not your own. When you get used to living off dividends, you are no longer dependent on your job. The true measure of a man's wealth is how many years he can survive if he did nothing. If a man can survive forever without work, he is a free man. Anything else is partial or full slavery.

4. Don't connect. Try to shield yourself from the world. Isolate yourself more. Use your dividend income to achieve this. Have your own room, don't connect with others. Live off dividends. Do your own thing. Be an urban hermit. Once you are achieved total independence, you can venture out in search of what makes you happy (dating, hobbies, etc) but you are safe in the knowledge that you can always retreat back into your fortress should you need to.

5. Never marry and never cohabitate. Marriage is slavery. Never have children either.

Bollinger Bands on the S&P 500

Notice how well Bollinger Bands can predict market booms and busts. Buy when the index hits the top band and sell when the index hits the bottom band.

ANZ Apple Pay

At work, I hear many people talking about Apple Pay and how great it is, but I have researched it and don't see what the big deal is. I use a 2013 Nexus 5, so a three year old is quite old in the smartphone world. I may upgrade, but I feel that my current phone is adequate. The phone already has the Commonwealth Bank app, which allows you to use PayPass with your phone. The problem with this is that, in order to use PayPass on your phone, you need to first log into your phone and then enter a PIN in the app. It's far easier to use your credit card. An advantage of using your credit card is that you can hand the card to the person taking your order and have him do all the work of tapping the card and processing the payment. The only thing you need to do is say, "PayPass, please." (I sometimes use PayWave as well since I also have a Visa debit card.) Asking for Apple Pay, and then handing a giant phone to someone, just doesn't seem right. I know that handing over your credit card to someone is not the best in terms of security, but it's fairly easy to monitor how much money is coming out from your account using your phone (the Commonwealth Bank app has a widget that updates how much money is on your account on your home screen), so if you monitor your balance all the time and everything looks regular, there's no reason to not trust them.

I also admit that I have a bias against Apple products, and the people who always tell me to use iPhones and Apple products don't seem to be able to articulate a good reason for it other than blind faith that the product is good because of how great Apple products are.

Using E10 and Commodity ETFs to Destroy Animal Farming

I've always been a meat eater. Meat tastes good. I also love milk and cheese. But I've always been guilty of the industrial slaughter of animals that occurs in order to produce these goods. When I speak to people about this topic, there is a tendency to rationalise. For example, people say it is natural to kill animals. Even animals themselves kill each other. When I respond by saying that it is also natural for humans to kill humans (as humans have done often during human history) people criticize me for thinking too much about it. In other words, there is a tendency to just stick with the status quo, and if something just doesn't seem right, rationalise it away.

Animal cruelty takes place in an animal farm. If you care about animal welfare, you must study the business model of the animal farm and do everything in your power to disrupt it.

How do you disrupt a business? There are three ways: (1) increase costs, (2) reduce revenue, and (3) increase volatility of costs and revenue.

If costs rise and revenue reduces, the animal farm becomes unprofitable and will shut down. If the volatility of costs and revenue is high, e.g. if the price of feed fluctuates too much, then animal farms are less likely to start up due to unacceptable risk.

Many vegans already try to increase costs and reduce the revenue of animal farms by switching from meat to plant-based food. For example, if instead of eating beef you eat vegetables, the revenue of the animal farm decreases and furthermore because the land that is set aside to make vegetables to sell to the consumer is used for this purpose rather than being used to sell feed to animal farms, then the price of feed will go up.

That is simple enough, but there are two more ways I think we can disrupt the animal farm. One is to use ethanol blend petrol in our cars (E10 for most cars or E85 or E100 if the car is compatible). Proof that this works can be found in American renewable policy that forced petrol to be blended with ethanol. This causes the demand for ethanol to rise significantly, which in turn meant that corn being grown on farms was being sent to cars rather than to animal farms. Animal farmers then had to pay higher prices for feed. This resulted in much higher meat prices (see Ethanol Helps Boost Meat Prices - NPR).

With regards to increasing volatility in agricultural prices, this is where I recommend buying agriculture ETFs as part of your investment portfolio. Not only can it save animals' lives, agriculture investments can make you rich. For example, in Australia, you can buy the Betashares Agriculture ETF. These investments don't actually buy agricultural products like corn and soy and store them. That would be far too difficult. Rather, when you buy these investments, a team of financial experts buy and sell futures contracts for corn, soy, wheat, and rice. Buy doing so, your investment will approximate the prices of the underlying crops. When fund managers buy and sell agricultural derivatives on the market on your behalf, you are contributing to more speculation in these markets, which has the potential to increases prices and, more importantly, to increase price volatility, which makes the business of animal farms much riskier.

The bottom line is that we should be switching from meat products to plant products. This applies not just to what we put in our bodies, e.g. switching from cows milk to almond milk. This should apply to what we put in our cars and our investment funds.

The Importance of Global Diversification

"Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land."

Ecclesiastes 11:2 (TNIV)

I have great respect of John Bogle, the founder of the Vanguard Group. I believe that if you are unsure how to invest your money, just do what John Bogle says. That being said, there are few issues I have with him. The first relates to his aversion to foreign (i.e. non-American) investments. According to John Bogle, if you invest in a mutual index fund that replicates the S&P500 index, given that most S&P500 companies are multinationals with operations all around the world, you are getting foreign diversification anyway.

This is wrong.

What Bogle completely ignores is the fact that, by investing in only American equities, you are limited to companies that list on a small and undiversified number of stock exchanges. Every stock exchange around the world has different listing requirements. Some stock exchanges have very strict listing requirements, demanding that companies meet demanding disclosure requirements. Other stock exchanges may have lax disclosure requirements. Furthermore, some governments or stock exchanges (or both) may be more corrupt than others. You simply don't know, and it is for these reasons that you need to diversify across stock exchanges and countries. It is not enough to invest in an index fund that replicates the S&P500. You need to invest in European shares, Asian shares, Australian shares, and so forth. And that is only looking at shares. You should invest in other asset classes as well, such as REITs, bonds, and commodities.

One good argument against diversification if it's just too difficult. For example, in my opinion it makes sense to invest in commodities like gold for the sake of diversification, but investing in gold is not simple. You can't walk into a bank and just ask for gold, and storage of the gold becomes another difficulty. However, diversifying your equity investments across different countries is easy. There are many mutual funds out there that automatically diversify across multiple countries.

Hide and Diversify Your Wealth

If I could give two pieces of advice on investing, it would be the following: 

1. hide your wealth
2. diversify your wealth.

The first piece of advice is due to safety. If you save up money and go around telling people how great you are at saving money, the risk of theft only increases. I don't even recommend you tell family or friends about money you're saving. If you spouse knows, the payoffs from divorce are so much higher, which would tempt him or her. Just keep it to yourself and, better yet, pretend that you are poor. If snobs don't want to be friends with you because they don't want to associate with poor people, it's probably better that you didn't know them anyway.

The second rule of investment is you must diversify. In fact, when I think about it, the first and second rule are similar in that they exist due to lack of trust. If you hide your wealth, it is because you cannot trust people who will tempted to steal. If you diversify your wealth, it is because you cannot trust those people who hold your money to destroy your wealth either due to corruption or incompetence.

The two rules above help protect your wealth.

Betashares Offers Commodity ETFs for Australians

Link: BetaShares

Most people invest in shares, bonds, and real estate. Shares and real estate tend to perform well during an economic boom. Government bonds are seen as safe investments since they are backed by government, and many people hold government bonds or government bond funds in addition to growth assets such as shares and real estate in order to diversify. But what about commodities?

The word "commodity" is not perfectly clear, but investing in commodities involves investing in such things as gold, oil, soybeans, wheat, and livestock. It is an investment in hard assets that are more often than not necessary for humankind. Investment in commodities are perfect not really for periods of economic booms or economic recessions. Rather, commodities are excellent to hold during times of stagflation, that is, a combination of stagnant economic growth and inflation.

One way of combating massive inflation is to adopt The Alpha Strategy, that is, hoarding essentials such as rice and toilet paper in your home. The less extreme option is to buy a commodity ETF.

For Australians, a firm called Betashares provides a diverse range of ETFs, including an ETF that invests in crude oil futures. I am thinking of using my margin loan to purchase a good chunk of commodity ETFs via Betashares but I am unsure if I should. Perhaps shares in resource companies already provide sufficient commodity exposure. The fact the Australian dollar is a commodity currency also provides some exposure. Then there is the worry about the safety of synthetic ETFs (read Quant Congress USA: Avoid synthetic ETFs, says Avellaneda - Risk.net) with some saying they are fine for short-term trading but not appropriate for long-term investing due to counterparty risk.

If anyone has any deep knowledge on this issue, please comment.

Carbon Tax Compensation Present Opportunity to Salary Sacrifice into Superannuation

To compensate for the impact of Julia Gillard's carbon tax on the cost of living, income tax cuts will compensate anyone who earns less than $80,000. For further details about the tax cuts, see the following: Individual Income Tax Rates (ATO website)

Basically, the tax free threshold will increase from around $6000 to about $18000 and instead of being taxed 15% after that, you will be taxed 19%. For each dollar you earn above $37,000, instead of being taxed 30%, that marginal tax rate will increase to 32.5% and then eventually to 33%.

What this means is that, for those who earn between $37,000 and $80,000, you can cut your income tax by 33% (rather than just 30%) if you salary sacrifice. One option is to salary sacrifice into your superannuation fund. Money that goes into superannuation is taxed, of course, but it is only at 15%.

Be careful when you salary sacrifice into your superannuation fund as there is a limit. For younger people, there is a concessional contribution limit of $25,000 per year. It is best that you speak to a financial advisor if you are concerned about exceeded this limit.

Personally, I have taken this as an opportunity to salary sacrifice more into my superannuation fund. All it involved was sending an email to HR requesting it. I now salary sacrifice $600 per fortnight into my superannuation fund.

My reasons for salary sacrificing into my superannuation fund are not just monetary. There are also some personal reasons why I am doing what I am doing. I find that having too much money around doesn't help and actually makes me worried or anxious, so putting money aside (so that it is out of sight and out of mind) actually calms me considerably. Instead of doing something stupid with the money and losing it, it is now safely stored away in my superannuation fund, and I don't have to worry about it until I'm very old.

Some people argue that putting money into superannuation when you're young is a waste of money. They argue that superannuation funds invest money in the stock market, which underperforms residential real estate. They would prefer to be hit with the higher tax and then put the money into residential real estate (by paying off their mortgages). The problem with this argument is that is assumed two things: the first thing it assumes is that superannuation funds invest only in the stock market and not real estate. This is wrong. Superannuation funds typically offer investors with the choice of a range of investments, but typically industry super funds tend to offer shares, bonds, listed property, and cash. These investments, in my opinion, are fine. But if you are absolutely desperate to invest in residential real estate, you can set up a self-managed super fund (SMSF) and invest in residential real estate. The benefit of salary sacrificing into your superannuation fund is that you can save on tax, but it is wrong to assume that superannuation funds only invest in the stock market. The second assumption is that residential real estate outperforms the stock market. This is not true. Residential real estate is very hard to measure but most studies done on this topic find that a broad Australian stock index is roughly the same in growth as residential real estate over the last few decades. Of course, you can always cherry pick some story about some guy who purchased some home for x amount and then sold a few years later for ten times the amount. Likewise, you can pick and choose select stocks like Westfield and Fortescue Metals and launch the same story in favour of the stock market, but what this teaches you is that past returns mean nothing. Just because something has performed well in the past, it doesn't mean it will perform well in the future, and in the world of finance it tends to be the opposite: i.e. those assets that go up in price rapidly in the recent past tend to be overvalued, and a correction in the form of rapidly decreasing prices usually proceeds.

In other words, there is no solid evidence that residential real estate will outperform the stock market in the long run. The best we can do is to diversify across many types of investments, from the stock market, to cash, to bonds, and even listed property and maybe some residential real estate as well. Ecclesiastes 11:2 states the following: "Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth."

Next Eleven Frontier Market Countries

Back in 2001, Jim O'Neill from Goldman Sachs coined the term BRIC to denote four countries with very large populations that he predicted would dominate the world economy in the future. His predictions turned out to be correct. Today the BRIC countries dominate the world economy and even challenge the G8 in world politics.

Goldman Sachs has now moved on from the BRICs and have developed the Next Eleven ("N-11"), a group of eleven frontier market countries. The firm has created the Goldman Sachs N-11 Equity Fund for investors who believe the N-11 countries will experience significant growth.

We Are All to Blame for GFC

There are some documentaries you watch that are so brilliant that you need to tell others about it. This is one of them. This documentary, part one of four, details the history of today's global financial crisis. The GFC hit in 2009 but was fixed with bailouts and other policy measures designed to provide fiscal stimulus to the economy. But now what we are witnessing is the reality that these policies have uncovered massive debt in the balance sheets of sovereign governments.

While many are quick to point their fingers to bankers, I would like to add that many of us are guilty. Many people I talk to hate bankers. They tell me over and over again how bankers are greedy and evil. However, these same people, although they talk bad about bankers, their actions reveal otherwise. These people invest their money into savings accounts with these bankers. These people borrow money from these bankers to buy houses and cars. If you don't like bankers, don't do business with them. As soon as your salary is deposited into your bank account, withdraw it and put it in under your mattress, or covert it into physical gold and bury it. But nobody does that. Modern banking has become mainstream and normal. The people who detach themselves from the banking system are seen as weird and crazy. Our actions suggest we love the banks, we trust the banks wholeheartedly, yet when things go wrong we want to blame someone else.

I do believe the major bankers are at fault for plundering the public purse when the GFC hit, but what else could the government do when so many people's money was tied up in these banks? People shouldn't have trusted these banks in the first place and shouldn't have put too much money in them.

Ultimately it was greed that led us to where we are now. It was greed from people who in partnership with banks and government tried to extract as much cash as possible from residential real estate. We had too much faith in real estate. This is a good old fashioned bubble just like the bubbles of the old days, such as tulip mania. It does not matter whether debt is transferred from banks to government to taxpayers. Regardless of where the debt goes, there are three options: (1) the debt needs to be paid off (2) the debt needs to be defaulted on, and (3) the debt needs to be inflated away with money printing. The prices of stocks and other assets will go up and down depending which the relative magnitudes of these actions. Because it is difficult to know what direction government will take with regards to how much money it will print, how much spending it will cut, etc, the best we can do to protect our wealth is to diversify.

Equity Index Fund Investors Being Plundered

A friend of mine told me that executives and directors in many publicly listed companies sell shares and accept money from index investors. Then they plunder this money by accepting bribes from unions to lift wages of workers. They also accept bribes from corrupt politicians to raise company taxes to help fund election campaigns to keep them in power. The union leaders are able to "negotiate" a higher wage and get performance pay bonuses. The politicians too raise tax revenue to use to help them stay in power. The executives take bribes and pay themselves large bonuses and salaries. Everyone wins except the shareholders (including index fund investors).

So why then do people keep investing? Why do shareholders keep plowing money into the company only to see it being plundered? Because they are sold a dream. By telling investors to invest for the long term, there is no accountability. Index fund investors keep plowing money into stocks like lottery players keep plowing money into tickets.

Buying and holding in equity index funds worked in the past because we were living in an era when the size of government was small. Today, the size of government is large and, let's face it, government is controlled by a network of executives and directors of big corporations whose objective is to create wealth for themselves. Hence they use the power of government to seize the revenue of corporations and distribute it among themselves. They are looting shareholders and selling them the opiate of the investor masses (i.e. "in the long run everything will be okay").

If you don't believe me, look at the statistics on the size of government. It has increased massively. Furthermore, the dividend yield on S&P500 companies used to be high but has fallen to almost nothing.

APN AREIT Fund Yields 9%

As of 16 July 2011, the APN AREIT Fund gives a distribution yield of 9.12 per cent, paid monthly. I have been invested in the APN AREIT Fund for a little over half a year now, and I am very happy with not only the high distribution yield but also the monthly income as well as the stability of the investment income. The payout from the APN AREIT Fund is so stable and predictable that I can make plans for various spending and can reasonably rely on future APN payouts to pay off the liabilities (e.g. if I use a credit card). This predictability, high performance, and stability created by what is seemingly highly compentent active management makes me question the value of unpreditable index funds that pay quarterly distributions that are highly variable.

My hope is that as the income from my APN fund increases, I can devote more of my salary income to investments and rely on the income produced by APN to fund all my living expenses. This means that ultimately I will be able to live without working, which for me is very appealing!

Vanguard Bond Fund Yields 15% for 2010-11

According to Vanguard's website, the Vanguard Index Diversified Bond Fund paid distributions of 15.52 cents per unit in 2010-11. Given that the price of a unit now is $1.01, this equates to an annual distribution yield of around 15 per cent. This is significantly higher than the 5% distribution yield that I am used to, so I began to wonder why bonds did so well last financial year. I am not one to reinvest managed fund distributions and instead have spent the money on buying new running shoes (I will write a post about my shoes later).

It turns out that I am not the only person who noticed this massive distribution on the bond fund. Over at the Bogleheads forums, there is a forum post about the bond fund's massive distribution payout, as well as an associated massive drop in unit prices. The Bloomberg chart below shows the extent of this fall in unit prices.

A Bogleheads member named Tonens gives the following explanation for the anomoly, saying that the large distribution was the product of the strong Aussie dollar.

... [T]he Vanguard Diversified Bond fund is 60% International Bonds, with that proportion hedged to the Australian dollar. The hedging gains as the Aussie dollar appreciated over the last year rather than interest earned likely accounted for the majority of that large distribution.


The total distribution for the fund over the last 12 months its close to 16c (ie about 16%). If the currency goes the other way, it'll contract accordingly.

 
Another member named Asset Chaos explains why the unit price colapsed:

I think you'll find that the price of a unit of diversified bond is not constant. It fluctuates daily in line with the market prices of the bonds held in the fund. The reason that the unit price drops after a distribution is the fund gets paid some interest on its bonds on many days in between the dates on which the fund distributes this income to the unit holders. That accumulating interest is an asset of the fund and so is reflected in the unit price, which is just the total value of the fund divided by the total number of units outstanding. When the fund distributes the interest income, that money is no longer in the fund, so the fund's value drops suddenly on the distribution date. But you as a unit holder still have the same value: you've got a unit's worth of value still in the fund plus the value of the distribution, which you have in the form of cash in hand or in the form of additional units.

It worries me when an investment pays out large distributions accompanied by a fall in unit prices. This is because the fund may be paying for the distributions by eating up capital. However, the explanation that the massive distribution payout is the product of the strong Aussie dollar makes sense.

Vanguard Australian Shares High Yield Fund Now Pays Distributions Quarterley, not Monthly

Vanguard has sent emails to its members notifying them to changes to one of their funds. According to an email I received on 18 April 2011, there have been two changes made to Vanguard's Australian Shares High Yield Fund:

1. The fund will now use the FTSE ASFA Australia High Dividend Yield Index rather that Vanguard's own custom index.
2. The fund will now pay distributions quarterly rather than monthly.

Change (1) is not a huge problem as allowing the index maker to be an independent organisation makes Vanguard more of an index tracker. If Vanguard is both the index maker and the index tracker then there is a risk of active management, whihc is not what you'd want in an organisation that preaches about the benefits of index tracking versus the problems with active management. With FTSE now managing the index I am hoping there is transparency with regards to the index holdings. Most ETFs on the Australian market now have full disclosure of holding, e.g. the iShares ETFs and the SPDR ETFs from State Street Australia. Unfortunately, Vanguard Australia's managed funds and ETFs both do not have the same level of transparency.
 
Change (2) is worrying as most investors would prefer more frequent distributions. Nevertheless, even though this fund's PDS claims to pay distributions monthly, in practice it only pays distributions quarterly or twice quarter anyway, so this recent change to its PDS won't change much.

What if the Aussie Dollar Collapsed?

One of my hobbies in life is to read financial porn, i.e. stories about how the economy will collapse in the future. One such scare story I have read is in the Contrarian Investors' Journal titled Will There Be an AUD Currency Crisis?

This piece explains that the Australian economy is highly leveraged to the mortgage debt market. Even though public debt in Australia is around 7 per cent of GDP, this masks the massive extent of private sector debt in the country, mainly held by invididuals in the form of mortgage debt.

Everything will be fine if Australians continue to be able to pay their mortgages, and signs so far seem to suggest that Australians are managing to pay their mortgages. Pay your mortgages like the obediant slaves you are!

However, if something bad happens, chances are the government will take over these banks and, as in America, private debt will be nationalized and public debt will skyrocket. Furthermore, foreigners will be less likely to lend to Australians (both Australian governments and Australian banks) and this will cause the Aussie dollar to collapse. Furthermore, the unwinding of the carry trade will also smash the Australian dollar.

A great deleveraging and unwinding of the carry trade occured in late 2009 at the height of the GFC. During this great period of deleveraging, the Australian dollar collapsed to the point where A$1 = US$0.65. However, there was a recovery in the stock market, the American government started to print money like crazy, and now the Australian dollar has soared against the US dollar where A$1 = US$1.01. I feel very superior to the Americans at the moment because this means that my salary in US dollars rises a lot and I admit a guilty pleasure of mine in my spare time is to browse through Wikipedia and check out the median incomes of people in certain states and counties in America and then compare my income to their income. Because the Australian dollar has soared so much, my income converted into US dollars is approaching the median incomes in many of the exclusive areas in America! This means I have become rich according to American standards! (I know I am not really rich and that this illusory wealth is just a product of American money becoming worthless.)

Given that everything is going so well at the moment, I often wonder how long it will last. If life has taught me any great lesson it is that you should always have a plan B. You should always have an exit strategy. What if the Aussie dollar collapsed? What do you do?

One thing we can look at is what happened in the last deleveraging when the Australian dollar. Some people suggest that buying American shares is a good idea if you want to protect yourself from a falling Aussie dollar. But the graph below shows that the American stock market--as measured by the S&P500 index--collapsed with the Australian dollar.

What can you do? The graph above suggests that gold is a good idea. Even the GFC struck, stocks fell, and the Aussie dollar plummeted, the price of gold in Australian dollars went up.

This analysis is purely technical and looks only at historical data. It does not look at any fundamental reasons why gold would be a good hedge against an Aussie dollar collapse. Personally I believe that those who are worried about an Aussie dollar collapse should convert Aussie dollars into both US dollars and gold (physical gold or gold ETFs). But I don't necessarily believe the Aussie dollar will necessarily crash. If Australians continue to pay their mortgages, then all should be fine. Even if they cannot afford to pay their mortgages, surely the Australian central bank will lower interest rates.

AREIT Funds - Vanguard vs APN

It is my opinion that a great investing opportunity exists in AREITs, so I plan to start investing in AREITs.

I have just been looking at Lonsec's Australian Property Securities Funds Sector Review 2010, which interestingly is found on Vanguard's website and highly recommends Vanguard's AREIT fund, which predicatbly tracks the S&P/ASX 300 A-REIT Accumulation Index.

Strangely, Lonsec's study recommend's Vanguard's fund over the APN AREIT Fund, which is find startling given that my prima facie examination suggests that APN's fund seems superior.

One of the reasons for this, according to Lonsec, is that Vanguard, which employs passive management, offers low fees compared to those funds that employ active management: Page 7 of Lonsec's review states the following: "[A] majority of funds are still charging relatively high fees for low conviction 'active management'. This is disappointing, given that most managers hold over a third of their portfolios in the Westfield Group.... To this end, Vanguard has retained its 'Highly Recommended' rating. This rating reflects Lonsec‘s confidence in Vanguard, should advisers choose to invest in a low-cost, index fund in this asset class."

However, Vanguard's management fees that it charges for its managed fund (0.90% per annum for the first $50,000 invested) is much higher than the fees it charges for its AREIT ETF (0.34% per annum). Furthermore, APN AREIT Fund's management fees are even lower than Vanguard's (0.85% per annum where no adviser remuneration is paid) (Source, APN AREIT Fund PDS, p. 1). To top it off, Vanguard's fund pays distributions half yearly whereas the APN fund pays distributions monthly. As of 2 December 2010, the APN AREIT Fund's current yield is running at a phenomenal annualized rate of 9 per cent!
 
One of the supposes strengths of Vanguard's AREIT fund is the fact that it tracks an index. But as Lonsec pointed out in its report, this AREIT index is about 40 per cent made up of the Westfield Group. Why pay Vanguard 0.90% per year in management fees to essentially invest in Westfield? There is little diversification. APN, however, are "index unaware," which means they are not constrained by having to follow some index. This allows them to seek out value, maximize diversification, and minimize risk -- and they do all this with lower management fees.
 
I am not saying I don't like Vanguard. I believe they offer a good diversified bond fund. I am also invested in their high yield fund, although I am not satisfied with this investment as it claims to pay monthly distributions but in actual fact seems to pay zero distributions every third month. Quick calculations of the last few years of distributions received reveals that Vanguard's high yield fund only gives a running yield of about 4 or 5 per cent per annum, which is quite disappointing for a fund that is described as "high yield." This may not be the fault of the fund manager and can be blamed on market conditions, but nevertheless it certainly is disappointing for investors.

Differences Between Gold and Real Estate

One of the benefits of investing in gold is that it protects against inflation. One cause of inflation is a rise in the money supply, which can be caused by money printing by the government. Money printing is very tempting for governments because it gives politicians more money to spend without actually increasing taxes. Even though printing money runs the risk of increasing prices, it's a more subtle way of raising revenue rather than directly taxing people. Printing money also devalues the currency, making exports more attractive.

Gold cannot be printed, so it is much more difficult for the supply of gold to increase. Gold can be mined from the ground, but obviously this is not as simple as printing money.

Some people suggest that real estate is a good investment that can keep up with inflation and has similar safe haven properties as gold. They argue that in times of hardship, you can grow food on your land. Furthermore, land cannot be printed. There is a finite supply.

It is true that you can grow food on land, but there being a finite supply is hardly helpful. The major problem with land is that governments have too much control over it. Physical gold is difficult to tax. It is almost pointless for government to tax gold because people tend to buy physical gold and trade among themselves, leaving no paper trail. Gold is portable and can be easily stored and hidden. Land, on the other hand, is not portable. It cannot be smuggled out of the country. You cannot hide it from the government. The result is massive taxation. The reason why banks are very happy to lend to home buyers is because they know that if they lend to you, they have you by the balls. You cannot run off to another country if you cannot pay your debt. The bank can easily sieze your land and sell it. Gold is different. If you borrow money from the bank to buy gold, you could easily run off to another country with the gold. Gold is freedom. Real estate is slavery.

If government were to slap a tax on gold, people would simply move it out of the country or just do informal transactions. If government were to slap a tax on land, people cannot do anything about it but to accept it. Just as government can print money, government can also print land. Not literally! For example, the government can control the amount of land released for residiential development by altering the urban growth boundary. If government wants to keep land prices higher to collect more land tax or land transfer duties, it can limit the supply of land. If government wants to help out property developers, it can increase the supply of land.

In an end-of-the-world scenario, when banks collapse and civilization as we know it is finished, land ownership will be worth nothing because the land you own is land you own thanks to a piece of paper enforced by the judiciary. If civilization breaks down, it is assumed that the judiciary has no power and hence your land is gone. Even though you may live on it, it's not really yours. Gold is different. Physical gold is held by you and hidden by you. Since you control it and since you own it by force or threat of force, then it is yours, regardless of what a Supreme Court judge says.

Aurora Property Buy-Write Income Trust

The Aurora Property Buy-Write Income Trust (ASX: AUP) is currently yielding about 10% per annum, which is very high. It achieves this by buying listed Australian real estate trusts and then selling call options on these securities to earn extra income. A portion of the income it earns from selling these securities are then used to buy put options for protection against price falls. This is a strategy that I am definitely unfamiliar with. Regardless of the strategy, the fund pays very attractive dividends. This is something I will strongly consider, even though this fund seems to have very high fees. It may be worth it consider the attractive dividends. It's worth a try.

Aurora Funds Management has a number of other investments, such as funds that employ a technique of dividend stripping on Australian equities, a fund that employs the buy-write strategy to global infrastructure, and a hedge fund called Van Eyk Alternatives Plus whose performance has been underwhelming, and a brief skim of this hedge fund's PDS reveals things like commissions for financial advisors. Most impressive of all, Aurora Funds Management has a fund (ASX: ABW) that pays 8.4 per cent and has been able to track the ASX200. It is able to track the ASX200 by using future contracts and other derivatives. An investment that tracks the ASX200 and pays dividends of 8.4 per cent is very impressive. Given that the ASX200 has average about 8 per cent over the long run and given that this fund's yield is 8 per cent, you are looking at potentially 16 per cent total return for this fund.

Below are Aurora funds listed on the ASX with their estimated yield (estimated by CommSec).

ASX Ticker	Estimated Yield (%)
AOD	6.2
ABW	8.4
AUP	10.0
AIB	8.4
VBP	4.6

Like I said, I will consider these, but I do not like the high fees, and I'm not sure if I get any currency diversification. Aurora's funds, its investment strategy, and so forth have a Bernard Madoff feel to it, so some more reading would be necessary before I jump in. The great thing about these listed investments is that you can put a few thousand dollars in and if you are dissatisfied with the fund's performance (e.g. it pays low dividends) then you can simply stop putting more money in. If you feel like the performance is good you can put money in as you go. This control that I get from investing in listed securities is why I am pro-shares and anti-real estate. (When I talk about real estate I am talking about homes, not A-REITs.) If you buy a home, you are all in. The average house in Melbourne costs $500,000. If you decide to buy a house you borrow maybe $450,000 and then you are a slave to the bank for the rest of your life. You work like a slave to pay the mortgage and then when the banks raise interest rates you complain and complain. This is the typical behaviour of that breed of Australian known as the Aussie battler. As you can see I am passionately anti-debt, but that is not the main focus on this blog post, so I will hold my tongue. I have a tendency to drift to unrealted topics. The rant about the Aussie battler will have to wait until later.

Spend Less vs Earn More

In this blog I speak a lot about investing and personal finance. Investing is not a precise science as there are so many market uncertainties. For example, it's hard to tell if the US dollar is going to keep going down or whether it will strenghten in the fiture. These uncertainties are what I love about investing.

I consider investing to be a hobby. I do it in my spare time and I find that it is a lot of fun. Someone once said to me, "Dude, why do you spend so much time studying investments. You should be spending time increasing your income instead." My friend, in my opinion, believed that work and investing is a trade-off. If you do more of one thing you must do less of another. I think this is wrong. My response to his comment is that I do spend time increasing my income. I do try to do the work I need to do at work to the best of my abilities. I don't study investing at work. Investing to me is leisure, so I do it at home after work or during the weekends. It does not interfere with work. If I weren't studying investments at home, I'd probably be doing some other leisure activity, e.g. watching reruns of Survivor or Shaytards.

Some people argue that saving money, investing and so forth is a waste of time because you should be focusing on improving your career, getting promotions, and so forth. Everyone has his own preferences but personally I find saving money and investing to be a lot of fun. The investing is certainly more fun than saving money, but saving money and investing as a whole is more fun and certainly more easy than working hard.

Working hard actually involves hard work! If you listen to all the career gurus, they will tell you that doing well in your career requires major analysis on office politics. You've got to do all sorts of difficult things like networking and watching what you say, making sure that give good impressions to others, and so forth. Some people are naturally good at this. I am not. You can call me old fashioned but I believe that you go ot work to simply do the work you're given. If you are given X then you do X to the best of your ability. There is no need to go beyond that. There is no need to stay back at the office just to show off to the boss. There is no need to set up coffee with every single person in your division to expand your network. There is no need to walk around the office and volunteer to do everything and find that with so much work to do you are overloaded and cannot cope. Like I said, for some increasing your income is easily, but for me it is difficult. Furthermore, because I work for the government, our pay structure does not include bonuses and other complex incentives structures that reward you for hard work--nor should it be because working in government is not really about hitting certain KPIs, as what is good for the organization is public welfare, not something measurable like profit or stock price appreciation.

Saving money and investing is simple. In fact, saving money is very simple because you don't do anything. If you want to advance in your career you usually have to do something, e.g. impress your boss. To save money you have to not do anything. The less you do, the more you save. If you spend your free time going to bars, pubs, casinos, movies, nightclubs, and so forth, then you will pay big. But if you don't do any of these things, you don't pay anything and you save money. Some people are what I call active savings in that they save money by aggressively trying to find hihg-value goods. These are the people who will not buy a coffee because $3 for a cup of coffee is not good value because you can make your own coffee for 50 cents. These are the people who are happy that they spent $5000 on their wedding because the average price for a wedding is $30,000. Active savers spend a lot but whenever they spend they save a lot of money. This is not me. I am a passive saver, which means that the way I end up saving money is simply by not buying things. The active saver will be happy if he spends $5000 on a wedding rather than $30,000. A passive saver will not get married and ends up paying nothing. I am not saying that I don't value marriage or leisure. I am just lazy, but this laziness has its benefits.