My investing strategy is to allocate funds into the following LIC/ETF split:
1) 50% into LICs that offer a DSSP/BSP (i.e. $AFI or $WHF)
2) 50% into Vanguard international market index ETFs (e.g. $VGS)
If you don’t know what a Listed Investment Company (LIC) is, check out this great article at Strong Money Australia.
As I intend to live off dividends once I achieve FIRE, it makes sense for me to focus on building a high yield portfolio. Australian index funds are especially great for this due to higher than average dividends (compared to stock markets of other countries) and franking credits. Fully franked dividends of 4 – 6% p.a on average is quite reasonable to expect for an ASX index fund.
So why am I opting to go for LICs instead of a regular ASX index ETF such as $VAS or $A200? The main reason is because I am in the top income tax bracket (just barely), and certain LICs have great tax benefits for those in higher income brackets via their DSSP/BSP.
My theory is that in the long run, my decision to go with LICs that offer a DSSP/BSP (instead of something like $VAS) will have a significant compounding growth effect by saving 17% on tax when reinvesting dividends.
Why international index ETFs?
So after reading this article you can probably tell I’m a big fan of LICs that offer a DSSP/BSP. Well why wouldn’t I go 100% into these LICs then? The reason is simply because I want to achieve some diversification in my portfolio.
Australia represents only 2% of the global equities market, and tends to be heavily reliant on a few sectors, e.g. banking and resources. Therefore it makes sense to diversify into other international equity markets. For example, US markets such as the S&P500 have a history of higher capital returns, averaging almost 10% p.a for the past 90 years.
- Half in ASX, half in international equity markets
- For the ASX half, opting for LICs that offer a DSSP/BSP to take advantage of tax savings to exponentially grow my portfolio faster
- For the international half, going with low fee Vanguard index funds (e.g. $VGS)