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24. Why we recommend dollar cost averaging into index funds using geared concessional contributions?
From 1 January 2009 we are recommending all doctor clients implement a simple tax planning and investment strategy based on the principles of investing regularly over time (dollar cost averaging) through self-managed superannuation into cost Australian index funds, such as the Vanguard Index Australian Shares Fund.
[DIAGRAM TO GO HERE]
The arrangement is depicted in the following diagram: The idea is the doctor sets up automatic transfers so that:- on the first day of each month $8,600 is transferred from the practice trust to the SMSF, being the doctor’s maximum deductible superannuation contributions for the year, ie $100,000, divided by 12;
- on the fourth day of each month $8,600 less 15% tax, ie $7,300 is transferred from the SMSF to Vanguard Index Australian Shares Fund (or if the client prefers another investment such as a small number of direct shares).
If cash flow is insufficient in any month a debt facility should be used to maintain the automatic transfer of $8,600 per calendar month.
This is a simple, elegant, “set and forget” strategy that means over time virtually all participants will have significant wealth and financial independence. Its features include:
- low operating costs, the SMSF accounts and audit cost less than $1,000 a year (see www.mcmasterssuper.com.au) and Vanguard charges just 0.35% management fee each year, which is the lowest in the industry;
- low time commitment. Once the transfers are set up the system runs automatically without need for further client involvement beyond basic maintenance;
- low anxiety: there is no need to constantly assess and re-asses your investment strategy as you are automatically going to achieve the average of the market;
- tax efficiency, due to both the tax benefits on deductible contributions and the low or no tax payable on the fund’s investments;
- the VIASF is highly diversified and has lower than usual risk, making it suitable for super benefits;
- the strategy accords with the dominant investment theories, generally known as modern portfolio theory, that posit that in the long run it is virtually impossible for one person to beat the market. (Therefore why try?) and
- Warren Buffet thinks it is the best way to invest1. He has publicly stated on many occasions over many years that the best way to invest is to invest regularly over time into low cost index funds, and doing so will out-perform most amateur and professional investors, due to the cost savings achieved.
Further reading
| Article | Links to information | |||
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Dollar Notes dated 15th April 2008 “Year End Superannuation Planning 2008” |
Client only section of www.mcmasters.com.au | |||
| Dollar Notes dated 4 October 2008 “The Doctors’ Guide to Simpler Super” |
Client only section of www.mcmasters.com.au |
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Dollar Notes dated 17th March 2008 “Borrowing to pay large deductible contributions” |
Client only section of www.mcmasters.com.au |
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| Dollar Notes dated 16th January 2004 | Client only section of www.mcmasters.com.au | |||
| Articles we wish we had written: dollar cost averaging |
Client only section of www.mcmasters.com.au |
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| Articles we wish we had written: index funds | Client only section of www.mcmasters.com.au | |||
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