u/CashNegative7411

Under the new proposal for indexation of cost base, it should follow that if growth is less than CPI, capital loss should be claimable.

E.g. I buy CBA stocks at $100 today. After 10 years, let's say they still remain at $100, whilst CPI is 3% pa. CPI adjusted cost base will be $134, and I can claim $34 as capital loss.

I hope that this will be implemented if the CGT changes go through. It will affect the way I invest.

This will be a long post. The purpose is to share my investing journey and hopefully be of help to those in similar situation.

Background: I am in my 30s and want to build wealth through (largely) passive investing, and my risk tolerance is very high. There is prevalent advice about wealth building in Australia using residential real estate in Australia. Many "influencers" talk a lot of fluff, but the principles are very simple: purchase a property with high leverage, maximise deductions for tax efficiency, hope for capital appreciation, and then use the equity to purchase the next property, rinse and repeat. Can this strategy work for listed assets? I believe so.

Strategy and set up: Instead of residential property, I will construct a porfolio using listed assets, then lever this portfolio up. Similar to property, however, I will borrow against my PPOR as the first step (ie "deposit using equity") to buy into the portfolio, then lever up using a margin loan (ie the "investment loan"). As my portfolio achieves capital gain overtime, I can use this gain to borrow more using margin loan facility, akin to using equity to purchase more property.

Portfolio construction: The portfolio should exhibit historical growth above the margin loan interest, otherwise this will not work. It should also aim to achieve growth through economic cycles and avoid extended periods of negative returns. To this aim, it must diversify across uncorrelated risk factors. I have opted to copy model portfolios used by super funds and investment companies like Vanguard. Target allocation constraints as follows:

Asset	Allocation	Constraints
Public equity	min 60%	max 100%
- Australian (all caps)	min 12%	max 35%
- Ex-Australia (all caps and across both developed and emerging markets)	min 39%	max 80%
Public debt	no min	max 40%
- mix of corporate and government bonds, both Australia and international		limit emerging markets and high yield bonds to less than 25% of fixed income allocation
Others/Alternative assets	no min	max 30%
Listed commercial property - Australia and international		ETF only
Listed infrastructure - international		ETF only
Private equity - listed vehicles - Australia and international		ETF only
Private debt - listed vehicles - Australia and international		ETF only

The portfolio is long-only, "buy high & never sell". Public market equity will be the cornerstone of the portfolio. Bonds, real estate/infrastructure, and listed private market vehicles may be considered. Since I am levering the portfolio using margin loan, there is flexibility as to when to purchase which securities (limited ability to time the market, so to speak). In order to use the margin facility, the portfolio must use ASX/CXA listed securities only. The portfolio does not invest in commodities or thematic equity selections. All assets purchased must distribute income to claim tax deduction on loan.

Leverage constraints: the investment is essentially 100% LVR, since I am borrowing from PPOR with additional loan from margin facility. This is no different from property investing. However, margin call risk needs to be managed. Different listed assets have different LVR limit set by the margin loan, maximum LVR allowed by the margin facility is 75%, ie for $1 borrowed from PPOR, I can leverage maximum $3 more. To manage margin call risk, the portfolio must be able to sustain a 20% drop in value without triggering a call. I also need to maintain enough cash reserves to service a margin call if the portfolio drops by 30%.

Year 0 update: I have opted to allocate 100% to public equity at this stage, using following funds:

Australian equities: DACE 26%

International equities: DGCE/DFGH/EMKT 63%/2%/9%

Current lever: Portfolio LVR 96%, Margin facility LVR 53%, weighted-interest rate 7%

I implemented the strategy a month ago. I have conviction in the FF5 model for explaining public equity returns, so have chosen to use Dimensional core equity funds. Unfortunately they do not list their emerging market fund, so I used Van eck instead. Since, the value of the portfolio has gone up 4%, thus the LVR (counting loan against ppor) now sits at 96%. There in lies the flexibility of the margin facility, I can immediately use this capital gain as collateral to purchase more shares within the facility. However, I am considering other asset classes.

Future directions: There is a strong argument against bonds for the portfolio at this point, as its returns is less than the margin loan interest. However, as the portfolio grows, margin loan intest will decrease, and I will add bonds for portfolio stability (rather than return). I have found that bonds are very interesting, there is much to learn before choosing a fund. I have also been looking at private assets, with the goal of diversifying risks and limiting portfolio maximum drawdown. I have yet to make up my belief how correlated listed private asset vehicles are with he broader public market. At the moment I am considering adding the following funds to the portfolio at some point:

Public debt: CXA:FIXD, CXA:YLDX, CXA:PDFI

Private debt: ASX:LEND (ETF of US listed BDCs)

Private equity: ASX:GPEQ

There is some (limited) flexibility for me to time my entry into specific slices of the portfolio. Entries come with interest cost, so the DCA method does not necessarily work. I balance the portfolio 1-2 times yearly, but with additional purchases only. I plan to borrow more against PPOR each year (equity release/debt recycling), with additional leverage on top as I was approved a large margin limit. I am still unsure about adding listed real estate and infrastructure funds at this stage.

A long discussion can be made regarding each slice of the portfolio allocation, which security to choose, level of leverage. Happy to hear some thoughts if you use a similar strategy. I might do an update in 1-2 years.