The journey to Financial Independence comes with many things to learn along the way.

To help simplify tricky questions and clear away confusion, we’re running an ongoing Q&A series.

We hope these discussions and case studies provide you with insights to further your thinking as you progress towards your goals :)

Just so you know, in many cases there’s often not a “right” answer, so be sure to think carefully how to adapt any information to your own circumstances.

If you have a question you’d like answered, feel free to leave it in the comments below, or post it on the Pearler Exchange.

In this Q&A session, we’re tackling:

– Am I diversified enough?
– Is borrowing to invest still worth it?
– Have I stuffed up debt recycling?
– High dividend ETFs
– How much house should I buy?

Am I diversified enough?

Q: I’m new to investing (late 40's) and have already taken the plunge to buy VAS, VOO & VEU. To diversify my portfolio, is there any other ETF or bond ETF worth looking at? I have tried comparing and doing my own research but getting a bit stuck with overlap. Any suggestions are welcomed, thanks in advance.

Dave: To be perfectly honest, you already have a fully diversified portfolio with thousands of companies from all around the world. There’s not really much to add in the shares/ETF universe that isn’t doubling up somehow.

You’ve got Aussie shares (VAS), US shares (VOO), other developed countries and emerging markets (VEU).

You’ve actually done what most people fail to do – you’ve built a simple, low-cost, diversified portfolio that you can simply add to over time and grow your wealth in a low-fuss manner. Too many people overcomplicate it with lots of extra holdings, when the main building blocks are where all the action happens.

Adding bonds is basically like adding cash. That can make sense if you would like to reduce the volatility of your portfolio. If you really struggled to hold your nerve and keep investing during the recent tariff tantrum the market had, then it could be worth considering adding a bond fund.

Just keep in mind this comes at the expense of long term returns. I personally think it’s better if you can learn to build a stronger stomach for those things – but not everyone can. But that depends on your risk tolerance, so consider what feels right for you in this situation.

I wrote about bonds a bit in this Q&A article (down the page), which you might find useful.

Is borrowing to invest still worth it?

Q: I wonder, is it still worth it to take out home equity to top up my current share portfolio vs using the equity to invest in a rental property in today's higher interest environment?

Dave: There are really two questions here.

The first question is whether it makes sense to use debt to invest at current interest rates. I do think that property and shares will both provide higher long-term returns than 5.5-6%, meaning I still think it’s profitable to borrow to invest.

I wrote about investing with higher interest rates here – other options are debt recycling or paying down debt.

The second question is basically property vs shares. That’s a personal choice based on which asset you’re more attracted to; what returns you expect from each; your specific goals and timeframe; and your risk appetite.

Nobody can know the answer to this one but you.

Both can be sensible long-term investments. Shares are typically better if someone is trying to create passive income in the next 5-10 years, whereas property can be better if the goal is purely long-term net worth growth and one is happy to keep maximum leverage and fund the properties with work income.

Have I stuffed up debt recycling?

Q: If someone is debt recycling and they have: split their loan, redrawn the equity, dollar cost averaged the equity over time into income producing shares (say 5k parcels totalling 200k)... is this going to cause this person and their accountant a headache if they unwind it later? Have they stuffed the strategy completely?

Dave: This won't necessarily cause any headaches at all. I'm not sure what you mean by 'unwinding' or which angle you're approaching it from, but here's how I look at it...

1) While building the portfolio, all the accountant needs is your dividends earned, any sales transactions (unlikely for long-term investors), and any interest accrued relating to the recycled loan. This should be easy enough since the loan has been split, as long as the funds were never co-mingled with personal funds. Where were the funds put when redrawn? Were they simply invested? If so, it should be fine.

2) When living off the portfolio, it’s the same deal. The fact that debt was used to buy these shares makes no difference when it comes to CGT or ongoing taxes other than interest claimed.

3) If shares are sold later down the track, then one can choose for tax purposes which shares have been sold. This part is the headache part people refer to. But this is easily solved with either a spreadsheet, or by just selling at your 'average cost price', or my preferred lazy option is using a tracker like Sharesight where you can choose which method of record-keeping for any shares sold.

You can choose 'highest cost base' or 'lowest cost base' or 'maximise/minimise gain'. Whichever makes the most sense for the situation – all with no effort, but this requires a premium subscription, though in my mind it’s worth it. I believe since Sharesight tracks all purchases you can probably just wait until later before going premium and getting the high-end tax features.

Keep in mind, this applies whether debt has been used or not. The only downside with the 'sell-down' method is that any shares sold from the debt recycled money means that specific portion of the loan isn't deductible anymore (since the asset has been sold/partly sold). It’s best to sell other holdings if possible.

You can read my detailed article on debt recycling here. We also dove into this on the Aussie FIRE Podcast, in Episode 19 & 20.

High dividend ETFs

Q: I have a question about "high dividend" ETFs. I currently invest in 2x ETFs that are ranked as "high dividend" funds – Russell High Dividend Aust. shares (RDV) & SPDR Select High Dividend fund (SYI).

SYI currently pays 6.21% with 85% franking and RDV pays 5.58% with 57% franking. If the franking isn't 100%, I will have to pay more tax on both of these at tax time. So how can they claim to be "high dividend" when, after ALL tax, the dividends are less than 6.21% & 5.58%?

Dave: A few important things to cover here.

First, ETFs can't control how much franking they pass on. It's typically related to the companies in the fund and whether those holdings pay fully franked, part franked and unfranked dividends.

The ETF also has no control over your personal tax situation. What ends up being taxed at 0% for one person, may be taxed at 47% for another. So that's an individual outcome unrelated to the asset itself. It's unreasonable to blame the fund for either of these factors.

As for whether these are “high dividend” funds in practice, I would say they are. After all, both are in the region of 7%+ gross yield. You can get higher yields, but they will prove far less sustainable over the long run. 7% yield from any asset is arguably a high level of income, since a solid total return is in the region of 8-10% pa.

If you want more than this, you may end up disappointed. Even if the income does deliver, it may not keep pace with inflation over time. To be perfectly honest, at this level there are many crappy choices and borderline predatory funds which offer huge yields to lure investors. I wrote about the trap of high yields here.

Zooming out, Aussie shares are about the only place in the developed world where you can get such a high level of income from a semi-diversified basket of decent companies. Most other countries are in the region of 2-4% with no franking credits. So while I understand the desire for maximum income, it's important to put this in perspective.

How much house should I buy?

Q: Thanks so much for all your content – it’s helped me so much as I navigate some tricky moments in life. I'm wondering what would you do if you were in my position: about to sell my home due to separation and will need a new place to live. I’ll have a pretty sizeable cash amount from sale proceeds.

Do you recommend I find the cheapest house I can (looking at a 2x2 apartment in Melbourne for approx $450k (body corp is $5k pa). Or spend a little more (say $650k) and buy a brick unit with strata around $1k a year? In both scenarios, I'll rent out the other room to generate some extra income. I’m also fortunate enough that I can pay cash either way, but curious to hear your thoughts on that too. Thanks so much for your thoughts if you have time!

Dave: Sorry to hear about the separation – hopefully you can have a great fresh start.

Interesting scenario. As usual, it depends on what you're aiming to maximise here: money, enjoyment, or a balance of both?

Would you enjoy living in the more expensive unit a lot more? Sometimes these things are worth the extra cost. Or do you not mind either option?

On a financial basis, spending $200k extra to save $4k per year in strata fees is a crap return. The only saving grace there is that I’m guessing the brick unit will have a higher land component (if it’s a villa/duplex), and therefore may experience higher capital growth. But given this is your home, to me that's less important, especially since we're talking about $200k – not chump change!

Think about the lifestyle of each and which one you could see yourself living in for the longest. Then balance that with the financial outcome you'd like to get. Are you trying to build a share portfolio as quickly as possible? If so, then a cheaper home gives you a great start on doing that. More invested = more passive income = freedom sooner.

But if you’re not in a rush – and are more in ‘cruise mode’ – then it won't really matter, so you can choose based on preference.

As for paying cash, I think that's awesome! Your housing costs will be zero (or positive after the room-rent situation!), so your monthly cashflow is extremely cushy after that.

Of course, you could opt to get a home loan, then debt recycle the entire thing and then have a nice sized share portfolio too. That would be the technically optimal thing to do for tax and wealth growth.

But I’m guessing by the size of the separation proceeds, you’re likely to be in your 40s or later. For that reason, I think the debt-free housing approach makes a lot of sense. It’s a weight off your shoulders and most people absolutely love that kind of setup.

Final thoughts

I hope you enjoyed this Q&A session, and these answers gave you food for thought.

Remember, if you have a question on a topic you’d like some more information on, feel free to post it on the Pearler Exchange. They’ll be answered by fellow investors in the community – like myself, someone more knowledgeable, or one of the Pearler team.

You can also post a question down in the comments selection and we’ll cover it in a future Q&A article.

Until next time, happy long-term investing!

Dave

Dave’s best-selling book Strong Money Australia is available on Amazon. Listen to the audiobook on Spotify or Audible.