4-5 LICS for Debt Recycling Strategy

Discussion in 'Shares & Funds' started by JK200SX, 12th Jul, 2019.

Join Australia's most dynamic and respected property investment community
Tags:
  1. JK200SX

    JK200SX Well-Known Member

    Joined:
    24th Jun, 2015
    Posts:
    448
    Location:
    Melbourne
    A relative is considering using LIC's to debt recycle, as per the method shown in the classical Peter Thornehill diagram that is floating around here on the forum. The person has a non-deductable debt on their PPOR of approx 600K and has access to approx 150-200K in a loan split that has been specifically set up for investment purposes.

    If you were in this scenario, which 4-5 (or 6?) LIC's would you invest in to help repay the non-deductable debt, with a view to eventually keep growing the LIC bas.

    Thanks in advance,

    JK
     
  2. The Falcon

    The Falcon Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    2,472
    Location:
    Sydney
    Just use VAS and save a lot of time and the likelihood of underperformance.

    If committed to the LIC path then you'd just go the old standards, AFI/ARG/MLT/AUI unless you wanted to get fancy.

    I'd caution this however - when that $200k of LICs becomes worth $100k and they have just added $100k to their mortgage how will they respond?

    The theory doesnt deal with that.
     
    Jaik2012, sharon, Anne11 and 6 others like this.
  3. Froxy

    Froxy Well-Known Member

    Joined:
    22nd Sep, 2018
    Posts:
    72
    Location:
    Sydney
    No offence but if they cant do their own research they should not be leveraging in, particularly at market highs and exposed to purely domestic equities and to that amount.

    This forum is great, especially when getting started. But you need to have some serious conviction and a thesis for doing this.

    Have them do their own research and lay out their portfolio and reasons why they are included and write down how they would time investments and react to certain outcomes.
     
    Anne11, number 5, Burgs and 1 other person like this.
  4. Silverson

    Silverson Well-Known Member

    Joined:
    11th Jun, 2016
    Posts:
    440
    Location:
    Melbourne
    ARG, MLT, VAS, VGS, WHF, IEM, NDQ, PL8
    Find an allocation that helps sleeping at night, add anything that tickles your fancy as you go along, that above is pretty much becoming my core holdings, will make up circa 65-70% of my holdings with the remainder other lics/etfs and direct holdings. For what it's worth I'm using very small amounts of leverage (top up/cash out using equity on ppor)
    Before anyone shoots me down, save ur energy, I'm sure it's not the perfect plan but I'm comfortable with it
     
    sharon, Froxy and Greedo like this.
  5. Hodor

    Hodor Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,731
    Location:
    Homeless
    Some thoughts.

    Has your relative considered Dollar Cost Averaging (over a year or two)? Might help them deal with potential volatility in the short term.

    As suggested by a few an ETF like VAS is an option, even PT has softened his view on ETFs from my understanding. I wouldn't buy an LIC unless at an NTA discount (this doesn't need to be more than a 1 minute check) having that panel of 4-5 helps here and an ETF allows regular buying.

    Some international exposure (even 10%) is worthwhile considering even with the yield trade off.
     
  6. Hodor

    Hodor Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,731
    Location:
    Homeless
    I've done worse.
     
    Silverson and Froxy like this.
  7. Silverson

    Silverson Well-Known Member

    Joined:
    11th Jun, 2016
    Posts:
    440
    Location:
    Melbourne
    Do tell!
     
  8. Nodrog

    Nodrog Well-Known Member

    Joined:
    28th Jun, 2015
    Posts:
    7,519
    Location:
    .
    For this strategy perhaps best save the use of leverage for when LICs are cheap which usually means the market and economy have fallen in a heap. And ensure that during this time they have a high probability of keeping their jobs when others are losing theirs!

    And even before doing the above have them imagine the value of their shares cut by 50% or more and dividends cut by at least 30%. Will they be able to tough it out or fold under pressure not only losing much of the value of their shares but potentially their home as well.

    All this stuff looks great in theory but if it goes pear shaped the outcome can be devastating.

    It can still work but they really need to understand the risks involved and have a plan in place to deal with potential negative events.
     
    Anne11, ChrisP73, Burgs and 3 others like this.
  9. Isla_Nublar

    Isla_Nublar Member

    Joined:
    10th Jul, 2019
    Posts:
    11
    Location:
    Sydney
    What ETF do you suggest for international exposure alongside VAS for Australian exposure? Do you use VGS given its Australian domiciled? I need to increase my international exposure given I’m currently 100% Australian
     
  10. Zenith Chaos

    Zenith Chaos Well-Known Member

    Joined:
    10th Jul, 2015
    Posts:
    1,100
    Location:
    Sydney
    Rarely mentioned but IWLD is similar to VGS with half the MER.

    To the original post: the tax strategy should be a lower priority than the TSR. Thus the aim should be a diversified portfolio with appropriate risk reward for the personal situation. You can do that with ETFs or LICs or a combination, which has been discussed before.
     
  11. Burgs

    Burgs Well-Known Member

    Joined:
    19th Jan, 2019
    Posts:
    73
    Location:
    ACT
    That IWLD is interesting how it us made up of 4 different ETF's.
    upload_2019-7-15_8-17-59.png
     
  12. Greedo

    Greedo Well-Known Member

    Joined:
    17th Aug, 2017
    Posts:
    50
    Location:
    Cairns
    Hadn’t seen IWLD before, thanks. It’s trailing distribution looks like c. 4.7%. What is driving that?
     
  13. skinner84

    skinner84 Member

    Joined:
    20th May, 2019
    Posts:
    23
    Location:
    Melbourne
    For debt recycling to work you need to be receiving regular dividends right? So investing in international shares that don't pay much of a dividend doesn't make sense. Unless you plan on selling them down if they reach a new high - hard to time though I would think.
     
  14. Terry_w

    Terry_w Broker, Lawyer, Tax advisor Business Member

    Joined:
    18th Jun, 2015
    Posts:
    21,384
    Location:
    Australia wide
    Not necessarily.
    The 2 broad methods of Debt Recycling The 2 broad methods of Debt Recycling
     
    Froxy likes this.
  15. skinner84

    skinner84 Member

    Joined:
    20th May, 2019
    Posts:
    23
    Location:
    Melbourne
    Terry_w likes this.
  16. geoffw

    geoffw Moderator Staff Member

    Joined:
    15th Jun, 2015
    Posts:
    6,284
    Location:
    Canberra
    International shares do pay dividends - they're just not franked dividends.

    But if you're choosing to invest in companies which don't pay dividends but which are growing, it's possible to just sell just some shares, subject only to a minimum parcel size, to follow the approach suggested by @Terry_w
     
  17. SatayKing

    SatayKing Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    2,427
    Location:
    Australia
    I'd be somewhat cautious about another party gathering information about investing issues. Best if they did it themselves. Then they own it and are responsible, and need to accept that responsibility, for their decisions based on information they have personally researched.

    Not saying it's the totally wrong thing to do but it isn't ideal in my view.

    Second on the debt recycling aspect. Merely because it can be done doesn't mean it should. If the other party is going down that route based on second-hand information I feel there is a danger. They need to comprehensively understand their situation and attitude to the share market, risks - of which there are many - and how to deal with matters if and when it doesn't all go according to theory or as shown in wonderful computer simulations and graphs.

    Anyone happy to put their hand in their pocket to bail out some obscure dudes who don't thoroughly consider their situation but act on "'advice" which is another form of pub talk? I wouldn't.
     
    Anne11 and Terry_w like this.
  18. skinner84

    skinner84 Member

    Joined:
    20th May, 2019
    Posts:
    23
    Location:
    Melbourne
    Got ya. Sorry to hijack here but I feel like OP and I are in a similar situation. I have a low income earning partner so I would love to take advantage of franking credits. But at the same time I don't like being invested too much into one market. Would something like 50% VAS/LIC with 50% VTS make sense? Or maybe just VDHG to keep it even simpler (higher MER though of course).
     
  19. geoffw

    geoffw Moderator Staff Member

    Joined:
    15th Jun, 2015
    Posts:
    6,284
    Location:
    Canberra
    A lot of generic suggestions have been made. As you're asking more specific questions, any specific suggestions to your situation might be touching on advice, which should take into account many things about things like age, investments, risk tolerance, earnings, cash etc. You may be better to get professional advice, especially if the amounts are significant.