LIC & LIT Beginner's Guide to Investing in Listed Investment Companies

Hi Gang,

Seeing the above-titled document I've created can't be made a sticky in the main LIC thread or posted in the Resource section of the forum I've decided to create a separate thread.

The existing beginner's guide has been extensively revised after feedback from others including those recently new to LICs.

The extensively revised "Beginner's Guide to LICs" is attached as a PDF document.

IMPORTANT: Please note that this thread is only for updates of the attached document and basic discussion on LICs for beginner's. Other general LIC discussion, research reports, advanced topics, news updates etc should continue to be discussed in the main LIC thread:
Listed Investment Companies (LICs)

 

Thanks @austing , I hope this thread continues as the main Peter Thornhill and LIC threads continue strongly. I found the above document useful as well

 

A huge thanks to @austing, and others, for bringing together the info page, and for the FAQs for LIC newbies.

I have been reading and taking notes as I can as I go through the 86 (+++) pages of discussion on LICs, as well as the Peter Thornhill discussion. In reading the discussion, I thought I would post some questions, as I continue my reading:

1. How long do I have to hold LICs for before the investment growing to a point to be able to take an income from them? (ie are these a long-term (25+yrs), mid-term (10-15 yrs) or shorter term (5+yrs) hold before taking an income?)

2. Scenario examples for this question may be:

a. I am 55 with little super, so am looking at other income options, if I can start with $50,000 base, how long would it be before I could pull a (say $40,000) income (a question a friend asked as I waxed lyrical about LICs), or

b. I have built a portfolio and am looking to sell down to move into a passive income stream (thinking about The keithj Interview), how much would I require before I could expect a sustainable income?

3. I am building up my portfolio to retire in 10 years, what approach would you suggest (from a fellow investor’s perspective )? how would LICs fit into this?

4. How do you buy into LICs, while keeping a passive approach (how do you monitor the market for buying opportunities without being connected to a computer each night to assess the NTA to determine when a good time is to buy)?

5. I have read that LICs aren’t traded as frequently as other shares. If I see the share price at a point that I am interested in buying in at, would I be able to buy at that price, or may I miss out as others (faster to the post) have filled the orders before me?

6. How do you develop a plan for buying LICs? (@Pier1 ’s great comment in LIC thread)

7. If you’re looking into a new LIC, what are some things you should look for when looking at an LIC?

8. What are some good books to read for newbies for LICs?

I am simply posting questions here and while I have thoughts about how I could possibly contribute to some, I haven’t added any further comments as I would hate to confuse the answers from our esteemed forumites (eg good books that I have picked up in previous posts are Peter Thornhill’s Motivated Money, $1 million for life – Ashley Ormond, Super Smart Money – Michael Holmes – all on their way to me now, I’m sure there are many others that I’ve missed in the posts).

Apologies for the many noob questions in a much more sophisticated discussion (I’ll look back on this post in years to come and shudder….)

As always, I take the comments on these forums as comments, and not advice

Thanks for all for your ongoing comments!

 

Busy at the moment sorry. I'm hoping others here who have been following LICs for awhile now can also pitch in to help answer beginner's questions. There's a limit to how much time I can devote to the forum. And variety is welcomed by all.

HELP PLEASE!

 

Hi @austing , yes certainly looking for a variety of comments from the many experienced forumites, and as I read more, I will add as I can for others to correct me (contributing is one sure way of ensuring you understand what you read!).

Certainly appreciate your comments and time,

 

Short on time so just quickly an answer to a single question.

Perhaps Thornhill's rules are a good starting point:

Those linked in the beginner's guide fulfill or come close to meeting that criterea.

Anything more than the simple rules above would likely require a lot more knowledge. Like Thornhill suggests the objective is to just keep it simple at the start, stick with relatively safe LICs that have proven themselves over decades. Time, knowledge and experience will then have you capable of deciding what LICs if any you might want to venture into later. That's getting out of beginner's territory which this thread is aimed at.

Cheers

 

Very broad brush stroke answers above

 

I'll do my best to answer based on what I have learnt from @austing, @The Falcon, @Hodor et. al. on the LIC and other relevant threads.

When you buy LICs you will immediately start receiving income as dividends. This resource Australian ETF and LIC fund list, blogs, news provides LIC metadata and a quick check shows that the following low-cost (MER < 4%) LICs all pay a fully franked dividend of over 4%: DJW, FSI, BKI, AUI, MLT, AFI, DUI, ARG with WHF and CIN rounding out the top 10 each paying around 3.7% fully franked. Note that you shouldn't select the LICs you buy solely on dividend yield, there are other factors such as past performance, current NTA vs share price, manager etc that should guide you.

If you are asking when the LICs can grow to pay an income that you can live off comfortably, there are additional questions that need answering:
- Define living comfortably in a per annum figure: 30k, 40k, 50k, 100k, 200k etc
- How much money will you be investing in LICs during the growth?

To simplify the calculations I will assume you buy LICs that on average pay fully franked dividends of 4%.

To receive 40K per year gross in dividends, you will need 40x0.7=28K net

This requires 28K / 0.04 (NET / dividend yield) = 700K in LICs.

Assuming you started with 50K and reinvested all your dividends the approximate number of years it would take to grow to 700K based on the following total rates of return (including dividends):
12% - 24 years
10% - 28 years
8% - 35 years
6% - 46 years

Note that in 46 years, 40K won't have the same spending power as today. However, I've also assumed that you are not investing any more money.

In summary, you need about 700K in today's money to get a 40K gross salary assuming you buy LICs paying fully franked dividends. To get this 700K, it will be a combination of what you have now, how much that can grow over the investment period, and how much you can save and re-invest during the same period. The future total rate of return is unknown but you could estimate based on past performance.

- Understand where you want to be in 10 years: ie your goal and work back from that goal. e.g. I want 700K in 2017 money in 2027, which is 700K x 1.02 ^ 10 (where inflation is 2%) = 853K
- Get educated about diversification, LICs and other investment vehicles
- Understand your tax situation
- Work out a strategy to reach the goal

LICs are just one of the instruments you can use - we are on a property forum (although I am not saying you should invest in property). LICs have a degree of diversification built-in as they invest in multiple companies. In addition you could buy LICs that focus on different sectors (small/mid vs large caps) and countries (Australia vs international).

I use Excel. I download the prices of select LICs and ETFs each day and when certain trigger events happen (e.g. a LIC is at a discount to NTA and at a 52 week low and the ASX is at a 52 week low etc) I consider buying. When I buy, I try to get a deal, I don't just "buy at market" and I don't buy at the opening. Others can provide buying tactics - when to buy during the day to get an absolute minimum price without missing out altogether.

But as @austing says, the best time to buy is when the markets are low, e.g. during GFC, and everyone is panicking and selling. However, you don't know when that is going to happen, and you probably want to invest some of your money now rather than wait for the next meltdown. But that's entirely up to you.

The LICs I buy appear to be very liquid.

Reading the LIC thread, education, experience, asking questions (as you're doing).

I just chose the top few LICs based on comments on here, cheap MER, good management, past performance and some diversification (e.g. international and small/mid caps). Then I wait until those LICs are cheap and I buy. When the dividends come I don't reinvest straight away, I put it into a high interest savings account and wait until the next buying opportunity. My plan is also to have a few LICs so when the Share Purchase Plans come along I have more opportunists to buy at a discount.

In no particular order:
- Management Expense Ration (MER) - the cheaper the better
- Management team / Long-term performance - proven performers over a long period
- Dividend yield - higher the better, fully franked is better too
- Dividend growth - relates to performance, but ongoing dividend growth is a good sign
- Sector / market - To balance my portfolio

I don't know, but the general consensus is "Motivated Money" by Peter Thornhill and "A random walk..." are both good.

The journey of a thousand miles starts with a single step.

...and most importantly... "not advice"

 

PS, I'd like to thank @austing and co once again for all their time and knowledge. I couldn't have answered any of these questions before I started reading the "LIC Thread", as it can be fondly referred to, but all this knowledge and answers to my questions have helped me form my own ideas about how to invest using LICs and ETFs. My point is, these forums are valuable and the knowledge sharing shows there is still good left in this world.

 

Great contributions from @Pier1 @austing @ErYan. Just want to add how i usually work out at what price to buy for the chosen LICs( with those defined criteria mentioned previously such as dividend growth over time, been around a long time, low MER etc..) is to calculate the expected dividend yield based on last year dividend and the current price: if it is >=around 6% grossed yield (4.2% yield) then i will buy if not i will wait. If there are a number of LICs on sale at this yield range and my fund is limited then I look at which LICs currently offered higher discount to NTA.

Ta

 

It will take as long as it takes to save/reinvest to get to the amount you need. Key factor is how much you put into it!!

I think people are being a bit conservative here in regards to dividends you'll receive. 6% dividends are a fair expectation. So you will need 700k or so and will earn 42k divs. If this is split between you and a partner there will be almost no tax to speak of.

Just think "whatever I put in lics will earn me 6% dividends" so every 100k you put in will earn 6k.

Up to you if you sell down assets to build up this income stream so you can live on it. Currently that's what I'm doing.

Hope that helps a bit

 

Brings a smile to my face. I come back from dinner at the pub and what great replies.

@Mac Fields in relation to all these scenarios:

I'm afraid my answer is probably going to be disappointing. I'm not a great fan of using spreadsheets to predict future outcomes. There are just too many unknowns. GFC 2 could come along in the next 12 months giving those prepared for such opportunities to significantly fast track their wealth creation.

So what if a spreadsheet calculation tells you how long it might take to reach x amount of passive income. You can still only work with whatever your household income is then:

The only thing I would add is:
8. Although implicitly stated combine points (2 + 6) to fast track wealth creation.
9. Get good advice on structuring to minimise tax as this can make an enormous difference.

Personally I ignored trying to plan my financial future based on a spreadsheet. We just saved as best we could, followed a very similar plan to the one @Pier1 has provided and minimised our tax using all means legally available. We then just took it day by day, month by month, year by year and watched the dividend income grow. Then one day we reached a point when there was enough passive income for us to live the life we wanted. That point will be different for everyone. Some will live their perfect life on $50k passive income whereas others might feel they need $150k.

The critical thing is to get started on a good investing plan and stick with it. Of course you can try to optimise by selecting shiny new LICs and fine tuning buying opportunities based on NTA etc but that's really just tinkering around the edges.

Keep it simple, work on saving as much of your household income as you can then stick to the plan. The result just might surprise you.

 

Fantastic statement.

I just saw this after I posted my reply to @Mac Fields. It sums up exactly what I was trying to say in a long winded way.

 

It is important to get your strategies and tax structures in place before starting. If, for example you go ahead and buy a significant dollar value of LICs in your own name and later realise that it would have been better in a Trust, it is not possible to transfer the assets into the Trust without a Capital Gains Tax trigger as well as buy and sell brokerage, which are not insignificant.

Point being, get it right from the start.

 

Hi @ErYan,

Got a chance to read your post properly this morning. Absolutely excellent answers to all questions. You leave me for dead. A few of your comments could be useful in the Beginners Guide if that's ok.

I didn't think of the ETF Watch site when creating the LIC Beginners Guide. I should probably add a Resources section so that beginners keen to learn more have some places to start.

Some ideas include these, a couple of which have already been mentioned:

RESOURCES
1. Motivated Money Videos
https://m.youtube.com/channel/UCwH2W3eN7WoWWTC7KiUVR6A
2. Motivated Money by Peter Thornhill
... Welcome - Motivated Money
4. LIC Research Reports
... Listed Investment Company updates - Cuffelinks
5. Australian ETF and LIC fund list, blogs, news
6. @Terry_w guide to ownership structures for shares
Legal Tip 151: Structuring the Ownership of Shares

NEW SECTIONS TO THE GUIDE
1. Net Tangible Assets
... Why LICs trade at premiums or discounts - Cuffelinks
... A section on how to use, where to find it and how to calculate it for LIC index proxies
2. Example of a SPP. (Suggested by @Il Falco)
3. Rights Issue with example
4. DIVIDEND SUBSTITUTION SHARE PLAN (DSSP) for those wanting to reduce tax (offered by AFI, WHF - may be others?)
5. The importance of minimising tax in ones investing plan.

The problem I'm having is that I'd like to continually update (eg if a link no longer works) and add to the Beginner's Guide but the only way I can do it is to create a new post with the updated version every time. I sent a message to @Simon Hampel about this but have not received a response. I know he'd prefer all this sort of stuff to happen on InvestChat I tried my best on that site but the interest just isn't there and I don't have the time nor energy to follow and post on both sites. So PC it is for me.

Anyone have suggestions how I best deal with these limitations?

Keep the questions and suggestions coming.

The beginners guide will continue to get better.

Thank you

 

Of course @austing you may use any of the material - it's your knowledge. Please let me know if you need any more help with the compilation of this excellent material.

 

Any help will be appreciated. Thanks for your kind offer.

Trouble is I know quite a bit but getting it out of my head is the problem and I'm not much of a writer. Plus I've been following LICs for so long now it's hard for me to put myself in a beginner's shoes so to speak.

At the moment I'm torn between just having the basics in the beginners guide or also including somewhat more advanced material for those keen to know more detail. For example, when it comes to NTA one can try to keep it basic but some newbies will immediately be wanting to know where find, how to calculate and use it etc. rather than a separate FAQ and internediate to advanced guide perhaps the beginners guide can touch on some of this. By the time a beginner has read the guide they're then in the position to independently research further themselves.

Any thoughts?

 

He he, I'm not sure about that. In terms of what is used in the guide quite a bit is copied from elsewhere and edited or rewritten to ensure I can't be accused of plagierism . Anything copied in full is checked for copyright as best I can and the source quoted. I just know where to look for most stuff having read about this stuff widely on the web.

If I took it all out of my head it would sound like it was written under the influence of way too much home brew.

 

So far you have done a fantastic job putting it all together. Examples with figures such as @ErYan has provided really helps. As a begginer myself, what I really wanted and needed to understand was how the returns worked in yields this year, next year, and how much return it would and could in ten years time and so on, apart from all the other material indicating how to purchase, what your purchasing etc.
Coming from only knowing property prior, and also being a property forum I think many also want to understand the returns people can get over the years. And tax structures may be more complex for beginners guide, but it's an absolute must in my opinion as those franking credits make a huge difference over the years with compounding in the correct structures.

 

Good list so far,but i don't think anyone can tell you what approach is best for anyone,but at least posts like this will help people settle on a trading style..
South Sea Company - Wikipedia