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

Hehe. Only been introduced to it in recent times. Very nice on a warm day, outside on the balcony and simply enjoying doing nothing in particular for a couple of hours.

It's probably my age but to me it interesting to note in various threads the apparent level of worry and angst about where to place investment funds, what will those funds return, will I lose my capital and so on. I get it because that was me many years ago. I suppose it is normal.

Now I'm not overly perturbed about investing in shares, LIC's of course, if it's on my personal account. Whatever I place I don't expect to need those funds again. If I ever thought I'd need them I wouldn't place them in the share market because it can be volatile and there are no guarantees. Slowly I have developed a mind set, and it's only mine and I'm not suggesting others should adopt it, not to hand money over to the share market unless I never expect to need it in 10, 15, 20 years or whatever.

I find I'm more relaxed about things now and feel pretty OK with myself. Took me years to get there. For sure, I still worry when I am about to make a decision on using the cash. Making decisions can be a bit stressful for me but it is a rather nice feeling, once the decision has been made, to have a degree of worry just go away. Makes for a nicer, calmer life for me. And it's all about me.

With superannuation, and other entities, it's a different matter as there is a level of legislative accountability required but with one's personal share holdings none of that applies - provided your partner, should you have one, is also in agreement.

Apologies for the amateur philosophy ramble. Self needs coffee.

 

@SatayKing after a 13 year hiatus from the public forum arena it’s certainly good to have you back.

The following assumes money invested in the market is widely diversified such as is the case with many LICs / ETFs.

I take a bit different point of view when I hand our money over to the sharemarket in that I differentiate between capital and income. Perhaps this is what you’re getting at? I don’t really treat our wealth in Super all that differently to personal other than one has more rules attached to it. It’s still our money.

I accept that a reduction in capital for a potentially very long period of time is possible as ocurred during and after the Great Depression for an extended period of time. Which is why I feel very uncomfortable investing for capital gains to generate income.

Dividends is a different story though. During the Great Depression at its worst in the US capital value of the market was down 90%. Dividends however at their worst were down 50% and recovered much quicker than capital.

Research has me convinced comfortably enough that other than a Great Depression scenario (excluding catastrophic events like nuclear war etc) the next greatest risk is home country risk. Which is why I’m prepared to invest more Internationally nowadays despite the reduction in income.

Those much smarter than me have suggested that in the worst case scenario an investor should be prepared for a 50% cut in dividends when the **** hits the fan. Global diversification in the case of Australia being such a small market might also be wise.

So in summary when I invest money into the sharemarket I accept that one can’t potentially rely on getting the full value of capital back in the long term but I don’t accept that the money is lost. What let’s me sleep well at night is knowing that there’s a high probability even in the worst of times that a good portion of our share income will still be there even when Capital has been close to obliterated. Importantly having a generous cash buffer (Gov’t guaranteed) in place provides extra security in being able to top up reduced dividends when necessary and to avoid drawing on capital at the worst possible time. That is turning a temporary capital loss into a permanent one!

Fortunately we’re all different which makes life much more interesting.

A long day and tired head. So my ramblings are even worse than amateurish.

 

I look more at dividends when investing through the SMSF. I know I can take less risks here, and tend not to buy anything speculative. I like the dependablity of a regular (even if possibly smaller) income. LICs and ETFs make up the bulk here.

When investing personal money, I tend to take more risk, and hope more for CG. I only ever invest money I can afford to 'lose' (but hope not to), and am far more prepared to be speculative. Sometimes it pays off (thanks A2M and WEB), and sometimes I just have to be prepared to hope for a recovery (such as SRX and SCU).

 

Good stuff @austing.

I wasn't clear in my meaning. I do go off on a tangent sometimes which definitely can cause confusion.

My approach is if I place money to buy shares for my personal account, I have to be darn, bloody sure I won't need those funds for my personal needs, e.g. buy a yacht, an A380, vineyard, new car, holiday, food, etc, because once in the market I have no intention to withdraw them to pay for those. So in that sense the money is "lost" from my ready cash. That's where I'm coming from. Probably not explaining it very well even now.

As you rightly infer, it is highly likely the shares will have a value whatever that value may be at some point. But I don't overly focus on that aspect. I suppose that is a large part of why I almost become disengaged when I hear others banging on that their shares went up or down by x% or $$.

As for super, too right it's my money, although for some strange reason I have this offbeat ability to act as if it isn't and I'm being the Trustee for another person. Yeah, I know: crazy. Even the financial wallah's commented I don't refer to myself whenever discussing the investments in the SMSF. No longer able to contribute to super now and part is in the pension phase and the other in the accumulation phase.

 

@SatayKing I was assuming that was what you meant knowing your long term, buy and hold income focus. I was just being a bit more detailed in my response to clarify.

The SMSF is an odd case though. We like to think of it as very long term, buy and hold as is the case with our personal holdings but depending on one’s age this isn’t possible. That’s because of this as I’m sure many are aware:


At some stage should we be fortunate to live long enough and wish to enjoy the tax free benefit of an account based pension some assets will likely need to be sold to meet the minimum withdrawal requirement. Those of us lucky enough to have excess in Accumulation can leave it there taxed at a low rate of 15%.

I haven’t really thought that much about this till recently due to me being 57 and my wife 54. But now I’m looking further ahead assuming that at least one of us will be impacted by the pension high withdrawal percentage during our lifetimes. In this post I won’t go into the additional complexity of estate planning when a partner passes post 1 July Super changes. It will come as a shock to many.

I like to have an allocation to International equities to reduce home country risk and provide better SANF but the yield in general is noticeably lower than ASX. If I hold International funds in own name and need the income at some stage there will be CGT. In the SMSF there’s no / minimal CGT. But International funds in the SMSF reduce overall yield making it harder later on to meet the minimum pension withdrawal rate. So what to do?

The following relates to the SMSF. I figure the low yielding International holdings need time to grow so best introduced earlier on many years before one may need to convert capital to income. Being a retiree as for reduction in overall yield now and going forward due to the International Fund Holdings that’s where I see the advantage of owning lower growth, high yielding funds such as DJW. I get better SANF through owning potentially higher growth, wonderfully diversified International equity funds with the likes of DJW offsetting the lower yield of International.

@SatayKing you’ll no doubt think me too tax focused. But I’m like Kerry Packer when he was alive in his view that the Gov’t isn’t doing such a great job of spending our taxes that we need to give them more than their entitled. to. We’ll choose which charities get our money rather than pay more tax than we legally have to. I won’t even get started on what I see around me in our location in terms of abuse of the public purse. But of course I respect others views as this is a touchy subject with many having very contrasting strong views. Enough said.

Some here might have noticed some incongruence in my investment holdings / views over the last couple of years. But it’s reasons like I’ve just posted above, increased conservatism with age, improved knowledge, my reaction to a rapidly changing world and what’s needed for SANF that’s behind it. I’m happy to admit though that any selling of listed funds is usually regretted. So any selling going forward is only likely to be direct shares to top up LICs and listed funds if we don’t have a choice.

This really should have gone into another thread as it’s off topic. But there ya go.

Would appreciate others thoughts on this.

 

First, @austing I agree and possibly the moderators could do a favour by moving a number of these posts to a more appropriate thread. My apologies for being the initiator of thread drift. It's a bad habit of mine.

I admit I am slowly but surely tending towards increasing my exposure to international and it's happening across the various portfolio's in which I am presently involved. Slightly different reasoning in that I've begun to appreciate Australia is a rather concentrated market. Sure, it's been darn good to me over the years and hopefully it will continue in that regard but I think exposure to a wider number of industries and markets isn't a bad thing. It's just a question of how to do it, when, what and cost in terms of income, fees, etc. At the minimum it provides me with another active interest.

As for superannuation, my word, is that a subject and a half. When the proposed changes were first announced in the May Budget I spent considerable time trying to understand it's implications for me. Largely it was a waste of time as I then had to try to get to grips with the ramifications of the legislation as passed by Parliament. Probably a number of people did likewise but I suspect a large number haven't a clue yet. At least that is the impression I have gained listening to dinner table talk. I'm sure I don't fully understand it. Gawd, I'd be hopeless trying to talk about transfer balance caps, defined benefit pensions, capital gains relief, pooled or segregated accounts, contribution limits. You name it. A mess in my view. Plus the Government has landed the ATO with administrating the thing.

As for tax, well, each of us has a personal view on it. And that's fair enough. Gotta be careful as it starts to become politically orientated. It's a pretty touchy subject. My opinion, for what is is worth, is that many decisions seem to be politically orientated as opposed to being good public policy. I reckon that sucks. Yet many essential services do require public funding and I'm not opposed if my relatively small contributions assist in that regard. All I'm going to say on that issue.

On a much brighter note WE BEAT THE ALL BLACKS! Yippie.

 

I haven't worried too much about the superannuation rules - at only 44, I think that there are likely to be so many changes between now and my retirement age. Every time I think I know what's going on, the Government moves the goal posts.

Having said that, I'd be very interested to know what you mean by your statement about the post-1 July changes, @austing.

 

Unless you have a couple of weeks to spare, don't, just don't.

However, if you masochistic tendencies, and I hope not, here is a link to some reading matter from the ATO.

Super changes

 

Nup. Don't think I'll bother. Sometimes, having one's head in the sand is the best way to maintain one's sanity .........

 

It’s too complicated and off topic for this thread to go into great detail. But it mainly affects couples with larger balances. Without proper planning when one dies and the surviving spouse has already reached their pension limit the deceased’s Super balance (Pension and Accumulation) must be removed completely from the Super system. In many cases this will end up in the surviving spouse’s own name. A huge tax change prior to when their partner died. Previously the deceased partner’s Super balance could revert in total to the surviving spouse and stay in the tax advantaged Super environment.

Careful planning can improve on this with the surviving person commuting their pension back to accumulation to make cap space for the deceased partner’s reversionary pension up to the cap limit.

Careful planning and documentation needs to be in place to avoid all sorts of complications and unintended consequences.

But essentially for the wealthy a lot of money will be forced out of the Super system when their partner passes. Not a bad thing in a lot of cases as it’s rediculous the tax benefits some of the wealthier superannuants are getting due to massive balances of $10 mil plus even up to $100 mil in a few cases. It will however come as a shock to many who aren’t aware of this yet. And it would appear many are not!

See all very simple. @SatayKing I’m sure will be happy to explain all of the changes to you over a few (may need a few dozen in this case) gin and tonics.

I can hear @SatayKing grumbling already about the tax minimisation at play here so I’m off into hiding until he’s had a few coffees / gin and tonics to calm down.

 

I thought you liked to keep things simple Austing.

Minimum annual percentage withdrawals only apply to amounts in account based pensions which are tax free.

If you need to sell down a growth oriented asset to make the minimum withdrawal – What’s the big deal?

Just do an off-market transfer and continue holding the assets in your private names. It is a capital gains event but your tax rate, as the asset comes from the allocated pension, is zero and the resetting of the cost base should be beneficial to your charities/heirs avoiding the 15% beneficiaries tax for non-dependants on the taxable component.

I dunno, but I reckon giving any thought to minimum withdrawal rates as part of the asset selection decision process to is an overcomplication and in your case a waste of home brew dinking time.

But I dunno much so maybe you should worry about it. Maybe you can do the worrying for me too cause I won’t be giving it a second thought – I’ll just stick with buying the best assets I can find regardless of whether it happens to be growth or income oriented.

 

Removed previous comment on pension benefits as was incorrect. See subsequent post.

My objective is to try to keep as much as I can in Super for as long as I can.

Every person’s financial and estate planning is unique. Some of your assumptions may be misplaced as you don’t know our personal circumstances which I’m certainly not going to make public.

But a very interesting post.

 

First point. Nup. Too hard and I don't fully undestand it anyway.

Second point, again nup. No grumbles from me where it's legit and I assume people are abiding by the legislation. In any case, which body passes the law? So it's their fault.

As for the G&T's, they're nice but only very occasionally. Makes them special.

 

I do need to Spend some time getting more up to date on the new Super rules.

Some more on new pension requirements involving in-specie transfers and lump sum commutation etc:
Super contributions and benefits | Money & Life

 

From a quick scan of the document you linked, the ability to partly commute and meet the minimum withdrawal requirements with an in-species transfer has disapeared July 1 2017.


But so long as your investment is liquid. Sell it in SMSF– pay pesion in cash - Immediately repurchase in private name; Same outcome. It won’t be a wash sale because the primary purpose is to make pension payment – not minimise tax.


Fine line between keeping it in SMSF for tax efficiency as long as possible and dying with taxable component in SMSF which is not a good outcome for your beneficiaries unless they are dependants.


Mmmmm how did the way over complication of super rules finish up in a beginner’s thread?

Beginner’s - buy good assets at the right price and hold them for a long time!! The rest is just sweating the small crap.

 

I blame @SatayKing and @KayTea, I’m always innocent.

This is Beginners stuff, wait till you see the advanced Super stuff.

That sounds like advanced stuff to me.

PS: sorry Beginners (ummmm that includes me I’m now convinced) please ignore all above unrelated posts regarding Super.

 

@Nodrog In regards to the Beginner's guide, would it be feasible to add in the comments made on another PC thread about the suggestions for having an 'asset register' and also advice on recording and electronically saving share purchase transactions?

 

Not really relevant to LICs but if you can give me a link to the post which you found useful I’ll look at doing it. Hopefully I still have the LIC Guide in original Word format? I haven’t looked at it in ages and didn’t think anyone was interested in it anymore.

If Labor gets in there mightn’t be any interest in LICs anymore.

 

@Nodrog Thanks 'young fella' my cut and paste skills are not all that good but this was the thread - Record Keeping (CGT / Estate) - Shares / LICs / ETFs. The thread included:
"You can choose to enter information from your CGT records into an asset register. Keeping an asset register may enable you to discard records that you may otherwise be required to keep for long periods of time. For more information, see:

• Guide to capital gains tax 2017
• Taxation Ruling TR 2002/10 – Income tax: capital gains tax: asset register."

"Asset registers
You can choose to enter information from your CGT records into an asset register. If you keep an asset register, you may be able to discard records that you might otherwise need to keep for a long time.

If you choose to keep an asset register, transfer the following information to it from the records you generally need to keep for CGT purposes:

• the date the asset was acquired
• the cost of the asset
• a description, amount and date for each cost associated with the purchase of the asset, for example, stamp duty and legal fees
• the date the CGT event happened to the asset
• the capital proceeds received when the CGT event happened.

This information must be certified by a registered tax agent or a person approved by the Commissioner.

If you use an asset register, you must keep the documents from which you have transferred the information for five years from the date the relevant asset register entry is certified. You must keep the asset register entries for five years from the date the related CGT event happens. Keep the asset register for a longer period if you need to substantiate any carried forward net capital losses, for five years after any CGT event where you have applied any capital loss against capital gains.

For more information about asset registers and who can certify them, see Taxation Ruling TR 2002/10– Income tax: capital gains tax: asset register.
Guide to capital gains tax 2017"

A quote from @PandS posting advice is:
"Well the buy and sell statement has all the info ATO or anyone needs for tax purpose how much you bought it for, at what price and how many share and the day the contracted made/settle and what name it under etc...same goes for the sell contracts and dividend statement prove your income from the holding. All this info should also be available online in electronic form for about 5-6 years from your broker for buy and sell contracts and share registry for dividend statement. What I do is I have cloud folder and I create one financial year per folder eg FY1617 FY1718 then anything to do that year I download the electronic statement and name it something like this and chuck it in, I also have software that tracks all my buy sell, dividend records and measure performance so at any time I can trace up any transaction and able to retrieve the info I need do this as you go it takes less than a few minutes a day as soon as you buy and sell stuff else it snowball into a massive pile you hate to be doing it at tax time, I made hundreds of trades and options and stuff every year to do this at the end of the year is a nightmare
2017-12-20-XYZ-Sell-CXXXXXX Number
2017-12-20-XYZ-Buy-CXXXXX Number
2017-12-20-XYZ-Dividend-Half-Year
2017-12-20-XYZ-Dividend-Full-Year

These were the postings at the start of the thread that you had a lot of input into from memory.

 

And yes, I have a read to refresh every once in a while.