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

We currently live in Dubbo. Renting and work pays most of the rent. We plan to buy our own property, probably in the southern highlands of NSW in about 5 years when we should be ready to retire.

 

Forgot to mention in my previous post, the figures assume owning the shares in our own names which is highly unlikely to be the case. Again, the question is more to see if I have a handle on the math and thought process.

 

Looks right to me. Or you can calculate it from the difference between the two rates:

(5.71%-4.8%) * 1.1 mil* .641

 

The maths is not the problem.
The yield trap is the problem.

The yield trap is where you focus entirely on the yield so much that you completely miss the other half of the picture - a growing income.

The cash you put into offsets has zero growth since the property is growing regardless of whether there is more cash in there or less, so the cash is providing you with no growth. Actually it is devaluing in the same way as putting it in a term deposit.

LICs/ETFs would provide you a similar amount of income, but it would be a growing income since a portion of the profits are retained each year and invested back into the companies you invest in to build their asset base.

In 20 years would you prefer getting 5% of 550k equivalent when the money in the offset has devalued to half, or would you prefer to be getting 4% of 1.1m equivalent that has continued to hold its value vs inflation?

Not advice. Just pointing out the yield trap.

 

Great post.

 

I could be totally wrong here & if so I stand corrected.But if you each invested $550,000 in your own names then the income is split in two,then first $18,000 is tax free in each name, bringing your taxable income down to $13,405 approx each,taxed at 15% plus medicare levy.

 

Yes I realise that and meant to add that there are a whole host of other factors that need to be considered. Time frame, my better half, cash flow, risk V reward, etc.

 

And don't forget to add the ongoing costs of each of the investment vehicles, and relative levels of headache. The difference between gross and net yield for IPs can get rather large.

 

Yes agreed.

For the sake of clarity I will mention that in 5-6 years time we will be selling all our IPs and moving everything into LICs/ETFs. Right now, with NRAS entitlements, rent, tax deductions, they are all massively cash flow positive and well worth keeping.(except the PPoR which is only slightly CF+ and hence selling it before we have to pay CGT) My consideration about what to do in the mean time is based mostly on my better half's risk tolerance and dislike of debt. Showing her the math and pointing out we could pay down the debt faster with the extra money from LICs/ETFs is a good starting point so I wanted to make sure I had it right.

 

Ok, it seemed fairly obvious, just missed from the initial posts about your figures. I'm sure you'll sort through the chaff to find the wheat, and start sowing seeds .

 

More noobish questions to all you experienced and accumulators. Wondering Anyone committing for DCA would you bother to look at P\e ratio, EPS, DPS Or just buy at regular intervals?

Others buying in Dips what would be your comfortable P/E ratio buy? Anything around 12/13 considered a good PE ratio?Also should I consider companies having good EPS as generally a good stock?

 

Given this is a LIC thread, I'll assume you are referring to LICs, the purchasing of which has been discussed in depth elsewhere in the forum. However, if buying at regular intervals, and assuming you had a few to choose from, things to consider would be NTA, dividend yield and 200 day moving average. You are seeking the LIC that is most out of favour in the eyes of the investors, a very fickle crowd indeed. The LIC's fundamentals (management team, past NTA performance, experience, EPS/DPS, MER, investment philosophy etc) should be good as that's why you chose it in the first place.

 

Hi Eryan thanks for the reply. I was referring to LIC's but not sure what difference my questions would make compared to a good individual blue chip stock.

I am trying to understand about the EPS/DPS part particularly. Say in today's value AFI's EPS is 21.3 and it's DPS is 24 cents. Here the outgoings are more than the incomings. My understanding is AFI is big in size and in previous years they would have held a good proportion of income to smooth out dividends or to re invest when opportunity arises. But how about other companies how can they sustain a pro long period of bear or down turn ? In the above instance should I become wary and expect at some stage where the EPS <DPS the dividends would be cut down and Cut down in dividends would take the share price down?

 

There are more qualified people here to answer this question. With respect to LICs having eps > dps is a good sign. It confirms they are currently heading in the right direction rather than using previously earnt funds for dividend smoothing. I feel that the reporting is too much like a marketing brochure as opposed to a research paper. It means you only receive the information the managers want you to know. Danger Will Robinson, Danger.

I'm slowly moving back to the ETF fold. I think there are up and coming young ARG, AFI, MLT, AUIs out there but it's not possible to know which ones to choose.

 

I tend to agree

I am in a situation where I started an accumulation about a year ago but through some restructuring have decided that putting our investments through a Trust is the way to go for us - I have accumulated LICs and ETFs and some have made a modest gain and some have made a great gain (WMI luck more than anything)

Anyway, It means we will need to sell and repurchase in the trust and even though it is frustrating I get to start again in a sense

What this last year has taught me is that my plan of accumulating monthly over the next 20 years seems to have some merit and to not get too worried about ups and downs of market. I feel I wrote a plan but struggled to keep to it and mostly that was being inexperienced and enthusiastic I wanted a piece of everything..

I hold ARG/AFI/MLT/WHF/BKI and I am trying to work out what future role they play for me - for someone who is restarting their portfolio - to me they have not outperformed the benchmark in a long time, do very little if any "active" management of their portfolio and can potentially come with a risk of NTA/CTG/Franking credit alteration that may come

I believe the dividend smoothing effect is a bonus and being able to offer dividends especially in in down markets eg GFC can be a bonus - for me retirement is not for another 20 years or more away.

I feel that in my portfolio 2.0 I will be adding more ETF and less of these older LICs - in the active market it seems to me that FGG/FGX are good exposures to active management and perhaps small to mid cap MIR

To some of the experienced investors, if you had to start again today would you setup your portfolios differently eg ETF (VAS) vs LICs

Any thoughts would be great

PS just a side note, I was in Sydney for the weekend and 3 of my Uber drivers were real estate agents all working part time to get some extra cash, all noted the "cooling off" of Sydney market

 

I hate to say this but with Labor’s franking credit policy in particular a possibility VAS is likely a safer option. LICs will be at a structural disadvantage if the change ever gets legislated. You can always add selected LICs later if desired when more is known. Potentially at a sizable discount should the change happen?

Not advice.

 

With regards to the trust, I assume you realise that Labour may implement a change to charge all trust income at the company tax rate.

Confirm this with your accountant and I might be prudent to move funds into the trust step by step rather than Big Bang.

Re: real estate, we were inspecting a property in the neighborhood on the weekend and the agent said it was a buyer's market. I almost vomited. It's cooled off but calling it a buyer's market is outrageous.

 

First off, I am not an experienced investor. So feel free to disregard anything I have to say.

Putting that aside, if I had to start again, I would choose exactly the same LICs and do almost the same as I have done before. Perhaps, the only thing I would have not have done is buy more investment properties along the way.

The more I think about it, the more I realise that there will be an opportunity should Labour win and should they manage to get anywhere near implementing this legislation. To borrow a @Nodrog phrase, it will be self-cleansing.

I was looking at the performance reports for my shareholdings in 2017 and everything looks golden. No wonder PC was lit up with threads about investing in shares and people could not get enough of it. But like all good things it had to end and a black swan event was always going to happen. If it was not this plan from Shorten, it would be something else. As always, the less committed will fall by the wayside or the truly silly will try and chase the flavour of the month.

In the end, the people who succeed are those who can stick with the program over the VERY long term and course correct slowly and sensibly as an when the evidence presents itself. It is usually investors who panic that get crushed in the equities market. For all its faults, selling a property is such a huge impost, I suspect many investors through gritted teeth manage to hold it for a decade or two and in spite of themselves, manage to do quite well from it.

Shorten will come and go (perhaps he might not – who knows). There will be a recession at some stage, major natural disasters and worse. If we live long enough, there will probably be more GFC type market corrections and this time Australia might not be as lucky as the previous time. Those who can plod along consistently in the rough approximation of what appears to be the sensible path will prosper. But human nature being what it is, many will get distracted by the shinier investment vehicle or completely lose nerve and jump in and out. There might even be a day when LICs are back in vogue!

None of this is to persuade the benefits of LICs vs ETFs or remotely intended to be advice. Make up your mind.

NOT advice.

 

THIS. Brilliant post @orangestreet !

 

As with every change in taxation, you adapt to it. From back in the days when over $50k pa was taxed at 48.5% (a time when you could salary sacrifice the equivalent of your mortgage and your tax home pay as a result varied minimally) through to introduction of GST and a myriad of other bits of legislation passed by Parliament. Work through any alterations, use guidance if necessary, bloody well get on with investing for INCOME and cease worrying too much. You cannot change the events, you can only modify your approach to them. And vote. A very important aspect in my opinion.