Ideal Passive Income Portfolio for Retirement - advice from forum experts

I know it can be very overwhelming at times when people are using all sorts of buzzwords which you do not fully understand. Let me assure you both LIC and index fund/ETF investing is very simple investing strategy and best part is it is truely passive. You do not have to monitor or manage it but it keeps giving you good returns. As the economy and prosperity of a country grows due to the collective efforts of humans through their hard work and intelligence the businesses that are either run by or employed by those people become more profitable which causes the share market to rise over time.

When you buy an index fund you are basically buying basket of stocks through that one fund. The number of stocks and amount of each stock purchased depends on the type of index the fund follows. For example Vanguard Australian Share Index ETF tracks the S&P ASX300 index. That means it will buy the top 300 companies on the Australian stock exchange in proportions to their market weight. So if CBA has market weight of 8% and BHP 5% and Wesfarmers (coles, bunnings) 4% then for every $100 you invest $8 is invested in CBA shares, $5 is invested in BHP shares and $4 is invested in Wesfarmers shares and so forth.

The beauty of index strategy is addition, removal change in weightage in the index is automatically done by the index fund. So it is self cleansing where new profitable companies replace old unprofitable companies over time. Hence, the top 300 companies can keep changing with time and those changes are automatically reflected through your investment in index fund.

Old school LIC are very much like index fund in the sense that they invest in same companies that index fund invests in but they make minor changes depending on whether they like a particular company more than another company. Overall, the differences are minor and returns from both are very similar over the long term. The other difference is they operate through company structure which allows them to smooth dividends thereby giving more certainty on future income to expect.

I would strongly recommend you have a look at Peter Thornhill's YouTube videos and buy his book Motivated Money and if possible attend his seminar. @Gockie can advise you when the next seminar is.

It can take some change in mindset to start appreciating the benefits of investing in shares through a diversified portfolio. But that change can only happen through knowledge which unfortunately, you will have to put in the effort to gain.

Good luck.

Cheers,
Oracle.

 

Yes, I'm here.

Light reading! My head is spinning.

Thankyou.....see....layman's terms. Phew!

I thought Peter Thornhill was one of these Guru's that taught you to invest in individual shares & trading....you know, complicated stuff. I will buy his book for some not-so-light reading on my next holiday (next month). I'm hoping it's not too dry.....I've bought shares books before & given up, as the writers have put me to sleep.

 

@skater here is Thornhill’s approach in a nutshell thanks to a now famous summary by @Pier1:

1. Have a plan and never take your eye of it,
2. Spend less than you earn,
3. Borrow less than you can afford,
4. Select your LIC/s of choice, some conservative LICs with a proven track record and low fees which have been around a long time include (many decades in most cases):
... a. Australian Foundation Investment Company (AFI)
... b. ARGO Investments (ARG)
... c. MILTON Corporation (MLT)
... d. BKI Investment Company (BKI)
... e. Whitefield (WHF)
5. Buy what you can when you can,
6. Reinvest all the dividends,
7. Pin the ears back buying when the market collapses,
8. Never sell.

Not advice.

 

For those who retired pre-Super, interested to know how you built asset base to generate income i.e.
1. Regular ongoing share investing from outset
2. Invest in property to build base, then move equity (or sell down) in to shares
3. Combination of above
4. Business interests
5. Other

 

Well they will be ok if the listen to Mr. Larimore. Going straight to Messrs Swedroe, Ferri et al then they will be lost! You need the basics first before you start on sharpe ratios, SD etc.

 

Fantastic post.

@oracle mentioned LICs able to smooth dividends. I think one of the best reasons why some of us favour LICs over local Index Funds is summed up nicely by @SatayKing quoted below. Satayking and I were very early investors in what I think was the first index ETF in Australia and still one of the largest and most popular ETFs. That is STW.

@SatayKing said:

Of course one can maintain a larger cash buffer to do your own income smoothing of Index ETF distributions but for the simple set and forget investor the older LICs with dividend smoothing just make life easier and reduce the risk of large cuts to dividend income when nasty market events occur. For example when the GFC hit the LICs in some cases didn’t cut dividends at all (unlike the index funds) and some others cut much less and / or for a shorter duration. So owning a few LICs when in troubled times can give that extra level of security and peace of mind.

 

I have retired with Super and I have:
1. Invested in shares and managed funds using cash via a SMSF to create CG and generate (retirement) income.
2. Invested in resi property using debt and minimal cash via trusts and personal names to create mainly CG and generate some income (but is NG).
4. Owned businesses as cash cows to generate lots of cash to fund Items 1 and 2 above.

The above approach is simple to understand but is not that simple to employ but I know it works.

 

6. Marry a younger woman.

 

I did and a high income earner (eventually) at that. But may not be suitable as a rule for the average investor. However I’ll check with the summary guru @Pier1.

 

In my experience, that is a great strategy to reduce one’s asset base!!!

 

There is another book, similar to MM, written by a financial planner from north Sydney. All I can remember is 'simple money' and I recall it has a man's face on the front cover??

If someone can remind me of the name, I found this book slightly lighter reading but still along the same lines as MM (had a slight slant of investing through SMSF). Possibly start with this one, then onto MM if you feel you need a gentle ease in.

 

Using the wrong selection criteria there!

 

Should I keep trying until I find the right one?

 

This is really a cash management issue though surely. If some want to outsource those decisions then no issues at all, but whether it’s an advantage is in the eyes of the beerholder

 

Now that could become expensive.... athough with these passive shares not giving you too much to occupy your time with...

 

Slightly different point. Is there an award for the fastest growing thread?? I expect this one to be in this week's top 10 threads that I get emailed each week. @sash you still there? What've you started... (and grown )

 

Sure is but not all investors are as disciplined as you and I when it comes to cash management. It’s another safeguard for many investors who are less disciplined etc. And as a result of the GFC there were a hell of a lot of retirees who got into trouble for not following such simple rules.

Wisdom comes with age in regard to beer. Probably the opposite when it comes to investing.

 

This implies requiring a capital asset base to generate income..... but this is not the only way.

Some may argue what I'm about to say as semantics but it's not. For example, income can be derived from IP - intellectual property (some will argue this is a Business Interest). IP may be a book, a patent, training material, a licensed process/system of work, an App, product endorsements etc.... The asset base in this case in not what most intuitively assiciate with "business interest".

Hypothetically, a retirement or semi-retirement passive income might be a combination of:
1. Licensed IP &/or Royalties
2. Trailing benefits/commissions
3. Defined Benefits
4. Property investment
5. Shares
6. Business interests

Not every passive income stream requires a monetised asset base. This simple shift in thinking is practically incomprehensible to the sheeple in my experience.

 

Sounds like my approach with IP's

1. Have a plan and never take your eye of it, Yep!
2. Spend less than you earn, Yep
3. Borrow less than you can afford, Yep
4. Select your IPs of choice, some PM's with a proven track record and low fees which have been around a long time
5. Buy what you can when you can, Yep
6. Reinvest all the dividends, Yep
7. Pin the ears back buying when the market collapses, Yep
8. Never sell. No, don't agree with that one, but hold on until the investment is ripe, then decide whether or not to sell.

 

Depends on one’s definition of “PASSIVE” I suppose.