LIC & LIT Listed Investment Companies (LICs) in 2017

@Tink I think you would enjoy @Snowball’s site:

Strong Money Australia - BUILDING FINANCIAL STRENGTH AND A LIFE OF FREEDOM

 

Thanks for the information. I don't think you are upsetting anyone with your comments. Every good analysis requires a contraction view and you are clearly very knowledgeable in this field.

I am trying to follow the KISS principal for my investing - trying to maximise my return while minimising my effort. Because I don't intend on selling the only question I need to answer is when and what to buy.

In the Australian market there are only a few small cap LICs that I'd consider, one of those being MIR. As @Nodrog mentioned, randomly choosing small caps is riskier than large caps so actively managed LICs are preferred over cap weighted ETFs. MIR has reached a level that it hasn't seen in a long time in terms of both absolute and NTA. The market appears overcooked a little at the moment, particularly the USA, but I need to keep buying as I have no idea what will happen tomorrow - it may crash, or it may jump another few percent.

That is pretty much my reasoning for saying it would be a buy for me now. I understand that a more indepth analysis could point to keeping the cash, but I want to keep it simple.

 

I want to retire early MMM style - Mr. Money Mustache

The first issue is the wish to live frugally for reasons including: fair use of planet resources, reducing natural craving for worldly things, retiring as early as possible; whilst still enjoying my life as I like to travel, drink good wine and eat good food. This dichotomy plays on my mind.

In terms of a specific figure, I have done back of beer coaster calculations. I can't really retire until my children finish school, but once they do I will work out a number and a detailed plan.

LICs, ETFs and IPs are the investments that I will use to fund my retirement until super becomes available to top it up.

I may end up selling IPs at lower CGT rates once I reach a lower income level as they are a pain to manage and are not always as profitable as the property investors say: "I bought in 2015 for $500k and sold a year later for $700k, easiest $200k I ever made".....but what about real estate agent fees, conveyancing, rental fees, maintenance costs and then the final killer, CGT.

LICs are the biggest percentage of my Australian portfolio and internationally I have a similar weighting of LICs and ETFs. The Australian LICs generally pay fully franked dividends, which means a 4% yield grosses up to 5.7%. Based on that, $1 million in the right LICs will give you $57k per year.

For many reasons explained previously in this thread, one can't just buy $1 million dollars of ARG and then sit back with SANF thinking you will be getting $50k a year indexed for life, but using a core satellite approach with appropriate diversification using ETFs and LICs the yield will be lower but not significantly so.

Final point, in the event of a massive market correction I will be taking out large loans and buying LICs and ETFs. Once the market increases I will definitely have reached my financial goals.

 

Ditto, a variety of comments brings substance to the forums and increases knowledge for all.

 

Yeah and even held long term IPs are not as great as many think. Property investors get excited about capital / plant & equip deductions along the way but will feel the pain when selling due to the reduction in the cost base.

The usual story especially from younger folk is that “hey CGT no problem as I will never sell”. But as time goes by and one ages the hassles associated with property ownership starts to get to you. It’s definately not a passive investment. Then as desired retirement approaches it becomes clear how poor the cash flow is from IPs. So the “I will never sell” becomes “I can’t wait to get rid of them”. But alas it can’t be done quickly given the lumpy nature of IP and CGT consequences.

This is a generalisation of course and doesn’t apply to everyone. But for many the preceding will be the reality.

 

Actually, I didn't have a goal of $xxx amount in retirement. First because I had no idea when I would retire and, second, I didn't know how much I would be able to accumulate.

The only thing in my favour from a personal aspect is a relatively frugal life, used cars, inexpensive but fun holidays, and the luck of having what one person called a strong financial discipline (I shopped at Target while others shopped at DJ's; now I can shop at DJ's while others are forced to shop at Target.) Attitude does have an impact I think. And time. With me it's been those two factors plus a good employment income and pure dumb luck in the market.

Even now my cost of living, if I eliminate all the frivolities I can afford, is $32,000 a year as a single person and even that I can par back if I needed to. And the cash buffer is well above covering that cost for a number of years. The rest of my funds which are surplus are either held in reserve or drip fed into the market - mostly according to my gut feeling as opposed to any analysis (which sounds like hard work which I avoid nowadays.)

 

With @dunno it’s my fault. I truely am very sorry for inadvertently stifling more advanced discussion of LICs. I get carried away at times in trying to encourage simplicity for the average time poor investor. I don’t want the average investor to be scared off from these wonderful assets thinking it’s too complicated. But I go too far at times although I don’t realise till later.

The irony is I get a great deal of pleasure from learning about the more complex aspects of LICs even though I tend to keep things simple. I’ve been a huge fan of LICs for decades. Tragic I know but hey there’s worse things to get excited about.

What @dunno was getting at upon re-reading his recent posts more thoroughly is that armed with an understanding of post tax NTA especially in the circumstance he described investors would know what a magnificent buying opportunity they were looking at. This wouldn’t have been obvious if using the more widely accepted Pre-tax NTA figure.

And it doesn’t have to be all or nothing. The average investor can continue to DCA into LICs but keep some dry powder (cash and / or LOC) for these infrequent opportunities when they arise.

Getting the more popular LICs at Post-Tax NTA, especially those with LIC CG Status which generally have significant unrealised capital gains, is of course very desirable for all LIC investors but opportunities tend to be infrequent and rare in some cases. But as @dunno highlighted this does happen and those armed with the knowledge he shared will know what to look for.

And even more ironic is that I just looked at my Share history spreadsheet. My two largest purchases of MIR during the GFC were 18/12/2008 and 11/03/2009. Out of curiosity I looked back at @dunno’s chart re-posted below. I’d like to think it was good management but unfortunately not. It was from nothing more than having a brief look at the long term chart and averaging in combined with a good dose of luck. Armed with @dunno’s information next time I’ll be better informed and a perhaps little greedier:



Hopefully @dunno will continue to post.

 

Similar. Didn’t ever have a particular date / amount in mind. I retired early to move around whilst my wife pursued her career. She retired early when the long hours started to impact her health.

Again similar. Plus having a partner with a strong saving mentality similar to myself helped. Always made do with a single car.

Never had any idea what retirement savings we’d end up with. Started with pretty much nothing then just kept saving over the years and got lucky being cashed up at times when the market entered gloomy periods. And was prepared to endure the discomfort of buying when most others were heading for the hills. Like many others we were surprised at just how powerful compounding can be. Smaller amounts with income reinvested become large amounts if given the time.

Can’t say our cost of living is low nowadays. We live quite well and are happy to enjoy the rewards of years of saving. That said, saving is in our blood so we continue to reinvest a sizable part of our investment income. I love accumulating more income producing shares. A collector I suppose. Some collect cars, stamps, wine or whatever. I however love to collect shares. I’m a shopaholic when it comes to Shares.

A generous cash buffer is crucial for our SANF. I don’t want to have to sell off part of our collection due to lack of liquidity when market mayhem occurs.

Buying nowadays is more opportunistic rather than DCA but when cash holdings get too high I will also do some periodic buying when reminded by SPPs etc.

So remarkably similar to @SatayKing in lots of ways. But that’s not surprising given his and other’s influence on me over the years.

 

Thanks, Nodrog - you have done a far better job of explaining what I was on about then I did.

I like numbers and figure a lot of the world out for myself via them, but words are not so much my strong point and I seem to complicate for others when I try and explain what I think are simple concepts.

A LIC strategy (near passive strategy) is simple - It’s a bit like an elegant formula is simple to implement - but the proof is complex.

I’m probably guilty of trying to provide some of the proof behind the simple strategy – when faith is all that is needed for it to be really simple.

Trouble is I’m more a science thinker than a faith thinker.

I’ll try though, to keep messages simpler.

ps
how do you link to a person's name like you have done in your post?

 

To link a person’s name just prefix with “@“.

Mate thanks so much for your understanding. I did feel quite bad.

Funny in that I’m pretty hopeless with numbers / science and as for words most around me including my wife would be much happier if there were a lot less of them spoken.

I suppose there is quite a lot of blind faith in what I do. I tended to seek out role models, typically older wealthy retirees, then try to find out how they did it. I focus on the the big picture and concepts involved. Likely this is because of my weakness and lack of motivation in dealing with numbers. I choose to outsource the hard stuff as cost effectively as possible hence why I like LICs / ETFs etc.

But I’d really like to understand company reports, P&L and balance sheets a lot better than I do particularly for LICs rather than direct companies which I don’t invest in anymore. I have a very basic understanding but it’s the occasional fine print and connections that I struggle with at times. It’s probably why I also like pictures such as a long term chart and some basic indicators. It puts it all into perspective and there’s no need to even look at NTA to know the LIC is a screaming buying opportunity. The picture says it all.

So in a nutshell my approach is severely lacking when it comes to science. Hence why I need posters like you here to help fill the void.

 

How do you decide the percentage of each LIC one is holding?

1.Do you decide based on which LIC gives what % of divi?

2. Based on overall performance ?(past performance is no indication of future performance)

3. Based on the fees?

4. Please provide how do you decide?


There was a post mentioning saving/investing $52K pa in LIC's. I am 33 and have young family, this thread of PC has opened up a new door (lic) for me other than direct shares and I have taken baby steps by sellng some of my direct shares (sold on good $ due to market is flying high) and bought LIC's. But I don't think I can afford to buy LIC's for $50K pa-Does this mean LIC's are not suitable for small investors?
( someone has $1Million in one LICs and receiving $40K pa income (divi) compared to someone like me who might have approx $15-$20K in 5 LIC's (no ETFs yet) as I have just started my LIC journey and seems like reaching $100K in each LIC is hard in next 20 years (due to everyday expenses etc. Buy stuff in Kmart and Aldi) then $ 1 million in LICs is like a dream.

Me and my wife both are good savers and I am an optimistic but I am also realistic because as we all know we need to have some cash as a buffer for rainy day, soon kids study etc. Hence my question :if LIC investing is more suitable for rich investor!?

Hi @Nodrog (A*****G),

Could you please explain bit more on your following comment(I have made the lines Bold as we do have IPs) or direct me to any link where I can get better understanding:-

"Yeah and even held long term IPs are not as great as many think. Property investors get excited about capital / plant & equip deductions along the way but will feel the pain when selling due to the reduction in the cost base.

The usual story especially from younger folk is that “hey CGT no problem as I will never sell”. But as time goes by and one ages the hassles associated with property ownership starts to get to you. It’s definately not a passive investment. Then as desired retirement approaches it becomes clear how poor the cash flow is from IPs. So the “I will never sell” becomes “I can’t wait to get rid of them”. But alas it can’t be done quickly given the lumpy nature of IP and CGT consequences.

This is a generalisation of course and doesn’t apply to everyone. But for many the preceding will be the reality."

Rgds

 

Depreciation schedules aren't a free ride, when you claim $'s your cost base is reduced by the same amount.

i.e. Purchase property for $500,000, claimed $50,000 deductions and sell for $600,000 you pay CGT on a profit of $150,000.

Many here aren't rich or on high incomes, I am a similar age and have a young family too, my partner isn't much of a saver . I believe the common thread is an appreciation of long term-ism and compounding returns.

It can be hard seeing where you are and where you want to be, there are many tactics discussed here to help with the psychology of this and what works best for you will depend of how your brain works. Such as;
- Have a target income p.a., with each purchase you mark yourself that much closer
- Work out a number of each LIC/ETF you would like, each purchase brings you closer.
- Break it down further, write down your desired income, favourite LICs and work out the units of each for one weeks income (never changes). Purchase in lots of a "weeks income for life".
- Totally ignore keeping track, invest when your savings get to 5k and see where you are in 20 years or so

Remember as dividends build over time it all gets easier.

 

Thanks @Hodor for the details. In the sbove statement do you mean buy every month using 1 week pay or keep saving 1 week's pay untill it reaches $5K and then buy?

Remaining question-how do you decide the number of shares for each LIC or ETF to buy-doea NTA dictates in rwlation to LICs ..?

Usually VAS and VGS are the most popular ETF's among investors and they are flying high-I may get into etfs once the crash happens (no one knows when is that).

But I need to know but more about theae as I believe at tax time tgere are different ways to do the calculations for etfs or lics.

Fyi:my wife is a good saver but she is not into share investing 100%

 

To answer your questions..... LICs are PERFECT for small investors!! You can start with as little as $500 and get a positive cash flow immediately (you’ll have to wait 6mths).

Deprecation on property reduces the cost base of the building on paper meaning a large CGT event when selling the property.

Some countries are now reducing (removing completely) deprecation percentage rates on buildings ….it won’t be long before Australia heads down this path as well. When that happens watch the heat fall out of the property sector!

Properties are brilliant wealth accumulators. I purchased my first one at 18 and they are now freehold so should produce a nice passive income. I’m NOT getting quite the income I had intended from them. Investment properties are NOT good retirement income investments! Costs include management fees, strata fees, building insurance, landlord insurance, council rates, water rates, repairs and maintenance and loss of rent due to vacancies. My maintenance costs include 2 updated bathrooms, 2 updated kitchens, 3 sets of carpet the list goes on…. These costs put a huge dent in my cash flow. My share portfolio which produces a similar income does not have any of these costs or hassles!

 

Thanks @unwillingwillis for throwing light on various ongoing expenses of IP and cash flow issue (post retirement).

Further on deprecation on property, just want to confirm: We purchased an IP last year just over $400K (including stamp duty etc) and then got depreciation report from BMT that has a schedule for 40 years.

So if I will sell the property after 5 or 10 years for $800K then I will be paying CG tax on $400K + whatever the depreciation amount of those 5 or 10 years- am I correct?

 

The two points you quoted are two ends of the tracking things scale and were to be read separately, I think I confused you there sorry.

The second one you have a savings account and as soon as it hits $5k you buy a parcel of shares, you don't worry if it takes you 1 month or 12 months to save that $5k, you just invest when you have that $5k. This is similar to what I do.

The first one you can look at each LIC you like and it's current dividend along with your desired income, say $52k p.a.($1k per week) for simplicity and we will ignore franking credits (if you get $52k dividends then the franking credits left over assuming no other income will be a nice refund or offset unfranked foreign income).
I'll break this down for AFI based on 2016 as it's what I have handy;
$0.24 dividend per share, so for $1k in dividends I need 4,166 shares of AFI @ $6.24 each, so you save (about $25k) and buy your 4,166 - one weeks income for life. Quite a lot of money for someone like me to save, I don't wait until I have $25k saved up to invest. Still that is one week you never need to work ever again as the dividends will cover that weeks income, or while you are still working they will go to work buying you another weeks income for life. What's more is that the dividends have traditionally increased faster than inflation so your quality of living should actually increase or surprise yourself with an early retirement.
This method probably is less useful for most, I like numbers and occasionally have free time at work so this is how I keep myself sane or convince myself or my sanity

If you have some IPs to convert to LICs you might be surprised with how many weeks you can "buy" in one hit.

I don't put a whole lot of thought into which LIC I buy, I have a list of LICs I am interested in. I loosely have an idea of NTAs, 52 week high and lows and what weightings I want in my portfolio so when I am ready you buy I just go with what feels right.

Everything could also go pear shape and these LIC things turn out to be donkey's, DYOR

 

I'm not an expert on selling IPs! I still own the first one I purchased at 18 years old. I'm not retired by the way I'm 41yrs old...sometimes I feel a lot older...
I also have a young family with two children so saving can be difficult at times but every cent saved is a small step closer to my short/long term goals.

To answer your question, with my limited knowledge. You would pay CGT of 50% of the difference of the book value and the selling price (less costs). Obviously this income bubble would put you into the top tax bracket for the year of the sale.

 

@Hodor , great example thanks for that.

Currently I am holding -WHF (also took part in spp once), BKI, MLT,AFI and ARG (I think I have selected DRP for majority of my LiCs) and few direct shares. MiR is also talk of the town here.

With the right time may buy ETFs as well.

Overall I think, I like your style of investing in $5K parcels as it is achieavable compared to buying in big amount.

At oresent we have been saving and putting in offset account but with new year this be a new way of investing .

I like the DYOR tag

 

Thanks @unwillingwillis -I will confirm with my accountant too but no plan of selling at this stage.

 

The first one you can look at each LIC you like and it's current dividend along with your desired income, say $52k p.a.($1k per week) for simplicity and we will ignore franking credits (if you get $52k dividends then the franking credits left over assuming no other income will be a nice refund or offset unfranked foreign income).
I'll break this down for AFI based on 2016 as it's what I have handy;
$0.24 dividend per share, so for $1k in dividends I need 4,166 shares of AFI @ $6.24 each, so you save (about $25k) and buy your 4,166 - one weeks income for life. Quite a lot of money for someone like me to save, I don't wait until I have $25k saved up to invest. Still that is one week you never need to work ever again as the dividends will cover that weeks income, or while you are still working they will go to work buying you another weeks income for life. What's more is that the dividends have traditionally increased faster than inflation so your quality of living should actually increase or surprise yourself with an early retirement.
This method probably is less useful for most, I like numbers and occasionally have free time at work so this is how I keep myself sane or convince myself or my sanity



Great post!

Shouldn't leave out the franking credits Hodor! I gross all of my dividends up! When my wife and I retire our tax rate will drop. In fact 37k each is only taxed at an effective rate of 9.65%. 37k (me) plus 37k (my wife) $74,000 at only 9.65% tax. That’s my long term goal. Shorter term goal is to get our GROSS dividend income to 18k each as that’s 36k tax free when we retire. Gross up everything!!