My portfolio. Does this look ok?

I think one of the big secrets to market success is understanding that volatility is not something to be feared. In fact it’s your friend. We retired early in part because of it. That is, events likes the GFC where volatility is through the roof provide rare opportunities to fast track wealth creation.

But learning to deal with volatility is a challenge for the average investor. It scares the hell out of them and is why so many fail as long term investors.

There are different approaches in dealing with volatility. Thornhill’s approach which I’m a fan of has one focus on the income from shares rather than capital as dividends are way less volatile than capital.

Then there’s defensive strategies such as shorting and the use of derivatives etc. Absolute return and market neutral funds fall into this category. Others used a sofisticated risk overlay involving derivatives to minimise downside risk and hence reduce volatility. I think @Alex Straker mentioned something along these lines in an earlier post?

Unlike some investors who take an all or nothing approach such as indexing vs active management I like to have a foot in both camps.

For example I invest in FGX a fund of funds LIC. It’s Portfolio allocation is as follows:

http://www.asx.com.au/asxpdf/20171214/pdf/43q5mzmn7c0cyj.pdf

I’ve received criticism about investing in this LIC based on the typical indexing view that given the number of funds involved index like returns is all than one can hope for at best but more likely underperformance will be the outcome.

But they’re missing one of the key features (bolded) of this fund, preservation of capital, reduced volatilty and importantly a growing stream of fully franked dividends. It will likely underperform in a bull market but reduce downside risk when the market corrects. And importantly it pays a decent dividend. Note the following comment from the latest FGX NTA Report especially about volatility:

That said some analysts have suggested that defensive strategies are best implemented using an “unlisted” fund structure rather than a close end LIC. That is the LIC Mgrs could be doing their job well but investor sentiment could see NTA discount increase thereby negating the downside capital protection strategies.

This won’t happen in an unlisted fund given they always trade at NAV. However I’m prepared to hold this LIC given the dividend and the company structure which allows them to smooth dividend payments. But ideally I do think the unlisted structure is more suited to defensive strategies where “capital protection” is of concern to the investor.

Not advice.

 

Hey Nodrog

You amaze most of us with the depth of your knowledge and desire to help others in imparting that knowledge.

"JLCollins tends to change his mind periodically but his book is quite good."

I was a bit surprised at his 7 year bond experiment that he revealed after 7 years

I particularly like his style and am attracted to the simplicity of his approach. I am very much biased towards an inherently simple approach and am prepared to trade any incremental gain for the ability to not give much thought to a more complex approach these days.

His book is a very good read.

It may be dangerous to take such a simple approach without some underlying knowledge, or not, I am not sure. I have enough of such knowledge to be dangerous to my own wealth, hence the attraction of simplicity for me!!

His video take on the 'Gambler' scene is worth a look - hope the link works. LANGUAGE IS A TOUCH COLOURFUL - WARNING



Mods - sorry about language on title

Best to all

 

LOL. Brilliant, very well done. @Redwing will love that too.

There’s no doubt a simple index approach will do the job for the vast majority. But what would I talk about then.

As mentioned at times we own VAS and VGS. And our older LICs are essentially Index proxies with the benefit of income smoothing and 100% franking. Active mid / Small Cap ASX exposure still provides income plus franking and reduces concentration risk. It’s an anomaly in the world of indexing for the majority of mid / small cap Mgrs to outperform the Index probably due to the high percentage of spec mining rubbish in the ASX. We don’t own Bonds though. Given our capital base we don’t really feel the need for them as a volatility dampener which probably makes me sound hypocritical given my preceding post. But there’s a bit more to FGX than just acting as a volatilty dampener.

The other thing is that as our capital base has grown we feel more comfortable spreading the money around across mgrs. Again it’s just a SANF thing which is unique to each individual.

I’m sure most here would be surprised at how much I read about index investing on sites like Bogleheads, especially the forums. The depth of knowledge there is astounding. I own JLCollins book. It’s a great read and his website has an amazing amount of information and a large following:
jlcollinsnh

 

Frank,
My understanding of Peter Thornhill's approach is that he is much less concerned with the share price and is more interested in the continuing, growing income that a share can offer. I also believe that he doesn't like property because the general notion with property investors is that property is 'safer' than the share market. Now each to his/her own to make your own mind up about this. But..
When you look at it purely from an income perspective you need to compare the return (rental return for property / Dividends for Shares), then take into account the costs (Property - rental vacancies, utilities, property management, insurance, etc. Shares - none). So a rental return of 4% may be reduced to 2% (after costs) but a FF dividend of 3% will return a gross of 4.28%. This is income and what you have available to spend.
The other part of the equation is Capital Growth but you can't spend that. You need to refinance and/or sell in order to make use of this gain that you then need to deploy to increase your asset base. Now thinking that PT is about keeping it simple might help explain his views further with regard to property.
Im still learning myself so happy for others to add to this.

 

See I find it hard to agree with that because it's restrictive. If there is little growth then I am restricted regardless of how much I get paid in dividends assuming I will spend the dividends in full.

This might be wrong but I'm always comparing share growth to property growth and visa versa. If someone says to me 'Frank why don't you buy a house in Brisbane and rent it out' I compare it to 'What if I invested in shares instead'.. If someone says 'Buy $1m in shares' I compare it to a potential scenario with Property. I do this as a way of justifying my choices.

So having said that,

What if you want to cash out on your shares after many years and invest in something else? Surely in this scenario you would have wanted your share price to have grown.

Or lets say that I want to sell all shares and give the money to my kids one day I want them to be able to at least buy a house with the growth from the shares.

I do understand that in his book Peter Thornhill says to not being overly concerned with growth because it will happen and not to dwell on it rather focus on the steady dividends. But still.. I want to see growth


-Frank

 

Frank, I feel that you're tying yourself up without (to my knowledge) of the fundamentals of property vs shares. As many have pointed out, IPs certainly have their costs, and who knows where and when the next market surge is coming for property. There are many great threads in the Where to Buy and Investment Strategy forums if you're looking to incorporate IPs into the mix, however 8 years is a restrictive timeframe if you're needing a debt-free IP in the mix. You would need to be creative with the IPs - timing the market, development, value add etc, and capital is still at risk (every possibility of selling for less than you bought, and if you need funds in an emergency, the whole IP mus be sold, at whatever price).

Shares grow in value, however, the likes of PT etc focus on income to support their SANF. If you're needing some options that specifically target CG, then you could use a core-satellite approach, such as @Nodrog and @pwnitat0r refer to.

Great advice from @Alex Straker and unless you're willing and able to investigate various shares/fund managers and the like, maybe talk with @Alex Straker further about his very informative post. As @Alex Straker mentioned, with $1.2m or so in capital/cash available, is there much CG requried? (ok a little, but not significant in the whole picture).

 

Yes, buying an IP now at 52yo and hoping to sell for CG to retire on is a mistake. Time is against me.. its too hard and I'm too old for that. Hence why I have chosen to invest in shares over property.. I still want to try to get some growth somehow.. The core / satellite approach that has been spoken about might be a good option for me.

I will definitely chat to Alex because I like his opinion and he has the general gist of my situation now.. To be fair he is a financial coach and I don't want to take up too much of his time on here but once the holiday season is over I plan to make an appointment to go and see him for some financial advice

Would this be ok @Alex Straker ?


-Frank

 

IPs are a very active investment (even the passive IPs!), hence why many are moving from IPs to shares etc for the income side - my personal observation.
I like the core-satellite as it has been described here, with some central, stable shares/LICs/ETFs/whatever as a base that's effectively locked away (apart from adding to them when opportunities arise), then for satellite options that are managed in liasion with someone knowledgeable about the why's and purpose of including these satellite options in the mix.

 

Great idea. It’s becoming clear that a good advisor will be very helpful in your situation.

 

I think the issue at hand is whether market neutral or absolute return funds even work, accounting for tax, costs and risk. Wazza had a 10 year bet about this recently didn’t he?

I don’t think that these hedge fund type products focusing on low beta outcomes is a revelation to anybody, they need to as alpha is hard to come by.

FGX may well surprise on the upside, regardless Mr Wilson will find a way to spin it...low vol, low correlation ...it’s a charity! Etc.

 

The extra performance one receives from these funds is in part higher equity risk premium from small / micro cap, compensation for very significant key man risk (EGP and Castlereagh are basically one man bands, the latter is a part time job!) and stock concentration risk.

I think the lay person has difficulty with performance attribution...pick a few that survive, create back story/criteria to fit, voila we have a recipe for ongoing outperformance!

I’ve followed a few of these guys that have copied the early Buffett partnership remuneration model, while it sounds fair and logical I can see some issues given that most aren’t Buffett, and the increased likelihood of higher risk appetite from managers in order to hit performance hurdle given there is zero income to keep the ship afloat otherwise.

Regardless, we each have our own appetites...horses for courses. Having said all that I believe that Small Cap + value are genuine sources of Alpha that should be persistent and that your approach is one way to access that.

 

Probably not. But just like craft beer I like the variety. And hey I’m a charitable person, well seems like a good excuse if Performance is crap. As I said in an earlier post somewhere I tend to be like a collector when it comes to investing nowadays. Some like to collect cars and whatever. I love to collect income producing assets. And like many collectors I like to have a few unusual things in our collection rather than continuing to buy more and more index / index proxy type product. FGX / G fall under that category.

Then again perhaps due to the love of craft beer there are so few little grey cells left that I can’t tell good from bad anymore.

And as for you you naughty boy galavanting around NY (one of the most expensive places in the world) at Xmas of all times at least our FGX / G produces income rather than consumes it. Hope you’re enjoying the warm weather there.

Happy new year mate.

 

@Nodrog $30k in 12 days...yeowwwcch.

Given you are interested in reducing volatility/correlation I’ll shoot you some thoughts

 

Hi Frank,

Happy New Year. I do hope that this year brings the answers that you are seeking and can invest your capital with the confidence you are trying to build.

This has been an informative thread and in your last post you have raised a number of different goals i.e. regular increasing income from shares, increasing capital growth, legacy issues, etc. Wouldn't it be great to have it all? I also have great respect that you are also looking out for your kids. The figuring our of the 'why?' or the 'what do I want this investment to do for me?' question is the first step. If you want Income and Capital Growth equally then either split your capital into halves and invest differently which each of the goals in mind. The other approach would be to accept a level of compromise and target good solid performers that are likely to provide reasonable Capital and Income growth.

Also with Peter Thornhill, I understand that 'yes' he owns the property in which he lives but that is not his preference. He would prefer to rent long-term i.e. 5-10years (something akin to the leases in Europe) but bought as he didn't want to face the possibility of moving at the end of the lease or at the landlord's discretion. He would have preferred to have invested that money in the share market.

When comparing property with shares please also remember the costs associated with buying and selling property, the lack of liquidity with property and the fact that property does generally rise but there are markets within markets and property can lay dormant for many years where there is no CG. If you have no CG in the period of ownership then all you have is rental income which is then reduced but the ongoing costs of ownership. This is why Peter Thronhill advocates renting and saving the difference to invest in income producing assets

 

Happy New Year @Il Falco!

 

Probably again more the variety and something very different to the rest. And another excuse to own it. See there’s two now the charity thing and low volatility if it underperformances. Truth be told as you know we’re pretty volatility hardened so not much to fear there. In fact just the opposite.

Yep always look forward to your thoughts so please shoot then my way. But you’re not going to go James Bond on me are you?

 

@Frank Manno sure mate, good to meet you and would be great to catch up and discuss all this properly. PM me contact details if you like and we can go from there.

 

Cheers Anne, likewise. Still about 7hrs to 2018 here

 

Frank you said you wanted a growing income stream. A near once in a generation event (GFC) has made 10 year performance look ordinary. Another year or so then the 10 year performance will look great. Such is the nature of selective time periods.

And you have to be really, really unlucky to have lump summed all your cash just at the market crash before the GFC hit. I did know one person who did this unfortunately. It’s also why I’m not a fan of lump sum investing. Admitadly you’ve got to be unlucky but I prefer safety first.

As posted by @willy1111 the following ain’t too bad a result for someone wanting to live off income in retirement:

AUI:


Not advice, but something more designed to confuse even further.

 

Happy New Year. Commenting that the NY's fireworks haven't gone off yet is calling for some piccies! (from the second best fireworks display.....)