Peter Thornhill 2017 #2

Have you completely lost your mind. Stop drinking / smoking whatever!

The whole reason for dividend investing is to remove the fear of volatility. In a crash price drops a lot, dividends drop a little. In fact volatility is your friend in that you can buy more for less. Rebalancing is unnecessary.

Bonds what the ...? Bonds are like annuities in that if it's a rare situation where interest rates are 14% plus (yes I've seen that in my lifetime) then lock that in for a long term duration. Otherwise forget about them.

Look into the bucket approach. Dividend growth assets plus a cash buffer equal to 2 - 5 years living expenses should see you through the most difficult periods.

The Bogleheads are intent on world domination. Already I can see the evil effect of brainwashing inflicted upon you. Don't give in, resist their assault. We can defeat them.

 

Thanks @austing. Needed that cold shower. Why do so many portfolios have bonds? Financial planners trying to get more of the pie, although I don't see how they get their fee income from advising clients to buy bonds.

What about balancing between say international and Australian allocations for example? Are you saying it's not really necessary. I personally have not been doing it, just buying more of what I have less of, but I'm assuming never sell means only sell to rebalance.

 

Bonds are often referred to as a volatility damper as they generally have an inverse relationship to shares. When the value of shares goes down the value of bonds goes up. This is important for those drawing down capital to live off.

However if you're intending to live off dividends and not concerned about the ups and downs of share price then bonds are not needed. A cash buffer is all that's required to top up dividend shortfall in a market crash.

The problem with bonds is that you give up an enormous amount of income by owning them compared to shares especially at this point in history. Bond yields are at historic lows due to central banks action. The 30 - 40 year bull market in bonds is at an end. Going forward as interest rates slowly rise there is likely to be losses especially in mid to longer duration bonds.

At least with cash YOU WON'T LOSE CAPITAL. Plus it the best asset around for liquidity if you need to draw on it quickly for whatever reason. Selling bonds to meet liquidity requirements may result in losses.

Even big names behind the start of the index movement such as Ellis and Malkiel are nowadays saying that investors in traditional bonds are giving up way to much income compared to in the past and suggest higher yielding alternatives including more reliable dividend paying stocks. They refer to what central banks have done as financial repression by pushing down interest rates to such low levels. There's so much debt in the world now raising interest rates back to anywhere near normality is going to be an extremely drawn out process. Just imagine what would happen to new home owners and IP investors with massive loans in Australia if interest rates returned to normal.

And generally if one is going to own bonds then doing this as you near retirement makes more sense if one is concerned about sequencing risk and capital volatility but I still prefer a cash buffer.

Most who are still working rebalance by placing their new investing money in whatever area that needs it to maintain the desired allocation.

In retirement if you do need to draw down capital takes it from the asset class that is doing best. But if dividend income is meeting your needs there is no need to rebalance. If there is surplus dividend income reinvest that in the asset class doing worst if rebalancing is important to you.

But a reminder that I can't offer advice. Others here are bond fanatics. So you will get conflicting views. Mine is obviously just that of an amateur, it may well turn out to be wrong.

 

/contrarian;

It's been a long time since we have had a recession. A market crash is very different from a recession where earnings (as opposed to stock price) are severely impacted. Corporate bonds will pay long after dividends are turned off, and when the worst happens the bond holder has a right to the underlying assets of the business, the shareholder is last in queue. One could argue that 5 years of cash reserves is a large opportunity cost, with no reward for the duration.......some cash and bonds would better serve than cash alone.

One issue with the low yield environment has been bidding up high dividend stocks, the so called yield trade - when the time comes that interest rates rise the high yield stuff will take the biggest hit and will underperform the broader market. Of course it all looks great now, because that hasnt happened yet. Australia is a market that will be negatively affected when that happens.

 

Oh and by the way my "have you completely lost your mind" was a joke in responce to asking about bonds in the Thornhill thread and a follow on from @Redwing's post:

Hopefully you didn't take that comment seriously.

 

I've put put my sell orders in.

Seriously though I was mostly referring to traditional Government bonds as mentioned in the previous post.

But do whatever you need to let you sleep well at night. What's required for my SANF is likely to be very different to yours. The sharemarket has seen recessions / depression before but not for an awful long time. It will be a shock and huge psychological / financial test for many.

Oh and given the current state of traditional bonds there's no guarantee they will work like in the past. I'll take the guaranteed cash option thanks.

As for me, I say bring it on, I'm ready and waiting.

 

Anyhow we're off to the coast for a break so feel free to battle out the shares vs bonds debate whilst I'm gone. Gotta do something to spend those dividends and recession proof the economy.

 

Recession. OMG it's about to hit:
Why we're selling all shares and handing cash back to investors

 

@Gockie hey Linda, was just reading some of the PT posts and I'm wondering if you will still invest in real estate now or mainly the share market? and if so I'm just curious why the swap.

Cheers.

 

I don't like the idea of re-balancing by selling, costs and tax implications are too much of a drag IMO. Re-balancing by using inflows is a more efficient use of what you have, even if it takes a few years to get back to your desired allocations - it is a smoother ride, like DCA vs bulk.

I think PT has a very good understanding of these drags on performance and hence his 50 years criteria for LICs - you don't want to be caught in an LIC/fund/other been closed down and capital gains been realised.

 

On the "never sell" I'm a bit confused about what the options are when you get access to super on retirement?
For example, say I ended up with $1m of LICs in my own name on retirement (ignoring what's happening in super for the moment), and earning about 4% fully franked dividends before tax (=$40,000 of income), then that income will have a marginal tax of 32.5c since it's outside super. The dividend income is thus costing 2.5c (above the 30c) rather than grossing up the rate, meaning around $1,400 due in tax.

Instead, on retirement an obvious option - just before retiring - is to sell as many shares as possible and put as much as legally allowed into super as the income would subsequently be tax free after retirement. Also, the CGT could be lessened through the non-concessional bring forward rule and putting into super. Ignoring the recent limits on super may put paid to some of those plans (if I had that much!). But $1,000,000 in super generating 4% or $40,000 tax free using fully franked dividends would mean a $17,000 refund (wouldn't it?) grossing the return to 5.7%.

Is this correct?
If so, is there any reason not to go down this path near/on retirement transition?

 

I've over-indulged at the coast as per usual. As no one has replied to your post here's my thoughts.

You're taking "never sell" too literally. Many of us may end up selling holdings at some stage. Just make sure it's for a sensible reason and not out of panic when the market crashes.

Assuming you mean a SMSF by Super?

Unless "retiring early" it would be better to have the Shares in Super in the first place to avoid paying CGT later.

You don't have to sell the shares, just "in-specie" transfer them into SMSF as contribution caps allow.

You can potentially reduce CGT if transferring shares into SMSF as a Concessional (not non-Concessional) contribution.

We transferred a lot of our shares from own names into SMSF leading up to retirement. There's still more to be transferred into wife's SMSF account.

A final thought. The best time to transfer shares into a SMSF is when the market tanks as that'll minimise CGT. From 1 July a couple can get $50k CC and $600k NCC (3 yr bring forward) into Super depending on cap limits.

 

I didn't.

 

When you say couple can get $50K CC do you mean each individual can contribute upto $25K from their respective employment income? Or can one spouse use their income to contribute towards the other spouses CC cap of $25K? Say husband contributes $35K from his income and wife contribute $15K from her income to bring the total CC for the couples to $50K.

Cheers,
Oracle.

 

If it is done before 1 July 2017, I thought the NCC limit was $1,080,000 per couple (3 yr bring forward).

 

Post 1 July $25k CC each. The spouse can " spouse split" their CC less contribution tax (usually 15%) to the other spouses accumulation account. Eg husband and wife make $25k CC each. Husband spouse splits 85% (after tax) CC to wife. End result is husband's accumulation account has nil increase but wife's accumulation account increases by 85% of $50k.

It doesn't have to be employment income, it could also be investment income. From 1 July all superannuants can make personal deductible CC's from employment / investment etc income. The 10% rule will no longer apply. And you are not missing out if your employer doesn't allow salary sacrifice Super CC's.

 

Yes. That's why I said from 1 July meaning 1/7/2017 when the new caps apply.

 

Hey @Leo2413,
I went to the Thornhill day in February and it just made sense. And they are low hassle, no tenants, grow over time...
Yes, you can be more active with property but there's plenty of cons too.

And if you get to a point where you only service with the likes of Liberty due to APRA, do you buy that 1 extra IP or do you start to look at shares?.....

 

Fair enough. I guess each person has to assess what's best for them and their situation and then formulate a strategy that they are comfortable with that allows them to continue to move forward towards their goals. You're pretty savvy and on the ball so I'm sure you'll continue to do well.

 

That's good.

But can one spouse salary sacrifice $50K and then do a spouse split of $25K into their accumulation account? I guess the answer is no.

Cheers,
Oracle.