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Question for Austing and Falcon

Discussion in 'Other Asset Classes' started by scoobie27, 13th May, 2016.

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  1. scoobie27

    scoobie27 Member

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    Firstly, I would like to say thanks to Austing, Falcon, Radson and many others for your contributions. I have learned so much and thanks to you guys and Peter Thornhill i have nearly overcome most of my fears and am now nearly fully invested, with all my spare cash in WBC, VAS, VHY, AFI, ARG, MLT, BKI and finally QVE (bought that today :)). I have always owned some shares, but in such small amounts that it made no difference whether i owned any or not.

    But i still have an issue that i don't think have been addressed yet in these threads. By buying just one LIC such as ARG, I would be very well diversified. I could just own one LIC such as ARG, and keep increasing my stake whenever i have cash to invest, and i would be fine, because ARG is basically a proxy of VAS. However i have spread my funds among all the great LICs plus VAS and VHY above to minimise another risk. It is the risk of one of these LICs going bust. The chance of that happening is very minute but is still a possibility. I also call it the Bernie Madoff risk. So with so many LICs that risk is taken care of :)

    But there is still one risk i am still worried about. The risk that Australia could become another Greece or Japan. If that happens, i feel that even the ever reliable dividends of these great LICs like AFI may be threatened. Or god forbid drop by 60 :eek:%. Even being well diversified with my holdings above won't help as they are all Aussie market.

    I could invest half my funds in the US or world ETFs. But like Austing i favor the Australian market because of it attractive dividends.

    So Austing, I was wondering if you have thought about this scenario as well. I ask because i believe you are also mostly invested in the Australian market? I am talking worst case scenario here, where we become a basket case like Greece. What would you do to protect from that?

    Thanks in advance and all responses are most welcome :)
     
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  2. Hodor

    Hodor Well-Known Member

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    No one knows the future. There are quite a few differences between Australia and Japan so I don't expect the same thing to happen here, especially for the same reasons.

    I built a similar portfolio but with VGS, MFF and PMC for international exposure. PMC has a really nice div and is fully franked, there is a large premium over NTA however.

    Someone else can confirm, but my understanding is if an LIC went bust then the assets (shares) would be sold off and proceeds returned to the investors.
     
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  3. willair

    willair Well-Known Member Premium Member

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    This is a simple quote from a book i have read..
    No matter how sophisticated our choices,how good we are at dominating the odds,randomness will have the last word,good luck with your new investments..
     
  4. austing

    austing Well-Known Member

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    @scoobie27,

    This is why I keep repeating the importance of being comfortable with any investment strategy. No matter how great it might be if it doesn't pass the SANF for an individual then it is likely to fail.

    There are arguments for and against International share diversification. However do property investors worry about owning all their IPs in Australia? Rest assured if Oz gets into a hell of a mess then IPs won't fair any better than the sharemarket in general. Some will no doubt throw up the argument that people have to live somewhere. Yes, but life still has to go on. Banks, supermarkets, telecommunications, gas, electricity etc etc will still be needed. God forbid if all these listed companies go under. In such a horrendous situation your investments will be the last thing you're worried about and your property will be worthless. Others won't buy it from you, they will just take it unless you're well armed.

    Regardless of whether it's valid or not I do however share a little of your concern even though I feel the risk of a Japan / Greece situation happening here is very remote. Hence for peace of mind I like to have have some unhedged International exposure as "insurance". And yes I'm potentially sacrificing some dividend income as a result. If I had a less nervous disposition I would just do as Thornhill does and stick to local shares. But I come back to the need to tailor a strategy to fit your risk profile and psychological makeup thus allowing one to sleep well at night.

    Not advice.
     
    Last edited: 13th May, 2016
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  5. scoobie27

    scoobie27 Member

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    Thank for your input all. Apart for the Greece, Japan scenario, i am not really too worried. Even if we had another GFC type scenario happen, that would not worry me at all. In fact having learned what i have in these forums from Austing and Falcon and from Thornhill, i would seriously welcome it and use that opportunity to plunge more money in from my LOC facility or drawdown any available equity.

    For me the Greece situation is my last hurdle that has given me something to stress about, although i do admit it is very very very remote. Australia's economy is nothing like Greece's. My SANF is very good considering i have nearly all my cash invested in the Aussie market. This time last year i would not be able to sleep even if I have only 10% of what i put in now.

    Austing, very interesting to hear that Thornhill only sticks to Australian shares. I did not realise his portfolio is so concentrated in the Australian market. It is reassuring to know that he has so much faith in the Australian market. I think i just repeated myself for emphasis :) Again, maybe my fear is blown out of proportion. If I did go to the talk he is giving soon at the university, this is what i would ask him if the opportunity for questions arose.

    Anyway i see the MCSI Greece ETF is still yielding 1.54% so it is not all doom and gloom. Plus i think i might slowly start to buy into PMC and VGS. My original plan in US investing was to buy the VTI index (vanguard total stock market index). That is as solid as it gets.

    Hmm maybe i should not be too greedy for dividends and buy VGS and PMC with the rest of my funds. And that would be it until i save up more money or reinvest the dividends. That would be organic growth. LOC only to be used for once in a lifetime GFC type situations.
     
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  6. austing

    austing Well-Known Member

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    @scoobie27,

    To be precise I think Thornhill still owns some UK LICs. However this is purely a matter of circumstance from when he worked in the UK during his early years. I assume if he had always lived in Australia it would likely be 100% local shares.

    As for you feeling reassured that Thornhill sticks to local shares is not the important issue. It doesn't matter what Thornhill or anyone else does if you continue to worry about having all your shares in Australia. However experience, knowledge and conviction in the sharemarket will overtime help determine the eventual strategy that is the right fit for each individual.

    It appears that you, like me, find Thornhill's dividend income approach a fantastic way to invest in the sharemarket. But that doesn't mean you have to go the full hog if it worries you all the time especially at the beginning. However do bear in mind that your ability to deal with risk and fear etc can improve with time and experience just like people overcoming any other fear in life such as public speaking etc.

    If owning some International shares makes one feel more comfortable then it's probably best to do so. Take me for example, everyone here would know by now my love of the dividend income approach. But that hasn't stopped me investing internationally regardless of its merit for a bit extra peace of mind.

    And in terms of income, International exposure doesn't mean you can't have a decent outcome. For example, you mentioned VGS and PMC. From memory PMC's dividend is currently around 6.4% ff and the VGS distribution around 2.2%. Hence as International shares go the combined yield of these two is still worthwhile. Better than cash that offers minimal long term growth and better than the current NET yield many IP investors are getting. More important is how much better is your SANF as a result of being diversified here and overseas?

    If you want to invest overseas for SANF but the lack of income concerns you there is another way of looking at it. A popular theme that has been pushed for sometime is "AUSTRALIA FOR INCOME, INTERNATIONAL FOR GROWTH". Note that for a genuine dividend to grow the companies earnings must grow. Just pulling rough figures from my head here but say the current yield of VAS is 5% and VGS is 2.2%. If one believes overseas growth will be much greater than Australia over the next 10 years then based on your initial investment the future yield could for example be 9% for VAS and 10% for VGS. That is, overtime your International shares could be yielding more than your local shares based on the initial investment.

    Then of course one could invest directly into some excellent overseas dividend growth companies as The Falcon does. However this is probably best left to the share investing enthusiast.

    I'm not suggesting the above will necessarily be the case but as always there is potentially more to these things than first meets the eye. And I'm not giving these examples to suggest International diversification is needed but merely to show that if investing overseas helps your SANF it doesn't necessarily mean it need be a disaster from an income perspective.

    Not advice, General information only.
     
    Last edited: 14th May, 2016
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  7. scoobie27

    scoobie27 Member

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    Thanks Austing! Yet another fantastic post! I agree with a lot of your thoughts. Very much want to buy into PMC and VGS in smaller amounts even though the yield is not as good in VGS but it is the nature of the beast (VGS). 2.2% or whatever is fine by me and as you said, it will grow over time.

    In the past year, no, actually in the last 6 months, I have become very comfortable with being fully invested in the sharemarket. As per my previous post, this would have been unthinkable a mere 9 months ago. I now see my shares as something as solid as property and as a vehicle/asset to produce income and totally not concerned with the ups and downs of the sharemarket itself. Even if it went down 30 or 50 percent it wouldn't concern me. The asset is still there, producing reliable income regardless of value.

    I don't mean to be alarmist but my Greece or Japan scenario was me trying to leave no stone unturned in terms of identifiable risk. I admit i believe this is very unlikely to happen, but i still wanted to put it out there. Apart from that i'm not too concerned about the other risks. The way i see it, there is specific stock, systemic, fx, and country risk. With this form of investing, i am only concerned with country risk.

    Hodor, Im not too worried even if one of the LICs went bust. An LIC going bust is unlikely but it would not worry me at all as my plan is to be very diversified by holding all the good quality LICs recommended in these forums. Inclusive of VAS and VHY, I currently hold 7 and plan to get some more with a minimum of 10. Will probably add WHF PMC and VGS, but Austing's post of WHF's bonus shares offer have been a downer having missed out :(. I had considered getting some a few weeks ago but the MER of 0.35 made me think twice. Big mistake. Oh well my fault for being such tight arse. So even if my LICs went broke and i don't recover a cent, it would only represent 10% or less of my portfolio and not game ending. PMC and VGS will likely to be my next purchases in the following weeks.

    If only i had had these post available 20 years ago to influence my thinking i would be in a great position now.

    By the way got some dividends from VHY and VAS recently. And about to get dividends from WBC soon. Its a great feeling :)
     
  8. austing

    austing Well-Known Member

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    He he, famous last words. Even for many experienced investors the following scenario is probably a more realistic one:

    1. Firstly there is euphoria over the wonderful buying opportunities.
    2. No matter how hard you try to manage gradual averaging down it is highly likely the fall will overshoot your worst expectation.
    3. You become peeved off that you've run out of cash / borrowed funds to take advantage of further falls.
    4. Your stocks keep plummeting and anxiety sets in despite your knowing what happens historically with recovery after these events. Uuummmm what if it is different this time, Japan scenario?
    5. Your stocks plummet even further with anxiety turning into one felling somewhat miserable.
    6. Your conviction to Buy and Hold will be tested BUT YOU DON'T GIVE IN.
    7. You continue to monitor your stocks less and less because it increases your misery.
    8. Eventually you stop looking and focus on other things in life.
    9. Despite occasionally feeling a little down you are thankful you took the dividend investing approach as the lion's share of dividends being paid prior to the crash continue to flow into the bank account (especially with quality LICs).
    10. After awhile you dare to occasionally check in on your stock portfolio. Things are looking better. You start feeling more cheerful. Yes I knew it would be alright whilst patting yourself on the back for having the balls to have hung in there.
    11. You now start getting a little excited as the cash / borrowed funds are building up again. You know there may be a bear market coming after the initial post crash recovery. Plus there is potential for some juicy capital raisings via SPPs and Rights Issues etc as companies seek to strengthen their balance sheets. Woohoo some more great buying opportunities.
    12. Things start returning to some kind of normality. After all the bargain hunting you find it difficult to buy stocks now they are more expensive.
    13. You start wishing for another crash to come along reminiscing about all those wonderful income streams purchased dirt cheap during the previous crash / bear market.
    14. And so the cycle continues as it always has ...

    All this talk of these quality LICs, especially the older ones, going bust is totally unjustified. Some of these have been going 60 to 90 years, are conservatively managed, with little or no debt and transparent operations. And if one was to close down the assets would be divested and resultant cash returned to shareholders. In fact sometimes in such a scenario the shareholder can come out of it quite well especially if the LIC typically trades at a discount.

    Sure is. Nothing to do. No tenant problems, major repairs, piles of expenses, PMs, huge transaction costs, and more importantly no loss of valuable personal time that could be better spent with friends and love ones etc etc. Just set and forget and enjoy the dividends hitting the bank account. For me personally investing just doesn't get any better than this. Absolute bliss!

    General info only, not advice.
     
    Last edited: 14th May, 2016
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  9. CatCafe

    CatCafe Well-Known Member

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    Curious to know if you built up your asset base through property before pivoting towards shares. Did you sell down your entire property portfolio?
     
  10. CatCafe

    CatCafe Well-Known Member

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    I interpret that as the CG component of Aussie shares is less of a concern as they will continue to pay an income stream that will grow in excess of inflation, which is ultimately the goal of self funded retirees.

    But can the above be true if the economy isn't expanding? For instance if we enter a deflationary patch can companies still continue to pay out ever growing dividends?
     
  11. austing

    austing Well-Known Member

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    In part, but not by choice.

    Currently 56 but started investing in share funds (Perpetual Industrial Share Fund and other similar funds) in my 20's a few years before the 87 crash. As a result of a consult with Daryl Dixon in my late 20's I discovered LICs which to this day are still my favourite investment. Tried a number of stupid things as well over the years such as trading etc. I think we only had one IP during this time, a former PPOR.

    Unfortunately due to a change in my wife's employment circumstances in my late 30's we had to dispose of all our share holdings for a period of around 8 years which I found very difficult to accept.

    I continued to enthusiastically follow shares and LICs during this time even though I couldn't invest in them. So not being able to invest in shares we reluctantly invested with leverage into a number of IPs. However a subsequent change in my wife's employment 8 or so years later meant we could start reinvesting in shares again which I was ecstatic about.

    Yes, except for one.

    Keen as ever to rebuild the share portfolios the IPs were sold down in a tax effective manner. Only one remains not by choice but because a family members resides in it. It will however be sold off as soon as this situation changes.

    As luck would have it after we stared to rebuild the share portfolio the GFC occurred as we were getting progressively cashed up. With long term faith and experience in shares behind me I threw every bit of cash and borrowed funds I could get my hands on to buy shares and LICs during this period. This helped makeup somewhat for those years we couldn't invest in shares.

    Since the GFC we have continued to invest in shares and LICs which make up the vast majority of our asset base. Plus we are now retired on a very generous dividend income thanks in a large part due to this magnificent way of investing.

    Shares / LICs as has always the case, the love affair continues stronger than ever. Oh dear I'm getting emotional:D.

    Not advice.
     
    Last edited: 15th May, 2016
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  12. CatCafe

    CatCafe Well-Known Member

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    Thanks for sharing! Funny how your contempt towards property lead to you a property investing forum :p

    Keen to understand how you achieved this as I am also looking to offload part of my portfolio in the coming years.
     
  13. austing

    austing Well-Known Member

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    Not my area of expertise but I'll have a stab at it.

    If we enter into a very low inflationary / deflationary period then living costs should decrease. Hence the level of dividend "growth" needed to keep ahead of inflation will also decrease. One would assume IP rents would also follow a similar path. Expect the same with wage / salary growth.

    From memory some so called experts are suggesting that we should only expect mid to high single digit returns for a number of years. Importantly dividends is likely to be the major part of the total return. As usual I will be content to rely on the dividends, capital returns can do whatever they want.

    No one can predict what will happen in the future which is why I always keep a few year's worth of living expenses in cash. Should dividends suffer worse than usual and cash is insufficient to tide us over the life we are accustomed to then we will do like everyone else and live within our means. Whether you're an employee, business owner, company, IP / share investor etc in such a environment most will be impacted negatively.

    With personal experience and history on my side I'm content to continue to put my faith in dividends whatever the future might hold.
     
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  14. mrdobalina

    mrdobalina Well-Known Member

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    I grapple with the conundrum of keeping our property portfolio (which generates positive income which is a few multiples of average income, and is also tax free after depreciation).... Or divest the IPs and invest in the share market for income. This would require a hit of cgt which will erode the equity available for investing.
     
  15. Hodor

    Hodor Well-Known Member

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    Can't you just draw some equity via a LOC or split loan? That is what we just did, dividends are above the interest repayments and CG would be extra cream.

    We aren't as far along as you seem to be. Plan to acquire a few more IPs when our circumstances are right, if our circumstances aren't right to buy property we will push equity towards shares.
     
  16. austing

    austing Well-Known Member

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    I'm afraid you're the only one that can answer that question. And as I have mentioned a number of times one doesn't have to choose one approach over another. Perhaps gently easing into shares first overtime to see how well it fits before making any rash decisions. A mix can also work well for some. Even though dividends are relatively stable experiencing share price volatility is not something that suits some people.

    Some of the best posts you will find discussing your question are by forum member @keithj. In particular search his posts on the old Somersoft forum. They are excellent.

    Disregarding the income aspect of shares vs property an even more important one for me is the pain in the ar*e factor. Dealing with IP related hassles didn't seem too bad when I was younger but now older and retired I just want to enjoy life without having to be distracted by time consuming investment related hassles. With boring set and forget LICs in particular there is nothing to do most of the time other than record two dividend events a year for each LIC. And unlike property there is only income coming in, not a pile of expenses along with it. And some of these IP expenses can be major causing havoc with retirement budgeting for day to day living.

    In summary, there are enough hassles in life to deal with. Adding investing related ones on top of this is certainly not for me.

    Not advice, general info only.
     
  17. Intrigued_again

    Intrigued_again Active Member

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    You might find this handy.
     

    Attached Files:

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  18. austing

    austing Well-Known Member

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    Actually it was mostly to keep abreast of Discretionary Trust issues and taxation opportunities:p:p. The old Somersoft forum in particular was one of the best resources around for this. I tend to come and go disappearing for long periods of time between enthusiastic bursts of posting especially if share related topics pop up.

    You are probably wondering why I would come to a property forum to discuss shares occasionally. There is a history element having been one of the earlier members of Somersoft but also to do with the fact most here are "investors" NOT "traders". Dedicated share forums are awash with "get rich quick wannabe" traders. Most will fail dismally. I have been down this path long ago and have no interest in it nowadays. At least most property investors here take a long term view as I do with my shares. In some ways many of the "investing" principles that apply to property also apply to shares. Their might only be a relatively small number of members here interested in shares but the conversation is much more to my liking even if I do occasionally get chastised by the IP diehards:eek:.

    @The Falcon did a magnificent job in kicking off this Section of the forum and this got me interested in posting here again. Shame he's heavily under the pump and has very little time to post lately. Hence you will have to endure my less intelligent ramblings:confused:. Apart from being more well read he is noticeably younger than me and hence has less damage to his brain cells due to my keenness for home brew:D.
     
  19. mrdobalina

    mrdobalina Well-Known Member

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    I certainly hope you continue to contribute to this forum and share your insightful knowledge.
     
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  20. The Falcon

    The Falcon Well-Known Member

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    Hi Scoobie, had a look at my current Portfolio weights this morning ;

    75% ASX listed
    25% Overseas listed - all unhedged

    Of the ASX listed stocks, around 15% of that 75% has very significant Foreign earnings exposure. (eg. ANN/CSL/RMD/CPU/MFG/PTM/RHC) So in rough numbers, say 65% domestic focussed earnings, 35% International earnings. I am comfortable with that.

    Re Japan situation, Chancellor's "Devil take the hindmost" is a good read to really get your head around what happened there. If you are still buying the index at 60-70x earnings "because its different this time" well, you are looking for a disaster. Like Greece, these are not just things that happen overnight.
     
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