Thoughts on my portfolio

Hi All,

Just wondering if I could get some thoughts on my proposed share portfolio.

I've settled on a dividend strategy(Thornhillish) as my income can be variable and I like the option of taking cash dividends if i need to supplement my income at any stage. I've gone all Australian for this reason outside super. (am a lot more diversified in smsf)

At the moment I'm thinking-

20% AUI (proven performer who weathered covid well)
20% AFI ( as above)
20% MLT ( a bit unsure due to recent dividend cut but past performance got them in)
30% VAS (no explanation needed)
5% CIP( a bit of extra yield and some com property exposure)
5% CLW ( as above)

The Reits were a bit of an after thought. Yields are attractive and they seem to have weathered covid well and appear to be undervalued at the moment. Also I have no other exposure to commercial/industrial property so they gained a spot for this reason.

Would appreciate any thoughts, potential changes or other ideas as to the suitability for what I'm trying to achieve.

thanks in advance.

Wilko

 

From memory Thornhill is not a fan of Reits. His reasoning seems fair enough to me.

Do you really need that many LICs and VAS? If an LIC hasn't cut its dividend its probably because they retained some the earlier ones so I wouldnt consider that a major benefit.

Personally I'd just hold VAS (I do) and take all the distributions in the lumps that they come. You wont end up any worse off that receiving smoothed dividends unless thats something important to you.

 

Ill give CIP and CLW a tick. If you have read any of my posts you will see my like of Reits for income as well as some growth.
VAS I don’t think you will find many who will tell you that’s a bad idea.

Lic’s have a big following across this forum. I personal don’t hold any and don’t really see the benefits of Lic’s over VAS. From what I understand the love for LIC’s comes from this dividend smoothing phenomenon rather than overall performance. At the end of the day where is this dividend coming from. Is the lic outperforming the index overall? If so and you believe it will continue too long term, then great go for your life. If it’s not then who cares about how they distribute the dividends. The dividends they continue to pay out doesn’t magically appear in LIC’s. It comes from the same place as the dividends that VAS pays out. So look at overall performance.

 

Your posts on the topic were partly the reason I came around to the idea of REITS. I was initially interested in unlisted property but couldn't justify locking up big chunks of money at my stage of the journey and ended up looking at REITS instead. I'll venture into unlisted when the time is right.
Agree there's probably no real advantage in LIC's over VAS except for the franking level.I went to a Peter Thornhill seminar about 15 years ago and I guess thats where the seed was planted for LIC's. Funnily enough I went against his advice on the REITS though. I thought his pathological hate for property was a bit over the top.

 

The franking of LIC dividends has no advantage over the the distributions of an etf.

For some LIC vs ETF discussion (including talk of LIC franking credits:
ETFs vs LICs and Strategy 3 Revisited - Aussie Firebug

 

Thanks, I had read that before but the bit about franking credits mustn't have sank in.

I'm thinking 3 LIC's is probably too many for no real advantage. Not sure I could just stick with VAS alone though despite being able to see the reasoning. Hopefully one day I'll have a million dollar portfolio and if it was all in one share I think I'd feel like I could've spread it around just a little bit.

 

I see where this is coming from and similar thoughts have run through my mind when I was adding capital to the actively managed funds I hold. I think you need to look at VAS differently to any individual share or even any managed fund. The same risks of concentration don't exist with VAS. VAS is not 1 share. Its 300 Shares.
Even with the actively managed funds that might hold 30 different shares. There is much more concentration with 30 shares. Then there is the manager risk. This is not an issue with VAS. 300 Shares and the market manages what goes in and out of the fund.

But I understand the psychological aspect of it regardless of how much sense it might make. That's something only you can overcome when your ready.

 

Following on from what @Big A mentions, check out the top holdings and weightings of any LICs (or managed funds for that matter) that you have your eye on.
You might be surprised at how many simply hug the index anyway.

Its because of that I just went with MVW (an equal weight etf) so sit alongside VAS to balance my own view that the ASX2/300 is too concentrated on the big four banks.

 

Why so concentrated on the Australian market?

On the dividend front, it is mostly an illusion and apart from psychological advantages is no different to selling shares and tends to result in a less diversified portfolio.

Dividends are not safer than selling stocks - Passive Investing Australia
Dividend investing vs total return investing - Passive Investing Australia

 

I have to agree. I think adding in some international exposure is wise. Again I get the higher dividends in the Australian markets provides you an increased regular income flow which makes us all feel warm and fuzzy. I started with my whole portfolio based around high income flow. Slowly I am forcing myself to look at overall long term performance rather than the short term income sugar hit. Problem is I have a sweet tooth. Love that sweet investment income flow.

 

I'd also mention that VAS already contains REITS at market weight. The main question you should be asking yourself is why you want to overweight them?
What's the deal with REITs? - Passive Investing Australia

5% weight is also not going to make a difference one way or another so I'd probably drop to keep the portfolio simpler.

 

On reread I see you have international assets in super. I wonder if the reverse is better, the higher yielding Australian assets in the low tax super environment and growth assets outside of super.

Personally I don’t bother with the hassle and keep similar portfolios inside and outside super.

Video from Ben Felix on the topic of asset location

 

I think those psychological advantages cant be underestimated.

With the dividend focus on accumulating units to increase income your decisions aren't influenced by the risk of volatility. The more units you accumulate the more money you make .If a strategy relies on selling down shares at some point then you're gambling with the market movements and your actions will be influenced by this risk.

At least that's how my brain works.

 

@wilco, you mention adopting a Thornhillish approach and he has reasons for not advocating international shares.

Despite being a fan of Thornhill myself I DO have reasonable international exposure.

I was reading a piece the other day about the Australian sharemarket success over the last 100ish years, so although small by global standards, you might be just fine sticking with oz. Maybe branch out later if the appetite arises.

I belive the Bogleheads approach is to sell down capital where dividends are not as generous as they are in OZ. Something to google anyway if it interests you.

 

Getting comfortable with total return investing does take some time. The thing is dividends are not guaranteed either. Just look at last year when they dropped from 4% to 2%.

by focusing on a concentrated market like Australia and further concentrating on high dividend paying stocks you are taking on additional uncompensated risk.

just because Australia has done well over the past 100 years doesn’t mean it will continue in the future, and even if it does dividends are taxed less favorably than capital gains which can be deferred indefinitely, compounding until you are in a lower tax bracket in retirement

 

I originally had no interest in REITs either, but did a lot of reading on their long term performance, correlation with other assets etc. That had me interested as they are pretty much neck and neck with usa total market since the 1970s but with a moderate correlation, so possibly a diversification free lunch.

Then I read David Swensens books on portfolio management and that sold me. That man is a genius, and if he says real estate should be in my portfolio I'm putting it in there.

 

Not so much in relation to REITs but David Swenson gets a shout out in this video and how difficult a time other institutions have had replicating his performance. Sorry if I’m coming across as a Ben Felix fanboy, I find his presentation style excellent at breaking down common questions.

 

Ben Felix fanboys unite.

Reconsidering REITs in Your Investment Portfolio — Rational Reminder

 

Another great video and confirmation bias of my recent tilt into SCV via AVUV/AVDV

If you did want to use REITS, a global ETF like DJRE might be a better less concentrated option

 

I didn't actually construct a portfolio with REITS in mind.

I was interested in unlisted property trusts but couldn't justify locking my money up for lengthy periods at my stage of life. So I actually bought CIP and CLW instead of going unlisted.

If I had said that I own unlisted property trusts and a share portfolio of 3 LICs and VAS that probably would have been more acceptable.

I can look at it and think I'm overweight in REITS, or I can look at it as though my allocation to commercial property just happens to be listed instead of unlisted.