Wealth creation is pretty simple really.

Discussion in 'Share Investing Strategies, Theories & Education' started by dunno, 2nd Mar, 2021.

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  1. jaybean

    jaybean Well-Known Member

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    Yeah it still takes a certain amount of energy to do nothing. For example, the day I buy shares, I remove them from my watchlist. I'm always tempted to put them back on but I have to force myself to LEAVE THEM OFF and do not check the price. They stay off my list for 5-10 years. Doing this, I have literally not made a loss on the stock market in over a decade (whereas I used to be about 50/50 when I day traded...so a 100% success rate is a huge step up!).

    Same with property. If I'm sensing things might be going bad, I will refuse to read any news about the economy or property. I will leave this forum, and I will stick my head in the sand and continue on with my life. With this approach I've avoided selling a single thing since I started.

    But the temptation to check is always there. Gotta resist!
     
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  2. dunno

    dunno Well-Known Member

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    Its not hard to do nothing if it is part of a plan and you understand why that plan works.

    You describe the actions of passive and the mindset of active (unless its going against you). No wonder you think the mindset thing is tough.
     
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  3. jaybean

    jaybean Well-Known Member

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    Probably yeah, I'm not going to lie and say it's easy for me.
     
  4. MTR

    MTR Well-Known Member

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    Right

    But sometimes life just happens, where its not a matter of staying calm, its a matter of survival.
    Health, divorce, loss of job etc to name a few

    I like the idea of accumulating enough assets so you have options if plan A does not work.
     
  5. learner

    learner Member

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    Buffett said "Productive assets such as farms, real estate and, yes, business ownership produce wealth". Aren't there active or passive forms of ownership in all of those?

    To me, keeping an inner calm means not overpaying or buying shaky assets during times of optimism/mania, and not selling (or failing to buy) during downturns/panics.

    Knowledge and understanding what you own is important, but I would not underestimate the importance of psychology/mindset, especially at the extremes!
     
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  6. Ynot

    Ynot Well-Known Member

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    Thanks for comments @Peter_Tersteeg i
    I basically see two lines of investment thoughts. One line of investing is the accumulation of income assets to provide a growing dividend income stream whilst the other investing approach is the accumulation of assets on a total return basis and the sale of assets for income.
    I have trouble with the sale of assets, on the presumption that this reduces the asset base for the following year with a resultant reduction in (dividend) income thus i presume needto sell more shares to maintain the same level of income. I understand capital gains tax can be less than income tax but i still cant see how selling assets is a long term proposition? What am i missing?
     
  7. Piston_Broke

    Piston_Broke Well-Known Member

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    Just like playing monopoly, you sell houses to build hotels.
    Where would Trigoboff get the money to build more units if he did'nt sell them for profit?
     
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  8. The Falcon

    The Falcon Well-Known Member

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    Here is a hint ; What happens to a share price when it goes ex dividend ?
     
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  9. monk

    monk Well-Known Member

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    True,but you still have the same number of income producing units & share prices mostly recover. In the case of investing for income unit price is largely irrelevant. Whereas once it's sold it's gone, especially in retirement if you don't have extra income to keep adding.
    I do get the index thing & while mostly I'm in Lic's I am slowly accumulating Etf's as I get that too, there's been great educational discussions on this forum about this, but guess it's depends on individual circumstances.
    If we have the market going down for, say, a few years & one isn't in a position to have a big cash balance to ride it out then of course 'the pot' just gets smaller.
    At this stage I'm way more comfortable to have a mix of the two. That's my sanf.
     
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  10. The Falcon

    The Falcon Well-Known Member

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    “Same number of units” is irrelevant, but it’s something that people seem to fixate about like it’s important. You are simply choosing a vehicle that returns value as income rather than capital. Trading income for capital growth, and increasing risk through lower diversification. With total return investing, you still get the dividend payers but you don’t exclude growth stocks.
     
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  11. mtat

    mtat Well-Known Member

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    Here's some reading on this:

    Dividends are not safer than selling stocks — Passive Investing Australia
    Dividend investing vs total return investing — Passive Investing Australia
    What is total return investing? — Passive Investing Australia
    LICs - are they all they are cracked up to be? — Passive Investing Australia
     
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  12. MTR

    MTR Well-Known Member

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    I love this
     
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  13. monk

    monk Well-Known Member

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    Yup, but ideally you don't always have the 'same number of units', hopefully the income is larger than your outgoings & this balance used to buy more units thus creating a form of 'growth'.Also there is likely dividend income growth too.
    Total return while likely a more efficient (?) way of investing & yes, looking at very long term index charts there's the very obvious upward trend, no denying that, if we had a few years of no growth, just when you need it, it could put a serious dent in one's portfolio without a descent cash backup.
    For me lic's are my bond substitute, while I mostly hold these, all/most additions are now index for the reasons you quote.
    Did I mention I was a slow learner?:(
     
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  14. Ynot

    Ynot Well-Known Member

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    i understand that it goes down sometimes by the same amount of dividend, sometimes more, sometimes less but you still have the same amount of shares and over time the value of those shares generally rises in the long term. If you sell them so dont own those shares, then they cant produce a future income!
     
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  15. mtat

    mtat Well-Known Member

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    I own a company worth $10m.

    I pay myself a dividend of $1m.

    Now I have $9m in equity and $1m in cash.

    OR

    I own a company worth $10m.

    I sell a portion of the company for $1m.

    Now I have $9m in equity and $1m in cash.


    How many units make up the equity portion - it does not matter.
     
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  16. Hockey Monkey

    Hockey Monkey Well-Known Member

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    You should always hold a decent defensive asset backup (cash or bonds) for just this purpose. That's why most people wouldn't hold a 100% equity allocation.

    LIC's are certainly not a bond substitute as the underlying assets are still equities.

    Whether you are selling equities or taking a dividend during a flat growth period, you are making a withdrawal from the portfolio.
    From Dividends are not safer than selling stocks — Passive Investing Australia

    But if I sell shares, I own fewer shares and reduce future income!

    Yes, that's true, but you're also reducing future income when you don't reinvest dividends.
     
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  17. The Falcon

    The Falcon Well-Known Member

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    LIC as bond substitute is a dodgy call imho. You are just getting the illusion of income stability while taking on concentrated equity risk

    LIC dividend stability is only down to holding cash to be used to smooth dividend payments. 2020 a great example of that. Dividends received from underlying holdings much reduced, supplemented with cash from reserves, but still mostly lower than 2019. You can do this by holding a bit of cash yourself without paying a MER on it.

    Anyway, this is pretty bad thread drift and not of interest to most ... back on topic.
     
    Last edited: 6th May, 2021
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  18. monk

    monk Well-Known Member

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    Okay back on topic of wealth creation, for me my portfolio is a lot more than pre-covid level & the overall decrease in dividends was so small as to be negligible thanks to dividend smoothing with old school lic's. Just my experience.
     
  19. Big A

    Big A Well-Known Member

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    Hold on, let me see if I can add more confusion to this dividend vs selling units for income debate.

    argument is 10 units valued at $1 each so $10 worth of units pay out $1 dividend and the $10 worth of units will usually drop in value ex div and become worth $9. But come next dividend pay day regardless wether the units are worth $9 or back up to $10 or went further up to $11 you still get the $1 dividend. Yes the dividend could change, but for arguments sake let’s say dividends remain stable for this story.

    Now our $10 worth of units we sell down 1 unit worth $1 to collect our $1 worth of income. Our 9 units are now valued at $9. In theory the units should be worth $10 because the dividend has not been paid out and it’s value is in the unit. But that doesn’t mean it will be reflected in the unit price. But your 9 units regardless of what they are valued at will now only pay out 90c in dividends every pay day. Even if those 9 units might now be worth $10 or $11.

    it can be argued that if the value of the 9 units has risen the equivalent of its cash holding that was not paid out as a dividend hence your total holding is still worth $10 after you sold 1 unit and collects $1. But that’s not guaranteed. Your units could still only be worth $9 even if the company kept the cash.

    Am I making sense or have I confused myself and everyone else? o_O
     
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  20. MWI

    MWI Well-Known Member

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    Confused me for sure. I thought buying EFT's paying dividends was simple, no need to worry, just hold cash reserves, so what do you all mean, you need to keep an eye on it too?
     
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