Portfolio Update and Getting A Sharemarket Education

portfolio

I’m back!

Strong Money Australia has been M.I.A for the last couple of weeks.

Don’t worry, I haven’t retired from retirement.  Not yet anyway 😉

So what’s my excuse?

Well recently, I flew over to Victoria to spend some time with family, which was great.

It was so nice catching up with my family there and looking around a few places where I grew up.  Not far from Phillip Island, for those familiar with country Victoria.

Anyway, blogging was not top of the priority list for that week.  But last week I have to admit, was just pure laziness!

Here I am though, back in the saddle.  So let’s get on with it…

 

Portfolio Update

Regular readers and people who know me, will be aware of our investing situation.

We started off investing heavily in property for capital growth.  A couple of years ago we learned about shares and dividend investing, so we began buying shares for income.

We then realised we actually had enough savings/equity to retire, if it was all in strong income producing shares, such as Listed Investment Companies (LICs).  So we decided to begin converting our property equity into dividend-paying shares, rather than continue working to chase more wealth.

Here’s where it gets messy…

Since we’ve now retired, but the dividend-focused portfolio isn’t fully built yet, we are living on the proceeds from property sales.  At the same time, we are also using this money to build up our holdings in shares and LICs.

As we continue this process, our dividend income grows larger and larger.  And each time we sell a cash hungry investment property, our expenses get lower and lower. (The properties are negative-cashflow)

Eventually, we end up with no properties and all shares, with the dividend income easily exceeding our expenses.  This may take quite a while, depending how soon we decide to sell the remaining properties. Importantly, our level of equity is more than enough for us, should things not work out quite as smoothly as expected.

 

Sold!

Recently, we completed the sale of another property.  It was an apartment in Sydney, and we ended up getting a higher price than we expected.  Those following the property markets will know that Sydney and Melbourne have been absolutely flying for the last few years and prices have increased quite a bit.

Originally, our plan was to systematically sell-off an investment property every couple of years or so, instead of all at once.  This helps to minimise Capital Gains Tax, and also allows us to build up our share portfolio steadily, rather than all at once.

An approach like this might help reduce any ‘beginner’ mistakes I make.  I still consider myself quite the amateur investor.  I’m still under 30, after all.  There is a gazillion things I don’t know, but I constantly try to keep learning.

As time rolls on, the more investing experience I have, the less likely it is that I’ll make poor decisions… well I sure hope that’s true anyway!

Another reason we decided on this approach, is to take advantage of Dollar Cost Averaging when buying our shares.  If we invested a massive amount of equity all at once, and the market took a large dive, I would regret it.  Not because I would panic, but I would be pissed off that we purchased so much and then shares became cheaper!

Imagine for some strange reason, you buy a whole years worth of groceries.  Then Woolies/Coles announced they are offering 30% off everything next week.  You would be pretty damn annoyed at that I’m sure!

 

The Property Strategy

What we have settled on doing instead, is selling off the remaining properties at opportune times, so we can take advantage of strong markets and favourable selling conditions… such as right now in Sydney and Melbourne.

At this stage, we will most likely sell our remaining Melbourne property in the next 12 months.  Selling conditions are very good and the market has had such a strong run, which will inevitably slow at some stage.

 

What did we do with the money from the sale?

I won’t go into specific numbers here, but just give an outline of what we’re doing.

We took a chunk of this money and bought more shares in our preferred LICs.  Some of it went into Argo Investments (ARG), MIlton Corportation (MLT) and Australian Foundation Investment Co. (AFI) among others.

All of these conservatively managed investment companies have a great history of increasing dividends over decades.  They invest for the long term in a large portfolio of shares, around 100 different companies, with a focus on providing shareholders with a regular and reliable income stream.

They are run at very low cost (around 0.15%) and many of the portfolio managers/investment committee own shares in the company too.

We are keeping a fair bit of the proceeds in the bank for now, sitting in an offset account.  This is to cover the shortfall on the remaining properties and to cover future living expenses.  We still have plenty of capital left over from our first property sale last year, but we wanted to take advantage of the Sydney market’s strong selling conditions.

 

Education

I recently got an email from a reader who wants to begin educating themselves about the sharemarket.

Sadly, there is not much good information out there regarding sensible long-term share investment.

This is where I pointed our dear reader, and where I recommend everybody start their education on investing in shares…

  1. Read ‘Motivated Money’ by Peter Thornhill.  Pick it up from your local library, or you can get it on his website at www.motivatedmoney.com.au
  2. While you’re there, read his articles and most importantly, watch his videos!The videos are incredibly eye-opening and a breath of fresh air, in an industry that thrives on being complex and confusing.  Peter also has an excellent interview on youtube where he shares his strategy and experience being fully invested in shares during the GFC.  Fascinating stuff!
  3. One of his best articles here, and a written interview here.
  4. Go back to step 1.  Seriously, this stuff really helped me.  Peter is great at explaining the simple yet powerful approach of investing in shares for income.

I’m a slow learner so I completed these steps a few times until the message sunk in 😉

It costs nothing, but it’s likely to save/make you a shipload of money, through better decision-making and a simple strategy to follow.

Invest in Industrials for income

Peter Thornhill’s philosophy is to invest for the long-term in dividend-paying Industrial shares.

This generally just means all industries, excluding resources companies.  Reason being, they are typically unreliable dividend payers.  This is due to their cash-intensive mining projects and their profits are reliant on volatile commodity prices.  Resources companies as a group, also tend to have poor long-term performance, when compared to Industrials.

Peter outlines this in an article here, and also has many great examples in his book.

The easiest way to follow this investment philosophy is to buy shares in good quality Listed Investment Companies (LICs).

These investment companies tend to invest with a focus on income, and heavily weight their portfolio to more reliable dividend-paying companies.  They do often own shares in some of our largest dividend-paying mining companies, but in general, they favour Industrials and are underweight Resources companies.

Although I’ve never been, Peter Thornhill also sometimes runs a one-day course on investing in shares.  This usually takes place in Sydney, and I’ve heard good things about it.  If you’re a Sydneysider, consider checking it out.  Details are usually on his website if one is coming up.

If not, the videos and book will easily do the trick!

 

Find what works for you

Just because I follow this investment strategy, doesn’t mean it’s the right fit for you.

Indeed, many people may just prefer investing in index funds.  And that’s absolutely fine.  It’s a great approach and can work fantastically well.

But for me, I’ve decided to follow a dividend investing strategy.  I don’t want to sell off shares in my portfolio for income during retirement.  Although this is the standard plan for many early retirees following the global indexing approach, it’s just not for me.

I’ll go into this in more detail in a future post.

But for now, just do the homework I’ve set  🙂

So there it is.  A bit more about our strategy, where we’re at and where we are heading.

Definitely take a look at the material I’ve outlined above.  It really helped me learn about how to approach the sharemarket in a sensible way.  I’ve found an investment strategy for shares that suits me, and is simple to follow.

Importantly, it’s a strategy that provides an excellent income-producing portfolio for early retirement.

I believe other people would be well suited to this dividend investing approach too, so I wanted to share it.

Take a look and see what you think.  Happy learning!

 

 

Note – In the spirit of the great Aussie movie The Castle, this book ‘Motivated Money’ by Peter Thornhill is so good, it’s going ‘straight to the pool room’… or in our case, it’s going straight to the Recommendations Page.

12 comments

  1. “But for now, just do the homework I’ve set 🙂”

    Ok Teach, finished my homework. What’s my next assignment:-)?

    As per the below article posted by you note that Peter detests Areits (even though they are Industrials) almost as much as Resource stocks.
    http://www.motivatedmoney.com.au/mysay.php?iid=ueuf2ddua0

    But the good news is the older style LICs tend not to like Areits all that much either for similar reasons. Given their size it’s hard for the older LICs to avoid Areits completely but they do tend to underweight them.

    During a conversation with Peter T many years ago he stated that in an ideal world he would prefer not to own any Areits and Resources. But he’s pragmatic about it all with the older LICs, given their other benefits, being a good enough proxy for his needs. I tend to agree.

    Speaking of investment property the last one is being sold this financial year. Woohoo!

    1. Didn’t you read it… it says go back to step 1 and repeat 🙂
      Haha, you are exempt from homework Mr Austing. Hell, you should be teaching the class!

      I find the REITs example pretty interesting. To be honest, I would have thought they’d fare a bit better than they have over the decades, aside from the debt binge in the 2000s.

      Thanks for sharing your chat with Peter T. The LICs aren’t perfect as you say, but they do a pretty good job at growing dividends over the years, despite some less than optimal holdings. Still serves our income objective better than owning the index.

      All the best on the sale this year. Peter would be impressed, and have an amusing comment to go with it I’m sure.

      1. “Didn’t you read it… it says go back to step 1 and repeat 🙂”

        Funnily enough I try the same approach with Beginners in relation to the PC LIC thread🙂. It’s only 195 pages, I can’t understand why they complain about such a simple request🤔.

        In regard to what Peter would say about selling the IP I have a fair idea. It would be something along the lines of “about bloody time you got rid of the lead in the saddle bags”.

        Glad you’re enjoying the Dividend income approach. We love it as retirees. The thought of perpetually having to sell assets to pay for living expenses would be a pain in addition to impacting our SANF. It doesn’t mean you never sell your shares but the longer you can leave it the better.

        Enjoying seeing how you’re progressing. Keep up the great work.

        1. Haha yes I’ve seen you say that a few times! I’ve read the entire thread 3 times. People need to show some level of dedication to learning, instead of being told what to do. I guess some are a bit lazier or maybe just less obsessive than me.

          He’s a funny character alright, very passionate.

          Thanks for all your help by the way! Sharing your knowledge and experience is very valuable for some of us who have only been investing in shares for a few years.

          Appreciate the kind words Austing 🙂

  2. Welcome Back! I’ve missed your Blogs!
    I’ve also been purchasing MLT and AFI recently. The PT thread on the property chat website is my favourite. I have read it several times (BIG thanks to Austing). I still own my IPs and at this stage don’t intend to sell. All the cash flow from my IPs (minus expenses…..which are considerable) gets pumped into ETFs/LICs. LICs are GREAT….a wise man said `buy them and then just get on with the rest of your life’. They are the only stocks I own that I hope drop in value so I can buy cheap…..I can’t say that about TLS!!!

    1. Thanks unwillingwillis!
      Yes it’s a great thread, Austing is a legend. Sounds like a good system you’ve got going on there mate 🙂
      We likely need to sell all our IPs eventually, so we can create the cashflow to live on, but we’re happy to do so.
      I hold Telstra also, shame about the div cut, but should help them reinvest to hopefully grow earnings.
      Can’t argue there mate, it’s nice to see them lower!

      1. He he, I’ll have to come here more often. Good for my ego. Thanks for the kind words but lengendary, far from it. I’m only ok with simple stuff and happy to stay that way. The older LICs were created for those of us lacking time and / or interest in analysing stocks.

        I’ve never bothered much with trying to analyse the older LIC’s Annual reports. After investing in them for decades when personal conditions allowed I figure they’ve got to be doing something right to have prospered for this long. Shorter term analysis based on five year rolling averages, activism etc is not my game.

        You’ve probably already seen this but long before Thornhill even knew about LICs there was Daryl Dixon. Based on a consult with Daryl well over thirty years ago before Thornhill had even returned to Australia Daryl Dixon enlightened me about the virtues of LICs. AUI and DUI were his first recommendations based on value at the time but any of the oldies were recommended when cheap (ie discounted NTA).

        In case you haven’t seen it here are some excerpts from an AFR interview with Dixon some years ago:

        “Daryl Dixon is the founder and executive chairman of DIY specialist firm Dixon Advisory; a former employee of the Treasury department and the International Monetary Fund in Washington DC, and an economics graduate from Cambridge University.

        He has the financial expertise, and no doubt the funds, to invest in every whiz-bang product that is launched from deep within the financial laboratories of global investment banks. But he doesn’t, preferring to stick with straightforward instruments such as listed investment companies, cash, bond funds and preference shares.

        “My experience over many years is that it pays to be a conservative investor. I tend to pick investments to buy and hold.”

        And those investments are straightforward and transparent.

        The best investments are relatively simple.

        Some 60 per cent of the portfolio was in listed investment companies at the time, including Australian United Investment Company, Diversified United Investment, Milton Corporation, Carlton Investments and Brickworks.

        Dixon is a big fan of listed investment companies that are quoted on the Australian Stock Exchange.

        From time to time when he has held other assets in the portfolio they have invariably been replaced with listed investment companies.

        The advantage is you get a diversified portfolio, he says. You could not get such a broad-based portfolio otherwise.

        “Twenty stocks are about as many as any reasonable [DIY] fund can manage and one of the troubles with investing in individual companies is the surprises get you, as we saw in the global financial crisis.”

        Furthermore, he argues listed investment companies are run by knowledgeable, informed people, they charge low management fees and have outperformed the index over much of the past 20 years.”

        Daryl is very wealthy and has enormous investing knowledge / experience / resources at his disposal yet he still sticks mostly to plain old LICs which was his advice to me decades ago.

        That’s why when the more clever types on the PC forum present complex analysis and short term strategies in an attempt to maximise performance I just smile and ignore it. It’s the Dixons, Thornhills of the world that I wanted to be like. And fortunately we’re living it ourselves now in retirement. Simple, low / no maintenance strategies as suggested by Dixon / Thornhill work. They understand that money should be your slave not the other way round. Life is for living not trying to become your own fund Mgr analysing companies etc as Thornhill would say.

        Cheers

        1. Oh man, I totally missed this comment!! Sorry mate!

          Appreciate you sharing your wisdom around here, that’s for sure 🙂

          I do love reading the annual reports out of interest, but it doesn’t change my approach.

          I have read that old article with Dixon before, quite interesting. It’s a good point. Just because one has more money, doesn’t mean they should be investing in so called ‘sophisticated’ investments. Good to see he sticks with the boring buy-and-hold investments for the income stream.

          You’re right, the over-analysis gets tiring to read, and I think misses the point. Being simple investments, we should approach them in a simple manner. Everyone is guilty of trying to optimise and complicating things at times. But it’s important we try to keep it simple as much as possible.

          Thanks for the reminder!

  3. I like your analogy about the benefits of dollar cost averaging.

    “I’m a slow learner so I completed these steps a few times until the message sunk in” – this! I sometimes think I am taking in so much new information that I don’t really process anything. There’s something to be said for finding a source that really makes sense to you, then concentrating on really understanding it. As long as you have a well balanced enough reading list that you can pick a quality source.

    Thanks for sharing your strategy. As someone who’s never bought an investment property, I find it interesting to read about the ins and outs. Were you hit with much CGT?

    1. Haha yes, repetition is important to let things cement in your mind. Constant learning is great, but it’s only the stuff we remember that actually helps us.

      You’re spot on, the secret is not just following a strategy because everyone else is doing it, but knowing why a strategy suits you best and understanding the ins and outs of how you will implement it in real life. I know your reading list is huge, so it probably a bit of a blur in your mind! Just go with what makes sense to you most and what you think will be easiest to stick to.

      With CGT, actually no, we barely paid any at all on our sale from last year. We effectively retired early this year, so gave us less yearly income. Also the remaining properties are running at negative cashflow which reduced taxable income and sheltered a fair bit of the CGT. Combined with the 50% discount for owning the asset longer than 12 months, and there was almost none to pay.
      Our sale or two this tax year will likely be zero tax because of the remaining properties running at negative cashflow and no employment income. All told, we didn’t make huge gains on them anyway as we only held those ones for a few years.

  4. Fantastic work and I’ve just come across your site. Love seeing other Aussie blogs. I am not retired myself (no where near it) but still love personal finance and investing.
    Have you ever considered the WAM series of LIC’s. There expenses are much higher (~1% ouch!) but their returns since inception are phenomenal. I am a real lover of their LIC’s. I own WAX and it has returned c.18% p.a. since inception, so paying a 1% fee to receive 18% (before fees) seems like a reasonable buy for me. Cheers

    1. Welcome, and thanks for stopping by!
      There seems to be heaps of Aussie blogs now. It’s as if we all noticed the lack of them, and now there’s heaps lol!
      Yes, I own WAM Capital and WAM Research. I do prefer WAM Research, as it’s more fundamental driven without the trading like WAM Capital. Both have been excellent performers though, despite the high fees.
      The returns are nowhere near as good after fees, but still easily market-beating. I like their focus on dividends to shareholders too. Currently trading at fairly hefty premiums though.

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