Sitting Down with Strong Money – Your Questions Answered #5

Welcome to the latest Strong Money Q&A session, where I answer a bunch of questions sent in by readers.

The idea behind these posts, is to share my thoughts with all of you, rather than just one person.

Lots of good topics today – property, international diversification, timing the market, and even an investment idea I’ve never heard of!  But before we start, remember…

Nothing on this blog should be taken as personal financial advice.  You’re solely responsible for your own choices.  As always, do your own research before making investment decisions.  OK? 🙂

 

Question #1

Hi Dave

Love the content, very interesting and enlightening.  Just one question if you don’t mind; what do you think about global dividend ETFs such as WDIV for some diversification?  It has a decent yield although lumpy payments and unfranked.

Currently I have LICs and VAS for income but I’m worried about having it all in the Aussie basket.  Especially with talks on trade wars, the housing slow down and dependency on China.  Thank you, Daniel

 

Strong Money’s Answer:

Thanks for the support Daniel!

Some overseas diversification should definitely alleviate your concerns.  A dividend-focused fund like the one suggested does seem like an okay choice, but be mindful of the following…

It’ll have higher fees than a broad index fund like VGS, for example.  It may also underperform.  There will likely be higher turnover in the fund, meaning higher payouts coming from capital gains, making the income even less reliable and less tax efficient.

Bottom line: you could do a lot worse than a fund like this, but I wouldn’t make it a large part of my portfolio.  Personally, since international shares are going to be lower yielding, with less reliable income anyway (due to currency), and for me the main appeal of international shares is more diversification, I’d be more inclined to add a broad international index.  Anyway, just some random thoughts – hope that assists with your thinking.

 

Question #2

Hi SMA.  I like your blog and your take on dividend investing.

My question is, how can one really achieve financial independence using this strategy?  If I wanted $1 million in 15 years, I can buy two well located properties of $500k each and keep them for 15 years.  Due to leverage, if they double in 15 years I can sell both, pay out the mortgage and end up with $1m.

If I try to do this through shares, I need to invest about $3700 a month to have $1m in 15 years.  I really can’t afford to save $3700 a month.  Is this basic calculation correct or is there another way of reaching a million dollars in 15 years?

 

Strong Money’s Answer:

This is a common question.  The truth is, there’s no way to know the best future result.  I’ve invested heavily in property and I totally get the leverage argument, but it doesn’t always work out well.  And certainly not as cleanly as those numbers assume!  Here are some things to consider…

– For the properties to double, they’d have to grow by around 5% per annum.  Broadly speaking, I don’t think this is very likely over the next 15 years.  Wages growth is around 2-3% per annum and households are typically not able to increase their borrowing power much more than this.  So it’s very hard to see how prices can grow by 5% per annum in the future.  Some areas will, but not across the board.

– In your scenario, there are huge costs not being included.  To buy the two properties is going to cost close to 5% in stamp duty, fees and settlement costs.  Or about $50k.  Then on selling in 15 years time you’ll have to pay around 3% or so in agents fees, bank fees and settlement fees, which would probably amount to another $50k.  So already you’re looking at $100k of costs built into that scenario before you breakeven.

– There will be ongoing negative cashflow to pay for.  It’s very unlikely the properties will be positively geared.  The list of expenses for property are incredible.  Maintenance, repairs and necessary improvements can really add up over time too, as I mentioned here.

– Upon selling in 15 years time, you’ll be up for a decent amount of capital gains tax.  If both properties double like you said, you’d have to pay around $75k of capital gains tax per property.  So at least $150k across the 2 properties.  Already we’re at least $250k down from the figure you were hoping for, plus the ongoing negative cashflow.

Having invested in both property and shares over the years, I really think that focusing on increasing your savings rate and buying income-producing shares is the simplest and easiest way to become financially independent.  The problem is, people don’t want to spend less in order to save enough to retire in 15 years.  They want a magic solution, like relying on leverage to get rich.

I don’t want to discourage you here.  I’d just like you to think carefully before you make any big decisions.  Personally, if I started again today, I would buy no property (except maybe a place to live in), and instead would invest only in shares.  But you do what feels right for you.

 

Question #3

Hi Dave.  This question may be a bit off topic for your audience.  But do you have an opinion on investing in music royalties?  People like to speculate on the stock market – well, the music industry is seeing growth in streaming music.  There are auction markets like Royalty Exchange that allow investors to invest into music royalties.

Essentially if an investor is successful in the auction they essentially takeover the royalty income with payments received on a regular basis for the term (eg. 10 years) or life of rights.  What do you think?  Cheers, Banjo.

 

Strong Money’s Answer:

Hi Banjo – wow, what a fascinating idea!

I’ve never even heard of this before, so it’s a pretty crazy concept to me!  In general, all I’d say is make sure it’s only a little bit of play money, acknowledging that it is mostly gambling (unless you have genuine music industry knowledge or an ear for talent).

It’s not something I’d do personally, but if it works out for you that’s great!  Thanks for the very cool question!

 

Question #4

G’day Dave.  I’m glad I stumbled across your blog.  It’s great.  I have a question I’d love to hear your thoughts on.  I’ve recently started in the markets, having hammered the mortgage and the first
thing I did was to stick some money in one of Six Park’s Balanced Growth portfolio for my kids.  I like how they give access to ETFs at a low cost.

My accountant, who is also a lifelong friend, advised me not to reinvest any distributions from the 6 ETFs as he thinks it’s difficult to handle at tax time.  I’m a small business owner.

So I’ve received $72.83 in distributions from my initial $10,000 investment in under a month.  It seems silly to me that these aren’t immediately reinvested.  Would you agree or does my accountant have a point and I should just reinvest manually later?  Thank you for your time.  Sandy.

 

Strong Money’s Answer:

Thanks for the question Sandy, and for reading the blog 🙂

Great job on the mortgage by the way!  I’ve looked at Six Park and they look like a good option for set-and-forget, very diversified, automated investing.

To your question – the only difficulty I know of is when you go to sell those holdings, because there’ll be lots of little parcels bought using the DRP – so that’s probably what your accountant is talking about.  It might make his job harder, but at the end of the day, it’s your choice.  You’re the investor and you’re paying the accountant, so they can suck it up!

If you prefer to use DRP then go for it.  But if you’re going to be paying extra accounting costs for that or you have to work out the CGT yourself, then I’d probably hold onto the cash and reinvest in lumps of at least $1k or so.

 

Question #5

Hello.  Thanks for taking the time to provide the blog, it makes really interesting reading.  I’ve recently become aware of and interested in the FIRE movement.  Although I’m late to it, I feel better late than never.  I have a question regarding company shares.

I work for Caterpillar and have taken advantage of their Employee Share Program – I can purchase shares in the company each month and receive an additional half of my purchase on top from the company.

I’ve been in the plan now for a few years.  Since reading about LICs, I’ve been wondering if I should sell these shares (domiciled in the US) and use the funds to purchase Aussie LICs.  I’d really appreciate your opinion on this.  Kind regards.  Jim.

 

Strong Money’s Answer:

Welcome to the FI space Jim!  Definitely better late than never – you’ll find a ton of people that are happy to share whatever they’ve learned with you.  The FIRE crowd are usually pretty generous and happy people!

Interesting scenario.  I’ve heard of similar company share plans before.  The employee share plan is pretty awesome, but that doesn’t mean you want to keep the shares long term.  So I’d simply get the bonus and meet the criteria then cash out whenever you can (there’s probably rules to this).

Then I’d start buying more diversified set-and-forget investments, like LICs or index funds.  Reason being, you’ve already got quite a lot riding on this one company since your salary is coming from there.  That’ll probably give you the most benefits without the risk.  All the best on your new path!

 

Question #6

Hi SMA.  I just started the debt recycling strategy and was wondering if you had any excel spreadsheets you use or apps to track how well it is or isn’t working?  Cheers, Mike.

 

Strong Money’s Answer:

Hey Mike.  No mate, I don’t have any apps or spreadsheets for stuff like that.

The best way to tell if your strategy is working will be in about 10 years time, when you look back and see your overall debt is the same or lower, and your investment income is much, much higher, due to growing dividends and regularly topping up your portfolio, while your personal mortgage continues to shrink in comparison.

But from year to year I wouldn’t even worry about it, just keep saving, paying off the personal mortgage, investing whatever cash is available, and watch the income grow.  Remember, you’re building a passive income snowball.  It takes time.

 

Question #7

Hi Dave,

Just wondering if there is a good time of the month and/or year to buy ETFs or LICs?  Thanks, Damon.

 

Strong Money’s Answer:

Hi Damon.  Yep there is a best time to invest…

When you have the money!

Seriously, I don’t worry about it at all.  Just keep investing regularly as much as you can – that’s where the progress is made 🙂

 

Question #8

Hi StrongMoney.  Great website mate, been reading your articles for a couple of months.  So I have $75k-$100k saved up sitting stagnate.  I’m sold on investing shares, comfortable with riding the highs and lows, and sticking it out for the long term.

My only hesitation is the daily articles and Aussie reddit chatter painting bleak narrative pointing towards a big recession.  Whether it is sensible to pay any attention, I don’t know.  And I do agree that no one has a crystal ball.  But it has made me very cautious.  You’ve pretty clear opinions on getting started the sooner the better, and you don’t sweat the speculation on share prices.

But… if you were in a position where you had yet to invest any money and a stack of it sitting idly by… would you be holding off at the minute to see if a storm is indeed coming?  Or would you be all in tomorrow without a second thought?  If my money were already all tied up in shares I would not even be bothered, but I am hesitant to pull the trigger at the moment and wondering if I should wait it out and see if there is any truth to these doomsday prophecies.  Thanks, Ricky.

 

Strong Money’s Answer:

First, thanks for reading the blog!

Personally, I’d try not to pay too much attention to the media or chat forums – where everyone seems to be an expert on, well, everything 🙂

The truth is, the future is unknowable.  There’s always something to worry about – whether it’s China, debt, the US, rates too high, rates too low, politics etc.  It never ends.  If you wait until ‘the dust settles’ you’ll never invest, because it never does.

People seem to be either worried because the market is falling, or worried because the market is rising (assuming it must be due to fall).  It’s a permanent state of worry when you think about it!  Anyway…

Given we’re talking about a decent chunk of savings, there’s nothing wrong with averaging in.  Buy $10k of shares for the next 10 months or so.  Something like that.  Prices might be higher or lower in a year.  We just don’t know.

If prices fall 20% before you get started, you won’t buy shares, I can almost guarantee that.  Because you’ll feel like they could fall another 20% – and they could.  But this is the problem with trying to time the market or wait for better opportunities.  It’s just so damn hard and only obvious in hindsight.

Mathematically you’re usually (not always of course) better to put it all in ASAP, but emotionally averaging in tends to be more comfortable.  Either way, pick one and get started!

In short, no, I would not wait to see whether a storm does or does not hit.  I’d invest the cash as soon as comfortably possible, and continue adding savings regularly.  Remember, if you have other savings each month to invest, you can naturally get plenty more shares if lower prices do come around.  And don’t forget, you’ll be able earning dividends which you can reinvest at lower prices.

 

Question #9

Have you thought about possibly buying options to insure against losses in the share market?  A market downturn on a $1m share portfolio could reduce that $1m to $800k or even $700k for months or years…

I realise diversification among different LICs and index funds can help reduce the risk, and you are slowly buying in over time.

Like we are paying fees to LIC managers to manage the LIC.  Surely we could insure part of the portfolio for another 0.2%pa and sleep easier at night?  Dylan.

 

Strong Money’s Answer:

Another interesting question!  I haven’t considered buying options to offset a sharemarket fall, and I have no interest in doing so.  Reason being, the price volatility means little to me as we’re investing for a growing income stream.

The money I’m investing is going to be exposed to this risk and I accept that.  If I want to take less risk, I’ll hold more cash.  A simpler way to achieve the same thing.

Like most insurance, it can probably be expected to have a negative benefit over time, so it does come at a direct cost as well as complicating the process and creating extra work.  But don’t let me stop you from looking into it if that’s what you’re interested in.

 

Question #10

Hi Dave.  I agree that renting is cheaper than owning a property and so I’m considering renting out my apartment and then renting a nicer apartment.  This avoids all the selling/buying fees in upgrading to a nicer property and I can’t afford the extra $500k it’d take to upgrade!

So I might earn $500 per week rent on my property, and pay $700 per week to rent the new place.  But it doesn’t work out tax-wise because I’m fully taxed on the $500 income, yet I’d get no tax deduction on the $700 I’m paying in rent.  Hence (after-tax) my resulting rental income is roughly $280 per week, if I’m on the top tax bracket but I’m still paying $700 to rent.

Can I ask how do you make it work by paying rent and also renting out your home?  Because it seems more tax-effective to live in the property as opposed to renting it out.  Thanks.

 

Strong Money’s Answer:

Good question!  The thing here is, you’re trying to upgrade housing while making it cheaper somehow.  That’s unlikely to work.  Renting is cheaper than owning, for a comparable property, not for one that’s far more expensive (you said $500k more!)

You’d have to rent something equal or lesser value to your current place for it to make sense.  If you want a flash property, that’s going to cost you more money, period.

For high taxpayers in your situation that have already paid off their house (which it sounds like maybe you have), owning a home is pretty tax efficient, though still comes with hefty ownership costs.

If you were to sell and invest the proceeds into shares you’d pay tax on the dividends right now, so it may be more effective to wait until you’ve reached FI.  Then if you’re still keen, you’ll be in a low tax environment so you can sell your home and invest the proceeds into shares paying a decent income.  This would likely cover your (reasonable) rent comfortably plus provide growth over time, without the costs associated with owning.

 

Notes

Seems worrying about the market is becoming the norm lately.  And this is at a time when the market has had a good run.  How on earth are people going to cope when the market has a few bad years?  We’ll find out at some point!

One good piece of advice that I didn’t mention is to stop being sucked into the gloomy headlines.  The media’s job is not to create balanced, well thought-out articles, with the long term in mind.  It’s to create eye-catching, short-term focused scary shit, because we’re wired to seek that out.  So please, for the sake of your happiness, sanity and wealth, please get into the habit of ignoring it…

The long term is what matters, and if anything, a falling sharemarket is your best friend when you’re regularly investing money for FI!

Anyway I hope you found this Q&A interesting. As always, you can send me a question through my Contact Page, and I’ll do my best to answer it.  Thanks so much for reading!

Over to you – how would you answer these reader questions?  Please share your thoughts in the comments…

***Last chance to grab tickets to the Playing with FIRE Sydney Premiere – August 14th @ 6pm, UNSW.  I’ll be part of the Q&A session among a panel of Aussie Finance Bloggers.  Come along and say Hi!***

27 comments

  1. Great post as always. I enjoy reading people’s questions and seeing what the feelings are out there. It shows there are no ‘silly questions’ as there is likely someone else out there wondering the same thing.

    1. Definitely no silly questions – and it’s interesting to note how similar ones keep popping up over time.

  2. The arse seems to have fallen out of AFIC, Whitefield and, to a lesser extent, ARGO in the past few days, Dave. What do you think is behind that?

        1. When a company goes ex-dividend the share price will generally drop by the dividend amount that’s paid out. In the case of AFI it paid out a 0.14c dividend and went ex-dividend on the same day the market corrected.

          1. Hello. Slight change of question. To work out dividend yield, you add up the interim + final dividend payment, then divide by the share price. So in the case of AFIC:
            Interim Dividend 0.14
            Final Dividend 0.18
            Divided by 6.2 ish and you get 3.61 net (franked) dividend. What I don’t understand is which share price? The current? Gives a different result! The share price at Ex-Dividend time or actual payment day, it fluctuates a lot!

            Thanks.
            Geoff

          2. Geoff, what are you actually trying to work out? Dividend yield? Annual dividends (excluding special dividends) for AFIC are currently 24 cents per share. Share price is 6.28. So 0.24 divided by 6.28 = 3.82%. Add franking credits by dividing by 0.7 = 5.46% gross yield.

            Always use current share price as if you buy shares today, that’s the yield you’re purchasing at.

  3. Hey Dave
    First time poster but long time reader. Luckily for me I’ve discovered your blog a year ago and I’ve read every post since. I’m only 20 but have saved up nearly 50k that is just sitting in my bank account and had no idea what to do with it until I came across your blog. I’ve been wanting a passive investment strategy that’ll provide me with cash flow that’ll grow over the long term and now I’m convinced that LICs/ETFs are the best vehicle for this, after having done thorough research of course. Similarly, like a couple questions above allude to, I’ve been hesitant to start investing as I’m too paranoid about starting at the best possible time. This post has helped me overcome some of that analysis paralysis that comes with investing in the share market.

    But besides this, I’ve always wanted to get your view on the ‘BetaShares Australian Dividend Harvester Fund (managed fund)’ (ASX code: HVST). This EFT has a dividend yield of 8-11% per year and pays out monthly. Given the high yield and monthly payout of this fund, would you think this would be an appropriate option for growing your cash flow consistently? Other things to consider? Potential downsides? Interested to hear your thoughts on this fund and others like it. Keep up the solid work mate!

    Cheers,
    Bailey

    1. Thanks for commenting Bailey. Appreciate you being a dedicated reader!

      Great job with the savings – and really glad this post was helpful to encourage you to get started. Long journeys start with a single step, as they say!

      To be blunt, I hate that fund with a passion. I think it’s a joke. A classic yield trap. In fact, when I was writing for Motley Fool, I wrote an article about it here. Dividends are not growing, capital is not growing. Both are going backwards and the fund has delivered TERRIBLE returns since it started.

      If I thought there were any great high yield funds out there I would write an article about them, but unfortunately most are pretty lousy options and not in line with our goals here, which is a growing income stream from long term ownership of businesses (shares). That strategy and others like it (Plato LIC) are trading in and out around dividend dates in an attempt to provide a huge yield – that’s not really investing in my mind. I hope that helps Bailey and thanks heaps for reading! Remember, keep it very simple and avoid fancy sounding funds promising high returns 🙂

  4. Question #8.

    I believe I asked a similar question to you through email back in January, Dave. I had around the same amount of cash as Ricky and you offered similar thoughts, which I took on board.

    I dollar cost averaged over 5 months into LIC’s and ETF’s as I was more comfortable with this than lump summing and continued to ignore headlines.. especially the federal election and the franking credits drama, which fortunately worked out very well in the end.

    Took the opportunity today during the market sell-off to add VAS to my holdings and looking forward to dividend payments from LIC’s at the end of the month to purchase more next month!

    I think dollar cost averaging with a lump sum really helps alleviate the anxiety and allows you to get comfortable with the market.

    Cheers!

    1. At least my thoughts are consistent then lol 🙂

      Nice work Scott! Averaging in makes a big difference mentally even though statistically it’s better to invest all at once. The sharemarket is such a psychological game that I think it’s fine if we do certain things to make it easier on ourselves. No use following an approach that stresses you out!

  5. In response to Question 8…

    Something I came across on another blog (I think) was that everything that is known about the share market is already factored into its price. If timing the market was easy, no one would bother showing up at work because everyone would already be rich. And they’re not. Not even the guys working in Wall Street who know more about investing than all the personal finance threads on the internet put together.

    If it helps, my first foray into the share market was a $50k lump sum in September last year. I bought VAS at $80.60 and within months it was trading in the $60s. I was pissed off for a few days but then the other day it was trading at $87. My average purchase price is down to about $75 now and I’m way in front despite the ups and downs since.

    None of the gurus on this stuff — Warren Buffett, Jack Bogle, this blog’s author — say that market timing is the way to go. It’s purely psychological and you need to suppress that part of your mind if you want to be a successful investor anyway.

    I forget the stats exactly, but it’s something like: “miss the best 10 trading days in a lifetime and your overall annual return drops from 9% to 5%”. No one knows when those 10 days are… do you?

    1. Fantastic comment Chris!

      Yes it’s no doubt true that timing the market sounds great in theory but a nightmare or impossible in practice. Like you said, all the greatest minds (Buffett, Bogle etc) admit they have no clue where the market is going in the short run and don’t know anybody who does, and don’t know anybody who knows anybody who does! Haha!

      It sounds and feels smart to keep plenty of cash and make a prediction with all sorts of analysis but it’s the future – nobody knows. The sooner we accept we know nothing and commit to regular investing, the better off we are, and the process becomes vastly more enjoyable – watching your ownership and future income keep increasing.

      We need to embrace lower prices when we’re actively investing. The stuff we’re buying just got cheaper, and when the market eventually recovers, as it always does, we’ll be rewarded. Buffett’s two quotes about hamburgers and socks comes to mind 🙂

  6. Hi Dave,

    Not sure if this is the best place to ask you about it but here is my question re Raiz account. It works all good for me and out of sight created a decent investment of $4,000 and it keeps growing. And now I started to look further. Our ultimate goal is to live of the dividends but I couldn’t find an option in Raiz where dividends can be paid to my account rather than automatically invested. Which works for now but not in future. Am I missing something? Otherwise it seems that I will need starting selling these investments when reached FIRE which is far from ideal.

    Thank you.
    Yuri

    1. Hey Yuri – I haven’t really looked into Raiz. I know some people enjoy it for micro investing, but I can’t get interested in it lol. I’m not sure if you redirect dividends or not – it may be a case of having to make a withdrawal from your account instead? That’s always an option, but bit of a hassle I guess if you were just hoping to collect dividends to your bank account. Sorry I can’t be more help. Maybe someone else has more info….

  7. Hello Dave, recently discovered your awesome site, well done! I am 46 and have always been dead “keen” to have some passive income, well, I’m still waiting lol. I plan on following, to my best ability, this strategy, at 46 I’ve only got 14 years of work before I can “retire” but will it be enough?! And I also figure in 14 years I can take smaller contracts and still get paid dividends. Two questions: Can I convert from a DRP to been paid the dividends later (10 years example)? As I am on a high tax bracket now I would like to re-invest into the DRP but later received the income.

    Second question maybe someone here has thought of and Peter mentions it on a podcast and I think even his book is transferring the corpus to my children upon my death. I plan on looking into Family Trusts so I can use this vehicle to grow generational wealth because if I buy shares in my name then die with 1million (example) into shares, my kids would have to, one way or another, pay CGT on them on the transfer into their name(s). Love the blog and really great reading all your posts and peoples questions/answers.

    1. Hey Geoff – glad you found the site and are enjoying it!

      Great job on committing to a plan – it doesn’t have to be perfect, it’s best to just get started 🙂

      You can reinvest all your dividends now, but tax is still payable on them. The income still needs to be declared even though you’re reinvesting them. The only exception is using the DSSP plan from AFIC or Whitefield for example – they have an ATO ruling where you forgo your dividend (and franking), in exchange for extra shares. I wrote about this here. That kind of thing typically suits high income earners, but be sure you are totally happy investing in those LICs before jumping in just to save some tax!

      My understanding is your children do not have to pay tax to receive the shares after your death. Only if they sell those shares, then tax is payable. See here and here.

      Hope that answers your question, and thanks for reading!

  8. As always great Dave.

    May I ask a tax question, maybe a simple one, if I bought 10 share $10 each and a few years later 10 more, $20 each this time. If I needed to sell 5 of them $30 each, what is my capital gain, is it $50 or $100?

  9. Howdy Dave.

    Have you heard of the new Magellan High Conviction Trust? It’s an LIT.

    “Billionaire Mr Douglass told the Financial Review on Tuesday that the new ASX-listed Magellan High Conviction Trust would avoid “conflicted remuneration” by paying no fees or commissions to brokers or advisers when raising between $250 million and $3.5 billion from its 70,000 existing investors and the general public.” – Financial Review.

    I was listening to Alan Kohler’s Money Cafe pod today and he was saying Magellan will pass the 2.5 – 3% they’d normally pay in commission’s onto the investor.

    Keen to know more.

    1. I have heard of it. Hamish seems like a pretty smart and sensible guy from seeing him interviewed a few times. His Magellan funds have done reasonably well I think and he’s initiated a few things to treat investors better than other managers which is great. But overall the fund fees are very very high, at around 1.3% plus performance fees. It’s hard to feel good about paying such high fees. This new fund may do well but it will be a concentrated portfolio which comes with higher risk attached.

        1. Yes over how long though? Only a few years, due to US exposure. A US or global index fund has had similar returns with minimal fees. Long term returns will not be 16% pa. I’m not saying avoid it, but I would not be expecting such high returns going forward. It’s important to put it into context.

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