Give me the long-term predictability of shares, at any age

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As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.

It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”

Warren Buffett, 2017 letter to Berkshire Hathaway shareholders, published 24 February 2018.

I noticed with sadness that an article promoting ‘life cycle’ investing was published in Cuffelinks last week, pushing this asset allocation technique as a sensible retirement alternative.

In 2015 Glenn Stevens, the then Reserve Bank Governor, pointed out the huge cost required today to produce a reasonable level of income and, more importantly, generate a sustainable income for longer retirements.

“In a low interest rate world, the problems of providing retirement incomes will become ever more prominent. The very low level of yields on fixed income assets means that it is very expensive today to purchase a secure stream of future income, which is what someone who is retiring is usually seeking. And there are more of such people, living longer.

The retiree can of course respond to this by holding more of her portfolio in dividend-paying stocks – accepting more risk. She may hope for a dividend stream that is fairly stable from year to year but that tends to grow over time.”

Glenn Stevens, ‘The Long Run’, address to the Australian Business Economists, 24 November 2015

Put simply, from the heady days of the late 80’s/early 90’s where a $1 million dollar bank deposit would have produced around $140,000 income a year, on this same amount we have seen the income fall to around $30,000 in 2018. I refer to this as the ‘cash crash’. If the sharemarket fell by 80%, can you imagine the outcry?

Challenging the definition of ‘risk’

Investing is about survival and we are living a lot longer in retirement than most people imagine or plan for. The greatest danger is locking into artificially low rates of return for long periods, such as with bonds, term deposits or annuities. I am reminded of the Law of Unintended Consequence when seeking the ‘security’ of cash instruments.

Stevens also reinforced my theme when talking about people facing retirement today when he said; “They have to accept a lot more risk to generate the expected flow of future income they want”. I accept that he is using the traditional measure of risk and is referring to the volatility of capital. I, however, will not accept that volatility of capital is a satisfactory measure of risk provided one is a long-term ‘investor’.

On the basis that a picture is worth a thousand words, the ‘mothership’ (as I call it) chart below, comparing cash deposits with industrial shares over 37 years, hopefully speaks for itself. This example shows $100,000 invested in both industrial shares and term deposits in 1979, with all income from both investments spent and not reinvested. After receiving interest payments every year, a term deposit is still $100,000 after 37 years whilst shares, in addition to the income received, are now worth $1.9 million. I must add, as with the interest, no dividends have been reinvested during this period.

This is why I prefer the safety and security of the sharemarket to risky assets like term deposits. I can live with short-term volatility over 40 years. It is my friend during accumulation phase as I inevitably buy more when the market is cheap and less when it is expensive. In retirement, I want income and for me, the volatility in the value becomes a non-issue.

The life cycle investing argument

In the same vein as the Cuffelinks article on life cycle investing, an article titled, ‘Your super can grow old gracefully’ in the Sydney Morning Herald in 2015 caught my eye. The chart below from the article explains graphically how an investor can automatically be transitioned from ‘risky’ growth assets into more conservative investments as they approach and then enter retirement. It is posited as a sensible and conservative approach.

Source: Sydney Morning Herald, 5 March 2015

Proponents of this strategy explain that this will ensure the security of your financial future. Thankfully, the authors of the article raised legitimate concerns but what annoys me about this simplistic approach is that it intimates an ‘account value’ without splitting it into the two components of capital and income.

It should be clear from the two charts above that theirs is the antithesis of mine. According to the second chart, as one grows older, investments will be shifted away from the yellow in my chart and more into the red so that by the time retirement comes, having invested for 40 or so years, the retirement future is now jeopardised. In addition, the entire account balance in the life cycle fund will be substantially less than mine as ‘they’ will have been selling shareholdings over the years and switching to cash.

To give you a sense of the compounding effect during the accumulation phase of life, if I had reinvested the interest and the dividends, the account balances would be $1.3 million for cash and $12 million for shares over the 37 years. Let’s take it a step further. You are now about to retire, and the account balances above can be used to produce an income. So, looking at the chart above, in retirement, your starting point for cash remains the $1.3 million whilst your starting point for shares will be $12 million.

The thought of this life cycle model being applied to our adult children strikes fear into my heart. If ‘Alice’ had stayed in the yellow, as per my chart, for all of her working lifetime, her eventual retirement pot would have been substantially greater than the outcome as proposed in the shifting asset allocation of the second chart. She, like my wife and I, would have no need for cash as a buffer to smother the volatility. The opportunity cost of the life cycle strategy will be huge. It’s the opportunity cost that no one talks about and the largely irrelevant volatility. When one hits retirement, one simply stops the reinvestment and turns on the dividend stream from a substantial asset base as a pension.

Why sell off the best compounding asset?

Commentators are always banging on about compounding, the ‘8th wonder of the world’. So why do the supporters of life cycle investing undervalue it in the latter stages of the accumulation phase of our lives? They are going to guarantee that as you progress through your working life, the strongest compounding (income-producing) asset will be sold off to buy something that will produce the lowest income stream.

The irony is that we are only now beginning to recognise the longevity risk, and retirements stretching out to equal our working lifespan. With most of your retirement fund in ‘defensive’ investments for 30-40 years, the experience of the last 37 years, as displayed in my ‘mothership’ slide, being applied to your retirement years should hopefully ring warning bells.

There is nothing conservative or defensive about term deposits or bonds, in fact, quite the opposite. In the longevity stakes they rank as the riskiest asset you can hold. Why must we cling to the outdated concept promulgated as ‘modern portfolio theory’ from the 1940’s? Volatility does not measure risk, it merely indicates the high level of liquidity.

Personally, I refuse to expose my family to these risky deposits, preferring instead the boring predictability of shares.

 

Peter Thornhill is a financial commentator, public speaker and Principal of Motivated Money. This article is general in nature and does not constitute or convey specific or professional advice. Formal financial advice should be sought before acting in any of the areas discussed. Share markets can be volatile in the short term and investors holding a portfolio of shares will need to tolerate short-term losses and focus on a long-term horizon.   

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78 Responses to Give me the long-term predictability of shares, at any age

  1. Nodrog June 11, 2018 at 9:28 PM #

    In case Peter doesn’t see your late post.

    Prior to being listed as BKI the portfolio was initially created within BKW back in the 1980’s. BKI has minimal resource and listed property holdings make in predominantly an Industrial share focused portfolio. Albeit recently converting to external management the management agreement has set the Mgr fee at 0.10%. Other operating costs result in a total fee of around 0.17% which is very cheap for a fund their size given the much larger LICs charge similar. BKI could be considered part of the Millner family stable of funds which consists of the likes of SOL, BKW and MLT (a very old LIC). Putting this all together albeit not exactly meeting Peter’s previously mentioned rules it comes close enough:

    1. Industrial focused portfolio
    2. Been around a long time
    3. Very low fee
    4. Although now externally managed it’s management agreement especially in relation to rock bottom fee makes it somewhat unique and not all that different to being internally managed.

  2. John June 10, 2018 at 9:43 AM #

    I have just seen this thread and there are some great comments and thanks for the article Mr Thornhill.

    In regards to your LIC holdings. Do BKI meet the above criteria you mentioned? As they have external management and have not been around for 50 years. Just wanted to clarify this. And I understand you hold BKI in your portfolio. Is this correct?

    Thanks

    John

  3. Jeff March 21, 2018 at 4:03 PM #

    How would you mitigate a poor decade of economic growth straight after retiring? Similar to USA from 2000 to 2010. Dividends would drop straight after retirement and the cash buffer would all be eaten up by topping up the withdrawals, especially if dividends don’t return to pre retirement levels for 10 or more years. Michael Kitces and Wade Pfau have done some research (sp 500) on a U shaped equity allocation just before and after retirement. This may help alleviate the pain?

    • Peter Thornhill March 21, 2018 at 8:21 PM #

      Not sure where you are sourcing your data from? I have the S&P 500 broken into income and capital; similar to the chart in my original article. Dividends continued growing from 2000 until the GFC, dropped back and then started to climb again. I also have the annual returns on the All Ords from 1900. There has never been a period of more than 2 years of consecutive negatives. If that’s the experience over 117 years I cannot understand the need for 5 years or more of cash to carry one through. I’m so over academics. Unless of course, they are expecting the next meteor strike on planet earth.

  4. James March 19, 2018 at 10:37 AM #

    Hi Peter,
    Any comments about your retirement income strategy in the event that Labor wins the next election and changes dividend imputation as they have flagged?
    Possible ways to minimise the damage?

    • Peter Thornhill March 21, 2018 at 8:31 PM #

      Business as usual James. How did we cope with tax rates at 49% and interest rates of 16%. I lived in the UK during the 70’s under a labour government (Harold Wilson and Chancellor Denis Healy) with a top tax rate of 98%. Healy’s Paul Keating moment was; “we will squeeze the rich until the pips squeak”. Life went on. By the way, there was also an investment income surcharge of 15% on top! The tragedy was the colossal waste of intellectual horsepower trying to avoid tax. Best way to minimise the damage if it is seriously a concern is to emigrate to a low tax region. In the 70’s all the UK rock bands moved to France.

      • Gordon A March 24, 2018 at 5:03 AM #

        The loss of franking credit refunds will also result in those of us with SMSFs following Peter’s strategy having to sell shares much sooner in life to meet minimum pension withdrawal requirement.

        The annoying thing is that many Public Offer Funds won’t be impacted by this proposed change. Pensioners in these funds will still likely receive their franking credit refunds. SMSFs may become less popular. Perhaps that’s Labor’s intent?

        I think LICs will cop a capital hit (perhaps permanent) if the change gets implemented especially the more active LICs that generate income mostly through trading (capital gains). Other structures such as LITs, unlisted Funds and ETFs can pass the capital gains intact to the investor. And of course capital gains is tax free in pension mode. LICs unfortunately would pay company tax on profits but the imputation credits would be lost to the pension member.

        The positive is that LICs will likely be discounted below NTA to compensate for any perceived disadvantage. Expect an initial knee jerk reaction which could result in outstanding opportunities. Not good for capital value but great for income investors able to continue to accumulate them. A return to the good old days where my favourite older style LICs were often trading at a discount to NTA rarher than a premium as is the case in more recent years.

  5. Graham Hand March 14, 2018 at 11:30 PM #

    Hi Rob and Justin, yes, there’s no tax on the capital gains in pension mode, plus 15% tax in super with a 50% CGT reduction, so likely to be less than the 17.5% tax on taxable component paid to non-dependants. This ‘death duty’ should receive more attention, and it is covered in Mark Ellem’s article this week.

  6. Justin March 14, 2018 at 7:41 AM #

    Surely Graham, in trying to avoid the 17.5% tax you mention on paying superannuation out to a non dependent on the death of the retiree, you are going to lose more in capital gains tax? For shares held for a long time, even with the 50% CGT discount (increasingly unlikely to stand the test of time too, especially if a Labor govt is elected) the capital gain could be enormous!

    • Rob March 14, 2018 at 8:43 AM #

      Not if you’re in pension phase when you sell, then commute the pension and withdraw a lump sum after that.

      • Justin March 14, 2018 at 6:37 PM #

        Ah, now I see. Thanks Rob!

  7. Sean March 13, 2018 at 2:18 PM #

    Is this strategy undermined by Labor’s just-announced changes to the treatment of franking credits should they be elected?

  8. John Page March 10, 2018 at 2:20 PM #

    Peter I have been a great fan of you and your financial philosophy. I do have one issue that I fail to understand and hopefully you may be able to help me.
    With my SMSF in which I have only LICs, I am required to withdraw each year 6% of the total as at 30 June the previous year. With the LICs you have referred to it is impossible to earn 6% so there would be a need to reduce the capital.
    How do you do it?

    • Peter Thornhill March 11, 2018 at 12:37 PM #

      You have raised what will be an issue for all retirees John. My simple-minded solution is as follows and I am assuming that you, like me, can live on the income that was received prior to be pushed up to 6%.
      As we age, the mandated withdrawals will increase. We have opted to live on the grossed up income provided by the franked dividends, roughly 5%. In reality, as old habits die hard, we don’t spend it all anyway.
      It must be accepted that the longevity risk is getting higher (my MIL died at 96 and my mother just died at 97), and the likelihood of my wife outliving me requires serious consideration.
      However, as the amount we must withdraw will exceed the dividend flow by a larger and larger margin, we will be forced to sell shares. As the income we receive will be greater than our requirements (by choice) I will use the excess income to repurchase the shares in our own names outside the super regime.

      The end result will be a gradual transfer of the shareholdings out of super to be held personally. This will ensure that the growth in our income, whilst not as tax effective, will continue until final death.

      • Graham Hand March 11, 2018 at 4:39 PM #

        There is also sense in this to avoid the 17.5% ‘tax’ paid on superannuation paid to a non-dependant. In fact, it would be a good move to have the paperwork ready to sign to transfer all money out of super as you lie on your deathbed. $175,000 per million is a decent incentive.

  9. Ben March 9, 2018 at 8:58 PM #

    Hi Peter,

    You’ve earned 15% p.a over the last 17 years?

    I thought you invested in good old LIC’s like AFIC?

    Their returns over the past 10 years haven’t been great 5.5% p.a, and only a smidge higher than the ASX 200 accumulation.

    Also, on a seperate note, the Aussie market is heavily dependent on the big 4 banks and their yields. It’s been a wonderful twenty years for the banks, however they are faced with three problems: our very high household debt levels (which they’ve profited from), disruption, and a Royal Commission!

    • Peter Thornhill March 10, 2018 at 1:48 PM #

      Not just LIC’s Ben. Whilst they are core holdings now I have held direct shares. Two employers going public whilst working in the UK. Ditto here. In the early years, following our return, I also bought direct shares.
      Dumb luck also had a big role to play; Cochlear floated out of Pacific Dunlop in 1995 at $2.50! Similarly with CSL.
      In fairness, I could also list the ones that went belly up; thankfully not many.
      My financial advisor also has to take credit for keeping me out of trouble.
      My concession to the ‘lifecycle investing’ is to wind down the direct holdings and shift more to the LIC’s. I don’t want or need a large number of shareholdings as we age.
      The other thing that helped along the way was my refusal to touch resources and listed property. This alone would account for a fair part of the outperformance.

  10. Phil Brady March 9, 2018 at 10:57 AM #

    Excellent summary of the problem Andrew and sums up the dilemma of managing multiple clients, not just your own portfolio, or Peter’s in this case, on which you can manage your own emotions or not. Much more difficult to manage other’s emotions. Part of the answer is education, but in my experience as well, the education may not actually sink in, or it is abandoned when fear becomes real, hence we revert to the ‘safe’ approach. The no win no fee lawyers would have a field day with portfolios 80% in Australian equities, no matter the theory. That’s why some choose to be educators and theorists I guess, and not personal advisers!

    • Rob March 10, 2018 at 10:13 AM #

      Spot on Phil,
      I once considered very seriously becoming a financial advisor (I was already involved in the finance industry in another capacity) however I was unable to reconcile my own firm views on high ASX asset allocation and the importance of income above all else, to the “standard” approach of the “balanced” portfolio and the much lower outcomes that must occur as a result.
      So I just stayed where I was and in the end was able to personally retire some 10 years ahead of most, if not all, of my colleagues and peers. This is not to “brag”, I actually state this with a sense of disappointment for the missed opportunities of the majority caught up in the mire of the bog standard asset allocation world.

    • Peter Thornhill March 22, 2018 at 10:15 PM #

      I am so glad I never became an advisor. Unconstrained by the ‘religious dogma’ of the industry I was able to step out and speak my mind. Just arrived home after presenting for an accounting firm in the Sydney CBD. The rare but treasured experience of having an elderly couple approach me; they had flown in from Armidale to thank me. They attended a presentation I did 20 years ago and wanted to thank me for totally changing their lives.
      GOLD!!

  11. Andrew Rowan March 9, 2018 at 10:27 AM #

    Hi Peter,

    Thanks for your article.

    I have been an observer of yours over many years and agree wholeheartedly with what you say. As an adviser for 25 years, my career commenced in 1993, and shortly after that, I came face to face with the Bond Crash of 1994, when even “safe” investments fell in value (collapsed), and obviously every “crash” since that time.

    When I was younger, I compiled possibly too many spreadsheets to prove theories such as yours for myself using actual client situations; nowadays I am happy just to know the truth.

    My observations during over time is that volatility has never really mattered in client portfolios provided that they have had sufficient cash to meet their income and “emergency” needs.

    In theory, I would like all clients to say hold near 100% in equities in their portfolio. However in the real world as advisers, we have to contend with the media setting expectations and trying to scare the daylights out of the public whenever the sharemarket undergoes repricing from time to time (what they call Australian’s losing “billions”).

    Coupled with this, is the concept of “Risk Aversion” where some people simply do not have the appetite for any volatility, such is their fear that they will lose their hard earned.

    In such cases, and as advisers we are under an obligation to “know” thy client and invest their funds accordingly. I know that when I invest a client’s money in a “conservative portfolio,” I am setting up the client to earn less over time.

    If on the other hand, I were to do the right thing by the client and invest in a way that we know the client will be better off (i.e. shares), then when next the market falls, my conservative client will in all likelihood complain. This could then cause them to sell their investments of their own volition and crystallise the “loss”.

    This scenario would likely end up with me meeting the lawyers.

    In my experience volatility for our clients is a concept until it becomes real, and the portfolio report shows a “loss”. That is when the real test is applied, and then when they listen to the media, they panic.

    My question then is how in the face of knowing what is right, how then do we deal with the reality of fear, risk aversion, misinformation and prejudice in clients.

    (sorry if this has been already asked, as I have not read through all 55 replies).

    Andrew

    • Peter Thornhill March 10, 2018 at 1:57 PM #

      Andrew, you have hit the nail on the head.
      Fear is based on ignorance; knowledge is power.
      I have always felt for advisors.
      Know your client? What a joke. You know many of them only until things don’t go their way and then it is your fault.
      The GFC was a great opportunity for many ‘clients’ who signed off on their plans to activate a ‘put’ option.

      This is why I left the industry. I’ve spent the next 17 years trying to provide sufficient knowledge to enable people to make better quality decisions.

  12. Jack March 8, 2018 at 10:49 PM #

    In retirement, income defines your lifestyle, not the size of your capital (eg, expensive house). In a low interest environment, poor returns condemn many retirees to supplementing income by progressively liquidating capital. Selling assets progressively increases longevity risk. Selling assets to generate income also exposes retirees to volatile market prices. Retirees who increase their asset allocation to cash or fixed interest in order to lower the volatility of market risk must also accept lower overall returns, thereby increasing longevity risk.

    Australian equities are a conservative and stable source of income, producing greater income than any other asset class over time. Provided that capital is not liquidated to supplement retirement income, the volatility of the market prices is not a significant risk. Dividend income from equities depends on growing company profits, not market prices.

    Inside a SMSF in pension phase, the full return of imputation credits from the ATO is a cash bonus. My SMSF consistently returns more than 7% income which is more than I need and allows me to continue to accumulate shares. Any growth in share prices merely makes these new shares more expensive.

    My wife and I have been funding our retirement for 10 years, through some turbulent equity market cycles, with over 90% exposure to equities all the time, without the need to liquidate capital. This strategy produces high income that also keeps pace with inflation, while keeping income-producing assets intact. We can see no reason why that should not continue, regardless of how long we live. We do not consider that we have a longevity risk. Instead we have an estate planning problem.

    • Rob March 10, 2018 at 10:00 AM #

      Spot on, Jack.
      These are our own circumstances almost to a tee. We are very comfortable with 90% exposure to ASX stocks and LICs both inside and outside of SMSF, and have been since pre GFC.

  13. Richard Brannelly March 8, 2018 at 12:33 PM #

    Another great article thanks Peter. In my view lifecycle investing is all about mitigating the business and brand risk for the big super funds, and not at all about mitigating risk for investors. Interesting that the increasingly widespread use of lifecycle investing is a uniquely post GFC event?

  14. Phil Brady March 8, 2018 at 10:14 AM #

    I didn’t choose that point Peter for any other reason than to show reality to incomes. If 80K was the lifestyle need then their income didn’t recover to that for nearly 10 years. So yes they needed a buffer of around 20% of the pre GFC portfolio value. Dare I say invested in Bonds! Dare I say a bit of a Balanced portfolio. Also since we are talking about starting points, and they do matter – your chart also conveniently starts in 1980 – the market P/E was under 10 at that stage from memory so well under average i.e. a great starting point and bound to make numbers look not bad over the next 15-20 years. Also, because I look at alternatives and risks, in the late 80’s investors were able to lock in lifetime annuities at 16% – fact. That is around 64K on your balance then of around 400K vs share divs around 20K. plenty of people would take that virtually risk free offer. Hindsight is terrific, but my point is to survey the landscape at the any point in time and make a decision after considering all alternatives, but I realise you are not suggesting a one size fits all approach.

    • Peter Thorhill March 8, 2018 at 12:31 PM #

      Thanks Phil. I didn’t choose 1980 either.
      Prior to December 1979 none of sub indices existed.

  15. Geoff March 7, 2018 at 11:24 PM #

    To show the merit of holding shares, I’ve done a simple example of someone who retired either at the end of 2007 or 2008 and held shares until 2014, which captures the impact of the GFC. To keep the calculations simple I picked Westpac as a proxy for an SMSF portfolio invested wholly in blue-chip dividend-paying Australian shares.

    If that investor retired at the end of 2007 when his portfolio held 25,000 WBC worth $698,000, the SMSF would have received dividends in 2008 of $50,750 (including franking credits). That would have fallen to $41,500 in 2009 but then would have climbed to $65,000 in calendar 2014.

    But had that investor postponed his retirement to the end of 2008, his portfolio at retirement would have been worth only $467,000 (including the extra 2,540 shares his SMSF would have purchased at year end with the dividends, net of 15% tax, received over 2008. That’s a fall of almost exactly one-third. Sounds like a terrible loss.

    A sequencing-risk-driven calamity for the investor? Far from it, since the SMSF would have received dividends in 2009 of over $45,000 increasing to over $71,000 in 2014. That’s 10% better than had he retired at the end of 2007 despite the one-third fall in value by the end of 2008!

    And it could be even better than that. I’ve assumed that the investor drew down a pension equal to the full dividend stream, over $45,000 in 2009, received by his SMSF, which equated to nearly 10% of the opening balance, $467,000 at the end of 2008. Had he instead drawn down just the minimum 4% of the opening balance each year, as do many SMSF pensioners, there would have been surplus dividend income left in the SMSF each year, leading to the purchase of still more WBC and therefore still more dividends and pension payments.

    The illustrative results of this example would apply to anyone who maintained a shares-oriented portfolio over the period and didn’t succumb to the advice of well-meaning advisers to change horses midstream and switch out of their shares at retirement, bad advice which would have resulted in temporary market-value fluctuations being crystallised into permanent losses.

    • Peter Thornhill March 8, 2018 at 9:29 AM #

      Well done Geoff. A splendid effort.

  16. Phil Brady March 6, 2018 at 12:37 PM #

    I’m always interested in what charts don’t say as much as what they do say. I can’t help but think that this chart would be much more useful if a persons starting required income/inflation linked was added. In the period pre GFC where income rose to 80K, it needs to be determined whether the investor needs all that 80K to live or they are only living on 50K. The subsequent drop to 50K meant that they would be required to sell growth assets to fund the shortfall, i.e. the recovery of capital wouldn’t look anything like the chart. The chart assumes they could adjust to the 50K. In the real world this is unlikely, but that is the case with all theories.

    • Peter Thornhill March 6, 2018 at 5:12 PM #

      Your arithmetic is correct Phil. Conveniently choosing the GFC as the starting point certainly does make shares look dodgy!
      If people, having chosen shares, are unable to adjust to a short term correction in income and insist on maintaining their spending then they stuffed up. As I have pointed out in previous comments, they should have had a buffer just as we did. It would be foolhardy in the extreme to ‘assume’ unbroken increases.

      Now, let’s assume they didn’t touch risky shares but used safe term deposits? With interest rates declining by around 80% from their peak, how are your sensible people coping with their income slashed? Spending capital?

      Call me old fashioned but the aphorisms that have guided our lives are; spend less than you earn and borrow less than you can afford.
      In the real world necessity is the mother of invention.

  17. Paul March 5, 2018 at 11:19 PM #

    Thank you, Peter Thornhill.
    Regards.

    Thank you, John Tatler.
    Regards.

  18. John Dwyer March 5, 2018 at 4:08 PM #

    All true except that ASIC will crucify any advisor that recommends anything other than the prevailing practice of “asset allocation”, and “conservative cash and bonds” for retirees or even people approaching retirement. And this is more ridiculous at the bottom of the rate cycle. The entire “industry” is now premised on avoiding litigation rather than a practical understanding of how financial assets actually work.

    • Peter Thornhill March 6, 2018 at 11:20 AM #

      Thank you John, too true. This is why I left the industry in 2000.
      I am particularly concerned about locking in low rates on long term fixed income investments at present. A hell of a time to be locking in an income stream.
      Thank you also to Graham for reminding me of the requirement of the authorities, you must ignore everything I’ve written as it could be, perhaps, maybe or possibly construed as advice. Phew.

  19. Graham Hand March 5, 2018 at 12:57 PM #

    I emphasise that while this is an excellent discussion, Cuffelinks is not licensed to give personal financial advice, and any replies from Peter must be considered general information without knowing the personal circumstances of anyone. Peter’s strategy will have short-term volatility regularly and few investors know whether they can tough it out over 40 years as he describes, especially in a panic. Cuffelinks is not responsible for any actions taken. Cheers, Graham

  20. Patrick March 5, 2018 at 12:50 PM #

    Great article and great feedback! You mention showing your hand and you mentioned the old school lics such as Argo, Milton BKI and Whitefield from previous articles and posts.

    I have a query in regards to a 20 something year investor with no home loan debt (equity) available for equity loan into lics and wanting to DCA into say BKI and Whitefield for the next 25 to 30 years.

    I’m sure this investor wouldn’t blow himself up if all he did was purchase this 2 lics every quarter for the next 30 years when funds were available and ticked the drp box and also bought the share purchase plans and rights issues and rode out the volatility of the ups and downs of the share price whilst focusing on the dividend income stream and utilising the equity loan against the ppor when the market well and truly nosedives?

    If I recall you mentioned that your son’s are basically riding this lic dividend train also without trying to time the market or share price forecasting?!!!!

    Regards!

    • Peter Thornhill March 6, 2018 at 11:33 AM #

      You’re right Patrick. All 3 sons have been investing for a number of years now. The regular share purchase plans (SPP) and rights issues are a zero cost opportunity to increase their holdings on a regular basis. Like their Dad, they all gear; eldest using the house to secure a line of credit and the other two using margin loans. Rather than putting in frequent additions, they plough the dividends back into the loans and then take bigger bites less frequently using the SPP and rights issues as zero cost entry points.

      Without taking up too much space, our eldest son recycled his dividends through their non tax deductible home loan as additional capital repayments, then redrew them from a parallel tax deductible line of credit. As the dividends grew it accelerated the home loan repayments allowing them to pay off their home in 10 years. I might add that the tailwind for them was the fact that they bought a ‘modest’ house.

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