# Any advice for the undercapitalised?



## cashcow (18 January 2006)

G'day all

I'm pretty new to this, but will say there are a great many smart people here --I mean really "life experience" smart and, from the sounds of things, their portfolios reflect that.  I'm rapt that I get the opportunity to listen, learn, apply and (hopefully) contribute. Thumbs up!

There is a wealth of experience, knowledge, and food for thought right here in these fora.  I've been lurking for a few months but finally decided to join up a few days ago.  Know what hooked me, and inspired me to re-evaluate everything I thought I knew? - the thread(s) on positive expectancy!  So kudos to tech/a and other luminaries who've contributed.

Ok, now that I've said g'day, I have a question.  There's been more than a random smattering of talk about how dangerous it is to start trading a strategy (even a profitable one) if you're undercapitalised.  I can see the basis of this concern and I take it on board.  

The problem I have is that my current circumstances dictate that building capital is going to be a very slow affair (despite rigorous budgeting and discipline), which is somewhat frustrating.  Not that I will risk any real money before my "numbers" dictate I should, but I'm curious to know what other people would do in my situation.  I know I could get a margin lending facility, but not sure if that's the best strategy at this time - plus the numerous mentions of Power of Attorney in the prospectus are somewhat daunting : .  I don't know enough about CFDs besides their basic definition (and I try not to dabble in things I don't understand yet).

At present I've stuck my savings in a reasonable managed fund and contribute to it regularly until hopefully one day in the not-too-distant future, I can liberate some of it and try things my way.

Are there any other real options besides these for someone who doesn't yet have 10k to invest?

Cheers!


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## ob1kenobi (18 January 2006)

Firstly Cashcow, welcome to ASF. Before I go any further, what I'm about to write is merely the reflections of one person, not advice. It could be an idea to read through the different forums, especially the Beginner's forum. You say that you've been lurking, so I am assuming from what you've said that you've started that process. Read widely, especially good books and magazines (eg. Guppy, Your Trading Edge Magazine, financial pages of the newspapers, etc, etc). Hook up with a broker that suits your needs. If you are going with the online brokers check a number of them out before settling. A number of members find Comsec suits their needs. Personally I use E-Trade. To start an E-Trade account, you'll need $1000, from memory Comsec requires $5000. Whichever way you go, there is a capital requirement there. Note you only need that to open the account, you can then use it to trade. find the research area of E-Trade invaluable, I'm sure Comsec users would say the same about Comsec as well.

As for trading and being undercapitalized, it is never wise to run a business undercapitalized. Think of it as a business. All businesses need a business plan, in trading, good traders have a trading plan. Write it down, your goals, your expected costs, expected games, your research methods, what triggers a buy trade and what will trigger an exit from the trade (including stop / loss). Always rely on your own research and never enter a trade if you're not willing to lose money. There are gains to be made, there are also losses to be made! Learn from the losses and appreciate the gains.

You should give consideration as to whether you're an investor or trader. This is important and ultimately helps determine your trading strategy. It also has taxation implications which you should be aware of (Capital Gains Tax v Income Tax). The ATO website has information on this at http://www.ato.gov.au and would be worth a visit. If you see yourself as a trader, what timeframe are you working in?

You need to consider whether your going into it for Income purposes, Capital Growth purposes, or whether you're buying stocks purely because they are good value at the moment or whether you plan to be a high risk trader (not encouraged by the way!). As you are undercapitalized, I would suggest that your looking at a growth strategy supplemented by whatever income is derived from dividends, possibly from undervalued stocks. In this scenario, you would be likely to buy now and sell in 12 - 18 months time when the price has increased, thus allowing you to grow your capital and reinvest the proceeds (less tax obviously). The minimum amount for a buy trade on the ASX is $500 if you don't already have shares in that company. Once you have shares, you can add to that portfolio by buying some more. Note that $500 won't see you make massive gains over the short term, but you can grow it over the short term. Somewhere along the line you need to consider some leverage buy borrowing. 

This all means that you need to consider your financial objectives carefully and possibly seek professional advice. You said your money is in a managed fund. So long as it is growing, that might well be the best place for it at the moment. Whilst it is there growing, paper trade the ASX. This allows you to test your trading system and refine it, so that when you do come to trade, you’re a bit wiser.

Good luck!


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## ob1kenobi (18 January 2006)

Cashcow, before I forget. Until you have a good, solid understanding of buying and selling shares, don't leap into Options and CFD's, etc. If you do, make sure you really know what you're about. Some other members may talk further about this but I think it's important to get the basics right first up.

Regarding Capital Gains Tax, the following link from the ATO site should help.



http://www.ato.gov.au/individuals/content.asp?doc=/content/20427.htm&pc=001/002/002/010/004&mnu=1007&mfp=001/002&st=&cy=1

Again, good luck!


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## tech/a (18 January 2006)

ob1kenobi said:
			
		

> Cashcow, before I forget. Until you have a good, solid understanding of buying and selling shares, don't leap into Options and CFD's, etc. If you do, make sure you really know what you're about. Some other members may talk further about this but I think it's important to get the basics right first up.
> 
> Again, good luck!





Here here!!

OK.
Firstly undercapitalisation leads to magnified emotions in trading.
Emotions in trading are like emotions on the battlefield they can kill you!

So now we know the enemy----how to solve the problem.

(1) You have to get a home that will appreciate with little effort on your part.
Sure you can reno and add value.This is where high return can come with minimum effort.You can rent aroom or so if your in the position to do so and minimise your costs.You may even be able to live there and be positive cash flow.(Over the longterm this should be your goal,actually multiple homes should be your goal,but remember "There must be a reason that a home will increase in value" Renovation,Position,Demand,Value,Access etc,dont just buy for the sake of ownership.)

(2) *Not in the position to get a house * and not likely to be able too for a while.
(Find a way!).
Then you must start thinking in terms of *% return NOT $$s*
Thinking in $$s will bring you unstuck almost instantly.If you can return 20%+ a year then your doing better than 90% of the country.
On $5000 thats $1000.

Now if it was me,I would consider one stock (I think there is someone here who uses this method---become an expert in a stock or 2,a very valid trading method)
Use an online broker,trade longerterm (If I had a bank of $5000)
You understand Numbers so trade something with Numbers that you can refer too and that way know whether your trading is profitable (by staying within the limits of the numbers of a profitable method).Drawdowns and being wrong are part of the business so you need to know what these figures are so that when they do happen you know whether the initial drawdown is within limit or the string of 5 losses is within tolerance.

At around $10,000 the world of Margin loan trading opens up and then you could investigate the use of margin on your funds.If successful your returns on investment can double,but can be a two edged sword.Eventually Exponential Growth cuts in as does compounding.
Understand RISK.
Like anthing treat it as a business.

Run a few trades here and learn from LIVE success or failure and the comments that will come.
If you can habitually return 20% or more then the day you have seriuos money to invest you'll have the confidence to do so.

Seekout a mentor/s you must know someone who is successful,they will normally be happy to share some snippets if asked correctly.(Dont be afraid to ask!)

Develope good trading and investment habits.
BE PATIENT.


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## bullmarket (18 January 2006)

Hi and welcome cashcow

I agree with the earlier posts but I'll add my thoughts for what their worth.

Firstly, you mentioned you currently have funds invested in a managed fund and contribute to it regularly. You also mention that you budget with discipline. These are all positive attributes and are an encouraging sign. 

I also assume you have a purpose/objective in mind for the funds in your managed fund atm...ie.....saving for a deposit on a house if you do not allready have one or maybe just as investment capital to grow over time.

If you plan to possibly use those funds as a deposit on a house or investment property in the future then imo a relatively low risk investment for now would be to leave the funds in the managed funds assuming the fund has been performing well and is invested in various asset classes like shares, property, bonds etc.  To invest less than $10k directly in shares limits you to at best only a handful of stocks (say 3-4 at the most otherwise even commsec's $19.95 brokerage becomes expensive).  Whilst, if you researched well, these handful of stocks could provide very good returns, imo you are exposing yourself to higher risk because of the low number of holdings as opposed to the diversity of the spread of investments in a managed fund and so any losses from your 3-4 stocks could be large as well if not monitored closely.

Another option to consider, assuming you currently have a mortgage and a small equity in your home would be to compare the pre-tax % returns your managed fund has been giving you with the  pre-tax return you would be getting by putting your managed funds investment towards repaying your mortgage.....ie...if your mortgage is at 7.5% for example, and say you are in the 42c tax bracket, then any additional payments towards your mortgage are in affect earning you an equivalent pre-tax 7.5/(1-0.42) = 12.9% return pa.  So the the point I am trying to make here is that if you have a mortgage, calculate the % return any additional payments will give you and if it is the same or more than what you think you will be able to consistently get from your investments year in year out, then you could be better off transferring your managed fund investment and current contributions to your mortgage - at least until you have a sizeable equity in your home (>50%)

You mentioned CFD's.  I would stay clear of CFD's unless you fully understand the concept behind them, how they work and the risks involved.  Basically they are a highly leveraged investment. I think you put up something like 10% of the investment and the CFD provider *lends* you the remaining 90% on which you pay interest.  So a 10% rise in the share price will give you a 100% return on your outlay, but a 10% fall in the share price will wipe out your outlay in total.

If you have equity in a home or some other asset, then imo a lower risk gearing strategy could be to take out an equity loan against the equity you have in any asset and use those borrowed funds to invest elsewhere.  But you would have to do some number crunching to see if it is worthwhile depending on the intended investments.

Anyway, all of the above is just meant to be food for thought and not specific advice so if you have any other queries or would like to discuss anything further just post away and I'm sure someone will be able to help.

Good luck and I hope this helps..

bullmarket


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## tech/a (18 January 2006)

bullmarket said:
			
		

> You mentioned CFD's.  I would stay clear of CFD's unless you fully understand the concept behind them, how they work and the risks involved.  Basically they are a highly leveraged investment. I think you put up something like 10% of the investment and the CFD provider *lends* you the remaining 90% on which you pay interest.  So a 10% rise in the share price will give you a 100% return on your outlay, but a 10% fall in the share price will wipe out your outlay in total.
> 
> 
> bullmarket




Yes true.
But you dont have to use the leverage.
To trade at 1:1 simply buy on CFD 10% of the parcel size leveraged of course at 10:1
2:1 20% etc.


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## Knobby22 (18 January 2006)

I agree with Tech/a. Follow one stock.
Try to make it a company with prospects and really understand how it works and trades. You would learn a lot and be less likely to lose your money.

Fools rush in!


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## happytrader (18 January 2006)

Hi Cashcow

Just another strategy. Have you considered topping up your superannuation fund with the governments offer to match your extra imput?

Cheers
Happytrader


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## money tree (18 January 2006)

agree with comments re mortgage / super

it is better to save $1 in tax than make $1.50 in profit. For some people its $2 profit required to match $1 in saved tax.

everyone should be abusing the $5k franking credit rule every year. 

dont forget, you have a 97% chance of losing money by trading. Your best chances of financial success are to not get started in this game.....especially with the market up here!


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## tech/a (18 January 2006)

money tree said:
			
		

> Your best chances of financial success are to not get started in this game.....!





Statistically your dead right.

ROFL that just tickles my funny bone!! ROFL


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## trader (18 January 2006)

You don't need much to start and learn maybe even better if you haven't because you can't lose to much. I bought 80.000 shares in SBM in April last year, nearly had a heart attack when they dropped 2 cents within 3 days and nearly sold at a loss of 20% but didn't. Now over the last 9 months have sold and brought numerous times and now have 300.000 shares worth nearly $150.000 and having spent only about $25,000 of my own money.

So it is possible to make money trading even with a small amount, the most
important thing is to do the research and try to buy into something thats
not overvalued eg ZFX.

PS I follow only 3 companies buy when low sell when high.


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## cashcow (18 January 2006)

Wow, an abundance of replies ...

obi1kenobi,
You touched on an important question there; whether I'm trying to be an investor or trader.  The short answer is a mixture of both really.  Due to my circumstances it's far, far more beneficial for me to look for growth via capital gain and so in that sense I'm an investor or at least a longer-term trader.  That said, I'm not going to hold a stock to get over the 12-month mark if that means sacrificing profits   I've already downloaded the CGT guide from the ATO which will make for some light bedtime reading.  It's definitely a good idea to get acquainted with all the intricasies of the rules before one steps onto the playing field 

tech/a,
I'm positioning myself to buy a home within the next 2 years.  I don't think there's any need to rush in.  I agree strongly with your point about being selective when buying real estate.  I can afford to buy something modest now, but I'd rather buy something I *want* (and perhaps, later, others will), instead of something I can simply *afford*.  The other point you made is surprisingly simple, but valid none-the-less.  I actually have a small parcel of WBC which has made about 25% in 3 months.  25% sounds impressive but, to me, it "only" represents $250.  Still, you're right about getting into the habit consistent return, appreciating the percentages, and not getting too hung up on the dollar value.

bullmarket,
Some years ago I made some *terrible* financial decisions and found myself burdened with a reasonably large personal debt and no tangible way to discharge it quickly.  So I quickly realised that, in my tax bracket, making extra payments was equivalent to "earning" about 20% on them.  You can guess where all my spare money went during that time   I am completely debt free at the moment, abiding the rule that the only "good" debt is deductible debt, but any time something out of that category arises, I'll be using the same strategy again!  Being broke certainly teaches you a few things about money 

Knobby22 and trader,
I like the idea of focussing on one or a few stocks intently, incorporating some fundamental/discretionary analysis I presume?  Indeed it was that which prompted me to buy my toy parcel of WBC last year (although I hadn't read much on this site at the time).  Incidentally, they offer shareholders a few perks such as waiving the application fees on home loans and a few other little sweeteners.  I guess this has so far worked ok for me, but I don't get the diversity I'd prefer.  Still excellent suggestions though.

happytrader and money_tree
Good points about the super.  Mine's set up how I like it at the moment, trying to balance additional contributions (for a longer term benefit) with leaving me enough funds to invest for short to medium turn benefit.  After all, there's no point retiring a billionaire if I haven't lived life during my first 65 years!   

Well, thanks everyone for taking the time to write out well-considered responses.  I really do appreciate it and I'm encouraged by the quality of people here.

Cheers
cashcow


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## Smurf1976 (19 January 2006)

If it were me then I would be designing and testing a system and proving that it works before putting ANY money in the market.

As far as tax and trading is concerned, I'd rather pay tax on profits than be looking for deductions because I made a loss. 

Don't leverage anything at first IMO. That's asking for trouble. Start small and aim for a decent % profit and then add more capital over time. Aim to make x % in a year rather than x dollars.

If it's in the news then you're almost certainly too late as the price will already have moved.

If you're going to trade short term then have you considered forex rather than stocks? The only reason for saying this is that there are various "demo" accounts with forex so you can practice trading with fake money but see the trades in real time in a real account (but not with real money so you incur no losses or profits). Just a suggestion. Not saying there's anything wrong with stocks though, just that the option of playing with a real account at no cost might make forex a good learning mechanism to try out ideas.


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## ob1kenobi (19 January 2006)

cashcow said:
			
		

> Wow, an abundance of replies ...
> 
> obi1kenobi,
> You touched on an important question there; whether I'm trying to be an investor or trader. The short answer is a mixture of both really. Due to my circumstances it's far, far more beneficial for me to look for growth via capital gain and so in that sense I'm an investor or at least a longer-term trader. That said, I'm not going to hold a stock to get over the 12-month mark if that means sacrificing profits  I've already downloaded the CGT guide from the ATO which will make for some light bedtime reading. It's definitely a good idea to get acquainted with all the intricasies of the rules before one steps onto the playing field
> ...




You're welcome. With respect to the Trader v Investor scenario, the ATO will determine in their own time which category you fall in. You may start out as an investor and one day be told by the ATO that they regard you as a Trader and thus as a business. Financial record keeping in all of this is a must. I merely highlighted the tax side as people often overlook it. Profits should dictate trades. In my trading plan by the way, I stipulate a minimum profit margin that I strive for. Currently that's 20%. Anything above that is terrific. different people will have different tolerances, find that which suits you best. The percentages are important to focus on, so to is your own research. At the end of the day, it's your money.

Good luck!


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## money tree (19 January 2006)

Smurf1976 said:
			
		

> As far as tax and trading is concerned, I'd rather pay tax on profits than be looking for deductions because I made a loss.




This is a typically ignorant view. You dont need losses to get a large cheque from the ATO every year. Remember that franking credits are a tax credit  issued at 30%. For those below this tax rate or those with super accounts, franking credits are an unexplored gold mine. For those above or at the 30% tax rate, there is still money to be made easily. My course explains these strategies. 



			
				Smurf1976 said:
			
		

> If you're going to trade short term then have you considered forex rather than stocks? The only reason for saying this is that there are various "demo" accounts with forex so you can practice trading with fake money but see the trades in real time in a real account (but not with real money so you incur no losses or profits). Just a suggestion. Not saying there's anything wrong with stocks though, just that the option of playing with a real account at no cost might make forex a good learning mechanism to try out ideas.




I was the first here to suggest forex as a learning tool. Some important points missed: With some brokers like Oanda, you can trade very small lots of REAL money. If you can make consistent profits trading $1000 lots, then move up to $10,000, then $100k. There is nothing like playing with real $$$. Demo accounts dont have the same emotional stress. Its too easy to reset your balance every time you make a mistake.


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## tech/a (19 January 2006)

(1) If your stock has fallen 20% your franking credits on dividends are little compensation.

(2) If you suffer from emotional stress when trading then your trading too larger parcels---PERIOD.

Ignorance seems to me to be an affliction the whole world suffers from but some how TREE and "Psuedo financial advisers" are immune.
You should have that growth removed-----


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## bullmarket (19 January 2006)

tech/a



			
				tech/a said:
			
		

> (1) If your stock has fallen 20% your franking credits on dividends are little compensation.
> 
> (2) If you suffer from emotional stress when trading then your trading to larger parcels---PERIOD.
> 
> ...




Your point (1) above  comes across to me as you possibly forgetting the fact that some investors, like myself, have income as their number 1 priority and not capital gains, although they are most welcome if/when they occur .  Hence franking credits at least reduce (if not eliminate alltogether depending on one's marginal tax rate and setup) the amount of tax payable on that income.

For me, as long as companies and/or trusts don't show signs of reducing their dividends/distributions and the payments keep coming in every 3-6 months then mrs bullmarket is happy  and if mrs bullmarket is happy then I am happy 

Not everyone is a trader or investor with cap gains as #1 priority, although I'll concede most probably are. But I'm retired now and so income (with minimal tax) and not cap gains is my #1 priority.

Good luck with your trading.

cheers

bullmarket


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## tech/a (19 January 2006)

Bullmarket.

I'm genuinely interested in this school of thought as I must say I cant understand it from this view.

If I retired or had a SMF and I had say 5 holdings each of say 10000 shares at an average of $10 a share each producing a fully franked dividend of say $1 per share/year and at sometime you notice that the value of your portfolio has decreased by 15% or worse why would you continue to hold---other than the fact that over time portfolio's certainly in blue caps generally rise?

I guess I'm seeing a buy and hold indefinitely strategy for the sake of dividends and franking credits as unduly risky to ones retirement nest egg.


Not only that but you could get a similar result dividend stripping like Rosella has outlined.
Yes I know the tax implications are greater if you pick up a capital gain and realise it.

Bluechips go belly up as well and a single delisting could seriously damage those funds.

Anyway I know you and Julia do this and interested in your views if there is anything to add.


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## Knobby22 (19 January 2006)

Can I just say that I am far from retiring but i know other investors with the same mindset and it serves them well.

If you buy stocks that gradually increase dividends every year (e.g.banks, gambling stocks) and stay away from dodgy stuff like Telstra, you tend to make a reasonable capital gain every year. If you look at the returns of reasonably yielding stocks they do OK.  In booms like the present you earn a bit less but in slow periods you can do better. 

I am interested if bullmarket thinks the above statement is true.


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## Julia (19 January 2006)

tech/a said:
			
		

> Bullmarket.
> 
> I'm genuinely interested in this school of thought as I must say I cant understand it from this view.
> 
> ...




Hi Tech,

Just for the record, I would absolutely not be happy with stocks which only offered me good income without capital gain.  My preference is for a stock which does offer a good yield and I have in the past held on to a few for their income.  But I'd never structure my whole portfolio just around yield for the very reasons you mention.

This year I've sold most of the companies that did not produce good capital gain in 2005, despite their good yield, in favour of those with better growth prospects (as you know).

Still, I'm gonna miss some of those dividend deposits!!!

Cheers

Julia


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## tech/a (19 January 2006)

*Still, I'm gonna miss some of those dividend deposits!!!*

Well they will be replaced by others will they not?

But I'm sure you mean that they were nice dividends!


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## money tree (19 January 2006)

There is no need to suffer any capital loss (or gain) by accumulating franking credits. I teach ways of eliminating all risk while stripping the franking credits (which I wont get into in this post).

What rozella does is not 'dividend stripping'. His aim is to extract the cash div and resell when the stock rebounds. 

Franking credits are not usable by overseas funds/shareholders and as a result ex-div falls do not allow for the franking credits (90% of time - Brown & Clarke paper 1992). This means if NAB pays a $0.70 cash div, the stock will most likely fall 70c once ex-div.

Therefore, if you buy the stock cum div for say $32, then sell ex-div for $31.30, you suffer a 70c capital loss (which can be very useful to offset other gains) and create income of 70c. But you also have a tax credit of 30c.  

Now if you have no capital gains to offset, depending on your investor/trader status (or if using a SMSF), these two will cancel out:

Cash div received = $11,666. Capital loss = $11,666. Taxable income = $0. Franking credits used = $0. Tax refund = $5,000.

Thats $5,000 created out of thin air. Every year. One for you, and one for your partner. Then do it on both Super funds. 

All of a sudden, you have $20k extra....every year   

Now you might think you need $200k to do this. You dont. It can be done with about $3k. Some might ask:

"yeah but what if the stock drops $1.25?"

thats why its important to hedge the risk. We sacrifice the possible capital gain in exchange for eliminating the chance of a capital loss.

And how many advisors / accountants know this? NONE. Ive taught about 3 advisors and 2 accountants this stuff.


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## tech/a (19 January 2006)

So then if nothing goes wrong the hedge is lost?

How long would you need to hold the stock?

*You want to be careful Tree I may even buy your course!!
If you keep posting meaty stuff!*


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## bullmarket (19 January 2006)

hi knobby



			
				Knobby22 said:
			
		

> Can I just say that I am far from retiring but i know other investors with the same mindset and it serves them well.
> 
> If you buy stocks that gradually increase dividends every year (e.g.banks, gambling stocks) and stay away from dodgy stuff like Telstra, you tend to make a reasonable capital gain every year. If you look at the returns of reasonably yielding stocks they do OK.  In booms like the present you earn a bit less but in slow periods you can do better.
> 
> I am interested if bullmarket thinks the above statement is true.




Yes I agree with you in general, if you stick to the so called bluechips for at least a few years given that the historical stock market return is about 10% pa.  But there will be the odd year where you could experience a loss for the year.

*tech/a*

re your "I'm genuinely interested in this school of thought as I must say I cant understand it from this view." let me try to clarify.

I am retired now and require a bit over 5% average yield from my investments in order to generate sufficient income for our annual living expenses.

Based on lifestyle choices my no.1 priority now is income with minimal tax and not capital gains (but as I said earlier they are welcome if they occur ). I don't want to be sitting infront of a pc all day watching changing stock prices or analysing price charts.

In June last year I decided to go more defensive and so I am now overweight in relatively low risk listed property trusts (with little or no exposure to property development) and energy/infrastructure trusts for their high yields.  The average yield on my investments is now 8.7% which gives me a comfortable buffer over the minimum I require and so I know I will have more than sufficient income for at least the next 12 months regardless of what the market does and that allows us the freedom to do what we want when we want without having to worry about the market and what it is doing.  Obviously I still keep a 'weather eye' on the stocks I hold.

The performance of the LPT sector (XPJ) over the last 2 years has been outstanding, although helped by a few mergers.  Although I don't expect the same rate of return from LPT's in the next 12 months, I believe that at least some of the higher yielding (8%+) better quality LPT's should provide a good defense if the markets go significantly south for whatever reason in the forseeable future.

The point I was making earlier re dividends and franking credits is that although they are not largely sought by day or short term traders they shouldn't be dismissed as they can be and are very useful to traders/investors with different objectives and risk profiles to you.

I hope this clarifies my "school of thought".

cheers

bullmarket


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## tech/a (19 January 2006)

Thanks bullmarket I can now both see and understand your veiw point.

Just as a side thought 25% use if funds to target capital gain could yield far more than your 8.7% and can be structured with minimal risk.

Food for thought.
I know its not your style.


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## Julia (19 January 2006)

tech/a said:
			
		

> *Still, I'm gonna miss some of those dividend deposits!!!*
> 
> Well they will be replaced by others will they not?
> 
> But I'm sure you mean that they were nice dividends!




Yes, but instead of a yield of about 7% I will instead in some cases be getting less than 3% so all up I will definitely experience a drop in income.

Bullmarket has expressed his philosophy very well and there is a lot to be said for it, especially in retirement.  My aim is to focus on growth until I reach retirement age, at which time I'll be looking for at least some of the portfolio to include such high yield stocks as Bullmarket has described.

Another factor is that some people just don't get all that much fun out of trading stocks - what activity they engage in on the stockmarket is merely what is necessary to generate sufficient income to live on.  And if one's portfolio is focused on blue chips with a high yield, then although the capital gain may not be as much as on some speculative stocks, it is mostly steady and reliable and allows the investor to do what they enjoy more.

Julia


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## money tree (19 January 2006)

tech/a said:
			
		

> So then if nothing goes wrong the hedge is lost?
> 
> How long would you need to hold the stock?
> 
> ...




a hedge ensures nothing can go wrong. like any insurance it costs a little.

the stock only needs to be held overnight.


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## Smurf1976 (19 January 2006)

money tree said:
			
		

> This is a typically ignorant view. You dont need losses to get a large cheque from the ATO every year. Remember that franking credits are a tax credit  issued at 30%. For those below this tax rate or those with super accounts, franking credits are an unexplored gold mine. For those above or at the 30% tax rate, there is still money to be made easily. My course explains these strategies.



Let's see. I break even on trading but claim some deductions and reduce my overall tax to zero including tax on income from my job. So maybe I've saved 10 - 15K as a result of trading.

Or I make a decent success of trading and make 100K profit and pay $48,500 tax on that. I'm $51.5K better off as a result of trading.

You decide but IMO it's making profits in the first place which is the greatest priority. Not saying that you shouldn't reduce tax, but it's not the first priority IMO.


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## tech/a (19 January 2006)

Smurf. I agree.

*If you're worrying about the tax your paying then your not making enough so you dont have to worry about the tax your paying.*

Minimise sure but make it your prime objective above capital gain---regressive thinking--

(General comment)


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## money tree (19 January 2006)

yield vs cap gains:

Where are the capital growth objectives in Monopoly? There are none! Why? Because capital growth is not the main reason for property investment. Sure it’s a nice bonus. There is an old investor’s cliche that goes: “never ever sell property”. If that is true, why worry about capital gains? You have to sell to realise the gain, which defeats the purpose of investing in the first place. The goal for any investor should be financial independence. This means investments that return regular payments to cover living expenses. Sure you could sell, but then you would have to invest the money somewhere else, as inflation will erode a lump sum. Then you are stepping backwards because the taxman has taken his slice. 

When you buy for yield, your investment is cashflow positive from day one. Any capital gains are a bonus. When yields are high, capital growth follows naturally. Investors will pay higher prices when returns are better. When you buy for capital growth, yield does not follow naturally. In order for yield to improve, prices would have to drop! In fact, depending where you buy in the cycle, you could buy when yields are low (meaning you have a cashflow negative return) and you receive no capital growth for several years. Some ‘investment’ that is! 

Amateur investors chase capital growth. It’s just like people who buy a lottery ticket. They spend small money on a near-certain loss, in an attempt to chase a large win. If you buy property in the CBD, capital growth is not guaranteed, but a cashflow loss is guaranteed. This is taking a certain, regular loss now, in the hope of a large, possible gain later. Sounds like gambling to me! Investing is about certainties, not gambles. Monopoly teaches us to invest our money before it runs out. When interest rates rise, yield investors are insulated, but capital growth investors are not. They sink deeper and deeper as rates rise, their cashflow leaking like a sieve. Yield investors ride out the storm, able to pay each and every payment on time, with no stress. Ask any investment mogul, investing is all about yield not capital growth. Let the amateurs chase the capital growth with the rest of the crowd. Smart investors demand a positive return from day one.


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## bullmarket (19 January 2006)

Hi money tree

I can see where you are coming from in your previous post and I generally agree with most of it.

But let me put forward my view on a few of your points I don't fully agree with.

1)  "You have to sell to realise the gain, which defeats the purpose of investing in the first place."

Maybe I'm being picky but I disagree with the above because you can still 'realise' the capital gain without selling the property by using the increased equity as security for a loan to fund additional investments elsewhere.  The pros and cons of this strategy I won't go into here now.

2) "Amateur investors chase capital growth."

I'm not sure what you are getting at here since 'professional' investors (or even unprofessional investors  )who negative gear a property are buying with capital growth as their #1 priority. Negative gearing means your expenses like interest payments etc are greater than the income (like rent) the investment yields and so the investor is making a loss each year and hence has to rely on the capital growth of his/her investment being at least equal to the nett annual loss just to break even. A negatively geared investor makes his profit from the capital growth of the investment eventually being greater than the losses.

I think you'll be hard pressed to find even a positively geared investor, especially in property, who is not also chasing at least average capital growth from his investment....eg...if after say 5 or whatever years in a +ve geared investment the total return was just say about 5% yield gross (from rent or whatever) and no capital growth, then the investor should be pretty disappointed imo as you can get at least 5%pa  for cash deposits at any of the online only banks nowadays.

3) "Smart investors demand a positive return from day one."

Not sure what you're getting at here as the above surely depends on whether an investment is +ve or -ve geared. In the case of -ve geared investments, the 'positive return' you refer to above has to also include a capital growth which I interpret from your post that you don't see as important, but just a nice bonus if it occurs.

Basically the point I'm trying to make from all the above is that I don't agree with you in that yield is the only consideration without any capital growth when evaluating potential returns from an investment.  When I evaluate say a potential stock purchase, one of my criteria is that the potential total annual return (share price growth + divs based on forcast EPS and DPS and a fair PER) has to be at least 10% pa for the next 2 years.  From what I read residential property yields, at least, are nowhere near 10% atm. In fact they are closer to 3-4% GROSS atm. And so I would be hard pressed to buy an investment property, solely with yield in mind and no capital growth as you seem to suggest, and still get my required 10%pa return.

Finally  I'm starting to think this thread is starting to drift away from the intentions of the original thread starter.

cheers 

bullmarket


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## Smurf1976 (20 January 2006)

I'm interested in BOTH approaches. Both short term trading and a longer term yield strategy. I can see the point in both of them but a loss IS a loss whether you sell the asset which has lost value or hold on to it. It's still a loss.

If I buy shares in XYZ which pays a 5% dividend and the shares drop by 50% then the bottom line is that I've lost half of the capital I invested in that stock. True, I'm still getting dividends (though that's suspect long term given the large drop in the share price - something's up) but it will take fully 10 years to get back to break even. It'll be unlikely to match cash in the bank in any realistic time frame. That I didn't "crystalise" the loss is meaningless. It's a loss. The money is gone and I can't get it back unless the asset rises in value.

IMO those arguing about a loss not being a loss until the asset is sold, that you never have losses if you don't sell and so on are usually the holder of some asset they bought at the top and didn't sell in time to avoid a big loss. Nothing personal, just an observation having heard too many people tell me that the price of some asset now is "below market value". Absolute nonsense. Whatever it's going for now IS market value by definition. It may have a different value yesterday or tomorrow, but it's a contradiction in terms to buy anything on an open market "below market value". Below your perception of its value maybe, but not below market value.

It would be like arguing that machinery doesn't lose any value until the day it's sold or scrapped. In reality it's wearing out from day one in a broadly linear manner depending on hours of operation. It's losing value every hour that it operates just like a car's fuel tank is dropping in level with every kilometre you travel regardless of how often you actually refill it. A loss is a loss.


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