# Where to start when it comes to trading/investing?



## nomore4s (14 April 2011)

This is a commonly asked question we see on the forums from newbies and I thought I would try to answer it in a bit more depth then we normally see but it will take me a few posts and quite a bit of rambling so you will need to be patient

The first thing that needs to be decided is how much time and energy is to be devoted to learning, devising and implementing strategies to start extracting returns from the market. This will then help determine what type of time-frame and strategies to devote time too.

The next stage is to set some goals, what do you want to achieve from investing/trading? And do the goals then match up with the amount of time you are willing to put into your trading. I'll give a bit of a hint here - probably the most important goal in trading is to control your risk and minimize your losses.

Alright we have covered the easy bits, this is where it now becomes slightly more difficult for beginners - building a plan to achieve your trading goals that also fits in with the time you are willing to commit to trading. Building a plan for a beginner can be very difficult due to the fact they don't know what they really need to know to build a good profitable trading plan. So that means the first goal and first step in a plan should be based around education, which is why they probably have ended up on this forum in the first place.

As the more experienced know it can take quite a few hours of study and then plenty of trading mistakes to finally formulate a understanding of how to be profitable. This is why I feel too many beginners (and some of us more experienced) get lost in the short term aspects of trading and should actually start with a long term investment strategy first as this gives time to study and learn other strategies while also giving a feel of how the market works. I know I wish I had, I would be probably 5+ years in front of where I am at now.

This is all I have time for atm and I know it has really gone nowhere so far but I will look to do a post on the power of long term investing in the markets using dividends to create an income stream highlighting why I think this is a good place to start. I will also look at giving a run down on my various portfolios that I run and the goals and ideas behind them.


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## youngone (14 April 2011)

nomore4s said:


> This is all I have time for atm and I know it has really gone nowhere so far but I will look to do a post on the power of long term investing in the markets using dividends to create an income stream highlighting why I think this is a good place to start. I will also look at giving a run down on my various portfolios that I run and the goals and ideas behind them.




Thanks for the run down for us newbies. Looking forward to the next lesson, and perhaps, if you have time explain to us on medium to long term trading plan. ($1000-$5000)


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## nomore4s (15 April 2011)

Before we go any further I will outline my various portfolios and the ideas and goals behind them. There won't be too many specifics as what I'm trying to do is give beginners an idea on how to structure an idea/strategy so they can then go out and do the research on how best to implement their plan to make it profitable.

I run four different portfolios all with different objectives and time frames. I will quickly outline the portfolios here and then go into further details in later posts.

1. Income Portfolio
- Build income stream from dividends
- My version of a buy and hold strategy (there is exit criteria although the goal is to never have to sell)
- This portfolio is about accumulation, a great deal of patience and long term vision is required.
- This is my retirement fund
- My money only - no leverage used

2. Long term growth
- Mechanical system trading - signals generated daily but are filtered at my discretion based on a checklist as I get too many signals to take.
- Aim is to capture long term trends (obviously works best in a bullmarket)
- Leverage is used, once a certain open equity level is reached  as this lets me continue to grow the portfolio when conditions suit it and I've run out of capital.

3. Swing trading
- Discretionary pattern trading (charts)
- Higher turn over
- Leverage used on occasion
- I run a number of different strategies within this portfolio depending on market conditions and cycles.

4. Futures day trading
- Discretionary trading of indexes
- Can be the most profitable portfolio but is also the most stressful and time consuming portfolio. Also requires the most skill and discipline to run successfully day in and day out.
- Requires a fair chunk of capital to help migrate the risks due to the high leverage used. 

I personally believe that beginners should stay clear of strategies like portfolios 3 & 4 until they have reached a solid understanding of - the markets and how they work, how to read charts, position sizing, risk management of not just trades but also the whole portfolio, how to test if strategies are actually profitable when traded, and lastly how to actually trade it profitably. This is where the 10,000 hour rule applys.

We all hear how only 3-5% of traders are actually profitable, imo it is because people jump into to trading too soon and then get burnt and only that 3-5% manage to survive or stick with it long enough to become profitable. Remember the markets will reward the patient and punish the impatient.

This is why I believe most people should start with longer term investing in the stock-market especially when they have limited knowledge, as they can begin to set up a decent long term strategy while still educating themselves on the various ins & outs of the market without exposing themselves to excessive risks due to limited understanding of the markets. But this does not mean they should just jump in without also doing the research needed to correctly implement a longer term strategy.

Capital constraints are also another issue and I realise that most people are not going to have the capital to be able to run 3 or 4 different portfolios like the above. Now I'm sure a few of the more experienced are going to disagree with me here but if a beginner has limited capital say $10,000, it is my view that is not enough money for a inexperienced trader to start trading short term strategies like portfolios 3 & 4 as brokerage fees and tax on any profits do take a toll on such small capital and then throw in one or two decent hits and it makes it very hard to recover.


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## skc (15 April 2011)

nomore4s said:


> Before we go any further I will outline my various portfolios and the ideas and goals behind them.




Nice thread, 123567890. Do you mind telling the audience...

What percent of your total capital do you allocate to each portfolio?
What range of returns do you target / achieve for each portfolio?

Thanks


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## nomore4s (15 April 2011)

skc said:


> Nice thread, 123567890. Do you mind telling the audience...
> 
> What percent of your total capital do you allocate to each portfolio?
> What range of returns do you target / achieve for each portfolio?
> ...




lol @ 123567890

I suppose I can.

Portfolio 1.
This is actually separate to my trading funds altogether and I allocated a set amount to start it off and now add 10% off my total earnings each year to it as well as 10% of my profit from my other portfolios and all dividends are re-invested. I also keep a war chest in reserve for any market crashes.
I also don't have any return targets for this portfolio except to provide a passive income for me and my family 20 years down the track.

Portfolio 2.
25% of trading funds.
Aim here is to achieve 10-15% return pa but in good market conditions with leverage I can achieve very very strong results. Been running this portfolio for nearly 2 years now and the returns were very spectacular early due to market conditions but has been a bit more steady lately.

Portfolio 3.
25% of trading funds.
Aim here is 15%-25% return pa depending on market conditions. Have been returning around 20-25% pa for the last 3-4 years.

Portfolio 4.
50% of trading funds.
With this style of trading can return 5-10% per month. But I have had days that have returned 10%+, but have also had some very bad days early on while learning. As stated before the returns can be very good with this style of trading but the pay off is it requires a great amount of skill and time and can cause quite a bit of stress. I have posted a weeks returns on another thread somewhere when I was trading oil futures.

I will add I don't re-balance portfolios, what they make stays in that portfolio and my position sizing then adjusts accordingly - except portfolio 4 - all profits after tax go into either my income portfolio, homeloans, or savings accounts.


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## NewOrder (15 April 2011)

Thanks for the taking the time for us newbies  Is it appropriate if I outline my plan and bounce some questions?


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## nomore4s (15 April 2011)

NewOrder said:


> Thanks for the taking the time for us newbies  Is it appropriate if I outline my plan and bounce some questions?




Go for it


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## skc (15 April 2011)

nomore4s said:


> lol @ 123567890
> 
> I suppose I can.




Thanks... very similar to what I do actually. Except my Portfolio 1 is made up of managed funds (a split of index fund and smaller company fund) just because I am lazy, and my portfolio 4 is the $300 account I left open when I tried out some new CFD mob. Starting balance $500 so down 40% since the start, showing what skill I have when it comes to trading futures.


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## NewOrder (15 April 2011)

Thanks 

OK this is my plan as it stands now but it is a work in progress. I have done a fair bit of self education, lots more to go. My Trading Plan is 80% in place. I then plan to paper trade for some months.

Portfolio 1)
Long term dividend reinvestment. 
Hold approx 15 stocks across at least 5 Sectors.

Portfolio 2)
Short to medium term tading based on TA
Strict risk management using 1% loss as max equity I will risk to start with.

Portfolio 1) is aimed as a long term passive income portfolio. 
Portfolio 2) is to generate some yearly income, anything over and above my fairy frugal lifestyle costs (except for big education expenses for the kids) will go back into either Portfolio 1 or 2.

The starting equity is mine, no leveraging. I will start with a fairly conservative outlook and only trade within Aust top 300 shares. After at least 12 months and some building of confidence I will then look at stepping outside this zone.

Questions
I have a large starting base but am low risk for now. I was thinking that I would hold all funds in a cash account and slowly begin Portfolio 1) first. As I do not need to accumulate the funds I was going to use TA as a means of timing into the shares. I understand that many people will buy in parcels as they accumulate the funds so dollar cost average but I have the funds there so don't want to throw the whole lot in at once therefore not giving me the same advantage of dollar cost averaging.
WDYT?

With Postfolio 2) again it will be a fair sum of money so I am not sure that jumping in cold will be all that smart. My thinking is to start trading with only part of the money, leave the rest in the cash account and then move it into Portfolio 2) as I get the experience.
WDYT?


TIA


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## nomore4s (15 April 2011)

NewOrder,

You are certainly going about it in the right way.

Will post some of my thoughts.

Portfolio 1.
You need to be very specific as to what you want to achieve from this portfolio.
Is it purely passive income from dividends?
Or is it a mixture of capital growth and income?
What you decide will have a big impact on the type of shares you pick and the criteria you use to both buy and sell them.
The set of criteria (for both buys & sells) you use will need to be very strict and clear, it doesn't have to be complicated just clear and understandable to you.

https://www.aussiestockforums.com/forums/showthread.php?t=22425

The above thread highlights what happens when you have no clear direction, goals or understanding of what you are aiming to achieve, you end up going nowhere and achieving nothing - except wasting 5 years.
They wasted 5 years going nowhere and have got lucky with 1 stock and are now jumping at the next big thing with still no clear systems in place and no idea what to do with the rest of the portfolio. 



> I have a large starting base but am low risk for now. I was thinking that I would hold all funds in a cash account and slowly begin Portfolio 1) first. As I do not need to accumulate the funds I was going to use TA as a means of timing into the shares. I understand that many people will buy in parcels as they accumulate the funds so dollar cost average but I have the funds there so don't want to throw the whole lot in at once therefore not giving me the same advantage of dollar cost averaging.WDYT?




I agree with this although I would be spreading my entries not so much to dollar cost average but to spread your risk. With this sort of portfolio the first couple of years will be the hardest due to the slow returns to start with. I will post up some info highlighting how powerful it can be in the long term.



> With Postfolio 2) again it will be a fair sum of money so I am not sure that jumping in cold will be all that smart. My thinking is to start trading with only part of the money, leave the rest in the cash account and then move it into Portfolio 2) as I get the experience.WDYT?




Take your time with this portfolio and do heaps of paper-trading of various methods, learn about things like fixed fractional position sizing and portfolio heat as this will control the risks.


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## kingcarmleo (16 April 2011)

Plenty of books to read for starters  :


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## NewOrder (16 April 2011)

Thanks nomore4s



> Portfolio 1.
> You need to be very specific as to what you want to achieve from this portfolio.
> Is it purely passive income from dividends?
> Or is it a mixture of capital growth and income?
> ...



Yes I ideally do want capital growth as well as dividend income. OK you have highlighted a massive problem with being a naive newbie as I had not written a strategy about this in my trading plan.
I will have set FA criteria for the stocks I buy but have not put in my trading plan what to do about stocks that do not show capital growth or indeed what level of growth I am seeking.



> I agree with this although I would be spreading my entries not so much to dollar cost average but to spread your risk.



 is diversifying across stocks and sectors not enough? Do you mean here to spread entry for one particular share across a longer time frame or to generally spread buying stocks for Portfolio 1) over time?





> I will post up some info highlighting how powerful it can be in the long term.



 is this going to be from your own experience? I am keen to see the info.





> Take your time with this portfolio and do heaps of paper-trading of various methods, learn about things like fixed fractional position sizing and portfolio heat as this will control the risks.



 Thank you, yes I plan on paper trading for a while, I really don't want to give away my money, I want to grow it 

I did start to read the thread you linked to but it did my head in, it just isn't how my brain works. 

Again thanks for taking the time. I am not looking for specific trading info or tips, I very much want to be in control of my own decisions and outcomes, I do however appreciate the time you have put into discussing this 

Cheers


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## Julia (16 April 2011)

NewOrder said:


> Questions
> As I do not need to accumulate the funds I was going to use TA as a means of timing into the shares. I understand that many people will buy in parcels as they accumulate the funds so dollar cost average but I have the funds there so don't want to throw the whole lot in at once therefore not giving me the same advantage of dollar cost averaging.



Why do you think there is an advantage to dollar cost averaging?


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## burglar (16 April 2011)

NewOrder said:


> ...  is diversifying across stocks and sectors not enough? Do you mean here to spread entry for one particular share across a longer time frame or to generally spread buying stocks for Portfolio 1) over time? ...
> Cheers




I would be guessing if I said you spread your entries over time so that you can see the profit coming on your first entries (if you picked good'uns) before going on?!

It is what I did ... and never did find out if it "wise" or just plain "feels right".

Hi nomore4s,

Congratulations, fine thread.

You have my attention!


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## nomore4s (17 April 2011)

Before I reply in detail to NewOrder, I will post up a spreadsheet that shows the power of a quality long-term income investment portfolio.

Now before I get any of the more anal posters pick it to pieces - this is purely an example using only 1 stock which of course will skew results a little but I only want to highlight the power of compounding using dividends and I would obviously *not* recommend setting this type of portfolio up with only one stock. And there may be some mistakes in it but I have tried to get it as accurate as possible.

I have picked CBA but nearly any of the big 4 banks will have similar returns. The big 4 banks are about 50% of my income portfolio due to the consistent increases in d/e's, but any stock that regularly increases d/e's will have similar results.

For this exercise the original investment is $5000 with a further $5000 invested each year and I have used $30 as the brokerage fee just to make it easier but this has little effect on the overall results. I have also picked the 1st trading day in July each year as the purchase date of each parcel, so i have not tried to pick the best or even a good entry every year, I just left this to luck.

There is a number of different year starts to highlight even if started only 5 years ago you would be well on your way with this strategy.
-15 years
-10 years
-5 years
-15 years with all dividends re-invested along with the $5000 just to further highlight the compounding effects but ideally this is how you would run this type of portfolio. Re-investing all dividends and adding in some of your own money each year if possible.

I have also included open equity using the closing price from Friday but with this portfolio that is purely a bonus and remember all dividends in this example are fully franked.


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## burglar (17 April 2011)

NewOrder said:


> ... I did start to read the thread you linked to but it did my head in ...




The thread in question is one of the weirdest here.
The Original Poster (OP) started with mention of Conspiracy Theorists, New World Order (NWO)  and Chemtrails (being something mysterious which disappears when Obama is in town and reappears when He departs!)

IMO he did this to add interest and gain attention to his real problem.

On a whim, he'd put some capital towards a silver mining company and made a very fast return. But now, what to do with with the ill-planned portfolio which has disappointed for the previous 5 years.

Hope this helps!


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## NewOrder (17 April 2011)

Julia said:


> Why do you think there is an advantage to dollar cost averaging?




Honestly? I am really not sure but what I am trying to get my head around is "should I put a large sum of money into a blue chip, dividend reinvestment type of portfolio, all in one hit or should it be in stages?"

nomore4s, that is a great excel chart, very informative and useful.

burglar, cheers for the explaination of the other thread m

I hope other newbies jump in here with questions.


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## NewOrder (17 April 2011)

OK another question, and yes I will get full tax advice at the appropriate time....

where do you pay the tax from? Do you take it out of your portfolios? If so would this need to be reflected in your excel chart nomore4s?


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## nomore4s (17 April 2011)

NewOrder said:


> OK another question, and yes I will get full tax advice at the appropriate time....
> 
> where do you pay the tax from? Do you take it out of your portfolios? If so would this need to be reflected in your excel chart nomore4s?




There is no tax reflected in the spreadsheet because nothing has been sold which means there is no tax payable on the capital gain yet and the dividends are fully franked, which essentially means the company has already paid tax (normally at 30%) on them so the tax on the dividends is minimal for most individuals but it is probably best to do a google search on fully franked dividends and see how it might affect you. This is another advantage of this sort of investing.

As for my other portfolios I just put aside 50% of the profits and then pay tax out of that when required.

There are a few other things from your earlier posts I will address as I get time.


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## nomore4s (17 April 2011)

NewOrder said:


> I did start to read the thread you linked to but it did my head in, it just isn't how my brain works.






burglar said:


> The thread in question is one of the weirdest here.
> The Original Poster (OP) started with mention of Conspiracy Theorists, New World Order (NWO)  and Chemtrails (being something mysterious which disappears when Obama is in town and reappears when He departs!)
> 
> IMO he did this to add interest and gain attention to his real problem.
> ...




Sorry, I should have just posted the 2 posts from the OP to highlight what I was saying, most of that thread is off topic.

Burglar has pretty much nailed it. The OP invested $50k into the market with no plan or strategy and as a consequence has achieved very little in 5 years. He/she has then had a punt on a penny stock and got lucky but still has no idea on where to go or what to do with his/her investing/trading.

All the other BS is purely to OP's way of justifying the punt on the penny stock.

Below are the relevant posts.



LifeChoices said:


> This is my first post here - I hope it goes well - wish me luck.
> 
> I'm a newbie to this forum, but not to the share market.
> 
> ...






LifeChoices said:


> Spot on KurwaJegoMac
> 
> I'm well aware of the risk. With the blue chips I've still got you just lose your money slower - OZL, WOW, RIO, IAG are depressing examples of that - it's a slow death.
> 
> ...




Centro (CNP) and Babcock and Brown (BNB) went down in flames but the writing was on the wall for a long time with both stocks, just search for the threads and have a scan through them. This also highlights the poor(or lack of) planning and strategies used.


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## NewOrder (17 April 2011)

nomore4s said:


> There is no tax reflected in the spreadsheet because *nothing has been sold which means there is no tax payable on the capital gain yet and the dividends are fully franked, which essentially means the company has already paid tax (normally at 30%) on them so the tax on the dividends is minimal for most *individuals but it is probably best to do a google search on fully franked dividends and see how it might affect you. This is another advantage of this sort of investing.
> 
> As for my other portfolios I just put aside 50% of the profits and then pay tax out of that when required.
> 
> There are a few other things from your earlier posts I will address as I get time.




which was what my understanding was until someone on another forum said otherwise. I am not putting in a cent until I have full tax advice anyway but thanks this makes more sense to me.


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## ENP (17 April 2011)

Here is a fool proof step by step how to get into investing:

1. Pay yourself first, basically take a % or $ amount out of your pay, treat it as a bill like you would rent, electricity and keep it for investments only. This is money you can afford to lose.

2. Choose your long/mid/short term goals for your money. Example, mine long are able to own a nice home, a beach house, 1 overseas trip a year and be able to work if I want to, rather than have to, mid term in 2-3 years is to buy my first home, short term is to grow my 1st home deposit from 17k to 26k this year. 

3. Look at which investment class you are going to focus on, stocks, property, business, other, only choose one to focus on first, as it's hard enough to master one asset class (Warren Buffet only invests in one of these assets and has done well)

4. Ask yourself what type of investor are you? Active/passive or a mix of both? Value investing, income investing, IPO investing, buy and hold, day trader, cyclic trader, etc. Example, I like buy and hold/value investing, I'd rather buy a tree and get a regular outcrop of fruit each season that chop it down for firewood and then plant a new tree.

5. Learn all you can about your chosen asset class, read books, newspapers, websites, talk to people who have proven themselves successful, talk to people who know nothing about it and observe the difference, etc. You will do more of this if you want a more hands on approach as you will need to be informed daily, eg day trader. 

6. Learn from your mistakes, even great investors make mistakes. Learn to control your emotions, learn what constitutes a good and bad buy price/deal. 

7. Rinse and repeat. Once you feel you have mastered an asset class, keep at it or diversify out to the next asset class. 

Example for me. I save roughly 25% of my income solely for investments, this allows me to pay bills and still have some fun spending money. I have already explained my short/mid/long goals above. My chosen investment class is property. I'm a long term value investor. I read websites, newspapers and books. I don't go to seminars. I've learnt to control my emotions in my investments and buy only if the deal is good based on the facts, not on my excitement. I'm saving up for my first home currently so don't want to take huge risks with my money. 

There is a basic blueprint on how to get started. 

As far as putting it into practice, I did pretend examples on excel of real estate income/expenses/mortgages, etc, went to open homes, talked to real estate agents, etc. 

As far as stocks go, I read up on newspapers and annual reports.


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## nomore4s (17 April 2011)

NewOrder said:


> which was what my understanding was until someone on another forum said otherwise. I am not putting in a cent until I have full tax advice anyway but thanks this makes more sense to me.




If considered an out and out trader you will be taxed in a different way but for the example in the spreadsheet it is an investment so capital gains should apply on any profit. But like you said - see a tax professional as we all know how distorted tax matters can become.


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## skc (17 April 2011)

ENP said:


> Here is a fool proof step by step how to get into investing




Nice post, ENP. But I thing we should give nomore4s some time and space to go through his methodology before we start posting our own methods and suggestions. It would make the thread cleaner and easier to follow.  Thanks


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## Julia (17 April 2011)

NewOrder said:


> which was what my understanding was until someone on another forum said otherwise. I am not putting in a cent until I have full tax advice anyway but thanks this makes more sense to me.



Perhaps bear in mind that if you do whatever investing you plan to do within Super, you will only pay 15% tax, and then no tax at all once you move into pension phase.
If you have a reasonable level of capital, a SMSF makes much sense.


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## toocool (17 April 2011)

Julia said:


> If you have a reasonable level of capital, a SMSF makes much sense.




What would the minimum amount need to be Julia ?

I have been thinking really hard about SMSF lately as my super fund is just flat out poor!!  They have achieved only 5.9% in cash, diversified and high growth!! (Can’t believe they are the same % on all three) over the ten years ive been it.


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## NewOrder (17 April 2011)

Julia said:


> Perhaps bear in mind that if you do whatever investing you plan to do within Super, you will only pay 15% tax, and then no tax at all once you move into pension phase.
> If you have a reasonable level of capital, a SMSF makes much sense.




Thanks Julia, this opens up a whole new level of thinking. A SMSF was something that was not in my plan at all. Is it viable if I split my start up capital from the long term portfolio and say put $100k into a SMSF, is this enough to start one? I do have about $25k in a super fund somewhere, could this be consolidated into a SMSF?

ETA snap toocool, similar question at the same time.


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## Julia (18 April 2011)

For years 'experts' dictated that you needed more than $200,000 to start a SMSF, to make the costs justifiable.

I think they've had to retreat from this somewhat as organisations like Esuperfund
have entered the market.  I've never used them, but believe they offer free set-up, plus the first year's tax return and audit for under $1000.

So, considering the % fees charged by most of the public super funds, you're probably going to be better off with DIY, provided of course you know what you're doing.  Not much point having a SMSF if you don't know how to make money in it!

Have a read through this thread which, from memory, I think covers most of the points you need to consider.

https://www.aussiestockforums.com/forums/showthread.php?t=15589&highlight=Super


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## nomore4s (18 April 2011)

Good catch Julia a SMSF is a very viable option, especially for the Income portfolio but let's try not to get this thread too far off topic. So maybe all related posts in regards to questions on SMSF re:setting them up etc could be posted on the thread highlighted by Julia, that way this thread won't get too cluttered.

Thanks


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## nomore4s (18 April 2011)

NewOrder said:


> Yes I ideally do want capital growth as well as dividend income. OK you have highlighted a massive problem with being a naive newbie as I had not written a strategy about this in my trading plan.
> I will have set FA criteria for the stocks I buy but have not put in my trading plan what to do about stocks that do not show capital growth or indeed what level of growth I am seeking.




At least you've found the problem now and not after you've invested money in the market and caught out by one of the scenarios.



> Do you mean here to spread entry for one particular share across a longer time frame or to generally spread buying stocks for Portfolio 1) over time?




Both, depending of course on how much money you have at your disposal. If only buying $5k of each stock you are probably better off just buying all of that stock at once but if buying $25k+ it might be better of spreading it over 2 or 3 entries, purely to make it easier psychologically if the stock goes down straight after buying it. And I probably would not buy the whole portfolio at once even if it is highly diversified for much the same reason.
By slowly drip feeding your capital into the market for a portfolio like this you can spread your risk a little even though once fully invested you will be carrying the same risks. But the advantage is probably more psychological as how much harder will it be to stick to the long-term plan if your portfolio is down 25% straight after buying it?

These are the sort of things our plans needs to cover. How will you deal with a 20-25% drop in the first year? How will you deal with a 20-25% capital gain in the first year? Will this change your thinking - ie cut and run on the loss or take the gain and run on the win? You need to have an idea on how you will react if the worst happens and how you will react if the best happens (trust me, both can be hard to deal with).

You need to be very clear on why/when you will enter stocks and why/when you will exit stocks and you need to know that the strategy works (back-testing, paper-trading etc etc). This applies to all forms of trading/investing over all time frames (shorter time-frames require more accurate entries & exits imo as the smaller the movement you are trying to capture the more precise you have to be). And then you need to be able to apply this with patience, consistency and discipline.


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## Caveman (19 April 2011)

Thx for the thread Nomore4s
I have a question for Portfolio 3 Swing trading
Do you set stop losses for the trades or just trade on the fundamentals?


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## nomore4s (19 April 2011)

Caveman said:


> Thx for the thread Nomore4s
> I have a question for Portfolio 3 Swing trading
> Do you set stop losses for the trades or just trade on the fundamentals?




Portfolio 3 is traded purely off charts, so there are stops used. The Income portfolio is the only one I don't use hard stops for, I have an exit criteria it is just not at a set price level due to what I'm trying to achieve with that portfolio - but it is essential you understand the risks if trading/investing like this.

While I call portfolio 3 swing trading I actually trade various strategies depending on what the market conditions are, and what is being offered up. It is essentially my discretionary trading portfolio. My hold time in this portfolio can vary from 2 days to 6+ months but on average it is around 2-3 weeks. I find fundamentals way to clumsy to trade these sort of time frames - probably because I'm not very skilled in fundamentals.

The only portfolio I pay any attention to fundamentals is the income portfolio, everything else is traded off charts. I am essentially a chartist, but understand that in the long run it is earnings that drive share prices.


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## LifeChoices (20 April 2011)

I've spent a bit of time reading various threads today, including this one. I am the OP refered to above and am the first to admit that I don't have a proper investment plan and am looking for a better way of managing my share portfolio.

in 2006 - 2008 when I started my comsec account with $50K you didn't need a plan to make money - virtually whatever you did just worked. In those two years I was up about 20% when the GFC hit. 

I did have a simplistic plan, In that I chose 10 companies from different sectors - all blue chip with probably an emphasis on mining/oil - $5K allocated to each. When a stock went up 10% I would sell. Often buying back into the same sector days/weeks later when the graph went down.

I didn't really have a sell policy - didn't really need it until 2008 - stocks didn't really go down by enough to panic - you just needed to sit it out.  By 2008 I started doing some far riskier things, which taught me some important lessons. Most of the profits I made during this period came from buying and selling Gold and Oil shares - with LHG, NCM, WPL, ROC, BHP, RIO being particular favorites  as the price fluctuations were quite large. 

These stocks seemed to be good revenue sources as I made good profits from them buying low and selling days later at a peak. Anyway, I bought into AGL, Centro and Babcock and Brown days after they dropped significantly. A couple of times I made healthy gains on these stocks in a few days - I was gambling and sometimes it paid off. But then two of them never went back up and collapsed. All the other shares I had - despite being quite good - were also bought near the top of the market as I was gambling rather than investing. This didn't really bother me/stress me out as I knew they would eventually come back to life.

So for two years while my stocks were all in the red I just did nothing. Obviously NCM, BHP, AGL, CSL came back to life - IAG, WOW OZL AIO are still basket cases. So I'm pretty much back exactly where I started in 2006.

A couple of months ago, I sold the NCM for a good profit and re-invested it into the silver mine AYN - which hasn't  been a bad idea - heck - it's gone up 37% since I bought it a couple of weeks ago. Went up 8% today.

Very easy to make money when the market is going up - experts everywhere in a bull market - I was an expert.  Not so easy when in 2009/2010

I think 123567890 has some really interesting points and his/her strategy does make a lot of sense.


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## LifeChoices (20 April 2011)

I just thought I'd have a look at the graphs of some of my stocks I own, just to see if a hold strategy would have been any better.

Pretty interesting, seems that if I did that I probably wouldn't have been any better off than I am now.

Stocks like ANZ, CBA, IAG, AGK have been flat or have gone down in 5 years and the miners have generally gone up.

Something really odd that I did notice. I have a purchase order for 52 RIO shares on 17/12/2007 for $142.000 However, when I look at RIO's graph i see a high of $124.19 in May 2008 WTF is going on with that?


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## nomore4s (20 April 2011)

LifeChoices said:


> Very easy to make money when the market is going up - experts everywhere in a bull market - I was an expert.  Not so easy when in 2009/2010
> 
> I think 123567890 has some really interesting points and his/her strategy does make a lot of sense.




Bit short on time atm but just quickly.

Having goals, plans and strategies in place is about being able to make more money in the good times and to protect capital and get through the bad times. No matter how we trade/invest there will be times when the market will be ideal and times when it won't be, understanding how we are going to deal with both extremes and everything in between is a key part of successful trading/investing.


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## LifeChoices (20 April 2011)

I've posted a graph of the All Ordinaries index from when I started investing in 2006 until today. 




Seems I was better off gambling as I did than if I had just stayed on the boring steady as she goes route with a portfolio of blue chips.

I've thought about your spreadsheet and came to the conclusion that it doesn't match reality. 

You've posted one stock - CBA you've put $5K into it each year for 15 years. You said you wouldn't do it that way yourself. So in reality maybe you may have 5 stocks  - 5K into each of them each year is $25K per year. 

Now I'm thinking if you had that much money idly sitting about each year you are already rich and investing is just a pastime, not serving a valid purpose.

Yes, everyone is an expert with hindsight, when the market is heading in an upward direction and you draw models that are not based on reality.

AYN up another 8% today - Go AYN


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## nomore4s (20 April 2011)

LifeChoices said:


> I've posted a graph of the All Ordinaries index from when I started investing in 2006 until today.
> 
> Seems I was better off gambling as I did than if I had just stayed on the boring steady as she goes route with a portfolio of blue chips.
> 
> ...




You really don't get it, do you?!

The spreadsheet is an example using one stock because I'm not going to spend countless hours doing it over a range of stocks but it is a valid method able to be used over a number of stocks.
Example - Starting capital of $25,000 and an additional $5000 per year.
Initial capital split over 5 stocks.
Additional capital then invested into 1 or 2 stocks each year(either new stocks or 1 or 2 of the original 5) as well as all dividends re-invested, growing the portfolio slowly but surely and letting compounding take effect.

This thread is not about that one system/strategy, it is about how to go about building a solid plan/strategy/system to meet your goals and how to be successful over the long term in all market conditions.

Now if you believe that what I'm posting here is nonsense and what you are doing is the way to go, fine keep doing what you are doing no skin of my nose. But I will not let you derail this thread, so unless you want to contribute something constructive to the thread I'd suggest you don't post in it anymore.


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## NewOrder (20 April 2011)

nomore4s I for one have already gained an huge amount from this thread. I have read the linked thread on SMSF and have had a couple of lightbulb moments thanks to you and Julia 

No derailing please this a great thread for some of us. FWIW I don't read LC's posts as trying to derail.


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## luckyforteja (20 April 2011)

Thanks nomore4s for taking time to educate us newbies. 



nomore4s said:


> I run four different portfolios all with different objectives and time frames. I will quickly outline the portfolios here and then go into further details in later posts.
> 
> 1. Income Portfolio
> - Build income stream from dividends
> ...




I have a couple of question on your strategy..

1) Can you explain about your exit strategy ? This is one area which confuses me.   Would you sell stock at a predefined value, when making profit or loss ?
2) When price is going down how do you limit your loss ? How do you decide to take 1% loss 5% loss or 50% loss ? Can you explain your decision process ?
3) Can you explain about your risk management strategy ?

I have lot more questions would save them for later.

I am a newbie, in the process of reading books and getting a hang of stocks. I haven't invest any thing yet and won't be investing till I have a clue about what I am doing.

Thanks is advance, and honestly appreciate your help mate..

Cheers,
Sri


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## nomore4s (20 April 2011)

Hi Sri, welcome to the forum. I will get around to answering your questions but it won't be tonight as I am about to go to indoor cricket.

I just want to clarify this thread is not about my strategies in particular, it is about the processes that go into building solid plans and strategies to suit the goals of each particular investor/trader. But obviously I have used my strategies as examples as they are the ones I'm most versed in.

By having an understanding of what you want to achieve and how you want to achieve it - ie the type of trading and over what timeframe, it is easier to research and then practice and perfect the methods needed to be successful.

Take Lifechoices as an example again, he/she has decided to chase the more speculative end of the market for fast returns after 5 odd years of going nowhere, which is fine and there are plenty that are successful at trading that end of the market, but if that's what you are going to do why not build a plan and strategy around that to give yourself the most chance of being successful and maximizing returns instead of in Lifechoices own words just "gambling".

There is quite a bit more I want to get too but I haven't been able to find the time just yet.


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## LifeChoices (20 April 2011)

Hey nomore4s. 

Not derailing your thread. Just questioning buying shares rather than putting money into a bank account.

If you do the maths and apply exactly what you did in buying shares in CBA - to putting the same money into a CBA bank account every year at 7% interest for 15 years you would be slightly better off. If you did it for the past 5 years you would be much better off with the bank account.


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## luckyforteja (20 April 2011)

nomore4s said:


> Hi Sri, welcome to the forum. I will get around to answering your questions but it won't be tonight as I am about to go to indoor cricket.
> 
> I just want to clarify this thread is not about my strategies in particular, it is about the processes that go into building solid plans and strategies to suit the goals of each particular investor/trader. But obviously I have used my strategies as examples as they are the ones I'm most versed in.
> 
> ...




Hi Mate,

Thanks for the prompt reply and its Good to see another Cricket Tragic.....

I am not really after your strategy but I really want to know your thought process in reaching that strategy. From my understanding you are more of a TA guy, I am the opposite I like FA/Value investing. I am in the process of putting a plan/strategy but I am really struggling to get my head around Risk Management.

I see lot of people saying that they sell stock if the value goes down by x%. I really don't want to use a figure decided by someone else. I would rather get an understanding about Risk management and Capital Protection from experienced investor like yourself and  your thought process, so that I can work on something that suits me.

Sorry for the rant

Cheers
Sri


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## luckyforteja (20 April 2011)

LifeChoices said:


> Hey nomore4s.
> 
> Not derailing your thread. Just questioning buying shares rather than putting money into a bank account.
> 
> If you do the maths and apply exactly what you did in buying shares in CBA - to putting the same money into a CBA bank account every year at 7% interest for 15 years you would be slightly better off. If you did it for the past 5 years you would be much better off with the bank account.




Hi LifeChoices,

From my understanding nomore4s was showing the power of compounding rather than showing an investment strategy. If you had half proper Investment plan and an exit strategy.
You would sell CBA shares in 07 @ $50 (Sell when price goes down by 2.5%)
and buy them again in 09 @ $38.

Just by having this simple strategy you would have been roughly $40,000 better off.

It is just my thought. I am a newbie and I have never invested in shares. So I could be completely wrong.

Cheers,
Sri


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## burglar (20 April 2011)

nomore4s said:


> ... why not build a plan and strategy around that to give yourself the most chance of being successful and maximizing returns ...




Agree with NewOrder that LifeChoices is not derailing the thread. IMO

The thread is helping newbies get from a bad (his/mine) situation to a better one!
It is also helping newbies to avoid a bad situation from the onset.


In either case, the thread is excellent, keep up the good work!


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## NewOrder (20 April 2011)

luckyforteja said:


> Hi LifeChoices,
> 
> From my understanding nomore4s was showing the power of compounding rather than showing an investment strategy. If you had half proper Investment plan and an exit strategy.
> You would sell CBA shares in 07 @ $50 (Sell when price goes down by 2.5%)
> ...




That is how I would look at at as well Sri. Brings up another question from me, in my plan for long term div. Reinvestment portfolio, I have written that it will be evaluated every 3 months. Is this a fair time frame or should it be monitored on a more regular basis?

Hope that makes sense, I am on my phone which is a PITA to type on.


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## LifeChoices (20 April 2011)

luckyforteja said:


> Hi LifeChoices,
> 
> From my understanding nomore4s was showing the power of compounding rather than showing an investment strategy. If you had half proper Investment plan and an exit strategy.
> You would sell CBA shares in 07 @ $50 (Sell when price goes down by 2.5%)
> ...




Hi Sri, I didn't happen to bump into you at the last MENSA barbecue at Koo Wee Rup? Were you the guy with the goatie and ponytail wearing the kilt banging on to me about Egypt? I was the midget, wearing a Daniel Boon style racoon hat.

I thought nomore4s was showing us an example of what he does with portfolio 1 - but yeah, I agree he/she would have been better off selling shares on 14 Dec 2007, putting the money in the bank at 7% interest and buying shares again on 23 Jan 2009.


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## luckyforteja (20 April 2011)

LifeChoices said:


> Hi Sri, I didn't happen to bump into you at the last MENSA barbecue at Koo Wee Rup? Were you the guy with the goatie and ponytail wearing the kilt banging on to me about Egypt? I was the midget, wearing a Daniel Boon style racoon hat.



 ......... Lol



> I thought nomore4s was showing us an example of what he does with portfolio 1 - but yeah, I agree he/she would have been better off selling shares on 14 Dec 2007, putting the money in the bank at 7% interest and buying shares again on 23 Jan 2009.




I would let nomore4s answer this.



NewOrder said:


> That is how I would look at at as well Sri. Brings up another question from me, in my plan for long term div. Reinvestment portfolio, I have written that it will be evaluated every 3 months. Is this a fair time frame or should it be monitored on a more regular basis?
> 
> Hope that makes sense, I am on my phone which is a PITA to type on.




It definitely makes sense to me. I think it is very subjective, depends on your trading plan I guess. For me I would probably have a glance at my portfolio every day, adjust my stop loss and do an evaluate every time a major event happens like Japan, major announcement or after their quarterly results. I wouldn't be really comfortable with evaluating after a fixed amount of time. Thats just me being me.

Cheers
Sri


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## nomore4s (21 April 2011)

LifeChoices said:


> Hey nomore4s.
> 
> Not derailing your thread. Just questioning buying shares rather than putting money into a bank account.
> 
> If you do the maths and apply exactly what you did in buying shares in CBA - to putting the same money into a CBA bank account every year at 7% interest for 15 years you would be slightly better off. If you did it for the past 5 years you would be much better off with the bank account.




Yeah except for the capital gains component, the tax benefits of a fully franked d/e over interest(which you need to pay tax on - which has not been taken into account in the attached interest spreadsheet so there is another 20%+ or so straight away) and in the 15th year you would get around $10,000 in interest payments but over $13,000 in the d/e re-investment model.

Have attached my interest calculator spreadsheet with interest calculated and paid monthly with monthly contributions of $420($5040 pa). And while you do end up with close to the same dollar amount from re-invested dividends or interest (about $150,000) the dividend payments are really starting to outperform the interest payments by the 11th year and that is with an extra $400 per year put into the interest model and like already stated with shares you also have the advantage of capital gains.

I know which model I'd prefer after 15 years.


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## nomore4s (21 April 2011)

luckyforteja said:


> Hi LifeChoices,
> 
> From my understanding nomore4s was showing the power of compounding rather than showing an investment strategy. If you had half proper Investment plan and an exit strategy.
> You would sell CBA shares in 07 @ $50 (Sell when price goes down by 2.5%)
> ...






NewOrder said:


> That is how I would look at at as well Sri. Brings up another question from me, in my plan for long term div. Reinvestment portfolio, I have written that it will be evaluated every 3 months. Is this a fair time frame or should it be monitored on a more regular basis?
> 
> Hope that makes sense, I am on my phone which is a PITA to type on.






LifeChoices said:


> t.I thought nomore4s was showing us an example of what he does with portfolio 1 - but yeah, I agree he/she would have been better off selling shares on 14 Dec 2007, putting the money in the bank at 7% interest and buying shares again on 23 Jan 2009.




Just be careful here as you are starting to curve fit. While it may sound simple to sell in '07 @ $50 and buy back in '09 @ $38, it raises a few issues.
-First there is the tax that needs to be paid on the capital gains, one of the advantages of this strategy is it lets me grow a passive income without increasing my tax, as remember the dividends are fully franked. 

-How do you pick the tops and what triggers the buy back? Here is a list of the major swings with CBA in the last couple of years.
$56.24 on 23.10.09
$50.40 on 2.11.09 - Swing of 10.38%
$55.95 on 10.11.09
$50.30 on 27.11.09 - Swing of 10.09%
$58.65 on 18.01.10
$51.01 on 15.02.10 - Swing of 13.03%
$60.00 on 21.04.10
$48.44 on 21.05.10 - Swing of 19.27% or $47.05 on 02.07.10 - Swing of 21.58%
$54.20 on 03.08.10
$48.07 on 25.08.10 - Swing of 11.31%
$53.96 on 15.09.10
$47.47 on 26.11.10 - Swing of 12.02%
$55.48 on 09.02.11
$49.25 on 17.03.11 - Swing of 11.32%

So in the last 18 months you could have been potentially stopped out of the stock 7 times with declines of over 10%, and now when do you buy back in on each move? It's actually feasible you would still be sitting on the sidelines and now you've paid up to 7 more lots of brokerage, tax for every-time you exit the stock at profit and maybe even missed some dividend payments.
This is fine but it now does not fit in with my original goals and strategies of the portfolio, it is now beginning to fall into Portfolio 2 or even 3.
This is why I'm saying you need to be clear on what exactly you want to achieve before you begin, knowing what your plan is when the stock rockets, falls or trades sideways. Under my exit criteria for this portfolio I would not have had one signal to exit CBA in the whole 15 years, that's not to say I won't have one in the next 15 years. 
The above is also why I run other strategies, so I can just let my long-term portfolio grow and do what I've designed it to do without having to chase the markets swings and roundabouts, as I'm trading these swings in my other portfolios. 

That spreadsheet is purely an example of how it can work. Remember in the original spreadsheet I purchased the stock on the same date every year without paying any attention to the price and that is not how I run that portfolio, I only did it that way to show even with a very crude entry method it is possible to get good results.
So now instead of trying to pick market tops & bottoms to improve the return and creating tax events in the process how about we bring in some simple entry rules to try and help maximizing the returns while still keeping within the portfolios original plan.
Possible Entry rules.
- As we are buying once a year why not only buy after a decline or at support levels  each year as the opportunities present -eg on current CBA chart buy at support at around $48
- If the market or stock is toppy - eg 2007, don't buy but wait for a decline and purchase 2 years stock at once at a discounted price, while still receiving dividends from current holdings.

Don't fall into the mistake of looking at charts and saying if I brought here or sold there or if only I had held here instead of selling, etc etc as it will do your head in.
You will never nail every move perfectly and you will have plenty of times where you exit a stock and it goes to the moon after you exit or you fail to buy a stock for whatever reason and it takes off.
All you can do is build a strategy/system/method/plan that is robust and profitable and then follow through on it to the best of your abilities.


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## LifeChoices (21 April 2011)

Thanks for constructing the last two posts. 

I didn't factor in capital gains tax, but I suppose putting money in the bank is more flexible than buying shares and is preferable if you have less income to invest annually into a buy and hold portfolio.

Your last post also rings true, while gambling on the stock market I did figure that all I was really doing was paying commsec commissions. When I look at all the buying and selling I did, I didn't end up much better off than the all ordinaries index and then there was the added hassle of calculating capital gains tax. My accountant one year questioned whether I needed to set up a business for all the trading I was doing. Apart from that I didn't have a crystal ball and couldn't accurately pick the top and bottom of the market.

I've found in the last couple of days on the forum, that quite a few people here make their living from this stuff. The share market for me has just been something I do just to pass time at work to make a bit of extra money.


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## nomore4s (21 April 2011)

LifeChoices said:


> I didn't factor in capital gains tax, but I suppose putting money in the bank is more flexible than buying shares and is preferable if you have less income to invest annually into a buy and hold portfolio.




Of course putting the money in a bank account is safer, but the goal in trading is to gain compensation for the extra risk of having the money in the market.


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## Ves (29 April 2011)

nomore4s said:


> 1. Income Portfolio
> - Build income stream from dividends
> - My version of a buy and hold strategy (there is exit criteria although the goal is to never have to sell)
> - This portfolio is about accumulation, a great deal of patience and long term vision is required.
> ...



Hello, first post here. I'm relatively new to shares (have read a bit over the years, but never really purchased anything). I only have a minimal batch of TLS shares.

I'm currently 25 and work in accounting. I currently have a neutrally geared rental property. I have set myself an initial goal of earning $5k per year of passive income from shares by the time I have turned 30. I plan to put in $10-12k a year minimum from my savings. I currently have $10k sitting in a mortgage offset account that could be used as start-up capital if required, otherwise I would cumulatively save and buy shares in $1.5-2k parcels. 

I would like take a conservative approach. So this would involve a long-term income portfolio earning passive income from dividends. Franking credits are obviously a bonus, and I would effectively pay no additional tax on the income as I am in the 30% tax bracket.

First question - is my goal realistic? What value of shares would be required to achieve a passive income of $5k? I would use the DRP strategy and re-invest any income along the way to reach this goal. Could I do even better? I am estimating that I would need around $80-100k in shares to achieve this, but with compounding I could be wrong.

Bear in mind that I would keep the portfolio after I have reached the goal of $5k income. 

Second - can you give me some sort of guideline as to what criteria you would use to select a portfolio of stocks to achieve this goal? My gut feel is that proven dividend and earnings growth is paramount, and companies with strong competitive advantages (Porters Five Forces may be handy here).

Stocks that I am keeping in my for this purpose include: the big four banks, WES, WOW, BHP, FWD, QBE, possibly ORG. 

With a smaller capital base would you recommend sticking to a core group of 4-5 stocks to begin with?

Anything that you may like to add would be great. I am sure I am missing some important factors.


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## nomore4s (3 May 2011)

Just quickly, I haven't forgotten this thread, I've been interstate and extremely busy with work. I'm going to find it difficult to update anything over the next few weeks as I've got a heavy work load and will also be overseas for a few weeks at the end of May. I will eventually get around to adding more and answering some of the questions.


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## nomore4s (15 June 2011)

All right, I'm back on deck so I will try and get this thread going again.

I will start with a bit of a re-cap and then try to go back through the thread and answer some questions that have previously been asked.

Quick re-cap.

- Determine how much time & energy you are willing to devote to trading/investing
- Set goals for your trading/investing
- What time-frame & type of trading/investing you want to engage in, and does this fit in with the amount of time you are will to commit to trading.
- Start researching & testing strategies/ideas that match up with your goals, preferred time-frame, available capital and available time.
- Build a plan that gives you an understanding of how you will react and what you will do if the best happens or if the worst happens. Your plan also needs to cover entry & exits techniques to be used, risk management strategies, money management & trade management strategies.
- Testing of your strategies & plans. Will they hold up under the pressure of real money in the market & are they profitable?

These are the sort of things that should be in place before putting a cent into the market imo, and even then there is no guarantee of success.


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## nomore4s (15 June 2011)

Ves said:


> I'm currently 25 and work in accounting. I currently have a neutrally geared rental property. I have set myself an initial goal of earning $5k per year of passive income from shares by the time I have turned 30. I plan to put in $10-12k a year minimum from my savings. I currently have $10k sitting in a mortgage offset account that could be used as start-up capital if required, otherwise I would cumulatively save and buy shares in $1.5-2k parcels.
> 
> I would like take a conservative approach. So this would involve a long-term income portfolio earning passive income from dividends. Franking credits are obviously a bonus, and I would effectively pay no additional tax on the income as I am in the 30% tax bracket.
> 
> First question - is my goal realistic? What value of shares would be required to achieve a passive income of $5k? I would use the DRP strategy and re-invest any income along the way to reach this goal. Could I do even better? I am estimating that I would need around $80-100k in shares to achieve this, but with compounding I could be wrong.




Your goal is realistic but $5k in the first 5 years will depend a lot on a number of factors, some of which you probably won't have control over.
You will need somewhere around $100k in market value worth of stocks to earn around the $5k in d/e's but how much of that value is your initial outlay and how much is capital gains will depend on the market conditions over the next 5 years. IMO though 5 years is not really enough time to see the true benefits of that sort of investing but you should start to see some sort of return in that time.



> Second - can you give me some sort of guideline as to what criteria you would use to select a portfolio of stocks to achieve this goal? My gut feel is that proven dividend and earnings growth is paramount, and companies with strong competitive advantages (Porters Five Forces may be handy here).
> 
> Stocks that I am keeping in my for this purpose include: the big four banks, WES, WOW, BHP, FWD, QBE, possibly ORG.




Obviously the criteria you mentioned are good starting bases and I would also have a very good look at the debt levels, companies with low debt levels, solid earnings & d/e growth as well as low dividend payout ratios are very high on my list of potential stocks for portfolios like this. I also take dividend yield into account, for instance BHP's yield is too low for me to justify buying it for my income portfolio.



> With a smaller capital base would you recommend sticking to a core group of 4-5 stocks to begin with?




Yes I would stick to a smaller core group until a decent amount has been accumulated but I also wouldn't totally rule out buying/adding another stock if a good opportunity came along.



> Anything that you may like to add would be great. I am sure I am missing some important factors.



Just make sure you have solid goals in place with a clear vision of what you want to achieve and then be consistent in implementing them.


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## nomore4s (15 June 2011)

luckyforteja said:


> I have a couple of question on your strategy..
> 
> 1) Can you explain about your exit strategy ? This is one area which confuses me.   Would you sell stock at a predefined value, when making profit or loss ?
> 2) When price is going down how do you limit your loss ? How do you decide to take 1% loss 5% loss or 50% loss ? Can you explain your decision process ?
> 3) Can you explain about your risk management strategy ?




1) Which portfolio? As they all differ somewhat.

2) This is decided before I take a trade but again it differs somewhat for each portfolio. For my general trading I used a fixed fractional position sizing method and if you search the forum you will find more info on it.

3) Again this varies for each portfolio. But basically I just try to control the amount of money I have at risk for each portfolio at anyone time. I do this by controlling the amount of money in the markets, how many open trades I have, my overall views on the market both macro & micro.


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## nomore4s (10 August 2011)

Time to dust of this thread I think, as there has been quite a few newbie posts going around during the current downturn that have highlighted a few things to me.

First, it truly amazes me how many people get into trading or investing in shares without truly understand how the market works, what phase the market is in and have absolutely no plan to deal with situations that can occur when trading the stock market.

You wouldn't start a business without a plan and an understanding of the industry you are gettimg into but we constantly see people throw money at the markets with little or no understanding of the market.

It is not to hard to get a decent education on the stock market now, with sites like this one and plenty of info freely available but it seems most are not willing to put the hard work in.

You really need to have a basic understanding of what you want to achieve out of the market and then a detailed plan of how you are going to achieve that.
Is it a retirement fund?
Is it extra income?
Is it to make a living?
Is it passive income & compounding?

How are you going achieve this?
Trading? Swing trading? Trend trading? Timeframe?
Long term investing for dividend stream?
Long term investing for capital gains only?

Do you have an understanding of the different phases of the market?
Can you differentiate between these phases?
Do you know the effect these phases will have on your trading or investing style?


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## nomore4s (12 August 2011)

Now you have an idea of what you want to achieve from the market and a basic outline of how you want to do it.

As an example.

Trade for extra income.
Want to trade various patterns similar to Curtis Arnolds PPS system - so continuation and reversal patterns. With hold times from 2 weeks to 3 months.

Now this is where the actual work starts.
- Need to develop and practice the skills required to trade this way.
- Need to obtain the tools required to be able to trade this way.
- Quality charting software with a built scanning software to scan for patterns​- Quality data​- Portfolio tracking software or spreadsheet​- Low cost broker that you can preferably go long and short with​- Need to test your ideas and strategies to make sure they will actually be profitable
- Need to understand what market conditions work best for these strategies
- Need to know how to identify these conditions and the conditions that don't suit your strategies (some times being out of the market is a good thing)  
- Need to be consistent in your application of your analysis and the application of the required skills.
- Need to understand your risks that are involved with each trade and with your whole portfolio and what sort of risk model you will use to determine position size etc etc.
- Need to understand you entry and exit signals
- Need to have some sort of review process so you can identify when your system/method isn't working as soon as possible and how you can rectify that even if it means not trading.
- Need to develop the skill set to bring all this together and be consistent with it.

As you can see it is really no different to starting and running a business, and that is the way you need to look at it. It requires hard work, good planning, good execution and a consistent approach to everything you do.


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## Ves (12 August 2011)

Thanks for your earlier post. I have done a lot of research on this dividend reinvestment method and on particular shares that may fit its critera. Learning a lot thus far.

Another question on the income & compounding portfolio, though.

This one obviously has a "never sell" philosophy (unless the income stream suffers serious decline or dries up completely.

So the recent market pullbacks / crash / other fancy word would not phase you within this portfolio.

But do you see this as a time to top-up? At 3800 some of the yields for companies that consistently see dividend growth are very enticing. Or do you have an overall "Technical view" of the market and even use it within this portfolio?


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## tech/a (12 August 2011)

nomore4s said:


> Now you have an idea of what you want to achieve from the market and a basic outline of how you want to do it.
> 
> As an example.
> 
> ...





*A capital base that is workable.*


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## nomore4s (12 August 2011)

Ves said:


> Thanks for your earlier post. I have done a lot of research on this dividend reinvestment method and on particular shares that may fit its critera. Learning a lot thus far.
> 
> Another question on the income & compounding portfolio, though.
> 
> ...




The current pullback has no effect on how I manage this portfolio, I don't even look at the capital gains component as that makes it easier to ignore the swings.

I have an overall technical view that we could very well go lower but I also don't look a gift horse in the mouth and have been buying for this portfolio after the strength shown on Tue as with that sort of rebound we could very well have seen the low for this year. Also with CBA going ex div on Monday has helped.



tech/a said:


> *A capital base that is workable.*




Hahaha yeah.


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## Ves (13 August 2011)

Cheers, in my own reckoning it is almost the perfect "crossroads" to start a portfolio like this. I have started drip feeding my salary into some smaller positions based on the higher yields of the banks. I am leaving a decent chunk of cash on the side for buying opportunities at levels 3800 and below.

View attachment Retirement-Calculator (Dividend Investing Model).xlsx


I found this calculator on an American website called "Dividends4life."

Obviously it has a flat dividend growth rate and in reality the fluctuations are going to produce different results, but even when using very conservative figures it demonstrates the power of such a reinvestment compounding strategy. It's a good counter-part to the spreadsheet that you produced for CBA.

It confirms the Richest Man in Babylon virtues of discipline and consistency.


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## nomore4s (13 August 2011)

Ves said:


> It confirms the Richest Man in Babylon virtues of discipline and consistency.




Yes it can be a very powerful portfolio but it is very very hard to put into practice.

It requires a lot of discipline and the ability to ignore market fluctuations over many years and the swings that brings with your open equity. It also can be difficult for the first 3-5 years as you see very little reward for this period.

I look at it as my private superfund and only put in money I allocate to my retirement and will not need till then but obviously the more I can pump into it now the better it will be in 20 years time.


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## Ves (13 August 2011)

nomore4s said:


> It requires a lot of discipline and the ability to ignore market fluctuations over many years and the swings that brings with your open equity. It also can be difficult for the first 3-5 years as you see very little reward for this period.



Agreed; but very easy if you have a vision for your future (not just "I want to retire") and the determination to succeed. I guess my personality type helps too. I am a big picture, long-term over instant gratification type thinker. If you have a vision and can set realistic goals toward achieving them it is very possible.

Thanks for your help. I am finding the long-term passive income portfolio idea the easiest to plan and formulate. The basic criteria (which will develop further to my tastes over time) make good sense to me.

Still working on some ideas for a "technical or trading" type fund, but as tech/a and yourself have said already this is not something that I will be able to implement nearly as quickly due to the learning curve. I may find that I never put this in place if I do not feel comfortable understanding the risk management side of things.


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## nomore4s (13 August 2011)

Ves said:


> Still working on some ideas for a "technical or trading" type fund, but as tech/a and yourself have said already this is not something that I will be able to implement nearly as quickly due to the learning curve. I may find that I never put this in place if I do not feel comfortable understanding the risk management side of things.




This type of trading is a lot harder because it requires a fair bit of knowledge, skill and experience to pull off. IMO you really need to treat it like doing an apprenticeship, it takes years of purposeful studying & practice to become a skilled trader. Study the basics first before trying to formulate a strategy.


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## nomore4s (13 August 2011)

Ves said:


> Agreed; but very easy if you have a vision for your future (not just "I want to retire") and the determination to succeed. I guess my personality type helps too. I am a big picture, long-term over instant gratification type thinker. If you have a vision and can set realistic goals toward achieving them it is very possible.
> 
> Thanks for your help. I am finding the long-term passive income portfolio idea the easiest to plan and formulate. The basic criteria (which will develop further to my tastes over time) make good sense to me.




No worries.

You will no doubt adapt the strategy to suit your personal goals and requirements, I have pretty much only discussed the basic outlines, the details are up to you. Good luck.


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## Tysonboss1 (13 August 2011)

A very simple but effective portfolio policy for the defensive investor is the 50/50 cash vs index fund approch suggested by benjiman graham.

It is a rather mechanical approach in which the defensive investor holds 50% of his funds in cash and 50% in a stockmarket index fund, 

Each time market movements upset the balance by 5% the investor adjusts the portfolio back to 50/50 ratio by either selling or buying the index.

So in an advancing market the investor steadily sells stock and in the declining market he steadily buys stock.


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## So_Cynical (13 August 2011)

Tysonboss1 said:


> A very simple but effective portfolio policy for the defensive investor is the 50/50 cash vs index fund approch suggested by benjiman graham.
> 
> It is a rather mechanical approach in which the defensive investor holds 50% of his funds in cash and 50% in a stockmarket index fund,
> 
> ...




That's really smart...buying and selling when you should be and always having funds to take advantage of the moves...perhaps a 30 (cash)/70 (stocks-index) ratio along with mechanical moves in and out at every 6 or 7% mite be more aggressive.

Further..spreading the stocks across 3 or more ETF's would also give some scope for getting CGT discounts by selling the oldest index shares first, i suppose with 50 to 70% of your money in index funds and only ever selling a little at a time there will always be shares held for over 12 months to get the discount anyway.

And now would be a great time to start!


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## craft (13 August 2011)

Great thread nomore2+2s




Ves said:


> I am finding the long-term passive income portfolio idea the easiest to plan and formulate. .




My focus is Nomore4s 1st Strategy. Maybe a new thread to discuss just that strategy could be started. I think there is a bigger agenda for this thread.



> Still working on some ideas for a "technical or trading" type fund, but as tech/a and yourself have said already this is not something that I will be able to implement nearly as quickly due to the learning curve.




Even if your long term focus is strategy one. There is an enormous amount of learning about yourself, the market and risk management that can be leant quicker and safer through GOOD Technical Analysis trading. Don’t let focus become tunnel vision.


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## craft (13 August 2011)

Tysonboss1 said:


> A very simple but effective portfolio policy for the defensive investor is the 50/50 cash vs index fund approch suggested by benjiman graham.
> 
> It is a rather mechanical approach in which the defensive investor holds 50% of his funds in cash and 50% in a stockmarket index fund,
> 
> ...




Crank up excel and do some random generation models of rebalancing. Rebalancing does add a little over non-rebalincing but the yield differential doesn’t have to be too much before you are better off going 100% for the highest yield option so long as you have a long enough time frame to ride out volatility.


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## ROE (13 August 2011)

Ves said:


> Cheers, in my own reckoning it is almost the perfect "crossroads" to start a portfolio like this. I have started drip feeding my salary into some smaller positions based on the higher yields of the banks. I am leaving a decent chunk of cash on the side for buying opportunities at levels 3800 and below.
> 
> View attachment 44031
> 
> ...




Chuck in some conservative number when I retire 
Richest man in Babylon rules are golden ... I pretty much set my goal according to
his golden rules...

GFC, Crash, Melt down these timeless wisdoms lives on

 - Your portfolio's market value will be: 		$8,220,480
 - Your portfolio's cost basis will be: 			$5,356,746

 - Your portfolio's current yield will be: 		4.50%
 - Your portfolio's yield-on-cost will be: 		6.91%

 - Your portfolio's annual income will be: 		$369,922
 - The above income In today's dollars will be: 	$187,436

Could you live on $187436 today?


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## Tysonboss1 (13 August 2011)

So_Cynical said:


> perhaps a 30 (cash)/70 (stocks-index) ratio along with mechanical moves in and out at every 6 or 7% mite be more aggressive.




He does give scope that a more experianced investor may change the break up to as high as 75% stock and 25% cash when markets proove to be very much under valued and as low as 25% stock and 75% cash when markets are looking to be close to bubble conditions.

He does warn though that if a novice does start to leave the mechanical 50/50 approach and rely a bit more on the subjective market timing 25/75 approach, he is increasing the chance of a mistake and there fore increasing the chance that he will buy of sell at the wrong time and all the emotions of greed and loss will lead him to speculative pursuits to play catch up.


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## Tysonboss1 (13 August 2011)

craft said:


> Crank up excel and do some random generation models of rebalancing. Rebalancing does add a little over non-rebalincing but the yield differential doesn’t have to be too much before you are better off going 100% for the highest yield option so long as you have a long enough time frame to ride out volatility.




Rebalancing also gives the defensive investor something to do making them feel that in some way they are reacting positivly to market movements rather than just sitting their on a rollercoaster again being tempted by greed of terrified by fear of loss.

it's not that you will have the smartest idea, but you will achieve a credible return over time and avoid any disasters,


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## Ves (14 August 2011)

Tysonboss1 said:


> Each time market movements upset the balance by 5% the investor adjusts the portfolio back to 50/50 ratio by either selling or buying the index.



I think that this is a really good idea from Graham for people who are building a conservative _Growth_ portfolio. 

I am not sure how you would apply it to a portfolio that is chasing _dividend growth_ to build a passive income (rather than primarily capital growth) such as the one that nomore4s is discussing. 

My gut feel is that the re-balancing would be detrimental to the yield on cost in this case.

Any ideas?


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## Tysonboss1 (14 August 2011)

Ves said:


> I am not sure how you would apply it to a portfolio that is chasing _dividend growth_ to build a passive income (rather than primarily capital growth) such as the one that nomore4s is discussing.
> 
> My gut feel is that the re-balancing would be detrimental to the yield on cost in this case.
> 
> Any ideas?




The  cashflow from this portfolio would grow over time, and rebalancing would increase the cashflow. Obviously Both the stock and cash component would be throwing off cashflow.

As the stock market advances and dividend yields decrease some of the stock is sold and put into cash which would probably be paying higher interest than dividends, As the share market falls and dividend yields are increasing cash is transfered back to shares.


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## craft (15 August 2011)

The nominal return for Australian shares since 1900 is 11.7% compared to bonds at 5.3%

An equally allocated portfolio would give you a return of 8.5%

Rebalancing will give you a bit extra. How much is rebalancing worth? Well that depends on frequency of rebalancing and volatility of the investments. But it’s not huge – around  ½% (you should model this yourself under different volatility and rebalancing time frame assumptions to verify).  Also don't forget about the transaction costs to carry out the rebalnacing.

If you have a time frame and temperament to handle the volatility, you will earn more over the long run with a 100% allocation to the highest yield investment. Rebalancing a diversified allocation will only give you a higher return then a focused allocation when the yield differential is small and the volatility is high.

If you want a balanced asset allocation for some reason (risk management, liquidity, psychological reasons etc) then periodically re-balancing back to that strategic allocation does make sense - it maintains your desired weightings and the boost to return actually comes from closing out the deviations to your desired weightings created by market volatility. 

My point is that rebalancing is a tool for getting the greatest efficiency out of desired asset allocation, there is seldom enough in it to make it a good reason for choosing to go with a diversified allocation.


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## burglar (30 May 2012)

Hi nomore4s,

Just revisiting.
Long time, no update.


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## obdcodes (4 July 2012)

One of the biggest mistakes traders make is dipping their toes in the water without any education. First, you need to educate yourself as much as possible about the market  you are trading. And second, have sufficient capital to trade. Some traders use "too" much leverage  and can destroy their account if they do not know what they are doing. I mainly suggest, that a trader should learn about market economy and chart education.


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