Minimum capital to make $30,000 per year in the stock market?

[qldfrog]

my attempt last year to do the 20% flipper after finetuning of stop loss/trigger based on backtesting ended up in the real world as a net loss and substancial loss in percentage in an overall bull market
another proof that you can back test as much as you want, if you enter at the wrong time in the cycle and limit your experience to a year, you can end up with a nasty surprise
just a world of caution...

 

[CanOz]

my attempt last year to do the 20% flipper after finetuning of stop loss/trigger based on backtesting ended up in the real world as a net loss and substancial loss in percentage in an overall bull market
another proof that you can back test as much as you want, if you enter at the wrong time in the cycle and limit your experience to a year, you can end up with a nasty surprise
just a world of caution...

Not wanting to go to far off topic, but was this your own code QLDFrog, or you just played with the index filter a bit? Also, Drawdowns are part of it all, trust me, we're in a a 25% draw down at the moment in a managed futures fund, I'm feeling the pain....

Here is the last 12 months...

 

[DeepState]

my attempt last year to do the 20% flipper after finetuning of stop loss/trigger based on backtesting ended up in the real world as a net loss and substancial loss in percentage in an overall bull market
another proof that you can back test as much as you want, if you enter at the wrong time in the cycle and limit your experience to a year, you can end up with a nasty surprise
just a world of caution...

If that was intended for me. Thanks for the heads-up. Could leave you flipping burgers.

I wouldn't use the rule as specified...although it is not without some merit deep deeeeep inside. No offense intended to CanOz to each their own..

Let's add another risk:

Model.

 

[tinhat]

Hi Tinhat,

Whilst some may argue that this is a low risk portfolio, I tend to disagree.

43% of the capital and around 43.5% is exposed to the banking sector. I assume that this is a set and forget portfolio, therefore it will be exposed to the cyclical nature of the economy over time. I would be wary of the banks, they shoot the lights out when things are looking good (and they have been for 20 years now), but would be exposed in a recession. Who knows what skeletons are in the closet? Sounds like a big risk wagering 43% of your capital on everything staying rosy for ever.

If those dividends get cut then you are forced to sell in an environment where capital value may be at a low ebb (banks historically have traded near book value in a recession).

The banks have their place in a portfolio, when risk and reward is well placed, but for someone relying on a long-term income stream 43.5% in banks looks way over the mark.

There has not been a hiccup in a long-time, but can you say that this will be the case for another 20 years as a certainty?

Hi Ves, what I provided is not a model portfolio, its a thought experiment. As I said with only a moment's thought, I just jotted down a short list of conservative "blue chip" income stocks and then performed the experiment to work out what capital base would be required at current market prices and using short term dividend forecasts to generate the requested $30,000. Personally, I think it is the best of the suggestions that have been put forward so far.

I tend to agree with you that as a model portfolio, you would probably reduce the weight to banks to diversify the risk across sectors. I am more in the school of money in bank stocks over money in the bank though. The fact that since the GFC, bank deposits are government guaranteed changes that a little. It would be interesting though to consider what proportion of the ASX200 is made up of banks. I don't know what it is off the top of my head but at the current capitalisation of the big four it is bound to be high.

If a person were to rely solely on stocks for income I would also suggest you would also need a two year cash reserve which would add another $60,000 to the initial capital requirements. The question asked was not specific though.

 

[DeepState]

Personally, I think it is the best of the suggestions that have been put forward so far.

I'll put a vote in for Sydboy007. In my view, he's actually closest to the mark. It seems this is a serious question.

$30kpa. Not a lot of money. No margin for error. Melbourne Institute Sept 2013 poverty line for a couple which does not work (and hence does not incur working expenses) is $20k. That's poverty.

Assumption: You do not want to live in poverty.
Assumption: You can't stand the thought of living in poverty.

The least risky....as opposed to riskless...thing you can do is buy Australian Treasury Indexed Bonds. These are currently trading at 2% real and could be regarded as expensive in absolute terms. This should not be directly compared to the figures provided by Sydboy007 for Southbank or Sydney Airport. FIIG adjusts their quoted yields for an expected inflation rate of 2.5% flat forever.

If you can assume that the real yield curve for the rest of your life will remain at 2% real (and it won't), you will need $600k. You will have next to nothing on expected death. To the extent the coupon does not meet your current income needs, you sell the bonds required to meet them. In reality you'd do all sorts of stuff to mix the durations/maturities of the bonds to best meet your needs and sell them in a precise formulation. You get the point.

This amount will fund you for $30k per annum inflated by CPI. In the event that CPI should fall below the level at the time the bond was issued, your coupon won't fall any further and you will feel richer, but the world economy is probably collapsing.

Assumption: Your income needs will increase at the rate of inflation.

As these bonds mature, you will need to roll them. There is absolutely no assurance at all that you will be able to get 2% real on the roll. So...you need to allow a risk margin.

I am guessing that you do not want to live on anything much less than $30kpa. All this is pre-tax. If so, this is what you do: Buy TIBs...on the ASX. You can't take risk.

It has been suggested that hybrids and other higher yield securities might help. It might..it might not. This adds risk. And...you may not be in any position to absorb a credit event. We just went through one. Typically, hybrids and 2nd tier will be completely wiped out or have nominal recovery. Senior debt gets 30% recovery. The yield gap reflects credit risk. This credit risk is not free money. Hybrids also contain derivatives in their payoff description. Essentially they have options embedded in them to enhance the yield. This is not a free lunch. Some investors call them "death bonds". For those inclined, the typical structure is an embedded collar, with a written put on the left wing.

I wrote about yield compression. Sydney Airport Finance recently issued a tranche of 10 year nominal bonds in Europe for only 100 bps over government. This is a security rated at the lowest rung of investment grade....ring any alarm bells? This pricing is essentially the same as per what their indexed securities are offered for, just in a different format.

Dude/Dudette your most riskless assets are TIBS. You will need to hold a margin over $600k, maybe $700k just to feel vaguely ok you won't slide into abject poverty from an investment angle. Any deviation from this brings risk and you have virtually no margin. As others have pointed out, your $30k probably doesn't make allowance for life events. Again, to the extent you do not want such developments to push you into poverty, you need to make allowance. If you happen to have more than something like 800-900k then, perhaps, go get funky with some of your hard-earned.

Bill M's analysis was accurate. The main difference between what he has calculated and the above is that he is using an assumed nominal interest rate and a fixed rate of inflation. In reality, you have no real idea...well some here seem to...of how the yield curve will evolve over the rest of your life. You do not know how interest rates will move against inflation. So there is no margin at all for the real return spread risk in there. The above hedges that.

Relative to a portfolio of stock with seemingly attractive yields....when the stock price dives, you can't hold. The peak to trough exceeded 50% in the GFC..big falls happened in Iraq II, Asian/Russian crisis, 1987...it will happen in your lifetime over and over. You can't hold because doing so brings the risk of poverty higher. Although some people seem to think it's easy, try it when you're sitting there watching your portfolio shrink by 50%. Please try it. You cannot know that the markets will recover or your cash dividends (as opposed to yields) will recover and you must protect your margin. Those who argue value/reversion have a point. But, you can only do it if you are in a position to absorb loss. You are not if you are looking at $30kpa as a living allowance and asking questions about the minimum required to get there. If you have to ask...you probably can't afford it [no disrespect, just a phrase]. I'll bet you've done your sums and this is the least you feel vaguely comfortable with. Maybe if you turn your car over every 10 instead of 5 years and patch your shoes, you could get by on $25k...but $20k...that's too harsh. You know what I mean. Naturally, if you have excess assets to the figures above, you have risk buffer and can go for it.

Hope this helps a little.

Disclaimer: This is not advice. I am describing a hypothetical scenario. I do not know your circumstances. I am not recommending the purchase or sale of any security. I am not recommending FIIG or its officers or subsidiaries. I do have an account with FIIG. Please do your own work.

 

[qldfrog]

about my bad experience with the 20% flipper:
own code in amibroker but based on Radge's book with no extra guess :moving average on the asx deciding to stop any new buy, backtest to decide best exit stops
started at the wrong time early 2013, my adjusted stop loss made me exit most of my positions with a loss in the april/may 13 decline(from memory); by the time the buy was on again, I had missed much of the surge up.
I exited most last october/november waiting for the crash which did not happen (yet?)..but did not loose much anyway.
I also believe the bias in the asx toward the banks and rio/bhp makes using the asx200 as an indicator too distorded.
But in a nutshell, these 30k per year are not that easy !

 

[CanOz]

about my bad experience with the 20% flipper:
own code in amibroker but based on Radge's book with no extra guess :moving average on the asx deciding to stop any new buy, backtest to decide best exit stops
started at the wrong time early 2013, my adjusted stop loss made me exit most of my positions with a loss in the april/may 13 decline(from memory); by the time the buy was on again, I had missed much of the surge up.
I exited most last october/november waiting for the crash which did not happen (yet?)..but did not loose much anyway.
I also believe the bias in the asx toward the banks and rio/bhp makes using the asx200 as an indicator too distorded.
But in a nutshell, these 30k per year are not that easy !

Wow, good on ya for having a go at the code.

Yeah, sometimes its easier to just go to work than worry about your investments, systematic, fundamental or whatever...

 

[burglar]

... Yeah, sometimes its easier to just go to work ...

Agree, if fit and well.

 

[tinhat]

I'll put a vote in for Sydboy007. In my view, he's actually closest to the mark. It seems this is a serious question.

I've found your and Sydboy007's responses to be very informative and very well thought out and explained. You are, however, adding a lot of assumptions to the original question which simply was:

what is the minimum capital for you to make $30,000 per year in stockmarket

You've provided a scenario where the poster is looking to create an investment income as the sole source of income for retirement and made some additional decisions about capital draw down without being provided with any information that would allow you to make reasoned calculations. None of this is in the original question but understand your reasoning and the solution you provide.

Although some people seem to think it's easy, try it when you're sitting there watching your portfolio shrink by 50%. Please try it.

This is not relevant to the original poster's question, but I've been there, done that. During the GFC when the death of a trustee of the family SMSF saw the share portfolio frozen through most of the crash. CBA, WOW and WES all paid dividends through the crash and the subsequent Euro crisis with stock prices that are currently higher than the 2007 top. If you had bought CBA at the 2007 peak of $62.16 and held them all the way through the GFC, the lowest yield you would have received was 5.2% (grossed up) in FY09.

If one accumulates and manages a portfolio of quality stocks over several decades, these market shock risks aren't as huge as they might seem. Obviously, those that managed their investments and implemented stop losses during the crash would have had the opportunity to profit greatly from the crash. The 2008 crash gave that opportunity whereas the 1987 crash unfolded much faster. Of course the stock market is volatile and everyone should invest according to their own needs.

[edited to add...]
Additionally, if we return to the original question, my thought experiment was partially to set a bit of a benchmark, perhaps for my own benefit, of looking to see what returns are available from an equally weighted portfolio of a handful of the leading income stocks amongst the giants of the ASX. My income portfolio has most of the stocks I mentioned (not WBC and not WPL) but I have a lot of smaller income stocks such as GZL, NWH and PRT which probably carry more risk and I have been caught with capital losses in owning smaller stocks with more volatile stock prices and getting stuck in a couple of dividend traps too.

 

[DeepState]

I've found your and Sydboy007's responses to be very informative and very well thought out and explained. You are, however, adding a lot of assumptions to the original question which simply was:

what is the minimum capital for you to make $30,000 per year in stockmarket

You've provided a scenario where the poster is looking to create an investment income as the sole source of income for retirement and made some additional decisions about capital draw down without being provided with any information that would allow you to make reasoned calculations. None of this is in the original question but understand your reasoning and the solution you provide.

Thanks for your thoughtful response. I guess Sydboy007 has at least two fans. Could it be the Avatar?

Yes, I made the assumption that SteelCat has this as the sole source of retirement income. And, I also indicated that if SteelCat has surplus assets that risk could be taken. However, given we are in the absence of further information and this absence leaves a whopping void (MichaelD "how long is a piece of string"), I feel free to state my assumptions and work within them. By the way, are you even vaguely aware you have also made assumptions by suggesting that SteelCat can withstand risk and has surplus assets and or income? That he values franking credits? That he wants these in perpetuity? That we wants to consume from dividend rather than total return? And on and on...none stated in the title. There are, in fact, a reasonable number assumptions behind your 'thought experiment'. You did not state your assumptions other than those related to the securities and franking. If you are to call my scenario to account for use of assumptions not presented in a short sentence, I shall raise the flag to you in return, sir. My assumptions just happen to be different to the ones that are seemingly implicit to you - except I don't know what yours are because many aren't stated even though they have been made. The fact that I have made assumptions in this context does not make them inappropriate. Absence of proof is not proof of absence.

Further if I was not provided with sufficient information to make a reasoned calculation, how were you able to make a reasoned calculation unless, given that a calculation took place,...it was not reasoned? I did label this a hypothetical scenario.

 

[kid hustlr]

I still feel like as a whole a lot of members on this forum run by the mantra "ah it doesn't matter if the share price is below what I paid for im getting the dividend so its fine". Business's can cut dividends to or go under completely. I get people in their later years need an income stream but buy and holding 'blue chip stocks' is a riskier approach than most give credit for.

 

[MichaelD]

but buy and holding 'blue chip stocks' is a riskier approach than most give credit for.

but it's a good company

 

[Julia]

I still feel like as a whole a lot of members on this forum run by the mantra "ah it doesn't matter if the share price is below what I paid for im getting the dividend so its fine". Business's can cut dividends to or go under completely. I get people in their later years need an income stream but buy and holding 'blue chip stocks' is a riskier approach than most give credit for.

Very good point. Particularly when we're dependent on our capital to generate a living, capital protection should be the first priority imo.

 

[ROE]

I still feel like as a whole a lot of members on this forum run by the mantra "ah it doesn't matter if the share price is below what I paid for im getting the dividend so its fine". Business's can cut dividends to or go under completely. I get people in their later years need an income stream but buy and holding 'blue chip stocks' is a riskier approach than most give credit for.

So most of your purchase share price always go up after you bought them? it doesn't go backward? how do you do that?

Stocky market is a high risk asset if you focus on short term price movement it doesn't matter what stock you buy..It is unpredictable, price move in mysterious way and act like a wild beast...

the key is you buy good business at the right price and you ignore the price movement....not buying sh*tty business and hope it goes up and keep up the dividend..

Blue chip stocks doesn't mean anything ...it just large cap business...
it doesn't tell you if the business model is any good, it doesn't tell you if it is financially sound...

some blue chip are a lot more risky then its much younger brother like RFG, NVT, FLT,ARP, TGA etc...
90% of my money isn't in blue chip and I fell very safe, I ain't care if it dropped 5% one day or up 3% the next.

Having said that it doesn't mean, I do nothing all year round... I do use the market opportunity to trade or use other instrument to control my risks and hedge my investment.

and to 30K question I dont think it is easy for someone who has little knowledge of the market to
be able to deploy the cash and has little worry.. It is all dependent on their age.

someone like me still have 2 decade plus left, I am not too worry about my capital being depleted, I can top up each pay cheque..someone in their retirement with no other income, they would be frighten seeing their capital move backward.

Right I can generate 25-30K income a year from dividend and option premium, factor in capital gain from trading and CFDs I can generate 50K-80K a year... I started with a modest 100K and that was 9 years ago and came out of the GFC stronger than when I entered it

 

[CanOz]

How about a combination of the following:

Investment Property: $350,000 @ 4.5% net yield = $15750

Three 'safe' large cap with divi = $100,000 x 6% = $6000

Equity trading system with 50,000 starting capital returning 20% average net = $50,000 x 20% = $10,000

Total $31,750 on $500,000 invested

 

[DeepState]

Equity trading system with 50,000 starting capital returning 20% average net = $50,000 x 20% = $10,000

FYI, HFRI Equity Hedge Index last 60 months annualized return: 9.46%...in a strongly rising equity market.

What matters is not current yield. What matters is sustainable ongoing yield which, as Kid Hustlr and Julia have pointed out, with MichaelD's approving wink, cannot be assured. So you are going to need a ton of buffer if $30k is a hard floor, and less buffer if not.

Actually this whole yield obsession thing is a fallacy. What matters is total return, gross of franking if you like. You can consume from running yield or capital. They are equivalent if in pension phase, or a trader for tax purposes. The "eat your dividends but don't touch your capital" philosophy is a mental accounting cognitive error, or otherwise a method for personal discipline.

Since we are here, the US equity market is the most successful market in the world. We forget that markets get extinguished or suffer egregious capital loss. So, even in the most successful market in the whole world....which you could not know would have been in 1900...the average bear market duration is 18 years for the period since 1900 (source: Forbes). The Japanese markets have never recovered from the disaster put upon them by the Plaza Accord and has been in a whopping bear market since the late 1980s..25 years. Australia was once compared to Argentina... Your dividend yield might be sustained...but your dollar dividend...the part you actually eat...is crushed along with earnings. Markets may...generally...go up in the long term. But you could die before they do. Check your assumptions.

Ever heard of the 6ft man who drowned crossing a 5ft, on average, river? You put up the drawdown chart for the Flipper previously. That's fantastic. Just be sure that your portfolio can hack it as you are drawing down in a stochastic environment. Average is just a concept. You will hardly ever get the average return. You will experience volatility. Drawdown and volatility are not good friends. They reduce expected realized effective return.

To Julia's point about preservation of capital...and as I was pointing out in the TIB's scenario, when you run out of buffer or feel at threat of doing so, you sell. You have to or you punch through your hard floor. Or, you have your account frozen or are blissfully unaware of risk. Sometimes ignorance is bliss and it can work. But, drawing from MichaelD's moniker with a nod to Taleb, it was a very bad bet to take in a probabilistic sense. You (not you) bet with stupid odds, but won. That's a dumb win. Believe it or not, you are paying a call premium for entering a market under these conditions and the premium is higher if your buffer is smaller (forcing you into cash or, more accurately, your matching asset...TIBs). It will force you to buy high and sell low. Kimmell (Morningstar) looked at the actual returns earned by people invested in a pile of different mutual funds for the 10 years to 2014 vs the actual returns generated by the mutual funds. Guess what...the actual returns achieved trailed what was actually generated by around 2% in all sorts of asset classes with greater losses in volatile assets like equity. Examination of cashflows showed a synthetic call type pattern. Naturally, everyone here has b...s of steel and amazing RockStar insight and will clearly do better than average. Nonetheless, they will incur this call option premium cost, because if they are Rockstars, they will understand risk and act to maximize the chances of meeting the objective.

Good idea to diversify over more things than equities. Great idea. And it is entirely reasonable to have non-directional strategies in the mix, if well managed. You would be in good company...Harvard and Yale Endowments would support you on the broad direction. They would, however, be using somewhat less aggressive assumptions on alpha generation than you are making on this front. They also consider investing in various types of commodities and other types of direct investments. But, you do what you can.

Overall, you are going to need more money if the $30k is a hard floor. It's probably alright-ish if your floor is around $15k. All pre-tax.

Best.

 

[Julia]

How about a combination of the following:

Investment Property: $350,000 @ 4.5% net yield = $15750

Where do you envisage this property to be to get that Net yield?

I've just done a very quick calculation on a $350K rental in my area - coastal Qld, pop 55,000, no shortage of tenants - and a property of that value, after expenses, would net roughly 2.5%.
Calculated as follows:

Rent $300 p.a. max: rounded up to $16,000

Less:
Rates $3000 pa
Management fee $500 p.a.
Insurance $1500
Water and general maintenance at least $2000 p.a.
= Net $9000 approx.

And that is before allowing for any tax.

Then we cannot assume property will appreciate in value. Property values here are still more than 20% below pre-GFC levels, so you have capital loss to consider as well.
So a poor ROE coupled with all the hassle of tenants.

 

[qldfrog]

I have to agree:
bought at the low: 270k unit (total cost after all stamp duties etc) rented at 320 a week
property now valued around 300k (ie 10 % capital gain in around 3 years-> just matching inflation when you think about it)
after all costs, repairs etc get around 7.5k a year so a return of 2.8%
I could get a bit more managing myself, not being nice to the tenant etc etc-> but a 3% return is IMHO the most realistic figure you can get at present time on a standard property;
yes there is some depreciation etc to add to this but will not add an extra point
and honestly, I think I am doing quite well with this one.
bying now at 300k + cost would reduce the return even more

Commercial property is better and I have a shed soon settled but finding a tenant will not be easy....

 

[CanOz]

Where do you envisage this property to be to get that Net yield?

I've just done a very quick calculation on a $350K rental in my area - coastal Qld, pop 55,000, no shortage of tenants - and a property of that value, after expenses, would net roughly 2.5%.
Calculated as follows:

Rent $300 p.a. max: rounded up to $16,000

Less:
Rates $3000 pa
Management fee $500 p.a.
Insurance $1500
Water and general maintenance at least $2000 p.a.
= Net $9000 approx.

And that is before allowing for any tax.

Then we cannot assume property will appreciate in value. Property values here are still more than 20% below pre-GFC levels, so you have capital loss to consider as well.
So a poor ROE coupled with all the hassle of tenants.

When i calculated it, I considered the net yield costs of only rates and BC....I have since been told not to listen to the RE agents, as they tend to optimize the yields...So yes, it was a little rich. My point was that if the vacancy rates are low, it could be one of the lower risk components of an overall strategy....So easy there mom.

 

[CanOz]

I have to agree:
bought at the low: 270k unit (total cost after all stamp duties etc) rented at 320 a week
property now valued around 300k (ie 10 % capital gain in around 3 years-> just matching inflation when you think about it)
after all costs, repairs etc get around 7.5k a year so a return of 2.8%
I could get a bit more managing myself, not being nice to the tenant etc etc-> but a 3% return is IMHO the most realistic figure you can get at present time on a standard property;
yes there is some depreciation etc to add to this but will not add an extra point
and honestly, I think I am doing quite well with this one.
bying now at 300k + cost would reduce the return even more

Commercial property is better and I have a shed soon settled but finding a tenant will not be easy....

Thanks QF, really appreciate that example...very helpful