Retirement Stocks 2019

Value Collector said:

To me, it’s not about whether something is an ETF or any other security.

it’s 100% about what underlying assets I own when I buy the security and how is it being managed.

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But it's also a matter of the price that you buy in at.

You're already in, but for a new investor is the market over priced at the moment ?

Share prices seem artificially supported by low cash rates in order to stimulate a slowing economy so is there a real profit backing for investments to increase in value ?

The other issue for retirement stocks is, if you buy stocks for capital growth, you have to sell them for income.
Then you have to use the money, you make from the sale to live on and have enough to buy another share that gives you the same capital growth.
It becomes a bit of a Ponzi or gambling game.
The scenario is completely different if you are working, because you just keep adding, with additional funds.
That isn't possible when your capital is fixed and you have to draw down on it for living expenses, plus add to it from the earnings it generates, it becomes a much more precarious equation.
I hope that makes sense, it is a difficult issue to explain.

SirRumpole said:

But it's also a matter of the price that you buy in at.

You're already in, but for a new investor is the market over priced at the moment ?

Share prices seem artificially supported by low cash rates in order to stimulate a slowing economy so is there a real profit backing for investments to increase in value ?

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Yes of course price matters a lot.

But I personally don’t think the market is over priced, I am still actively writing puts against some things I think are under valued.

If anything I think the market is over all close to fairly valued, we some things under priced, so I wouldn’t be telling people to avoid starting a savings and investment program.

If some one asked me what they should do now, I would probably say “spend less than you earn, and dollar cost average into the Aussie and world index, and continue doing so regardless of whether we see falls or not”

sptrawler said:

The other issue for retirement stocks is, if you buy stocks for capital growth, you have to sell them for income.
Then you have to use the money, you make from the sale to live on and have enough to buy another share that gives you the same capital growth.
It becomes a bit of a Ponzi or gambling game.
The scenario is completely different if you are working, because you just keep adding, with additional funds.
That isn't possible when your capital is fixed and you have to draw down on it for living expenses, plus add to it from the earnings it generates, it becomes a much more precarious equation.
I hope that makes sense, it is a difficult issue to explain.

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Unless you buy a stock that continues to see capital growth for years and years.

Each year you just sell a few to fund life style, and the remaining ones keep on appreciating.

Think about Berkshire Hathaway for example, I know it’s an extreme example.

But if you purchased $10,000 of Berkshire back in the 1960’s, you would have gotten about 1500 shares, today each share is worth $316,000 each.

You could have sold 10% of your shares each year and continued getting richer and richer.

You didn’t have to chop and change finding new investments, infact dong so would have been a disaster for you that you regret.

Value Collector said:

Unless you buy a stock that continues to see capital growth for years and years.

Each year you just sell a few to fund life style, and the remaining ones keep on appreciating.

Think about Berkshire Hathaway for example, I know it’s an extreme example.

But if you purchased $10,000 of Berkshire back in the 1960’s, you would have gotten about 1500 shares, today each share is worth $316,000 each.

You could have sold 10% of your shares each year and continued getting richer and richer.

You didn’t have to chop and change finding new investments, infact dong so would have been a disaster for you that you regret.

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The problem with that is, there are 100 failures, for every Berkshire and that underlines the gambling scenario.
When you are lucky enough, to have a large enough and diverse enough portfolio of investments that you are not dependent on any one of them, it all appears very simple.
It also enables humility, when considering the objectives of others.

sptrawler said:

The problem with that is, there are 100 failures, for every Berkshire and that underlines the gambling scenario.
When you are lucky enough, to have a large enough and diverse enough portfolio of investments that you are not dependent on any one of them, it all appears very simple.
It also enables humility, when considering the objectives of others.

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That’s why I recommend most people just hit up be index as I said above.

It will produce both capital growth and income, so you are hedged both ways, and you have diversification.

If you were 100% world and Aussie index, and simply spent your income + 2.5% of the capital value each year, you could plod along almost indefinitely.

On average over the years your portfolio would grow and replace the capital you draw out.

If you think you will be dead in 20 years, you can start spending 5% and your money will still out live you.

sptrawler said:

The other issue for retirement stocks is, if you buy stocks for capital growth, you have to sell them for income.

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Correct.

sptrawler said:

Then you have to use the money, you make from the sale to live on and have enough to buy another share that gives you the same capital growth.

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Yes to having to live off the money. No to buying other shares. You only sell as many shares as you need to live on. You don't sell specifically to buy others. Once you've retired, hence drawing down on your shares, that's it for adding to your portfolio (excluding rebalancing etc)

sptrawler said:

It becomes a bit of a Ponzi or gambling game.

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Hmm. I'll disagree with that assessment, but I'll explain why. If we agree share numbers don't matter: $1k worth of shares could be 1000 x $1 shares or 100 x $10 shares. Nobody cares if you hold 1000 or 100 shares - they both equal $1k worth of invested capital, and that's all that matters.

Back to dividends vs selling shares. Company A and company B's shares are both worth $10. Company A pays a $2 dividend, company B doesn't. You decide (by are not forced to) sell the same value of company B's shares, to exactly match the dividend.

Starting Point:
Company A: 1000 x $10 = $10k
Company B: 1000 x $10 = $10k

Dividend Time:
Company A: Pays $2 dividend per share. Shares are now worth $8. You have 1000 x $2 = $2k in cash, and own 1000 x $8 = $8k in shares. The astute amongst you will notice that $2k + $8k = $10k, so paying the dividend was a zero sum game.

To be fair, let's sell down $2k worth of company B's shares:
Company B: You sell 200 shares @ $10 = $2k in cash. You now own 800 shares @ $10 = $8k. So, $2k + $8k = $10k. Selling off shares is a zero sum game.

Now we get to your specific point. In company A, we now own 1000 shares. Ya! For magical dividends. But in company B, we now only own 800 shares. Boo for having to sell down!

But in reality, we own $8k worth of company A stock (1000 x $8), and $8k worth of company B stock (800 x $10). Comany B's shares are worth more. That's why we don't need to own as many.

We've already stated (in my first paragraph) that share numbers don't matter, only the total share value. Thus, dividend payment = selling down shares, when the dollar amounts are the same.

But (back to your point), come next dividend season, isn't company A going to pay me the same dividend, whereas I'm burning through company B's shares - hence Ponzi scheme?

We've overlooked one point. Let's say company A and B both earned 100 million in profit, and company A has a payout ratio of 80%. So company A gave away 80 million in cash! Company B didn't - it kept it all, and reinvested it to further grow its business. Hence, we would expect the earnings per share of company A to be less than the EPS of company B next time. Why? Because company A keeps giving away its earnings in dividends. Company B retains its earnings, and grows its business. Hence, the EPS of company B are likely to go up much quicker. That's why you don't need to keep buying new company B shares: they self grow due to the lack of dividend payment.

Bottom line: receiving dividends or selling down the equivalent amount, works out the same in the long run.

Interesting stuff.

I suspect in my case selling may not be necessary but could eventuate long term. Depends on the amount of income I receive - and need - from holdings outside of the SMSF plus the account-based pension.

For me the split is around 35% from personal holdings and 65% account-based pension and even after placing some $50k pa back into the market, I consider I live very comfortably.

I once calculated a person in the workforce would need to earn around $110k pa to get the after-tax equivalent of an $80k tax-free account based pension. Depending on your desired life-style someone who complains about how difficult to live off that should have a good look at themselves I reckon. I have encounter a few in that bracket who whinge. I've no time for them.

Belli said:

Interesting stuff.

I suspect in my case selling may not be necessary but could eventuate long term. Depends on the amount of income I receive - and need - from holdings outside of the SMSF plus the account-based pension.

For me the split is around 35% from personal holdings and 65% account-based pension and even after placing some $50k pa back into the market, I consider I live very comfortably.

I once calculated a person in the workforce would need to earn around $110k pa to get the after-tax equivalent of an $80k tax-free account based pension. Depending on your desired life-style someone who complains about how difficult to live off that should have a good look at themselves I reckon. I have encounter a few in that bracket who whinge. I've no time for them.

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So to all those contributors, what are your best 5 shares going into the next 5-10 years?

Not the faintest idea. I invest only via ETFs and LICs. The management of the LICs do selection for me and ETFs couldn't give a rats about specific company prospects.

Only slight exception is the small SOL holding I have outside the SMSF. Some consider it as an LIC but it is actually classified as an energy company.

Value Collector said:

But I personally don’t think the market is over priced, I am still actively writing puts against some things I think are under valued.

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What things in particular ?

SirRumpole said:

What things in particular ?

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A few things, as I have mentioned I am pretty fond of FMG, which I still think is under valued even though it’s had a big run, and some others things I don’t want to go into to much detail on because I will likely have people saying I am wrong, and I am not in the mood for a debate about it.

I will send you a pm

Value Collector if you can send me a p.m. too I would appreciate it as I would be interested to hear what stocks you are interested in. Thanks.

I've just come back to check this thread for the first time in some weeks. I did not anticipate that it would have lasted as long as it has.
There has been some very interesting discussion which I have appreciated.
In particular I remain interested in the LIC / ETF discussion.
May I ask, from those of you who are currently retired [and perhaps in an older age bracket] just which ETFs you own and whether you have been satisfied with growth and/or distributions?

Muschu said:

I've just come back to check this thread for the first time in some weeks. I did not anticipate that it would have lasted as long as it has.
There has been some very interesting discussion which I have appreciated.
In particular I remain interested in the LIC / ETF discussion.
May I ask, from those of you who are currently retired [and perhaps in an older age bracket] just which ETFs you own and whether you have been satisfied with growth and/or distributions?

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As I posted earlier in this thread I hold ARG, MLT, WHF, MIR, VAS, VGS. VGS is about 20% of asset allocation both personally and in the SMSF.

I also hold SOL outside of the SMSF.

Income outside of the SMSF is around 35% of my total income, i.e. dividends plus account-based pension.

As I don't trade at all I'm not up with the performance aspect for personal holdings. The ATO only requires me to accurately report my income and not to track performance so I don't. Yeah, I know but merely because others go "Ya gotta do..." doesn't mean I have to.

The accountancy firm does the SMSF stuff to meet any legislative requirements but I don't take much notice of the ins and outs of it. Keep sufficient cash to pay account-based pension for two years and the rest goes back into the market pronto.

I haven't added to any of the LICs for a while the only action being taking up WHF's SPP last year. I'm increasing the funds in VAS and VGS. This applies to both my personal holdings and those in the SMSF.

On the personal side after hiving off an additional $1k or so to cover anticipated increased costs (rates, insurances, etc) for the following a year I put the funds I don't require plus approximately 50k of the account-based pension into the share market. As I'm over 65 the mandated rate for the account-based pension is 5% of the portion of the fund which is in pension-phase. A whack of the SMSF is in accumulation phase due to the 2016 Budget. A weird outcome for something which was intended to be consumed in retirement but that's the way it is.

Muschu said:

May I ask, from those of you who are currently retired [and perhaps in an older age bracket] just which ETFs you own and whether you have been satisfied with growth and/or distributions?

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Also posted previously. I am happy with the distributions and growth. However, the growth of this ETF has not been as good as others mostly because of the weighing towards the banks that have been getting hammered lately.

Vanguard Australian Shares High Yield ETF, VHY. (5%> Distributions)
The ETF provides low-cost exposure to companies listed on the Australian Securities Exchange (ASX) that have higher forecast dividends relative to other ASX-listed companies. Security diversification is achieved by restricting the proportion invested in any one industry to 40% of the total ETF and 10% for any one company. Australian Real Estate Investment Trusts (A-REITS) are excluded from the index.
Link: https://www.vanguardinvestments.com...ct.html#/fundDetail/etf/portId=8210/?overview

Muschu said:

I've just come back to check this thread for the first time in some weeks. I did not anticipate that it would have lasted as long as it has.
There has been some very interesting discussion which I have appreciated.
In particular I remain interested in the LIC / ETF discussion.
May I ask, from those of you who are currently retired [and perhaps in an older age bracket] just which ETFs you own and whether you have been satisfied with growth and/or distributions?

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I have MLT and AFI, the rest of my account is in individual stocks, or cash.
I am happy with both the LIC's, but I have only been in them for a relative short time in relation to the SMSF set up period.
I can see the situation arising, where as I take profits on individual shares, I will be changing the bias more toward LIC's and ETF's.

Not overly fascinated by yield. They go all over the place with variances in both dividends and price so they don't mean much to me. My greater focus is on increasing income

No idea how to attach image and all that but one of my holdings (ARG) paid a dividend of $0.17 in 2003/2004. In 2018/2019 it was $0.32. This plus buying more - along with others I hold - have resulted in an increase in my income. A small factor called time as well as continually buying no matter what has an impact on the income result.

In the SMSF the pension phase of it has increased beyond the cap which results in an increase in the account-based pension for this year. Funny how most take the $1.6M as a limit. It's a starting point really and there is nothing in the legislation to prevent it growing while in pension-phase.

Thanks Bill, Belli and sptrawler for your collective wisdom.
VAS, VGS and VHY are ETFs I knew a little of, but have researched a little further today.
This I think would make some welcome diversity in our portfolio.

In general i dont like ETF's much however i was thinking the other day that a big diversified portfolio made up of just ETF,s would have a few advantages.

Firstly set and forget, you just wouldn't have to worry about anything investment related, Secondly unlike individual stocks they cannot fail, so no 100% losers, thirdly a
big portfolio of 20 diverse ETF's would capture almost very outlier event, i mean like the best performing ETF last year was the Palladium (metal) ETF, went up like 80%
or so and has already gone up another 80% this year...who the hell is deliberately going to buy that?

With say 20 deliberately very diverse ETF,s you could have the world covered, all the commodities and currencies and indexes, equal weight, and a div yield of maybe 3%