November 16, 2019
Welcome to the latest round of Q&A! Where I answer a bunch of great questions sent in by readers and share my thinking with all of you, rather than just one person.
Think of this (and all my posts really) as you and I sitting down having a cuppa together.
Today’s topics include getting started with investing, dealing with family pressure to buy a house, optimising for tax, the US stockmarket, and much more!
Remember, nothing on this blog should be taken as personal financial advice. General thoughts and information only. As always, do your own research before making investment decisions 🙂
Hi Dave. Am I correct in that the dividend returns from the older established LICs are about 4% annually? As someone just starting out and a long investing horizon, would I be better playing in the small cap space to get better returns, obviously accepting more risk?
Yes, that’s correct. Dividends from the likes of Argo and others are round 4%, which works out to about 5.7% including franking. Plus growth over time. Add it together and you get the total return.
It’s possible you get higher returns picking your own stocks. But that comes with more risk and much higher chance of failure.
Some of us try stock picking and then realise it’s really hit and miss and in the end you probably get the same or better returns with a diversified fund like LICs or an index fund, without the effort and risk of trying to pick the next big winner.
The truth is the pro’s every day are scouring the market looking for the next big winner – so I’ve decided not to bother competing with them! If you like, perhaps buy some diversified funds on the side, so you can compare your own stock picks and see how you go?
Either way, it’s safer to make stock picking a smaller part of the portfolio, so that if it doesn’t work out, at least it’s not going to slow you down too much in terms of reaching your goals.
Hi Dave. My question is whether you think I should purchase a home, or invest in my share portfolio? I have $200k sitting in the bank at the moment, and I don’t want it there for too much longer.
House wise, I’d be looking at a property around $500k-$600k. I wonder why I need a house however? I’ve have had no problem renting for the past 10 years. And I cant see how it will bring me any closer to being financially independent, in fact quite the opposite.
I have big pressure from my parents and my parents in-law, that believe to their core that it’s a MUST. And I’m insane to consider another option. My plan would be to steadily invest the cash into shares over the next 1-2 years, which would allow me to get more comfortable with the market.
Have read nearly ALL your articles as well, which has changed my perspective of a lot of things. So thank you for that. What are your thoughts on this situation? Gary
Hey Gary. Very nice work on the savings, and for reading nearly all my posts – solid effort!
I guess first thing is getting past the family pressure. Is that something you can shrug off? For some people it’s too much. Obviously, I heartily endorse everyone making their own decisions and not succumbing to the pressures from others, no matter what the situation.
Maybe explain you’ll be completely fine without owning a home, as you’ll have enough income from your investments to pay rent plus some left over, rather than tying up all your money in a house. Tell them the sharemarket isn’t such a crazy place when you’re investing for income rather than betting on speculative mining or marijuana stocks!
This may help, but probably not! Some beliefs are just too strong lol. Tell them you’re now part of a different religion/cult – the Financial Independence movement, rather than property 🙂
Obviously you’ve rented long enough to see the pros and cons, so you’re well informed. There is definitely no rule that says you have to buy a house! And certainly no way renting will delay your FI plans. As you said, it could well boost your progress as you have maximum flexibility over costs and location.
I think your plan sounds very reasonable. There is always the option of pulling your money back out later to buy a house if you change your mind (though keep CGT in mind).
Sounds like you’re happy renting but just looking for reinforcement. Well, I totally give you permission to forgo home ownership provided you’re going to invest all your spare cash prudently!
Later, when you’re getting lots of passive income and can suddenly cut down or stop work entirely, then you can be an example for your family (and others) of how it’s possible to simply rent, invest and retire very early. And who knows, maybe it’ll catch on!
Hi SMA. Would you have any thoughts about tax and investing in your partner’s name to reduce tax, etc?
I wonder if investing in my wife’s name would be better, as she’s the lower income earner. Cheers, Pat.
Generally, it does make sense to put the shares in the lowest income earners’ name. But keep in mind, you’ll be living on this portfolio one day so it makes sense to have at least some in both your names.
One option is to build up the portfolio in one spouse’s name first. Then down the track, start investing in the high earner’s name. That way, you’ll end up somewhere close to owning half each and will put you both in lower tax brackets when you retire early!
Also, franking credits tend to go a long way to cover the tax owing, so the tax isn’t as painful as many assume. Remember, you’re still making more money (by investing) than before, so higher tax is just part of that. A gold-plated problem I guess? 😉
Hello. I’m fairly new to the FIRE movement but I’m a massive fan. I want to start buying LICs and ETFs, however I just wanted to know what are the best ways to make regular contributions?
Obviously trying to avoid brokerage fees etc., is it best to accumulate funds in a high interest bank account and then buy shares quarterly or similar? Thanks, Paul.
I don’t think there’s a perfect answer to that question, Paul.
I like to invest every month or two, despite brokerage costs. The reason is that it becomes a habit and builds momentum on a regular basis. So every month your portfolio and future passive income increases, which is a great feeling and can provide more motivation to save and keep investing.
On the other side, waiting a few months to invest might mean you have a larger amount and will maybe start questioning whether it’s a good time to invest or not. Then, your mind can start playing tricks on you.
Either option is fine, just make sure brokerage costs are 1% of your purchase or less. So if you’re paying $10 brokerage, try and make sure you’re investing at least $1,000 at a time. If you prefer to invest quarterly and save on brokerage, then go for it. The main thing is to get started, keep saving and adding to your portfolio!
Hey Dave. I landed here from Aussie Firebug, you guys are both very knowledgeable. I want to start my FI journey (only just discovered FI but always hoped to at least semi retire by 40 – I’m 26 now btw).
So far I’ve invested all my money in real estate (around $120k). But moving forward, I like the idea of LICs and ETFs. I’m suffering really badly from analysis paralysis.
I have a large sum of money (for me) to invest (around $60k), but cant decide between investing it all now into some LICs and maybe 1 ETF, or picking one a month and investing say 25% in each. Cheers, Sam.
Hey Sam. Glad you found your way here! By the way, great job getting started. At just 26, you can definitely hit your goal of being semi-retired by 40!
This is quite a common question. Firstly, you want to keep it simple. So if you like both LICs and index funds, maybe have one of each. No need for a large group. Some of us have a bad habit of over-complicating things (hand up here!).
So if you choose two holdings, you could simply take turns in purchasing each. If it helps, invest $5k-$10k per month until its gone, rather than all at once which might be stressful. And try not to overthink it. Just get started and keep moving forward.
Hi Dave. Have you heard of factor investing?
Vanguard has started an actively managed ETF with factor investing called ‘Vanguard Global Multi-Factor’ – VGMF. Thoughts? Thanks.
I can’t profess to know much about this area (though aware of the concept). I probably wouldn’t invest in it personally. These funds typically cost more, have higher turnover (less tax-efficient), and are fancier ways of trying to beat the market.
If you’re trying to beat the market (I’m not), as far as active ETFs go, it’s probably not bad. Keep in mind, some funds close down if they don’t get enough investors so that’s something to consider with a new fund like this.
Personally, I prefer to keep it simple and stick with boring funds which have already been around a long time (man, is there an echo in here!?)
Hi. I’m very happy to have come across your blog! I found a post of yours on debt recycling and now I have started from the beginning and will read a post or two each day until I have read everything.
I’d love to hear your thoughts on a relatively new LIC ‘Plato Income Maximiser‘. It pays a monthly dividend and is invested in the Plato fund which has been a well-managed fund for a number of years. Benny.
That’s awesome, I appreciate the dedication Benny!
Plato is interesting, but I’m just not sure about it at this stage. The manager has only been around about 8 years which is not long at all.
The strategy for high stable income sounds good, but the fund is very high turnover (about 200% from memory). This means they only hold stocks for around 6 months. They tend to buy and sell around the dividend dates to create lots of income and franking. They also aim to do it in businesses which have good outlooks etc so they do keep growth in mind.
Honestly, I’m just not sure how it will fare over the next 30 years. The yield is high, but the fees and risk are higher too. Compare this to the more established low cost LICs, who are long term focused, simply collecting and passing on dividends – it’s all very predictable.
I guess my thoughts are, it could be a good fund, but I’m not convinced. The fund seems very reliant on franking credit refunds remaining in place… maybe not a great idea. Really more of a trading company than an investment company.
I prefer to be in funds which are long term investors, not trading around dividend dates. But if desired, this fund is best suited to people paying zero tax, given the high yield focus and franking.
Hi Dave. Excellent blog for a newbie like me to start thinking about FIRE. I have a question about index funds.
I am going through all Vanguard ETFs , and one – VTS (Vanguard US Total Market) – has consistently performed 15% per annum. Why have you not considered VTS? Any thoughts please? Thank you. Aaron.
Good question. Logically, we would choose the investments with the highest returns, right?
Unfortunately, it doesn’t quite work like that. 15% per annum is an extremely high rate of return and over the long term is not sustainable or realistic to expect. The US has just had a fantastic run since about 2009, when that ETF was created. That in itself doesn’t make it a great choice – it’s simply a point-to-point measurement.
Interestingly, if you look at a similar US index fund managed by BlackRock called IVV, it shows very poor returns. 4.8% per annum since 2000. Likewise, this doesn’t make IVV a poor investment – it’s simply a different point-to-point measurement.
I know it sounds strange, but neither result should sway you in your choice of whether to invest or not. All that matters is what happens from here. You’re not investing in the past, you’re investing in the future.
Both funds are a low cost way to invest in the US stockmarket, and a fine choice for long term investing. I simply choose to invest our personal money into Aussie investments, with our super allocated entirely to international shares.
An important point here is that after a period of high returns, comes lower returns. Now, I’m not at all forecasting disaster for the US (or anywhere really), but that’s the way these things usually work.
Interestingly, the US and Australia have delivered very similar long term returns, which you can see here and here – we tend to take it in turns of bigger upswings and downswings. Hope this provides some context on markets and long term expected returns.
Hi Dave. Thanks for all your blog posts. I enjoy reading them. I’m a late beginner (almost 40) to the stock market.
Got a question regarding investing in VAS. At the moment it’s trading over $80 per share. To live off the dividends at some point in the future, I’ll need to have significant savings to invest in VAS.
Hi Angie. This is a super common question. Believe it or not, the share price of different options is largely irrelevant. Let me explain…
Company A’s shares are worth $1 each. It pays a dividend of 4 cents – this is a yield of 4%. Company B’s shares are worth $100 each. It pays a dividend of $4 – this is a yield of 4%.
One is no more ‘expensive’ than the other. However much you invest in each option, you’ll receive the same level of dividends on the amount you’ve invested… 4%.
On average, VAS will have a similar yield to those LICs you mentioned even though the price of each share is much much higher. Hope that makes sense!
Hi Strong Money. Loving the wealth and substance to your blogs and conversations. Keep them coming!
I’m trying to get my head around figures on debt recycling and the potential benefits of having DSSP/Bonus Share plan with AFI and WHF. What are your thoughts on…
Having a line of credit to start debt recycling and investing in those LICs which offer DSSP so it isn’t touched by any tax, though the interest still reduces your taxable income?
Obviously you would need to be able to service the loan and make the repayments but is this the only drawback? Cheers, Jake.
Hi Jake. Great to hear you’re enjoying the blog!
Sorry to be the bearer of bad news, but debt used to purchase shares using those special plans will not be tax deductible. You have to be earning taxable income from your investments to claim interest costs, and those don’t qualify, as no taxable income is earned.
A full tax deduction and no taxable dividend income… too good to be true I’m afraid!
If you saw my post on debt recycling, you’ll see there’s lots to consider, but it can work well for some people. I wouldn’t worry about tax too much – if going this route, there won’t be much tax to pay anyway as interest costs will likely be similar to your dividend income.
But if preferring to keep it simple and not use debt then those Bonus Share Plans are decent options for tax-effective accumulation.
I really hope you guys found this Q&A interesting! I always try to include a range of questions which will benefit a good chunk of people – things that come up often in our little community. This way there’s hopefully something for everyone!
As always, you can get in touch with me through my contact page – I do my best to reply to everyone. Until next time, have a great weekend and thanks for reading!