A Sit Down with Strong Money – Reader Questions Answered #2

Welcome to the second Strong Money Q&A session, where I answer a bunch of questions sent in by readers.

As we speak my inbox is full of yet more questions(!), which I’ll get to soon – some of which will make the next instalment.

Hopefully you find this informative and it helps explain my thinking about certain things in more detail.

By doing these posts, my aim is to share my responses with all of you, rather than just one person.  But remember…

Disclaimer: This is not financial advice, it’s for general information only.  You’re solely responsible for your own choices, and as always, do your own research before making investment decisions.

Question #1

Hi Dave, can you help me with something?

I opened an account with SelfWealth and bought several shares in LICs.  I’m not able to find the option to confirm that the dividends will be paid into my bank account.

I contacted Selfwealth and they mentioned that I need to set this with Computershare or the institution owning the shares.  Is there any procedure to set the dividend payment made into my bank account?

Thank you very much.  Jim.

Strong Money’s Answer:

Hi Jim,

You’ll receive paperwork in the mail very soon asking if you want to participate in the dividend reinvestment plan (DRP) or have your dividends paid into a bank account.  Simply fill out the paperwork and send it back and you’re good to go.

If it’s been more than a month and you haven’t got it yet, or you lost the paperwork, here’s what to do…

It sounds like Computershare is the share registry for that particular company you’ve invested in.  Basically, this means Computershare handles the dividend payments and admin on behalf of the company you’ve invested in.

So they’re the ones to get in touch with.  Details to call are on their website – http://www.computershare.com/au

Whatever company you’ve invested in, just google ‘Milton share registry’ for example, and it should come up, or it’ll be displayed somewhere on the company’s website.

When you contact the share registry, you’ll just need your HIN number (that comes in the mail after you open a brokerage account and is also on most paperwork you receive).  Basically, it’s how the Aussie Stock Exchange identifies you as the owner of certain shares.

If you’re not sure what your HIN is, go to your brokerage account (Selfwealth in this case), log in, and click on Trading Account Details – it should have all your info there.

Hope that helps Jim.  I know it can be a bit frustrating at the start getting things organised 🙂

Question #2

Hi Dave, I am a late comer to your blog but I have read almost all of your posts and am very impressed to see what you have done at such a young age.

One question I do have though is how you plan to alter your strategy if you decide to have children? (I hope that doesn’t sound too personal).

Unfortunately I have started late in the investment game.  I am 35 years old, have a healthy $70-80k currently in a term deposit that will be used in 2021 for a property in Sydney (aiming for $150k).

Have just put $10k in shares spread over 4 of the LICs you recommend.  However, with my wedding this year and my partner wanting to start trying for kids also this year – I’m worried how massively this will impact trying to increase my portfolio, and just wondered if you had a strategy in place if you were to add children to the mix?

Thanks!  Brent

Strong Money’s Answer:

First, thanks for the kind words and especially for reading so many posts – that’s great!

It’s a common question.  I have zero plans to have kids.  Also my partner is a lot older than me and she’s already had children of her own (which are adults now), so that makes it even easier.

To be honest, I think it comes down to willpower and habits in most cases.  Avoid getting sucked into the belief that kids cost a fortune like everyone assumes.  A good role model in this space is Mr Money Mustache – a US blogger who has a son and does plenty of stuff with him and manages to still live a low-cost happy lifestyle.

People make it expensive because they think spending more on their kids (or anything really) is better.  But you’ll know I think that’s pretty misguided and most of the time there’s plenty of ways to avoid a high spending lifestyle – kids or no kids.

It’s a real cost for sure.  But with a bit of extra effort in optimising your expenses, focusing on keeping your life simple, you should still be able to manage a decent savings rate.

The differences will be everywhere.

Drive a second-hand hatch or wagon instead of massive luxury SUV/4WD.  Take your kids to the park, not to cafes.  Spend time with them and teach them things rather than just giving them stuff.

Clothes can be bought second hand and then recycled rather than constant new stuff that gets tossed soon after.  And consider whether it’s actually financially smart to use childcare or whether having one parent at home (and possibly doing some work from home) makes more sense.

Sorry, I admittedly have no real idea what parents spend money on.  But it’s pretty likely that much of it is optional with little thought given – as with most people and their regular expenses!

… Any readers who are parents able to chip in with some advice for Brent?

Question #3

Hi.  I’ve been reading through your blog and have been enjoying learning more.  I have been investing in ETFs and am now interested in LICs too.  So I have a question for you.

Is it ever a good idea to buy an LIC at a premium?

On top of the recommended LICs you’ve listed, I’ve done some research and have come across Wilson Asset Management LICs, and the ones I’m interested in have a good history of returns.  However, none of them are trading at a discount.

Is this something where you would need to wait for it to return to a discount, or are you better off just getting involved now if its for the long term?

Cheers, Pascal

Strong Money’s Answer:

Hi Pascal,

Thanks for your question.

It’s hard to answer that to be honest.  Some people will never want to pay a premium out of principle, but others are happy to accept it if they like the company, yield etc.

I’d say in general it’s better if you can avoid paying a premium, especially a large premium (like 5-10% or more), as there’s always a chance that premium can come back down to earth.

I explain my thoughts on LIC premiums and discounts more in this post.

Those funds are trading at high premiums due to strong past performance and also the high yield.  But as with anything, that yield is not guaranteed.  See later question on this.

In general, I do think Wilson is a good manager overall.  But these days I’m just more cautious towards higher fee funds and those that do more trading to make profits.

Question #4

Hi,

Thanks.  Belinda.

Strong Money’s Answer:

A200 is an Aussie index fund provided by Betashares, which is invested in the largest 200 companies on the ASX.

It’s pretty similar to the broad market index funds offered by Vanguard and others, just with lower fees.

So it definitely seems like a good choice.  But in the comments section recently, I was asked why I chose to invest in Vanguard’s index fund (VAS), when A200 is cheaper.

Here’s my answer for those who missed it…

1–  If I’m buying an index I prefer to buy the ASX 300 instead of the ASX 200.  Those extra 100 companies are a small percentage of the fund today.  But as the economy grows and broadens over the next few decades, I’d expect (and hope) those extra 100 companies become more important and a greater weighting in the index than they are now.

2–  I’m happy to pay more for Vanguard’s reputation of low cost and putting investors first.  Most index fund providers are profit motivated, whereas the parent company Vanguard US is essentially a not-for-profit company – by that I mean all profits are returned back to investors in the form of lower costs.  So although Vanguard Australia isn’t the same as this, the fees are still flowing back to the ‘not-for-profit’ Vanguard US.

I fully expect Vanguard and other broad index funds to end up at basically zero fees sometime in the next decade or so anyway (already happening in the US).

So I thought why not choose the one with broader diversification, a culture of investors-first and a long term reputation?

3–  Vanguard have been indexing for many, many decades, whereas Betashares is relatively new.

4–  VAS is a much larger and established index fund, which could mean better liquidity.

5–  VAS has also started doing securities lending (which is letting traders borrow stock to sell – a very common practice that many index managers in the US do as well).  This helps the fund earn a little bit of extra income and could result in slightly higher returns going forward.

6–  A200 also uses a different index run by a German company, which is why the fee is lower – very similar and probably fine but hasn’t really been running very long.

I’m no expert in this, so some of the above reasons may be invalid – but that’s what comes to mind for me.

To be clear, A200 is still a very solid choice for low cost indexing!  I’m just happier with VAS for the reasons above (mostly the first 3).

Question #5

My goal is to establish financial independence, and in turn, provide security for family, especially my parents.  I’d also like to give more back to society through the effective altruism movement (the most good you can do).

I’m keen to learn more about investing (particularly ethical investing) and how to build a portfolio that will continue to do good long after my existence.  I would like shares to be one of my vehicles of wealth generation to achieve these goals.

I get a real kick in learning about the fascinating world of finance, but I would like to be more efficient and speed up the process.  That’s why I am reaching out to you and hope that you can give me some advice on how to find a good financial planner who can help me navigate this convoluted road.

I would also be very appreciative and humbled by any advice you may give me.  Thank you very much for your time Dave.

Strong Money’s Answer:

In terms of investing and education, I think the best and safest way is simply learning by reading blogs or books etc.  Otherwise this area of your life will be something you have to outsource and pay for, which I don’t think is smart when it’s such an important aspect of our future.  I’m reminded of that old saying “nobody cares about your money as much as you do.”

So I can’t recommend a financial advisor.  Instead, I’d recommend you learn as much as you can through reading.  It’s all actually quite simple and it gets over-complicated by those in the industry for no good reason other than it’s in their best interest to keep it complex and keep the average person overwhelmed by it all.

If you enjoy my blog as a starting point, simply go back and read all my old posts and hopefully you start seeing investing in a much simpler, clearer light.

Probably the two best books I could recommend for learning about long term investing are:

Peter Thornhill – Motivated Money

John Bogle – The Little Book of Common Sense Investing

The best advice I can give is build a strong savings habit and stick with it.  Investing regularly into shares in a diversified and low cost way, will see your financial position become stronger over time and eventually create financial independence.

And the easiest way to get started is putting just $1000 or $2000 into an index fund like VAS or a low cost LIC like Argo.

With ethical investing – I understand the appeal, but I personally don’t think it’s worth the additional costs.  Over time I expect the companies that act poorly and are unethical will go out of business.  Consumers have so much information these days that it’s too hard to hide shady business practices and those companies will be shunned and eventually become irrelevant.

Also, if you believe (like I do) that the world is generally becoming a better place, increasing ethics is likely to occur naturally.

So I have no problem with buying an index fund which owns the whole market (ASX300) because it’s the simplest way to invest and I believe the bad companies won’t last.  It also offers the lowest fees and broadest diversification, meaning larger returns for us.

Then with our growing investments we can choose to donate to charities, help our family etc.  A great way is simply gifting shares to charities later in our life or setting up a trust which can donate the dividend income to charities every year after we pass.

In short, I would focus on saving and keep my investing as simple as possible.  This allows energy to be devoted to other places like your work, family and helping others.

Question #6

Hi.  It’s great to read about yourself, Aussiefirebug and Lifelongshuffler!  We are very much on track to reach FIRE.

A quick question, what is your share portfolio?  I’m sure you have said it somewhere in your
posts but I cant find it.  Would you be able to let me know so I can compare it to mine.  Cheers!

Also curious, what is your view on dividend reinvestment plans?  I feel like it could be good but I understand that you do lose control of what you can use those dividends for if you want other shares etc.

Any thoughts?  Jeff

Strong Money’s Answer:

Hi Jeff,

I haven’t shared it in detail as I don’t want people to feel like they should copy me.  But right now it’s mostly Milton, Argo, BKI and VAS.  Also have some smaller holdings including QVE and Washington H Soul Pattinson.  That’s about 90% of it anyway.

Dividend Reinvestment Plans are a good way to keep investing with no effort (and no cost) attached.  If you’d rather automate your investments as much as possible, then by all means that’s an excellent way to do it.

But maybe you’d rather choose what you’re buying each time and have more control – up to you.  And DRP creates lots of small transactions which can be tricky tax-wise if you decide to sell later on.

Just something to keep in mind.  No right answer.  And hope that satisfies your curiosity 🙂

Question #7

Thanks for your blogs, passing on your research and thoughts on LICs.  I have been a long term holder of Argo and have recently purchased some BKI, Milton and Whitefield.

To give my self some exposure to small & mid-cap Australian shares, and not compromise yield, I have been considering WAM (WAM Capital) and WAX (WAM Research) as they do just that and have a substantially higher yield than the LICs I already own.

I’d be very keen to hear what you think.  However I fully understand that any choices I make are my own.

Strong Money’s Answer:

WAM and WAX are very high yield, you’re right.  They’re generally well managed and have had good returns over time (though don’t use the numbers you read in their statements because performance is usually shown ‘before management fees, before performance fees, and before tax’.

Also, they aren’t simply passing through the income they receive from long term investments (like the old LICs do) – they’re trading to create profits to distribute as dividends.  This works fine as long as they continue generating capital gains.  But it does mean the dividend has a higher chance of being reduced should they run out of capital gains in the portfolio to harvest.

Another option with lower fees and still a decent yield would be Mirrabooka (MIR) which is run by the same team as AFIC, no performance fees, and good long term returns.  Or QV Equities (QVE) managed by IML which have been running Aussie managed funds for 20 years and delivered good returns after fees from their funds.  Both yield around 4% plus franking and offer some diversification away from the top 20 stocks, if you feel the need for that.

Personally I’d only invest 10-20% in funds like this and keep the core of my portfolio as old LICs or the index.  The index and older LICs have become less concentrated over the last couple years so I’m less concerned about extra diversification than before.  I also think it makes sense to have the majority of your investments in low cost funds

Maybe best to do some more research and thinking, then decide what you feel the most comfortable with.  And you may well change your mind later too, as I do sometimes 🙂

Question #8

Hi Dave,

First of all, love your work.  I always look forward to your new articles, especially the very practical ones. Keep up the good work.  You’re contributing hugely to the Aussie FI community.

My question is regarding buying LICs or Index ETFs at a discount.  I understand that LICs are considered as “at a discount” if they are selling under the NTA.  How does this apply to Index ETFs?

In particular, if my strategy is dividend investing, and every month I either buy one of the big 4 LICs or an index fund like VAS, how would I determine whether VAS is on a bigger/smaller discount than the LICs?

Eg. I remember Aussie Firebug once saying on a podcast that he bought VAS or A200 instead of the LICs because they were on an even bigger discount that particular month.

Thanks.  Darren.

Strong Money’s Answer:

That’s very kind of you to say, thanks Darren!

Basically, the index is the index.  It tracks exactly the top 300 companies and is never at a premium or a discount.

What Firebug probably meant was, the index had fallen in value more than the LICs over the month, meaning it was more attractive to buy the index at that time.  So because the LICs fell less than the market index (VAS), their share prices were likely trading at a premium.

So for your strategy, VAS is easy because it’s always NTA.  Then you can just check whether the LIC you like is trading at a discount or not, and decide which one you want to purchase from there.  Pat the Shuffler created a calculator which tracks this for you (pretty cool) – NTA Estimator.

To be honest, I wouldn’t overthink it too much.  For example, not long ago I bought Argo at a premium and Milton at a discount.  To me, that evens out.  In 30 years time I just don’t think I’ll care all that much – with any luck the main concern will be what to do with all the income 😉

But one sensible approach is to buy the index anytime your favoured LIC is trading at a premium.  Ultimately, it’s still a personal choice how we approach these things.

Hope that helps, and thanks for reading the blog!

Question #9

Afternoon StrongMoney,

I have saved up 70k and I am sold on starting my investing journey.  I am almost convinced on putting it all in AFIC, but my question is:

With Labor’s proposed changes to franking credits, do you think there is reason to hold off until after the upcoming election?  Considering the election is just around the corner, and that changes to franking credits may sway me to an Index fund over an LIC…

Many thanks!  Regards, Rupert

Strong Money’s Answer:

Notes

Hopefully you enjoyed this post and some of you found it helpful.  Again, reader’s names have been changed to protect their privacy.

Remember, the point isn’t to blindly follow my advice.  It’s simply to share more behind-the-scenes thinking, clear up common queries and give readers extra info to evaluate things for themselves.

As always, you can send me a question through my Contact Page, and I’ll do my best to answer it.  Thanks for reading!

How about you?  Do you have any additional thoughts or advice for our readers?