Beginner with $100k

[jdenhaan]

Hello all!

This is my first post here, so please go easy on me

I have $100k to invest and I wish to do so wisely, but not completely risk-adverse. Since I'm not much into stock trading and would rather leave it to the pros, I think managed funds are a good option for me. I've found the following two funds have both delivered decent results over the last few years. Clime is a bit more conservative and II is higher yield and more aggressive:

- The Clime Australian Value Fund
- The Intelligent Investor Value Fund

All this aside, I have heard there are plenty of reasons NOT to go with managed funds and buy LIC shares instead. One of them having to do with dividends being "fully franked" (what's that?), another one being lower fees and yet another being that you can often buy them below their NTA if you time it well.

Is this true? Are LICs a better choice for people who prefer a hands-off approach? Who has experience?

 

[CanOz]

Hello all!

This is my first post here, so please go easy on me

I have $100k to invest and I wish to do so wisely, but not completely risk-adverse. Since I'm not much into stock trading and would rather leave it to the pros, I think managed funds are a good option for me. I've found the following two funds have both delivered decent results over the last few years. Clime is a bit more conservative and II is higher yield and more aggressive:

- The Clime Australian Value Fund
- The Intelligent Investor Value Fund

All this aside, I have heard there are plenty of reasons NOT to go with managed funds and buy LIC shares instead. One of them having to do with dividends being "fully franked" (what's that?), another one being lower fees and yet another being that you can often buy them below their NTA if you time it well.

Is this true? Are LICs a better choice for people who prefer a hands-off approach? Who has experience?

You should determine your tolerance for risk first. Take a test and see how you come out, i just googled it and have no affiliation with this site... Then you can start to think about allocating your capital to asset classes that best suit this.

For example there's not much sense in you putting everything into an alternative asset class like managed futures if you haven't got the stomach for it. sure the returns over time beat many other investments but you need to be able to stomach the draw-downs....

One thing i recommend you try and do is minimize the amount of commissions and fees these parasites suck out of your capital. So just don't look for return, but how they are rewarded for managing your money.

 

[jdenhaan]

You should determine your tolerance for risk first. Take a test and see how you come out, i just googled it and have no affiliation with this site... Then you can start to think about allocating your capital to asset classes that best suit this.

For example there's not much sense in you putting everything into an alternative asset class like managed futures if you haven't got the stomach for it. sure the returns over time beat many other investments but you need to be able to stomach the draw-downs....

One thing i recommend you try and do is minimize the amount of commissions and fees these parasites suck out of your capital. So just don't look for return, but how they are rewarded for managing your money.

Thank you for your comprehensive reply. I will definitely take that test. Before taking it, I would probably consider myself somewhere in the middle; I'm not a mad risk taker, but I understand a certain level of risk is needed to attain decent growth levels. I also don't "fear" that risk and am quite happy to take it.

 

[jdenhaan]

OK. I've taken the test and got a score of 58, which is slightly more risk-taking than average. Right now I'm thinking roughly this:

- 60% goes to a managed fund of some description
- 30% goes to large blue-chip stocks that pay high dividend
- 10% in EFTS / LICs

As I learn more and more, I will likely move money away from the managed funds. I understand the objections towards managed funds (fees, fees and fees), but given my very limited knowledge in investing, don't you think it's a good idea I put most of my money in the hands of people with a proven track record in knowing what to do with it?

 

[CanOz]

....... don't you think it's a good idea I put most of my money in the hands of people with a proven track record in knowing what to do with it?

Well let us know when you find them, they are few and far between these days as the search for yield becomes more difficult.

There are few around however, that have continued to make money year in and year out without charging ridiculous fees. You really should however, educate yourself enough so you can spot these managers at the very least.

If you are not going to actively invest, then you need to be even more savvy to discern a good manager.

 

[burglar]

... don't you think it's a good idea I put most of my money in the hands of people with a proven track record ...

Many have a proven track record in establishing a revenue stream.

But then you know that already!!

 

[jdenhaan]

Many have a proven track record in establishing a revenue stream.

But then you know that already!!

Ok fair enough. So what would you suggest instead as a better alternative to managed funds? Govt bonds? More blue chip? EFTs? Not keen on cash; I've been sitting on that for a while and want to make it work.

 

[burglar]

Ok fair enough. So what would you suggest instead as a better alternative to managed funds? Govt bonds? More blue chip? ...

Both BHP & RIO seem to me to be in uptrend?!



I agree with CanOz about chasing yield ... see NAB chart

 

[Joe Blow]

Folks, please remember that it is not permitted to offer specific financial advice to anyone.

In practical terms this means that you cannot recommend that someone buy particular stocks, nor can you advise someone how to invest their capital.

Thank you for your co-operation.

 

[burglar]

Folks, please remember that it is not permitted to offer specific financial advice to anyone.

In practical terms this means that you cannot recommend that someone buy particular stocks, nor can you advise someone how to invest their capital.

Thank you for your co-operation.

Would it have been better if I had said:
Early in the year, resources stocks had been well hammered.
Especially those with an exposure to Iron ore.

Financials and other higher yield shares have been chased hard
by those unhappy with bank interest! (e.g. self-funded retirees).

I can't outperform my fund manager. Yes, he is that good! :

But one day I will.

 

[kid hustlr]

No one can really tell you how to invest your money. Obviously many on this board take an active interest in how there funds are controlled and as such would prefer to look after their hard earned themselves.

There's no issue going to a fund manager and giving them your capital but once again just make a smart decision, it is YOUR money.

The markets in recent history has been a difficult beast and as such a number of fund managers have struggled, that's why many on this board go the ETC/LIC route. You get index performance at a far cheaper fee than a fund manager.

 

[ktech]

My 2c. Read every book you can on shares-investing before you take on shares. Try a practice portfolio to get your head around it. Don't be in a rush to throw your $100k into the mix. Remember, there will always be a market for you tomorrow!

 

[pixel]

My 2c. Read every book you can on shares-investing before you take on shares. Try a practice portfolio to get your head around it. Don't be in a rush to throw your $100k into the mix. Remember, there will always be a market for you tomorrow!

I agree to an extent. I'd say "Study how it works", but not by reading every book. That would confuse you far more than being helpful, because there are about as many conflicting theories and methods as there are spruikers. Most of them are ancient and outdated or apply to specific market conditions, mindsets, or unlimited funds.

IMHO, a good starting point is right at home: http://www.asx.com.au/education/first-time-investors.htm
The ASX website contains plenty of educational material. And it's free.
You can even learn and win by playing http://www.asx.com.au/education/sharemarket-games.htm

 

[tinhat]

OK. I've taken the test and got a score of 58, which is slightly more risk-taking than average. Right now I'm thinking roughly this:

- 60% goes to a managed fund of some description
- 30% goes to large blue-chip stocks that pay high dividend
- 10% in EFTS / LICs

That survey that Canoz linked to is interesting. I came out in the 70s I think it was 73 (I did it last night). I predicted I would score 65! I am a firm believer that people are too risk adverse - but this is just my humble opinion and with taking on risk comes a lot of responsibility to keep on top of and manage that risk. There is reward for effort wherever we look in life. It is question of finding what is fulfilling for each of us (and not just in a financial sense).

You raise the question of what are fully franked shares. You can google this and you will get a good understanding of what they are. Basically companies pay dividends at somewhere in between being zero percent franked and 100% franked. If a dividend is 100% franked then 100% of the dividend that is being paid is profit that is net of company income tax that has already been paid on that profit. So the dividend comes with a credit for the tax that has already been paid at the corporate tax rate of 30%. You can apply this credit against your personal income tax to receive a deduction or refund for the tax already paid. Generally companies that receive all their income offshore or unit trusts (such as listed property trusts - REITs) will have zero franking credits attached to their dividends and companies which derive all their income in Australia and which are paying out taxed profit as dividends will have 100% franking credit attached to those dividends.

Another belief I hold is that in general people do not value the worth of a long term income stream highly enough. The compounding effect of a decent dividend income that is a good margin above the CPI should be a high priority for any long term investor. A company that can sustain an above average dividend on a long term basis will see the real capital value of its shares maintained over time.

One thing that is clinically proven is that humans generally undervalue the payoff of delayed gratification (future reward) but are are also likely to irrationally over value the worth of a potentially high payoff albeit with a low probability.

If you are going to invest in shares directly or via a managed fund remember that. like a lot of thing in life, timing is everything. When you buy is probably more important than at what price you buy. I believe in buying with momentum and in a rising market. Right now, the market (XAO) is at an important fibonacci retracement level - approx 62% retracement from the GFC peak to bust fall of 2007-2009. In terms of where the market is at in the cycle we are still in recovery. We are off the bottom but still some way and some time from getting back to parity with the last top (nominally). A prediction I posted on these fora last week is that we can expect the market to trade somewhere between 3,800 and 6800 over the next couple of years at least. In my opinion that is a realistic view to take of the risk of where the market is at in terms of its longer term cycle.

With regard to managed funds you need to remember that their performance will mimic the underlying performance of the markets they are investing in too.

Lastly, and there are others here that are able to execute and profit from trading strategies that rely on this principle, if you are going to take on risk and speculate on share price momentum, then what is important is not being right or wrong (as no-one can predict a stock's short term performance) but for how long you are wrong; that is, how long you wait before you cut your losses, and how long you ride your winners which you must do to compensate for your losses.

A final observation I will make is the reason I am at my computer at all is because I am deciding whether to sell my MLD shares which I had bought into on momentum but which have dipped down very close to my stop loss on very low volume these past two days. To be or not to be? That is the question.

 

[Judd]

Merely an addendum to tinhat's summary.

Unlisted Managed funds, EFT and A-REITs (or as I prefer to call them Listed Property Trusts) are flow-through tax entities. In other words after the management takes its cut, all the income is paid out the holders of the units or shares. They have no reserves so if things go a tad pear shaped, unlike companies which have the ability to top-up dividend payments these cannot. It's happened in the past so I think you should be alert to that aspect.

Also be aware that mangers can only take their fee from income and not any capital gain. It is why you sometimes see a franking rate greater than 30%.