Getting the best if you have only a small amount of capital

This post is in two parts.
First, would I be correct in thinking that telecoms companies would be the safest shares to invest in? My reasoning being that irrespective of the economic climate, communications are critical. It wouldn't matter if the world went into a deflationary, or inflationary depression, or peak oil savagely curtailed world trade and travel. Or even if the world economies grew healthily over the next few years. Communtcatons will always be critical. Ie: Telstra?
Secondly, I notice telstra's dividend is about 10%. If bought $25,000 of Telstra shares, did nothing but reinvest the dividend, with compound growth, that $25,000 would be $100,000 in just 16 years, even if I added nothing to the portfolio over that 16 year period.
To me that seems like a better return that virtually anything else I can think of.
Comments would be very welcome

riveroak said:

This post is in two parts.
First, would I be correct in thinking that telecoms companies would be the safest shares to invest in? My reasoning being that irrespective of the economic climate, communications are critical. It wouldn't matter if the world went into a deflationary, or inflationary depression, or peak oil savagely curtailed world trade and travel. Or even if the world economies grew healthily over the next few years. Communtcatons will always be critical. Ie: Telstra?
Secondly, I notice telstra's dividend is about 10%. If bought $25,000 of Telstra shares, did nothing but reinvest the dividend, with compound growth, that $25,000 would be $100,000 in just 16 years, even if I added nothing to the portfolio over that 16 year period.
To me that seems like a better return that virtually anything else I can think of.
Comments would be very welcome

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You have the right idea with respect to looking for an industry which will have a good chance at surviving bad economic climates, whilst also thriving in good times.
However when your investing with dividends in mind - just make sure the company you choose has the ability to at least keep paying their current dividend. How can you be sure of this? ---Take a look at the cash flow statement...find out how much cash is coming in, then compare it with the 'dividends paid' figure. If the amounts are close to each other (i.e payout ratio is close to 100%) then you might have to lower your future expected dividends if you want to be conservative...
Just something to consider...

Also their are a few other companies in the space you have described...internet bandwidth is a good one too - Vocus Communications (VOC). M2 Telecommunications (MTU). Not saying these are a good buy, or cheap...just giving you a few more stocks to look at....

riveroak said:

This post is in two parts.
First, would I be correct in thinking that telecoms companies would be the safest shares to invest in? My reasoning being that irrespective of the economic climate, communications are critical. It wouldn't matter if the world went into a deflationary, or inflationary depression, or peak oil savagely curtailed world trade and travel. Or even if the world economies grew healthily over the next few years. Communtcatons will always be critical. Ie: Telstra?
Secondly, I notice telstra's dividend is about 10%. If bought $25,000 of Telstra shares, did nothing but reinvest the dividend, with compound growth, that $25,000 would be $100,000 in just 16 years, even if I added nothing to the portfolio over that 16 year period.
To me that seems like a better return that virtually anything else I can think of.
Comments would be very welcome

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I would be looking at investing in a basket of such companies, a minimum of say 6 and a maximum of 20.

You want to own the best and brightest companies from a cross section of the economy and you also want to get them at a price that makes sense when compared against their earning power over time.

Investing in one company in one industry is very risky, Because you can never 100% gaurantee that you are not wrong in your analysis or some black swan event doesn't hit the company hard creating a permanent loss of capital.

riveroak said:

This post is in two parts.
First, would I be correct in thinking that telecoms companies would be the safest shares to invest in? My reasoning being that irrespective of the economic climate, communications are critical. It wouldn't matter if the world went into a deflationary, or inflationary depression, or peak oil savagely curtailed world trade and travel. Or even if the world economies grew healthily over the next few years. Communtcatons will always be critical. Ie: Telstra?
Secondly, I notice telstra's dividend is about 10%. If bought $25,000 of Telstra shares, did nothing but reinvest the dividend, with compound growth, that $25,000 would be $100,000 in just 16 years, even if I added nothing to the portfolio over that 16 year period.
To me that seems like a better return that virtually anything else I can think of.
Comments would be very welcome

Click to expand...

Let's review your logic.

1. Everybody needs communication irrespective of economic condition. This makes telecommunication a safe industry to invest in.
2. With telecommunication being a save industry to invest in, Telstra is a good investment with a high dividend yeild.
3. If I reinvest the dividend yield for 10 years, I will get great compounded return.

Unfortunately there are a few of logic leaps in this line of thinking.

1. Just because an industry is essential doesn't mean the companies in that industry will be profitable. And it certainly doesn't make it safe to invest in.
2. Just because telecommunication might be save to invest in, doesn't make Telstra a good investment at current prices (how do you know if it is cheap or over-priced?).
3. Just because TLS has a high dividend yield now doesn't mean it will have a high dividend yield in the future.

I am not saying you are wrong, but you need to repair / fill in the holes in your logic before you make your investment decision.

Because with your current logic you would invest in any company that provides products and services that are essential, at any price as long as the dividend yield is high - and there are many many companies that fit that description.

Nice safe warm fuzzy feeling.

BUGGER ALL PROFIT.

skc said:

Let's review your logic.

1. Everybody needs communication irrespective of economic condition. This makes telecommunication a safe industry to invest in.
2. With telecommunication being a save industry to invest in, Telstra is a good investment with a high dividend yeild.
3. If I reinvest the dividend yield for 10 years, I will get great compounded return.

Unfortunately there are a few of logic leaps in this line of thinking.

1. Just because an industry is essential doesn't mean the companies in that industry will be profitable. And it certainly doesn't make it safe to invest in.
2. Just because telecommunication might be save to invest in, doesn't make Telstra a good investment at current prices (how do you know if it is cheap or over-priced?).
3. Just because TLS has a high dividend yield now doesn't mean it will have a high dividend yield in the future.

I am not saying you are wrong, but you need to repair / fill in the holes in your logic before you make your investment decision.

Because with your current logic you would invest in any company that provides products and services that are essential, at any price as long as the dividend yield is high - and there are many many companies that fit that description.

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I thought tls would be the safest. Its big, I doubt any government would let it fall. The worst probable scenario would be tls would be bought out by another company. And with little capital, it would be hard to spread the risk by buying several different companies

riveroak said:

I thought tls would be the safest. Its big, I doubt any government would let it fall. The worst probable scenario would be tls would be bought out by another company. And with little capital, it would be hard to spread the risk by buying several different companies

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With little capital, you are undercapitalised and have already arrived at one of the "worst case scenario" for investing.

riveroak said:

Its big, I doubt any government would let it fall.

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It certainly is big. And to add weight to your argument, a very large number of voters are also TLS shareholders, so you'd think the government would be keen to keep those people happy.

But this government has already screwed over Telstra and its shareholders, and will doubtless continue doing so. The more they screw Telstra, the more value they can add to their NBN.

riveroak said:

I thought tls would be the safest. Its big, I doubt any government would let it fall. The worst probable scenario would be tls would be bought out by another company. And with little capital, it would be hard to spread the risk by buying several different companies

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If the government had to come in to prop up Telstra, ordinary shareholders would have already been wiped out.

riveroak said:

This post is in two parts.
First, would I be correct in thinking that telecoms companies would be the safest shares to invest in? My reasoning being that irrespective of the economic climate, communications are critical. It wouldn't matter if the world went into a deflationary, or inflationary depression, or peak oil savagely curtailed world trade and travel. Or even if the world economies grew healthily over the next few years. Communtcatons will always be critical. Ie: Telstra?
Secondly, I notice telstra's dividend is about 10%. If bought $25,000 of Telstra shares, did nothing but reinvest the dividend, with compound growth, that $25,000 would be $100,000 in just 16 years, even if I added nothing to the portfolio over that 16 year period.
To me that seems like a better return that virtually anything else I can think of.
Comments would be very welcome

Click to expand...

There's so much wrong with your post that its hard to know where to start.

would I be correct in thinking that telecoms companies would be the safest shares to invest in

Ask the Onetel share holders how that worked out for them.

riveroak said:

This post is in two parts.
First, would I be correct in thinking that telecoms companies would be the safest shares to invest in? My reasoning being that irrespective of the economic climate, communications are critical. It wouldn't matter if the world went into a deflationary, or inflationary depression, or peak oil savagely curtailed world trade and travel. Or even if the world economies grew healthily over the next few years. Communtcatons will always be critical. Ie: Telstra?
Secondly, I notice telstra's dividend is about 10%. If bought $25,000 of Telstra shares, did nothing but reinvest the dividend, with compound growth, that $25,000 would be $100,000 in just 16 years, even if I added nothing to the portfolio over that 16 year period.
To me that seems like a better return that virtually anything else I can think of.
Comments would be very welcome

Click to expand...

Alas ... if only it were so easy The Total Shareholder Return for Telstra, for the last 10 years ... is only 2%.

Your hypothetical example does show .. that you understand the power that compounding earnings can have on an investment. This is a good start, the trick is just identifying a company that is going to grow and compound its earnings

If I were you I would seriously spending some time educating yourself about the stockmarket, theres plenty to read online, lots of good sources, you just need to find them and follow it. Paper trade your tls investment for 6 months and see how much progress you make.

$25,000 to "splurge" in shares isn't exactly what I'd call a small amount of capital. I guess it's all relative on how much you earn, your age and assets etc.

You're on the right track with compound interest through dividends as has already been stated on this forum. But there are crucial, basic elements missing from your proposal (which is of course why you've come to Aussie Stock Forums).

There isn't a doubt in my mind that within the next 2 - 3 years if not more we are going to see an unprecedented amount of volatility in the market. This is more to do with international events rather than Australia however our market is heavily influenced by the US, EU and Asian markets in addition to commodity prices.

Where is that spare $25,000 at the moment? Hopefully you have it parked in a term-deposit account yielding at least 6% p.a. This will give you 6 months to research a little more into investing, provide you with an extra $750 (that's brokerage covered for around 5 or so trades) and will resist the temptation for you to make an irrational decision when a taxi driver gives you a "hot stock tip" on the way home from the pub.

Idea 1: Research GICS sectors and have a look at how the ASX classify it's listed companies. This will give you a very basic insight into diversification - which is paramount if you're looking at investing over a 16 year period. I always find it amusing how the ASX classify tobacco and alcohol related companies under "Consumer Staples" rather than "Consumer Discretionary".

Idea 2: Buy this months edition of Financial Review - Smart Investor and pull out the orange booklet called "How to build a winning portfolio". Better yet, save that $7.95 and go to their website and download it under the "Current Magazine > Supplements". (Note I don't endorse AFR, AFR Smart Investor Magazine).

Idea 3: Google "recession proof companies" or similar and find out for yourself what industries are indeed recession proof or even thrive during recessions if you are predicting a rough time ahead.

Idea 4: Look at what drives the Australian economy. What major player / players are involved. Do you think they could provide more ROI serving developing countries rather than TLS that has been well established and is heavily regulated?

Idea 5: If it all sounds too difficult, there is nothing wrong with researching managed funds and finding one which suits you.

Of course, all of these are ideas. I don't give advice or promote companies. Just giving you a heads up on your original question.

Either way you choose, good luck!

Alex

An index fund like STW is probably only going to yield 4 to 5% but at least has a (somewhat) realistic chance of doubling in value over 16 years...and you can divi reinvest (i think) plus the yield and there's your 100K.

tollbridge said:

$25,000 to "splurge" in shares isn't exactly what I'd call a small amount of capital. I guess it's all relative on how much you earn, your age and assets etc.

You're on the right track with compound interest through dividends as has already been stated on this forum. But there are crucial, basic elements missing from your proposal (which is of course why you've come to Aussie Stock Forums).

There isn't a doubt in my mind that within the next 2 - 3 years if not more we are going to see an unprecedented amount of volatility in the market. This is more to do with international events rather than Australia however our market is heavily influenced by the US, EU and Asian markets in addition to commodity prices.

Where is that spare $25,000 at the moment? Hopefully you have it parked in a term-deposit account yielding at least 6% p.a. This will give you 6 months to research a little more into investing, provide you with an extra $750 (that's brokerage covered for around 5 or so trades) and will resist the temptation for you to make an irrational decision when a taxi driver gives you a "hot stock tip" on the way home from the pub.

Idea 1: Research GICS sectors and have a look at how the ASX classify it's listed companies. This will give you a very basic insight into diversification - which is paramount if you're looking at investing over a 16 year period. I always find it amusing how the ASX classify tobacco and alcohol related companies under "Consumer Staples" rather than "Consumer Discretionary".

Idea 2: Buy this months edition of Financial Review - Smart Investor and pull out the orange booklet called "How to build a winning portfolio". Better yet, save that $7.95 and go to their website and download it under the "Current Magazine > Supplements". (Note I don't endorse AFR, AFR Smart Investor Magazine).

Idea 3: Google "recession proof companies" or similar and find out for yourself what industries are indeed recession proof or even thrive during recessions if you are predicting a rough time ahead.

Idea 4: Look at what drives the Australian economy. What major player / players are involved. Do you think they could provide more ROI serving developing countries rather than TLS that has been well established and is heavily regulated?

Idea 5: If it all sounds too difficult, there is nothing wrong with researching managed funds and finding one which suits you.

Of course, all of these are ideas. I don't give advice or promote companies. Just giving you a heads up on your original question.

Either way you choose, good luck!

Alex

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Hi Alex, thanks for your advice, you'll be glad to know it is parked in term deposit at %6
I'm happy to wait to before I invest. Cheers. Anthony.

Riveroak,

With a small amount of capital you heavily limit the kinds of investing or trading activities that you can do. This is the crux of your problem, you have insufficient capital with which to effectively diversify away non-market risk - which you will need to do given your stated timeframe. (selecting a single stock exposes you to a higher level of risk - especially since your timeframe is long enough for a major negative event to occur - such as the end of the economic cycle and inevitable correction that will occur in the future).

Here are a couple of idea's for you..

1) Leverage. When you introduce any kind of leverage into your investing you do two things (significantly increase your risk) and (have more capital at your disposal). This option means that you now have access to do those diversifying activities, but given the increased risk you will also need to have a complete understanding of positional sizing and money management. This is not for the faint of heart or uneducated. If you decide to look at this option, go into it eye's wide open and rigorously test your chosen investment method. I would suggest that CFD's would provide you with ample leverage.

2) Efficiency. You've stated that dividends are highly significant to you, because you want to use this cashflow from your investment to compound your level of return. Most companies pay dividends twice a year, giving you only two opportunities in a 12 month period to compound your investment. Over your stated time frame you are only talking about 32 opportunities to compound your investment. With $25,000 this is sufficient to run a dividend stripping strategy, where you purchase a share with the express purpose of selling it after the dividend is paid. (Become aware of the 45 day holding rule and when that will apply to you). This means for example that you may turn over your entire portfolio several times during a 12 month window. Instead of only using $25,000 - you now have a portfolio that will return to you an amount that is dependent on the number of rotations you can engineer in a 12 month period. Lets assume you rotate your funds only four times, and you have done your research and manage to exit the stock at your entry price, leaving the dividend as your only return. By doing so you will receive a dividend stream that is equivalent to a $100,000 portfolio, and give yourself a significantly higher ability to compound your gains. This suggestion also has it's pro's and con's - you will be designated a trader by the ATO, it's important to keep brokerage costs as low as possible, you will be subject to the 45 day holding rule if you wish to keep your franking credits for taxation purposes over $5,000 worth of franking credits etc.

Both of the above however may not meet your needs, both require you to be actively involved which imposes time considerations on you. I hope they help give you an idea of what might be possible for you to do with your $25,000. I encourage you to read as much as possible and find out what other options may be possible.

Cheers

Sir O

riveroak said:

This post is in two parts.
First, would I be correct in thinking that telecoms companies would be the safest shares to invest in? My reasoning being that irrespective of the economic climate, communications are critical. It wouldn't matter if the world went into a deflationary, or inflationary depression, or peak oil savagely curtailed world trade and travel. Or even if the world economies grew healthily over the next few years. Communtcatons will always be critical. Ie: Telstra?
Secondly, I notice telstra's dividend is about 10%. If bought $25,000 of Telstra shares, did nothing but reinvest the dividend, with compound growth, that $25,000 would be $100,000 in just 16 years, even if I added nothing to the portfolio over that 16 year period.
To me that seems like a better return that virtually anything else I can think of.
Comments would be very welcome

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I think you must be crazy or stupid.

Firstly why put money into crap like telstra. There nothing but a conspiracy.Right wing government long-necks waist of money and you fell for it.They have certainly got you eating out of there hand and now your standing in it. I'm sorry but I don't see any future in telstra.

secondly we are talking $25,000 and you are going to have to do better than 10% in 16 years. Why not invest it in sum small cap stocks. Get more for your dollar and sum bang out of you buck, make 10% in 3months and in 16 years you'll be a millionaire.
You have just got to know and find the right stocks to invest in!

"ANYTHING BUT TELSTRA"

open and trade a Forex CFD's account?

Firstly, this is an old thread, but came up due to bailx's current addition.

Reading through the thread out of curiosity, I have to say I am quite appalled at the nature of some of the responses, in what is meant to be the, "there are no dumb questions" beginner's forum.

Some of you people have forgotten what it's like to start out in a topic, not knowing anything.
Reaching that stage is not something to be proud of.

They say "don't invest more than 1% of your capital in one trade" which is a bit of a joke for us with small amounts of capital. Hopefully you don't have to invest more than 10% of your capital in one trade, this is the rule I've stuck to without even thinking about it & it's worked well for me. Hopefully one day I'll have so much "capital" that the 1% rule will be possible. Hope you didn't take the "watch the grass grow" route & buy something "safe". If so you'll be bored & gone from the forum, interest group, hobby.

(Edit addition)
I now notice the amount $25,000 mentioned, perfect, between $1500 to $2500 per trade, read Guppys Trading Tactics (& a lot of other stuff) & you're on your way, race you to our 1st million

Out Too Soon said:

They say "don't invest more than 1% of your capital in one trade" which is a bit of a joke for us with small amounts of capital. Hopefully you don't have to invest more than 10% of your capital in one trade, this is the rule I've stuck to without even thinking about it & it's worked well for me. Hopefully one day I'll have so much "capital" that the 1% rule will be possible. Hope you didn't take the "watch the grass grow" route & buy something "safe". If so you'll be bored & gone from the forum, interest group, hobby.

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Oh dear! You are running cold today! You have completely misunderstood what the "1% rule".

EDIT: Can I enlighten you are are happy with how its stands?