“Sick young Bacchus” a self portrait by Caravaggio (circa 1593) showing himself as the Greek God Bacchus, the god of wine. It is thought that Caravaggio painted this portrait when he was not well – probably suffering from malaria. From the Borghese Gallery, Rome.
Fear and greed are part of the human condition, these traits have evolved over time.
Without the right dose of fear, we would expose ourselves to unreasonable threats and, without the right dose of greed, we would forego opportunities to secure the resources that we need to live.
The fluctuations of the stock markets are just a symptom of these traits. There is a lot of general panic and selling when the stock market starts consistently falling. Stock owners become fearful of further losses and press the sell button. This sets up a chain reaction and the markets fall even further.
A “Herd Effect” exists in the financial markets when a group of investors ignore their own information and, instead, only follow the decisions of other investors.
It is easy to see how herd behaviour evolved as copying what other individuals are doing can be useful in many situations. For example, if there is an immediate threat, that you haven’t noticed and the herd has – it might save your skin to follow the herd.
Then, of course, there are the good times when the stock market is pumping – the buyers start piling in regardless of the fundamental foundations of the stocks. Asset bubbles often result and a good example of this greed was the “dotcom” bubble in the late 1990’s when big prices were paid for any company that mentioned the internet in its prospectus. Nobody wanted to miss out on, what looked like, easy money.
But these herd behaviours are the opposite of what the astute investor should be doing. We must fight these evolved traits and develop our own behaviours that keep us on the right path.
Savings Automation and Dollar Cost Averaging
Slack Investor has written before about automating your savings. There are also huge advantages to automating your investing – particularly when you are just starting out in the investing world. The first stumbling block that new investors face is to start investing. Then they must develop the habit to keep on investing. There is always a reason to use the money somewhere else or, you might think that right now is not a good time to invest. This “paralysis” must be over come and the best way to do it is through automation.
With auto investing, you don’t have to make the decision when to invest, it just happens automatically when your savings reach a pre-determined point. This opens up the delights of “Dollar Cost Averaging” where, if the market is relatively expensive, you will buy few shares – and if the market is undervalued at the time, your set amount of dollars will buy more shares.
You are buying in the good times and bad . This doesn’t matter – the important thing is that you are buying into companies and accumulating your wealth. Your purchasing is relentless, no decisions, no procrastination – Warren Buffet would be proud!
By investing regularly, in this case, $417 per month, you accumulate shares regardless of the share price. Dollar Cost Averaging buys you more shares when the share price is cheap and less when they are more expensive. – From SeekingAlpha.com
Pearler and Auto Investing
A new kid on the block in the broking business for Australian and US shares is Pearler with distinguishing points of a flat $9.50 brokerage charge and the use of the Chess system for attributing shares to individuals. This means that you are issued with a Holder Identification Number (HIN) and you have direct ownership of your shares. Slack Investor likes this model rather than the custodial model of many other new broking players. Pearler also offers free brokerage on the purchase of selected ETF’s (provided that you hold them for a year).
However, Slack Investor thinks the absolute best feature of the Pearler platform is that it encourages Auto Investing and makes the process simple. If you are serious about your investing journey, you need a broker and why not make it Pearler.
There are some well researched and comprehensive reviews of Pearler and its many features by Captain FI and AussieDocFreedom.
Auto Invest through Pearler is an excellent way to combat the cycles of fear and greed and take the emotion out of your investing decisions.
Other than just opening an account with them, Slack Investor has no affiliation with Pearler.
This is a beautiful detail from an impressive sculpture sitting under a fully-robed Athena (Goddess of War and Wisdom) from thePallas Athena Fountain in the front of the Austrian Parliament in Vienna. In Slack Investor’s favourite story of the month – which brought great delight for it’s ludicrous starting point, this wonderful sculpture is in the news as it is part of a new “genius” Vienna Board of tourism promotion to supposedly defeat censorship by social media providers.
Vienna and its art institutions are among the casualties of this new wave of prudishness – with nude statues and famous artworks blacklisted under social media guidelines, and repeat offenders even finding their accounts temporarily suspended. That’s why we decided to put the capital’s world-famous “explicit” artworks on OnlyFans
But I digress, the figure (above) representing the Inn River is depicted asking the Danube River for some leniency on her home loan rate – This conversation is something I highly recommend to all with a mortgage.
Not for the first time, I did a bit of a review of Slack outgoings this month. Starting with the large fruit first, loans and insurances. We have a small loan remaining on our house because I have used the home equity to buy some shares in the past. We could pay the loan off by selling the investments but, while home loan interest rates are low ( 2-3%), I am happy to keep this money in shares and hopefully gain a return more than my interest costs.
I noticed that the rate my bank charges me on my loan (2.7%) is higher than that offered to new customers (2.35%). A quick internet search revealed a few loan operators offering loans close to the 2% mark. An informed phone call to Bank Australia provided a quick revision of my rates downwards. Confirming that loyalty is only rewarded – when you nag the institution.
Regardless, I am happy with the saving of $8000 for the life of the loan that this phone call achieved. Those with higher loan balances should be rewarded more significantly for a painless phone call to your lender.
New Fintech loans
Beyond the traditional banks there is an emerging FinTech solution to loans. There are too many to mention but they all seem to be willing to lend you money for all sorts of reasons. In a further erosion of “old banks” business, Slack Investor was shocked to count over a hundred of these new enterprises. Each with their own “catchy – but cool” names. I would be very wary about investing any Slack funds in these new businesses as there seems to be a lot of competition in this space.
However, taking money from them … where they are assuming all the risk – and offering very competitive rates – sign me up! Providing, of course, that I know all of the conditions of the loan contract up front.
There are a number of new home loan providers Yard, Athena, Nano , Bluestone, Well, etc. Each are offering products at about the 1.99% rate for home loans with a high amount of equity. In the event of of a loan provider collapse, they offer the assurance that another loan provider will takeover the loan under the same conditions that you originally signed.
Athena Home Loans
There a range of home loan providers that are offering no-fee loans at around the 1.99% comparison rate. I have no affiliation with Athena. The only reason that I am focusing on Athena rather than the other excellent home loan providers is that I like their sustainable philosophy of trying to obtain their funds from super funds who need the stability of a fixed income for a portion of their portfolios. It is also a good marketing link to a lot of people. They also have a reputation of quickly passing on any reserve bank interest rate cuts.
We’re working on providing industry super funds a way to access the Australian mortgage market directly and aim to be the first in Australia to do it!
I am happy to go through the loan application process with Athena. They have streamlined applications so that it is mostly online. Their 1.99% rate will give me a further saving of around $8000 in total interest payments on my current loan. However, I note that I will incur discharge fees on my current loan of about $370. This does not trouble me as I would have eventually incurred these discharge fees when I fully pay off my home loan – and the further joy of the Athena loan is – No application fees. No ongoing fees. No discharge fees.
October 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
The Australian market remained flat -0.1%. Overseas markets seem on the move with the FTSE 100 up 2.1% and the S&P 500 rising an incredible 6.9%. The optimistic Americans seem impressed with a swathe of good earnings reports and have had the best monthly return this year. Slack Investor remains watchful with stop losses in place.
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
Slack Investor is drowning in paper. Owning shares is a lot of fun but the unnecessary postage and paper is a waste and a frustration. In particular, the posted CHESS Holding Statements from the Australian Securities Exchange (ASX) and useless bits of paper from the share registries are annoying.
(The) ASX sent out 19.2 million paper statements over the year to June (2020), a rise of 34 per cent, as trading surged during COVID-19. The statements used 103 tonnes of paper in the past year.
Australian Investors will be familiar with CHESS, the computerised Clearing House Electronic Sub-register System of the ASX. It was introduced in 1994 and has been around for most of my investing life. All my share holdings are settled through CHESS, through a Holders Identification Number (HIN) and managed by a broker.
There is no doubt that the introduction of this system 27 years ago was a bit of a revolution as it simplified share trading from the cumbersome system of share ownership certificates. It was a world leading technology at the time. However, things have moved on and Slack Investor issues a plea to the ASX, enough is enoughwith the useless paperwork.
ASX charges companies $1.25 for every “CHESS holding statement” sent out to investors, who receive them even if they quickly sell shares bought. Many investors put them straight in the bin.
I am by no means a frequent trader … but the constant statements that I get mailed to me for every small change in my share balances are a continuing source of frustration.
A Sample of the 10 Chess Holding Statements that washed up into my post box last week. These statements are issued by the ASX and are currently unavailable online – they are only issued in hardcopy via post
Although these are mailed out to me at the end of every month – I have never used these statements. The definitive holding record of what shares I own at any given time is held by my CHESS sponsor, my broker (Commsec or SelfWealth).
In the same way I trust my superannuation fund or Bank (i.e not much!), I trust my broker with the record of share ownership – and, I also trust them to work out any dispute if I disagree with their tally. If there ever was a dispute … I would go back to the PDF contract notes and certainly not the paper CHESS Holding Statements to try to resolve it.
How to cope with share record keeping now
At the moment the only way that you can get your Chess Holding Statement is through the post. For 27 years, I have dutifully filed these statements but now, like many of my fellow traders, I have decided to shred them and put them straight in the recycling bin. Shredding is important as these notices contain your name, address and personal HIN.
However, there ARE other very important bits of record keeping that you should try to handle in digital form.
Share Registry Stuff
Share Registries are another intriguing layer in the ownership of shares – and another source of paper and postage. When a company lists on ASX, most companies appoint a share registry to manage the book of shareholders. For we share buyers, the registries manage our share holdings, dividend payments, and the voting at the annual general meeting.
Confusingly, there are three main share registry companies in Australia, Computershare, BoardRoom and Link Market Services and, it is a bit of a raffle which registry manages each company. On purchase, I always label each share with its associated registry. You can look them up at ASX Share Info. For instance CSL is always CSL (C) in my records (Computershare) and Macquarie Group is signified as MQG (L) as it uses the Link registry. I find this cross-linking very handy when chasing down any company payments (dividends) or tax statements and I can’t remember which registry manages the company shareholders.
Whenever you make a share purchase in a new company, through your broker, even though it is using your personal identifier (HIN), at the moment it is necessary to contact the registry and do three things. You will probably be prompted by a paper mail delivery asking you to contact the registry.
Register your bank account details for dividend payments with each company (even though they may already have them)
Register your Tax File or ABN number (even though they may already have them).
Tell the registry how you want to handle all communications – (electronically/email) suits Slack Investor
Every registry change that you make usually generates a letter in the post. They charge the company (we shareholders) for this, though some registries seem to be letting me know by email if they already have my communication preferences.
Keeping track of your finances
These days most share transaction and income finance details are now pre-filled on your tax return. However, it is your responsibility to check on these things and, at a bare minimum, you should download a summary report from your share broker at the end of the tax year. This report contains your buys, sells and income and is usually sufficient evidence for your annual tax return.
A more complete share portfolio solution is using third party financial software such as Sharesight. This is amazing software and is free to use if you have 10 holdings or less. They supply end of tax year reports that even include a capital gains analysis.
Slack Investor is a bit “old school” here and uses the free Microsoft Money Sunset International Edition for portfolio management- But this is dated software now and not recommended for new users.
Because I like to keep track of everything without paper – Slack Investor also sets up folders on his computer for each tax year. There are subfolders for 1. Dividends and Distributions and Tax Statements (From the registries) 2. Broker Transactions.
Dividends and Distributions and Tax Statements: There is no excitement like dividend season as the dividends and distributions roll in via each company registry. I download PDF copies of all payments. I file them on my computer in the format: Tax Year_Investor_Company_Type_Date e.g., 2021_SMSF_CSL_DIV_2021-04-01. Or 2021_SMSF_RBTZ_TaxStatement_20210630.
Broker Transactions/Contract notes: When you buy or sell a share through a broker, a contract note is issued. These should be emailed to you and your broker will keep a copy of them. I also download each contract note for a buy or sell from my broker in the format: Tax Year_Investor_Company_Type_Date e.g., 2022_SMSF_COL_BUY_20210809
Capital Gains: When you sell shares for a profit or loss , you need to declare it on your tax return. Capital gains calculations can sometimes be tricky. A simple example is described in this ABC Overview here and Slack Investor will plan a later article on how to handle more complex cases.
Of course some paper documents still sneak through the Slack Investor fortress and I keep them in a tray in my office and bag them in envelopes labelled with the tax year and keep them for five years, as required by the ATO.
The Future
I am hoping that the share registries can ask the ASX for an email only option for share owners. All registries should have an automatic default instruction to use the same Bank account, tax file # and communication preference – whenever a share purchase is made with your Holder Identification Number (HIN). No announcements from the registries yet – I lie on the couch and dream.
In late 2017, the ASX sent a ripple of excitement through the market, announcing that CHESS would be replaced with distributed ledger technology
… but not until 2023. In the meantime, if these holding statements are necessary – can we at least have an e-statement option.
The ASX has had many delays to the starting date of this new technology. Distributed Ledger Technology (DLT) is similar to Blockchain. The full difference between Blockchain and DLT made my head hurt … so I hope they know what they are doing.
Unlike the CHESS system, Mr Squiggle never gets old – even after a 40-yr career starting in 1959 – With thanks to Norman Hetherington, Mr Squiggle, and ABC TV
But, please hurry up with these reforms ASX … after decades of complaints. Streamline the share registry process, ask us for our email details and give us the option for email delivery of statements. In its current form, the CHESS clearing system and paper mail trails just seems a little bit … of another time.
As much as Slack Investor hates retail shopping – he loves to have the opportunity to buy into companies. Like any new relationship, when you buy a stock, you are not really sure about how its going to work out – but its exciting!
I have never been good at predicting when the stock market will have a correction … and the current high valuations (PE Ratios well above the long term average) do make me nervous. However, Slack Investor would much rather be in the game than out of it and I have been looking for a few companies that would hopefully not suffer too greatly if a correction occurred in the stock market.
This is not advice … just an insight to the Slack Investor bumbling buying process. My rate of converting bought shares into winners of 55% is not that impressive – but my overall performance results are good.
I get heaps of buying ideas from investment sites such as Motley Fool, Livewire, ShareCafe. But I will always, always, check things out for myself before parting with any Slack Dollars. This involves a rigorous screening of the fundamental financial metrics PLUS a look at how the stock chart is going on Incredible Charts. This technical analysis consists of a quick scan to see if the chart is in a continual growth trend … or has just had a “breakout”, or broken out of a downtrend.
Let’s put on the buying boots. As well as the companies below, Slack Investor has also recently added to some small positions in PPK.ASX and TNE.ASX.
Slack Investor Buys Alphabet (GOOGL.NASDAQ)
Half of my buying cash went into an existing holding – Alphabet (GOOGL), This money making juggernaut is part of the new economy and I could buy this company all day. The first step is to go to the phenomenal MarketScreener.com. Registration is free on this site and they allow you to look at analyst data for up to 5 stocks a day.
Search for your stock and then finding the Financials Tab for that company. Firstly, I look at the chart Income/Sales and Earnings per Share. An increasing trend is good and, if the estimated earnings (2021 – 2023) are also increasing, I’m acutely interested. I do a quick check on debt levels. Alphabet is a cash king – has more cash than debt – solid tick.
Income statement for Alphabet (GOOGL on the US NASDAQ exchange) – from MarketScreener
I continue with MarketScreener to extract the Return on Equity (ROE), both past and forecast. I hope that it is above 15% – Big Tick. The final bit of vital information is the Price Earnings (PE) Ratio and it is here that I gauge whether the stock price is too high for Slack Investor. For a good growth stock, I try not to buy into companies that have a projected PE of more than 40-(50 at a pinch). The analyst estimates for GOOGL is a forecast PE of 23.0 in 2023 – Tick
YEAR
2018
2019
2020
2021(e)
2022(e)
2023(e)
ROE
18.6
19.3
19.0
27.2
25.8
25.2
PE Ratio
23.9
27.2
29.9
28.0
26.6
23.0
Table of fundamental financial metrics for Alphabet. The documented Return on Equity (ROE) and Price Earnings (PE) Ratio are shown for 2018-2020. Analyst estimates are shown for later years – MarketScreener.com
Slack Investor Buys NASDAQ 100 ETF (NDQ.ASX)
Not everyone has access to direct access to US shares – if you only have an ASX broker, then to get exposure to Alphabet, a good substitute is to buy the BetaShares NASDAQ ETF (NDQ) – Alphabet represents 8.1% of this ETF – and you get profit machines like Apple, Amazon, Microsoft and Facebook thrown in. I topped up my holding here as well.
The ROE for the NASDAQ Index is 17.7 and increasing (30 June 21) – Above 15, Tick. The projected 2023 estimate for the Price/Earnings Ratio for the NASDAQ Index is 22.47 – Below 40, Tick – Very reasonable for growth sector companies.
NASDAQ 100 Index 2020 PE Ratios and Forward Estimates of PE for 2021, 2022. 2023 – From nasdaq.com
Slack Investor Buys Coles Group (COL.ASX)
YEAR
2019
2020
2021(e)
2022(e)
2023(e)
2024(e)
ROE
29.8
32.8
37.0
34.9
33.3
34.3
PE Ratio
12.4
22.9
22.4
23.4
22.8
21.4
Table of Fundamental metrics for Coles Group . The documented Return on Equity (ROE) and Price Earnings (PE) Ratio are shown for 2019-2020. Analyst estimates are shown for later years– MarketScreener.com
The Return on Equity (ROE) for this retail business is pretty impressive and, the PE Ratio would be pretty good for a growth company – but the Income Chart below reveals that Coles is not really a “growth” company – so the expectation is that the PE Ratios should be much lower, in the early 20’s or below would be the Slack Limits for slow growth companies.
Income statement for Coles Group (COL.ASX) showing a very gradual increase in projected income – Compare this with the Alphabet chart above – from MarketScreener
The income chart shows some pretty shallow growth and the slow earnings per share (EPS) growth makes the Coles Group something that Slack Investor would not usually be interested in. But, I go to Coles Supermarket at least twice a week and I actually like going there as a company part owner. Coles is in the “stable income” section of the Slack Portfolio rather than “Growth”. Even if the worst of times was thrust upon us and there was a recession in the next few years, a business like Coles will keep on performing. I would much rather put up with the price fluctuation of shares and have my money in a business like this at a projected yield of 3.5 – 4% p.a. than have Slack Dollars tied up in cash for 2 years in a Big 4 bank term deposit at 0.3%.
August 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
There were significant rises in all followed markets (S&P 500 +2.9%, and the FTSE 100 +1.2%). The Australian stock market is also in record territory (ASX 200 +1. 9%). This is all happening during extensive COVID-19 related lockdowns in the populous South Eastern part of Australia.
Slack Investor is normally relaxed about most things, but I am moving to the edge of my couch and starting to get ready for action. Looking at the monthly charts for all the indexes, in these boom times, the index prices have been getting too far ahead of my stop losses for comfort. I have tightened up my rules for adjusting stop losses upwards.
All Stop Losses are live and are being moved upwards every month if the index price exceeds the stop loss by 10% or more. All Indexes have got this treatment this month – It is sometimes difficult to work out where to put the stop losses on the monthly chart. I usually go to the weekly charts and find a minimum on the weekly price range that is within 10% of the current price (see below). If the stock price is below the stop loss at the end of the week – I will usually sell at the next opportunity.
The weekly US S&P 500 Index chart showing an upward adjustment of the stop loss from 4056 to 4233 – Thanks Incredible Charts
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
Like Sally, one day the realization will come that your best interests rely on you steering your own bike – in the direction that you want to go!
The ultimate goal is to get your three substantial piles going – house, income and investments. But before any of this happens you have to develop a mindset … I want to be in control of my financial life.
You must gain control over your money or the lack of it will forever control you. —
If you don’t take control, perhaps you’re plan is to take all your affairs to a financial adviser one day. Most people will feel the need for financial advice at some stage but only 20% of Australians have a financial advisor. The current structure makes getting advice a difficult step – and it’s not the financial advisors fault.
The pricing problem of Financial Advice in Australia
64% of survey participants agreed that financial advisers were too expensive.
The Australian Government passed a piece of legislation known as the Future of Financial Advice (FoFA) in 2012. FoFA was a series of laws that were supposed to improve the quality and transparency of financial advice. One of the main purposes was banning conflicted remuneration – where advisers were recommending products that gave them good commissions. While FoFA and the Hayne Royal Commission were well intended and vital in restoring some trust in the sector – there have been some unintended consequences.
(The Financial Services Royal Commission) identified the problem of conflicted remuneration without providing a mass market solution.
There has been a huge rise in regulatory red tape and the associated compliance costs for financial planners. A combination of these costs, the big banks dumping their financial advice arms, and the need for upgraded qualifications has put this sector in crisis. The total number of licenced advisers is set to drop by a third in the next few years.
There is broad recognition that financial advisors have expertise that the normal punter does not have. However, the biggest barrier to getting financial advice is the expense. One of the big problems is that when you engage a financial advisor, they are obligated to present you with a full Statement of Advice (SOA). On the surface this makes sense, the client would want a document that takes into account your own circumstances and outlines the fees and risks of each strategy. However, according to one planner, the SOA has turned into pages of jargon, repeated disclosure and boring generic graphs. These statements are weighty tomes that take many hours to prepare. Sadly, they seem to confuse the actual adviceand provide no real value to the client.
A full Statement of Advice (SOA) runs over 100 pages and the need to review all circumstances and develop a plan takes 10 to 15 hours and costs between $3,000 and $5,000 depending on complexity.
James Kirby from The Australian uses the example of paying annual adviser fees fees of $3000 and he supposes that the structured advice that you receive will match the 4.3% pa return of the new Magellan retirement income product Magellan FuturePay (FPAY). He points out that for an investment of $500 000 and an expected FPAY return of $21 500, your advice fees would be 14% of your earnings. This does not make sense to him … or Slack Investor.
James Kirby suggests that a better model for the regulators to adopt would be that you could approach a financial adviser for advice that you need at the time … and pay the financial adviser for this “niche” advice. This is not possible under current legislation.
Take charge
So, with full service financial advice gravitating towards high net wealth clients, what is the average punter supposed to do? Robo-advisors such as Stockspot could be part of the solution. This automated service can provide help with allocation of assets other services that will suit your age and risk profile. But there are so many more financial questions you might want to handball to your financial adviser if you could afford one. Well, if you can’t … it’s up to you.
Decide what you want to achieve in the finance sense. Go through the savings basics and get your savings rate up. Take charge on where your money goes, get your superannuation set, reduce any unnecessary fees that you are paying, set a target on your financial piles.
Educate yourself on things financial. There are some great books. The Barefoot Investor is an excellent start. Some fabulous podcasts The Australian Finance Podcast will get you going and there are heaps of other Slack Investor favourites. Get involved and start to enjoy the immense freedom and satisfaction of riding your own bike.
Happiness is not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort.
Slack Investor presented his version of a bucket strategy – The “Three Pile Theory”. It is the three pillars of a House, Stable Income, and Investments that have supported me through most of my working life and now the three piles are still supporting me in early retirement.
These piles have been continually interacting with each other as I was trying to build them all up. At the start, the Prince of all piles was a good income and, as I have very poor entrepreneurial skills, the key for me to get a good income was to have a good education. I was lucky enough to have parents that encouraged me to go as far as my wit would take me.
Without education you’re not going anywhere in this world
Malcolm X
When originally talking about three pile theory, I glossed over the retirement phase and how the investment and stable income piles can keep you going … hopefully, for a long time. By retirement, if possible your house will be paid off – and this will be left as a dormant house pile which keeps giving back in lots of ways … but only as a last resort will you use it to fund your lifestyle in retirement!
Lets do the sums on just two piles – Your Retirement Fund
Consider a retirement fund with just two piles – Stable Income and Investments. In order to generate 4% of income per year, you need have most of your retirement fund in investments rather than stable income. According to his two pile theory, Rob Berger from Forbes Magazine recommends that you should have between 50% and 75% of the retirement fund in the investments pile 0f equities (stocks). Decide on a ratio of stable income to investments that you can sleep well with – a higher amount investments will mean potentially more growth … but definitely more volatility.
A bit of mathematics here … my original ratio of house:stable income:investments was 30%:20%:50%f Net Worth. When taking my house out of the calculations, my ratio of Stable Income: Investments is about 30%:70% – this is just the numbers that I am comfortable with.
My original plan was to use dividends and interest from the two piles of my retirement fund to give me income. That means taking out money from both piles every year – even when stock markets have fallen. Rob Bergen points out that this is exactly the wrong approach. Taking dividends out reduces the investments pile – it has the same effect on your investments pile as if you sold some of your stocks. In a down-trending stock market, for your long-term investments pile, you want to use those dividends to reinvest in a stock market that is undervalued.
(Using the traditional bucket strategy), assets are taken from (Investments) when market prices have fallen, which is exactly when dividends should be reinvested.
Rob Berger – outlining the folly of taking money out of your Investments account when the market is falling.
How to make your piles last in retirement phase – Rebalancing the Retirement Fund
This heading has Slack Investor lapsing into what my mother called “Plumber’s Humour”. Using the Rob Berger simple strategy, you maintain your piles. Even though you have the competing interests of wanting to withdraw annual amounts for a great lifestyle, and yet, keeping enough in your retirement fund to generate future income for many many years. There are lots of articles on buckets to fund your retirement but, it can get complicated – I really like the clarity of Rob Berger’s approach. He explains in detail how the traditional bucket strategy is flawed.
By the time you retire, you will have a good idea of your expenses, While you are healthy and fit, add a good chunk of income to fund some travel. At the start of the financial year, this amount gets withdrawn to your cash account to fund yearly living expenses. The remainder is your retirement fund comprising of Stable Income pile (Annuities/Bonds/Term Deposits/Fixed Interest) and Investments pile. Slack Investor is happy with 70% of his Retirement Fund in Investments (Equities/Stocks).
Set up a ratio of Stable income: Investments in Your Retirement Fund that you are happy with and take your annual expenses out of the pile that is over allocated at the end of the year. In the above case, Investments.
In a good year for investments (outlined above) your next years annual income requirements can be withdrawn from the investments pile. If you get a bad year for investments, then dip into the stable income pile. Take out enough from each pile so that after your yearly expenses withdrawal, the initial allocations are roughly intact – I should do some algebra here to make this easier … but you can do it for your homework!
Using this method, you are always selling from your investments pile when the market is high and buying when the market is low – masterful investing, Warren Buffet would approve!
May 2021 – End of Month Update
Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100.
There were modest rises in all followed overseas markets (S&P 500 +0.6%, and the FTSE 100 +0.8%). The Australian stock market is powering on (ASX 200 +1. 9%) despite Slack Investor and the state of Victoria being in a (hopefully only one week!) COVID inspired lock down. All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
“Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
Sir John Templeton
John Templeton (1912 – 2008) was a great investor, fund manager and philanthropist. He is best known for setting up the Templeton Growth Fund which averaged returns of over 15% per year for 38 years. Slack Investor salutes this kind of behaviour and listens when great investors say something. If Mr Templeton is right, this game should be pretty easy and we wait till the “Euphoria” sets in and the we sell … Right?
Well, according to the CitiGroup Panic and Euphoria Index , which looks at sentiment in the market back to 1950. The section from 1987 through to the start of 2021 is shown below – Euphoria is already well and truly established by December 2020. However, most markets have gone up considerably further since then!
Source: Haver Analytics, Pinnacle Data, and Citi Research – diamondportfolio.com.au– Click image for better resolution
This is a bit of a complex chart, and the grey solid columns represent the return from the US Stock market for the next 12 months (forward return) and the Magenta line is the Citibank Euphoria Index which tracks market sentiment.
Visually, it looks like whenever the Euphoria Index (LHS – Magenta) goes to a high value, there is a downturn in the next 12-month return (RHS – Grey). Citibank have defined a range (Blue Lines) where the market is operating “normally” and outline areas of Euphoria and Panic when the market is beyond that range. According to Citibank, we are in a period of Euphoria and the prospect of good returns in the next 12 months looks bleak. The Chief Economist from Citigroup, Tobias Lekovich, suggests that there is a “100% historical probability of down markets in the next 12 months at current levels.” – that proclamation was made 5 months ago.
Another Slack Investor hero, Warren Buffet, talks about the ratio of total United States stock market valuation to US Gross Domestic Product (GDP). This is now known as the “Buffet Indicator” – and, although he admits to its limitations, it still is “the best single measure of where valuations stand at any given moment“. At April 22, 2021 the Buffett Indicator is calculated to be 234% – the highest value since 1950. In contrast, the Australian market using this indicator is either “fair valued” or “modestly overvalued”
From Current Market Valuation – The Buffett Indicator is the ratio of total US stock market valuation to GDP – Click image for better resolution
By our calculation (the US Stock Market) that is currently 88% (or about 2.9 standard deviations) above the historical average, suggesting that the market is Strongly Overvalued
There are a lot of current examples of “investor exuberance” in the stock markets – particularly in the US. There is no doubt that the pricing of some companies has got well out of hand. The earnings of a company are critical when I look at my investments.
Another risk is that pockets of the market at the moment appear to be speculative bubbles. You can easily tally about US$5 trillion of assets, from cryptocurrencies to Tesla, that are not underpinned by any fundamental earnings. They’re speculation. And if these bubbles were to pop, that could drag down a wider range of investments.
There are a group of companies that I like that I have no intention of selling – because they have a good track record of increasing earnings and there future prospects look good – no matter what the market does in the short term. There is also about 40% my portfolio in stocks where I am not so sure of their long term prospects. It is these stocks that I will be watching closely at the end ofevery week and have set stop losses that will indicate to me that I should sell if the price falls below the stop loss.
Slack Investor is happy to go along for the ride and has no real faith in his prediction ability. Sure, stocks are at extreme valuations but these are very unusual times. Interest rates are very low and there has been an unprecedented amount of government spending to keep economies going along.
Still on the couch, I don’t feel euphoria … but I feel OK … I have a plan.
April 2021 – End of Month Update
Despite the “exuberance”, Slack Investor is still on the wave and remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. All Slack Investor followed markets this month had strong rises (ASX 200 +3.5%; FTSE 100 +3.8%; S&P 500 +5.3%).
In these uncertain times, especially with the high prices on the US market, I am monitoring my index funds weekly and if, at the end of the week my Index funds are below the stop loss, then I will put a post on the blog and sell at the next opportunity. All Stop Losses are Live.
All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).
