Soooo many questions:
OSienna said:
That's a rhetorical question. It goes without saying, the higher the risk the greater the expected return. Try posing that question to someone who played the tech stocks during the recent IT boom.
Hi OSienna,
My point is that with the
correct safeguards (Buffers) the
risk is NOT higher . . . with a better return.
IT Boom??
That’s a bit like buying highrise units off the plan and hoping for a good result. The most basic investment criteria is to do
due diligence and assess what a good / bad investment is
BEFORE buying. IT stocks represented a huge inflating bubble with
little or no real value. P/E was unacceptable, D/E was unacceptable, performance history was unacceptable and many more reasons
NOT TO TOUCH these shares!!
Yes I know many people got burnt in this sector . . . 80% : 20% rule.
For the record I DIDN’T buy any IT stocks at that time for the reasons mentioned above.
(Despite many, many, many people telling me I was missing the whole 'new economy".)
Bill.L said:
Let's imagine over a 5 year period where at 80% lvr, you have not gained. But you were at 30% before you started with a new riskier structure.
Before I continue.. Do you really think it is not riskier??? (NO I DO NOT!!)
You have a property that you purchased for $300k (and have $300k loans). A few years later when you start your new "live off equity" life it is worth $1m. You gear up to 80 % lvr and live the good life.
You have no growth for 5 years, and find the rules to lending have changed. Your answer is to simply sell the asset. (NOT NECESSARY)
Lets see how this works. Sell for $1m pay REA $25k, loans $800K, pay cap gain tax 25% of 700K = $175,000 (N/A)
Well at least you're square. (NO, NO, NO . . .)
Now let's see where you would be if you had just owned the property as an IP, where you would be?? asset worth $1m debt $300k, but more than likely cash flow positive, putting money in your pocket every week, for more than just the 5 years.
Hi Bill.L,
Original position before structure as per your example:
$1,000,000 property and <$300,000> Debt
LOC at 80% = $500,000
NO growth following 5 years:
No growth =
NO SPEND!!
Therefore You still have $1,000,000 property and <$300,000> debt and a $500,000 LOC
Okay so no better and no worse.
Now:
Imagine you put the $500,000 into the share fund:
Firstly the cost will be say 7.5% for the drawdown = <$37,500> per year.
Also you margined the shares to 50% at 7.5% = <37,500> per year.
Total cost = <$75,000> per year.
Assume NO growth in shares also!
So $1,000,000 of shares = $1,000,000 No loss in capital
BUT what about the costs?
1) Dividends at 3% to 6% (Fully franked) = Cover the expense of borrowing. (Yes tax benefit/ write off required.)
2) Distribution (Which is the realized profit between buy prices and sell prices . . . Dollar Cost Trading) @ 10% =
$100,000 per year.
So you will be $25,000 per year better off . . . compounded for 5 years =
$152,627-50
Next question is can DCT produce the 10%??
To date it
ALWAYS has . . .
BUT:
If you assume ZERO
volatility for the five years. (IE the shares stay at the identical prices) then
NO you won’t make this return.
THIS HAS NEVER HAPPENED!! I suggest that a portfolio of shares will remain absolutely static (Zero volatility) for about as long as you can hold your breath!!
keithj said:
So you're saying there is a 50% chance of a prolonged slump ? And therefore a 50% chance of 'disaster' (your words to SC). I'm all for seeing the glass is 1/2 full, but I'd consider the glass is mostly empty if there's a 50% chance of disaster.
WHY??
As long as you have
COVERED the downside disaster (Buffer) then the
upside is all to gain.
50% : 50% odds imply that we cannot be predictive . . . equal chance either way.
Long term trends seem to indicate that markets do trend up in the long term so I suppose the odds are more against than for the downside.
However, as long as
you do not spend your capital before you make it, then you will never be worse off than if you had done nothing.
keithj said:
I agree entirely. However, the question was
'How would you compare the risk of 'living off equity' in retirement to the more conventional retirement method of living off income while in retirement ?'
The risk is IDENTICAL:
Same rules as above . . . Don’t spend it before you have made it!
Then, besides having built up an enhanced portfolio,
the value is up to double, because it is not taxable.
Bill.L said:
Steve a quick question about your quote
"The KEY safety mechanism is NEVER to spend more than your previous years CG".
What if the previous years CG was negative?? Should you be putting money into the system/strategy rather than taking it out??
For a retired person living off equity where would this come from??
Hi Bill.L,
No you don’t need to put the money back in . . . you would be in the
identical position as if you had done nothing and your asset value will be down to the same extent as the negative CG
in both situations.
I REPEAT: You can only SPEND the equity when you have MADE it.
quiggles said:
Put differently, I will spend more when my assets earn more - I will not spend more by spending my capital.
Hooray
Regards,
Steve