How I got from just a PPOR to multi millionaire retiree in 5 years using only OPM.

[austini]

Hi Keith,

Thanks for your views.

Certainly interesting times are ahead. This coming week in the US will make for an interesting one. And of course as mentioned reporting season here in August will be keenly awaited by investors.

It's a strange situation here in Oz. As stated petrol and interest rates are real killers. But the gov't is sitting on a pile of cash it wants to spend but it can't due to capacity constraints and inflation. Housing is unaffordable but a significant undersupply is building. The resource sector is going well thank to China so our dependence on the US is less. However the biggie is sentiment which in some cases seems to be well and truely overriding fundamentals which is not unexpected given human psychology when faced with so much doom and gloom in the press.

In our case we have been steadily buying into quality Industrial shares offering attractive dividends since mid-June but fortunately we were cashed up and have only used a relatively modest amount of borrowed funds. I'm assuming in some instances a probable reduction or no increase in dividends. But the SANF is good. However it would seem that there is unlikely to be any quick turnaround given the problems out there. But I'm a contrarian and I'm patient.

Cheers - Gordon

 

[alba]

Hi Keith,

Thanks for your views.

Certainly interesting times are ahead. This coming week in the US will make for an interesting one. And of course as mentioned reporting season here in August will be keenly awaited by investors.

It's a strange situation here in Oz. As stated petrol and interest rates are real killers. But the gov't is sitting on a pile of cash it wants to spend but it can't due to capacity constraints and inflation. Housing is unaffordable but a significant undersupply is building. The resource sector is going well thank to China so our dependence on the US is less. However the biggie is sentiment which in some cases seems to be well and truely overriding fundamentals which is not unexpected given human psychology when faced with so much doom and gloom in the press.

In our case we have been steadily buying into quality Industrial shares offering attractive dividends since mid-June but fortunately we were cashed up and have only used a relatively modest amount of borrowed funds. I'm assuming in some instances a probable reduction or no increase in dividends. But the SANF is good. However it would seem that there is unlikely to be any quick turnaround given the problems out there. But I'm a contrarian and I'm patient.

Cheers - Gordon

Hi Gordon,

I've never owned shares but I've been following the markets for more than two years now. I've learned that before earnings season, share prices tend to go up as pple are buying them to receive the dividends, is that right? In the US the last time like that was April. Is August the earnings season for the Australian market? If that's the case and if the D&G in the US market continues (also the Nikkei had a wretched week) then perhaps August/September would be a good time to get started?

Best regards,

alba

 

[austini]

Hi Alba,

Yes August (and February) is when companies will be reporting on earnings etc.

In normal circumstances there may well be buying in anticipation of upcoming dividends. However the market is far from normal at the moment with high probability of capital loses given the extreme volatility of the market. So I'm not to sure whether too many investors will be game to buy into the market purely for the dividend given these circumstances.

But note that I'm not that knowledgable about the market and various plays. I'm just a simple long term, buy and hold income oriented investor. Whether the market falls 10, 20 or even more than 50% after I buy is of little consequence to me given my time frame is the long term. I do however try to identify quality companies unlikely to go bust. But given that I'm buying these quality companies up to 50% or more from their highs there is much less downside compared to the last couple of years when the charts were nearly vertical. It would be nice to be able to predict the bottom but no one consistently can. I don't even own a crystal ball

Cheers - Gordon

 

[alba]

Thanks Gordon, you're right, it is a dangerous game to try and pick a top or bottom. I have a feeling I still have time to gear up to get started and I'll look into buying shares in a trust as I thought it was a brilliant idea after reading keithj's post.

I am also looking for advice on managing my own super fund, I am new to this stuff as I only started a job last year so I haven't been exposed to capital losses as much as people with large amounts in their super fund but I had a look at my statement and was horrified...if I could have had that money simply sent into my line of credit account, where it saves 8.6% interest tax free I would be much better off. Any of you guys are managing your own super fund?

Best regards,

alba

 

[austini]

Hi Alba,

Yes, Keith has an excellent structure in place. This thread of Keith's is my all time favourite on Sommersoft. He has done very well.

All our direct share holdings (dividend paying Industrials excluding LPTs) are also in a Disc Trust but I don't have any margin loans in place. Any borrowings are sourced from IP inside and outside the trust.

We also have a SMSF but it only holds listed funds such as AFI, ARG, MLT, AUI, WHF, MIR, STW & SLF. This acts as a nice very diversified core (including some indirect Resource stocks exposure) for the overall portfolio and importantly keeps administration effort and costs to a minimum.

Anyhow I feel like I'm hijacking Kieth's thread here so I better shutup

Cheers - Gordon

 

[GreatPig]

I'll look into buying shares in a trust

One thing to consider with this is what happens if you make a loss (capital loss). If that happens, the loss will be trapped in the trust until it can subsequently be offset by a future capital gain. If the shares were in your own name, then the loss could offset other capital gains you may have (eg. if you sold your IP).

This may be a relatively minor consideration compared to other things, but still something to be aware of - particularly given the possibility of making capital losses at the moment.

In general, the more structures you have, the less flexibility there is overall to offset losses against other gains, as the two may be in different structures. You can't distribute losses from a trust.

GP

 

[ffc1883_1996]

Keith has an excellent structure in place. This thread of Keith's is my all time favourite on Sommersoft. He has done very well.

I’ll second that! Like many here, I’ve read great publications by the likes of McKnight, Doige, Eslick, Spann, Yardney, Lomas, Chan, Melvin, Somers, Wemyss, Whittaker, Hartman and others. But none have Inspired me to THINK for myself quite as much as Keith’s Somersoft interview and this thread.

Thanks for your contributions Keith.

 

[ILoveProperty]

Hi Bill, Still to much uncertainty for me. Next week or the week after, another US finance cpy implosion will occur & remind everyone how fragile the current confidence really is.

Good call.

 

[alba]

One thing to consider with this is what happens if you make a loss (capital loss). If that happens, the loss will be trapped in the trust until it can subsequently be offset by a future capital gain. If the shares were in your own name, then the loss could offset other capital gains you may have (eg. if you sold your IP).

This may be a relatively minor consideration compared to other things, but still something to be aware of - particularly given the possibility of making capital losses at the moment.

In general, the more structures you have, the less flexibility there is overall to offset losses against other gains, as the two may be in different structures. You can't distribute losses from a trust.

GP

So are you saying that do buy shares one does not necessarily set up a trust? Can we still deduct the interest if buying shares in own name?

 

[GreatPig]

So are you saying that do buy shares one does not necessarily set up a trust?

You don't have to, no.

Can we still deduct the interest if buying shares in own name?

To the best of my understanding, provided you borrow for income-producing purposes, then you can deduct the interest. With shares, that would mean as long as they pay a dividend, or there's at least reasonable expectation that they will pay one at some stage.

GP

 

[Trogdor]

Stupid question....

If a (discretionary) trust makes a capital loss > income for the year, you can still stream dividends and franking credits out, and the loss stays trapped to offset future capital gains?

But if the trust makes an income loss (i.e. interest > dividends) the franking credits are lost.

Is that an accurate summary (assume FTE is made).

 

[keithj]

If a (discretionary) trust makes a capital loss > income for the year, you can still stream dividends and franking credits out, and the loss stays trapped to offset future capital gains?

But if the trust makes an income loss (i.e. interest > dividends) the franking credits are lost.

Hi Trogdor,

I'm pretty sure the trust can still stream divs & franking credits to beneficiaries & any cap loss stays there to offset subsequent year.

I don't know what happens to franking credits when it makes a loss. But logically I'd guess you're right. Hasn't happened to me yet.

Cheers Keith

 

[alba]

Thanks GP for your advice. So it seems to me that trusts are most suitable for highly paid professionals who run a greater risk of getting sued, but are not necessarily the best structures for investors who are trying to replace their jobs with passive income because of its inflexibility. Am I right?

 

[Mr. Fabulous]

alba,

The best thing to do is to discuss your personal situation with an investment savvy accountant who knows and understands trust structures. Someone on here will be able to point you in the right direction for one in Melbourne.

Mark

 

[GreatPig]

So it seems to me that trusts are most suitable for highly paid professionals who run a greater risk of getting sued, but are not necessarily the best structures for investors who are trying to replace their jobs with passive income because of its inflexibility. Am I right?

As Mark says, you really need to speak to a professional regarding your own circumstances.

There are other factors involved besides asset protection. Trusts provide greater flexibility for distributions, so you might be able to distribute income and CG amongst multiple low income earners, but there are issues with negative gearing, if that's your intention. Trusts have a cost to set up and an ongoing maintenance cost (tax returns, etc), which makes them more expensive than just doing everything in your own name. And I gather trusts don't get any land tax threshold for real estate. They also involve more work, if you're the trustee, in terms of writing minutes and resolutions, keeping separate financial records, operating bank account(s), etc.

There are a number of reasons why one or the other might be preferable to your situation, which is why you really need to discuss it with an advisor who knows their stuff with respect to trusts.

GP

 

[AlwayzLearnin]

I have just finished reading this amazing thread... Thanks Keithj for your time to explain to us your strategies.

I am curious as to how you have held up since October. I don't follow the stock market much, but I guess your buffer would have taken a fair beating.

Are you able to share with us some of your experiences and lessons you have learnt in tackling the falling market over the last 2 months?

 

[keithj]

I am curious as to how you have held up since October. I don't follow the stock market much, but I guess your buffer would have taken a fair beating. Are you able to share with us some of your experiences and lessons you have learnt in tackling the falling market over the last 2 months?

Hi AlwayzLearnin,

Lots of the things that haven't happened for a several cycles have changed the investing landscape significantly. In November '07 it was hard to imagine that within 12 months -

• Oil would hit US$40
• Inflation would be falling, with talk of deflationary spirals
• IRs would be down 33% (from 9% to 6%), and heading towards 4.5%
• Stock market would be down 53%
• LPTs down 75%
• Big banks down 50%+
• BHP down 50%
• A$ falling by 30% in 6 weeks
• China growth slowing significantly with commodities down 50%
• Several ASX200 companies would be bankrupt
• Runs on big banks (in UK)

To paraphrase the former RBA governor 'Anyone who forecasted these events has been forecasting them for 10 years'. While it may not be especially hard to foresee some of these events it is hard to forecast when they will occur. A blue chip share portfolio with a conservative margin loan LVR of 30-35% would have been decimated by the 53% fall in the ASX.


My equity has suffered and company earnings are expected to fall, as are dividends. In the 1930s depression dividends fell by 30% - I don't think the current global financial situation warrants falls of that much.

Currently, rents & dividends keep coming in, so as a whole the structure is still c/f +ve. Dividends haven't fallen yet - although I expect they will as there is considerable earnings uncertainty. However, if dividends are put on hold for 1-2 yrs, then my buffer will start to look v. unhealthy.

I still have available borrowings. However, I'd like to have more cash & borrowing capacity available to take advantage of the upcoming quality c/f +ve bargains..... that's something I'm working on.


Lessons learnt.

Regarding shares: I think I'd do the same again..... I didn't see the 53% ASX crash coming - I expected any falls to be less than 35% and consequently didn't sell everything at or near the top. My reasoning was that if I had sold within 5% of the top, paid the ~25% CGT & bought in again within 5% of the bottom, then I'd be no better off. And in my view, the ASX wasn't excessively overvalued back in Nov '07.

As the ASX fell, I sold off some shares & kept the margin loan at a good SANF level for me. My reasoning was that I anticipated needing cash to buy in again closer to the bottom.

In the past I've advocated never selling quality assets while their earnings appear to be stable regardless of their price. Lesson learned: Keep SANF in mind when making sweeping generalisations.

Various left field events have caused otherwise solid ASX companies to fail, eg undisclosed loans in foreign currencies that cause loan covenants to be breached when the A$ fell 30% within 6 weeks. Another is banks forcing cpys to repay debt instead of paying dividends. Lesson learned: expect the unexpected.


Regarding retiring as early as possible: I'd definitely do the same again.... being around when my kids are growing up is impossible to put a value on. Lesson reinforced: there's more important things than equity.


Re Diversifying: As the ASX rose I was tempted to sell low yielding IP, pay tax & put the equity into shares/LPTs. I'm glad I didn't. I still think diversification is one of the few free lunches around.

Re Set & Forget: I had intended that the plan was to be set & forget - so I could sail off into the sunset (or trek around the Himalayas for 6 months). and just draw down on the income. However, when unprecedented events affect volatile assets, some adapting is needed. Lesson learned: Adapting to circumstances is more important than attempting to forecast them.

The bottom line is that the principles of the plan have held together, despite experiencing unprecedented financial turmoil....

.... so far.....


Cheers Keith

 

[Rixter]

Thanks for sharing Keith... one thing to come out of recent events for you is that you've road tested your investment structure and know you can ride through these type situations and still come out the other side.

Once again thanks for sharing.

 

[PrimeCommercial]

A very big thankyou Keith. Very interesting to see how your fluid your plan is.
And a couple of gold nuggets of wisdom

"Lesson learned: Keep SANF in mind when making sweeping generalisations."
"Lesson learned: expect the unexpected."
"Lesson reinforced: there's more important things than equity."
"I still think diversification is one of the few free lunches around"
"Lesson learned: Adapting to circumstances is more important than attempting to forecast them."
"Lesson learned: Adapting to circumstances is more important than attempting to forecast them."

I though that last one was worth repeating

Thanks again

 

[Gee Cee]

Adapting & change.
Seems like it fits into all parts of ones life