Living off equity – a Reality Check

[MJK]

I have to say I'm with Keith J on this one...Chapter 3 seemed to me more about reinvesting equity/Lazy dollars to create positive cashflow . We are all comfortable with this! But it doesn't fit my definition of the debate about LOE ie drawing down equity and spending it on lifestyle.

I'll be interested to see the numbers in chapter 4.

MJK

 

[Andrew_A]

I was thinking about your above list overnight , and realised that, while there are many different views on the forum on how to invest , most of the time people don't necessarily attack other peoples views on investing . Most of the time people seem to accept that there are just different ways to do things.

As far as methodology , the only person who seems to draw recurring negative comments ( as well as many adoring fans :0 ) .... is yourself.

See Change

I can't recall seeing Steve attack others views regarding investing (unless it's doing nothing). But he does defend his positions forcefully. Perhaps the negative comments that happen have something to do with the fact that Steve is a regular contributor with interesting ideas.

It's my experience of BB's and life in general that you can talk to a large group and get a whole spectrum of different responses which might bear no relation to the content of the message. There are people who just never get it, people who always try and shoot down others, people who follow a leader unquestioningly, people who react angrily, people who are very happy, a whole range of people.

So the formula for attracting consistent criticism would simply be no more than presenting posts with something that requires challenging thought, hardly a difficult formula to meet.

I present tech/a's contributions of Reefcap and Aussie Stock Forums as evidence, and some of Peter Spann's posts on here and... well it's a long list.

My 2c worth only. I enjoy all of Steve's and SC's posts! And listen closely to both

 

[Andrew_A]

Regarding living off equity, my view is that it's a strategy that will work excellently if enough importance is made to buying correctly, and enough discipline is paid to the cost of your lifestyle. Every year the structure survives it should theoretically get stronger (compounding assets higher than costs) which is something I like.

Rental reality seems like a good tool to use but just a beginning. If you have property in your portfolio that underperforms then that is going to be painful. A close view has to be paid to demographic and local area trends as well to ensure that CG will actually eventuate. My personal view is that land content close to major CBD's is the way to go for me, also with the view to future development on the land. If we are to be a nation of people living by themselves in 1+1 inner city appartments, then I'd like a block I can do some higher density work on at some point in the future To my mind demographics will always be king vs Current cost/yields and overpaying for the right property always gets less and less important as the years and CG rolls in!

Also I have a name for cashbonds, not sure if it has been used before. I see cashbonds in Steve's strategy as "Time Travel Dollars".. A method for accessing future growth for use today.

 

[Steve Navra]

Chapter 3 seemed to me more about reinvesting equity/Lazy dollars to create positive cashflow . We are all comfortable with this! But it doesn't fit my definition of the debate about LOE ie drawing down equity and spending it on lifestyle.

Hi MJK,

I'm with both you and Kiethj on this too !!

Patience please . . . I haven't finished and the answer to this question comes after the Risk Assessment section. (Chapter 5)

However I will give you the "short" answer now:

I have throughout the discussions that preceded this full response, hinted at being able to spend the capital (Future Growth) for lifestyle purposes.

AND it caused a huge uproar from the conservatives about the fact that IF there is no regular future growth that you will end up losing the shirt off your back !

So before one can actually start to USE the actual CAPITAL to live on, a sound structure of regular income for the purposes of covering all contingencies MUST FIRST be in place.

This is where we are up to at the moment:

Beyond the sound structure with EVERYTHING covered, (Including downside market declines etc etc etc . . .) then the portfolio equity will compound whenever CG occurs.

At that stage then, you will be able to live off (SPEND) these capital dollars, without stressing about the shirt on your back. (SANF)

So it is getting there,

Regards,

Steve

 

[MJK]

"So before one can actually start to USE the actual CAPITAL to live on, a sound structure of regular income for the purposes of covering all contingencies MUST FIRST be in place."

Its all good Steve.
My portfolio is at about chapter three now. Trying to get it all balanced. I'm getting a bit tired of negative cash flows . I'd like the structue to be 100% self supporting so that any of my PAYE that goes into it is a bonus ie. a cash investment rather than a stop loss!

MJK

 

[Steve Navra]

"So before one can actually start to USE the actual CAPITAL to live on, a sound structure of regular income for the purposes of covering all contingencies MUST FIRST be in place."

Its all good Steve.
I'd like the structue to be 100% self supporting . . .

100 cement

Regards,
Steve

 

[keithj]

I'm with both you and Kiethj on this too !!

Steve,

I glad you've finally come around to our way of thinking about what living off equity actually is and isn't.

However I will give you the "short" answer now:

I have throughout the discussions that preceded this full response, hinted at being able to spend the capital (Future Growth) for lifestyle purposes.

AND it caused a huge uproar from the conservatives about the fact that IF there is no regular future growth that you will end up losing the shirt off your back !

So before one can actually start to USE the actual CAPITAL to live on, a sound structure of regular income for the purposes of covering all contingencies MUST FIRST be in place.

I'm not sure if you read the whole thread or even the initial post where I suggested

What are the alternatives – ...
....- invest partially in lower risk high yielding assets (to provide a guaranteed base pension) and keep some highly geared, high growth IPs to live off equity IF growth occurs

Duncan and other I'm sure understood this way back on the first page in this post.

So to summarise your 3 chapters so far -

1. buy IPs, & watch them grow
2. draw down equity to buy more, watch them grow
3. when critical mass of equity occurs buy into a share fund yielding 13% - (critical mass depends on what income you need & what return the high yielding assetguarantees)
4. retire on reliable INCOME from this high yielding asset - pay tax on this income
5. IF Cap Growth occurs draw it down & spend it - live a life of luxury

I agree with steps 1 & 2 & 5 - I've done them. However, I have issues with the risks in steps 3 & 4 - I look forward to you justifying your methods.

Cheers,

Keith

 

[Steve Navra]

most of the time people don't necessarily attack other peoples views on investing . Most of the time people seem to accept that there are just different ways to do things.

Hi see_change,

Yes you are correct and recurring negative comments are not necessary.
We are all trying to achieve the same result and there are many valid paths to get there.

Offering a different method is necessary to the debate and valuable to all the members.

Differences of opinion too are absolutely necessary.

Negative comments, without a valid understanding and worse still without offering a counter solution are particularly unnecessary.
I call this form of "knocking" of the concept NEGATIVE.

I do vociferously defend against the "Knockers" for the simple reason that they cause many of the members angst and then this prevents positive action.

One doesn't have to agree with a given method . . . we all have the choice to find our own investment path: BUT TO GET A RESULT, irrespective of the chosen methodology we HAVE TO DO SOMETHING!

Regards,

Steve

 

[keithj]

100 cement

Hi Steve,

Sorry to keep questioning you - I hope no-one perceives it as attacking....

Are you saying the structure you are recommending is 100% guaranteed to be self supporting ?
And 100% guaranteed to provide consistant 13% dividends & distributions plus Capital Growth and a capital guarantee ?

Cheers,

Keith

 

[Steve Navra]

IF Cap Growth occurs draw it down & spend it - live a life of luxury
I agree with steps 1 & 2 & 5 - I've done them. However, I have issues with the risks in steps 3 & 4 - I look forward to you justifying your methods.

Hi Kiethj,

This is good, especially as you agree with 1 & 2 & 5
(Even though I haven't presented 5 yet )

I accept that you do not agree with 2 and 3:
If so what exactly do you disagree with?
And MORE IMPORTANTLY what is YOUR SOLUTION to whatever it is that you find disagreeable?

Regards,

Steve

 

[Steve Navra]

Are you saying the structure you are recommending is 100% guaranteed to be self supporting ?
And 100% guaranteed to provide consistant 13% dividends & distributions plus Capital Growth and a capital guarantee ?

Hi Keithj,

What you ask is just as guaranteed as:
Are you 100% guaranteed to wake up tomorrow?
Are you 100% guaranteed to always have a tenant?
Are you 100% guaranteed to be able to get a loan and maintain the same interest rate?
Are you 100% guaranteed to always have a job?
Are you 100% guaranteed to not to be effected by wars?
Are you 100% guaranteed not to get tax changes?
Is it 100% guaranteed that the market will go up?
Is it 100% guaranteed that the market will go down?
Is it 100% guaranteed that the property will go up?
Is it 100% guaranteed that the property will go down?
And the list goes on . . . infinitum.

Is your OWN current structure 100% guaranteed?

I will tell you what is 100% guaranteed:
Treasury bonds (Cash) That is as long as we have a democracy in Australia.

I do not regard your question to be reasonable.

There are NO GUARANTEES in life . . . and the solution to this fact is termed "Risk for Reward"

Can you be more specific about what you are asking of me?

Kind regards,

Steve

 

[keithj]

This is good, especially as you agree with 1 & 2 & 5
(Even though I haven't presented 5 yet )

I accept that you do not agree with 2 and 3:
If so what exactly do you disagree with?
And MORE IMPORTANTLY what is YOUR SOLUTION to whatever it is that you find disagreeable?

Steve,

You misunderstand - I'm not talking about your chapters - I'm talking about my 5 step summary of your voluminous 3 chapters. See below

So to summarise your 3 chapters so far -

1. buy IPs, & watch them grow - I agree
2. draw down equity to buy more, watch them grow - I agree
3. when critical mass of equity occurs buy into a share fund yielding 13% - (critical mass depends on what income you need & what return the high yielding assetguarantees) - I have issues with anything that claims to provide a 13% consistant guaranteed return with a capital guarantee
   
4. retire on reliable INCOME from this high yielding asset - pay tax on this income - I described some of these methods in post #1 here and here
   
5. IF Cap Growth occurs draw it down & spend it - live a life of luxury - I agree

I'd describe my retirement strategy as having a consistent guaranteed base income (with a small amount of tax payable) and with possbile equity drawdown (tax-free) when CG occurs for luxuries.

I'd say this is NOT the same as living off equity - I'd describe LOE as living SOLELY off equity with no guarantees of CG and therefore no guarantees of income.

Comments on these definitions of LOE are invited.

Cheers,

Keith

 

[Steve Navra]

I'd describe my retirement strategy as having a consistent guaranteed base income

But is it 100% GUARANTEED?

Please can you detail your guaranteed income

Regards,

Steve

 

[keithj]

Originally Posted by Steve Navra
100 cement

Can you be more specific about what you are asking of me?

Hi Steve,

Sorry, I though your response above was implying your structure is 100% guaranteed. What did you mean ?

What you ask is just as guaranteed as:
Are you 100% guaranteed to wake up tomorrow?
Are you 100% guaranteed to always have a tenant?
Are you 100% guaranteed to be able to get a loan and maintian the same interest rate?
Are you 100% guaranteed to always have a job?
Are you 100% guaranteed to not to be effected by wars?
Are you 100% guaranteed not to get tax changes?
Is it 100% guaranteed that the market will go up?
Is it 100% guaranteed that the market will go down?
Is it 100% guaranteed that the property will go up?
Is it 100% guaranteed that the property will go down?
And the list goes on . . . infinitum.

I will tell you what is 100% guaranteed:
Treasury bonds (Cash) That is as long as we have a democracy in Australia.

That's part of what I'm getting at. If you ask 99% of financial advisors if they can offer a guaranteed retirement structure - they wil say YES 100% guaranteed income for life with 100% capital guarantee - treasury bonds. Of course they ain't gonna guarantee the answers to any of the other Q's.

There are NO GUARANTEES in life . . . and the solution to this fact is termed "Risk for Reward"

I believe the reward for taking risk pre-retirement is a 100% financially guaranteed retirement. As I have retired I can attest to the value of SANF in retirement.

Cheers,

Keith

 

[Sunfish]

Keith, Are you saying retiring with residential IP's is an oxy-moron?

I agree with you. If I were to retire with a number of IP's I would sell one a year till I was out of them. Anything other than gov paper needs some supervision and therefore you are technically not retired. But I guess I don't wish to retire completely.

As an aside, how do you keep yourself busy?

Thommo

 

[see_change]

Negative comments, without a valid understanding and worse still without offering a counter solution are particularly unnecessary.
I call this form of "knocking" of the concept NEGATIVE.

So does this mean that anytime someone wants to make comments that question your methods , they have to give a full rundown on how they invest ? I think that would make this place very repetative and boring....

Way Solid , You mentioned Tech /A and Peter Spann. While Peter has been involved in some heated debates . I don't think people have consistently questioned the underlying premesis of Peters methadology.

Tech A .... I don't think he has too many detractors on the net, especially since he's traded his system from 30 K to 240K as of last friday in the two years ( sure it's been a good time for trend following systems ..). He certainly has been involved in a few verbal stoushes over the last four years I've know him , but that's because he calls a spade and a spade and not " manual excavation impliment "


See Change

 

[keithj]

Keith, Are you saying retiring with residential IP's is an oxy-moron?

Hi Thommo,

I've posted here recently about my 2 phased retirement plan - maybe I should consider a 3 phased plan - with phase III being 100% bonds/0% IP/0% shares. My portfolio still has IPs in it - for growth & +ve c/f. I'm all for a LOE approach combined with a guaranteed base income.

I agree with you. If I were to retire with a number of IP's I would sell one a year till I was out of them. Anything other than gov paper needs some supervision and therefore you are technicallynot retired. But I guess I don't wish to retire completely.

Selling one each year is a good way of reducing tax when swapping high growth assets for low risk assets. I'm pretty low maintenance, so I don't want or need an income of $100Ks pa, so I'm happy with a guaranteed base income & if there's equity available from growth then I may spend it or I may leverage it. So keeping shares & IP in the portfolio will keep me in phase II until my attitude to risk becomes more conservative.

As an aside, how do you keep yourself busy?

I enjoy bushwalking (often alone), help coach U6 soccer team, volunteer helping other people kids to read at school, thinking about financial structures & asset allocation & risk, buy shares & trade options occasionally, reno IPs if I feel like it(read - mucking about with power tools), furniture making(read - mucking about with power tools), visit library, abseiling, rockclimbing, exploring new canyons, mtn biking, looking at the view over 1000's km of Blue Mountains NP from my deck, occasional OS travel, teaching kids about the outdoors, (oh & reading this forum). I fit into the hobbies stereotyped in 'TheMillionaireNextDoor'.

Cheers,

Keith

 

[Steve Navra]

If you ask 99% of financial advisors if they can offer a guaranteed retirement structure - they wil say YES 100% guaranteed income for life with 100% capital guarantee - treasury bonds. Of course they ain't gonna guarantee the answers to any of the other Q's.

I believe the reward for taking risk pre-retirement is a 100% financially guaranteed retirement. As I have retired I can attest to the value of SANF in retirement.

Hi Kiethj,

We are obviously talking at cross-purposes here:

If you want 100% guaranteed income you will get returns based on that low risk profile. (Cash rate about 5%) Also you will give up all your future capital growth.

This might be your personal requirement in retirement, it is not mine (I prefer a slightly higher risk profile with higher returns) and certainly might not be the low risk profile chosen by many other forum members.

I wish to make a point here:
The vast majority of forum members are at the asset acquisition stage (Still building their portfolios) and that with such a low risk profile (100% guaranteed) they will literally never get to a decent retirement.

Another very valid point I wish to make to all retired members, is that 100% guaranteed income with no risk and low returns is VERY RISKY !!!

This is what our parents did and then high inflation completely wiped them out:
When their investments were earning them just the cash rate and inflation was more than double that. (Their dollar buying power was less than half)

It is very easy to forget these times, especially now in times of low inflation.
The risk of 100% guaranteed income is that there is a chance (Certainly greater than a 10% chance) that inflation will again one day exceed the return on cash.

If this is your choice then I am surprised: I DIDN”T REALISE YOU WERE SUCH A RISK TAKER.

Regards,

Steve

So does this mean that anytime someone wants to make comments that question your methods , they have to give a full rundown on how they invest

No it certainly does not mean they have to give a rundown of their exact method.

I ask only that the comments not be negative; and by negative I mean that one should not “Knock” another method without firstly fully understanding it and secondly if you don’t agree, then at the very least offer an alternative.

Personally I think you have achieved an excellent result with your methodology:
But if I stated that it was bunk; extremely high risk and didn’t think it could work and that in fact anyone else attempting to follow your method should be very wary in case they lose their value . . . without JUSTIFYING WHY I thought this . . . then you might see me as unduly negative too.

It is not something I take personally . . . it works for me, it is working for my clients and we are all happily achieving better than most others, EACH to their own and I personally congratulate any investor on their efforts irrespective of whether I agree with their method or not.

Taking action is a difficult enough decision for an investor to make: negative vibes tend to paralyze investors from making a decision and DOING NOTHING is generally not an option.

Hope this finally clears this up . . . and now please can we all get back onto discussing methods to create wealth.


Regards,

Steve

 

[Steve Navra]

I'd describe LOE as living SOLELY off equity with no guarantees of CG and therefore no guarantees of income.

Comments on these definitions of LOE are invited.

You asked for comments:

Living soley off equity without CG or Income sounds risky to me.

Wouldn't you run out of money eventually? Then like Duncan you would have to go back to work at 70 years old!

So tell me Kiethj, is this really your definition of LOE or were you joking?

Regards,

Steve

 

[Patosan]

All this talk of zero risk & guaranteed are we living in the land of Oz ?
Well most of you are but I ain't ... he he he ... not at the moment anyway.

Seriously though what are those seeking guaranteed safety asking for ?
IP are long term one of the safest investments araound, that's why most of us are here. So I am somewhat puzzled by arguments against Steve's plan on this point. There may well be cycles but nobody's going to lose their shirt doing LOE unless they start spending a majority of the portfolio very quickly and with worst timing. This is where common sense comes in.

It's not the system ... rather it's application that will determine it's safety.