Long term share market investments via superfund - help me

[ottg]

About to start a share portfolio by doing direct investments via my superfund and need some help. Would like to hear from other successful long term investors in Australia (with substantial portfolio size and no traders please)

a) Through which superfund are you doing it

b Do you have to setup a SMSF or does the fund allow direct share investments (like in South Africa)

c) What investment strategy do you follow (capital growth, dividend growth or both)

Do you reinvest all dividends

d) What is the typical compilation of your portfolio (shares, index fund, bonds) & which industries

e) Do you make use of 3rd party paid services for their share recommendation reports? Which ones? (eg Barefoot Investor, Morningstar etc)

f) Are you doing your own fundamental analysis

g) Do you include some technical analysis

h) Are there any specific analytically tools that you use and will recommend

i) Which brokers do you use (online, bank ?)

j) Do you make use of margin loans and through who?

k) Do you invest mainly in Australian shares, international shares (which countries/ stock exchanges)or both

l) What typical % growth did your portfolio achieved year on year over the past 3 years (local or off shore)

m) If you have to start from scratch what best lessons learned can you share.

Sorry for all the questions but I need some pointers

[RYLC]

About to start a share portfolio by doing direct investments via my superfund and need some help. Would like to hear from other successful long term investors in Australia (with substantial portfolio size and no traders please)

a) Through which superfund are you doing it

A SMSF through Esuper. They handle everything including tax returns and are very competitively priced.

b Do you have to setup a SMSF or does the fund allow direct share investments (like in South Africa)

We have SMSF but some funds allow something known as SMSF Lite which is direct share investment but only from a limited list. I think Australian Super is one that allows it but there are others too.

c) What investment strategy do you follow (capital growth, dividend growth or both)

Both

Do you reinvest all dividends

Reinvested as still in accumulation phase and not at pension stage yet.

d) What is the typical compilation of your portfolio (shares, index fund, bonds) & which industries

Shares (direct and ETF's, some index funds. Industries will depend on your appetite for risk. We have the usual blue chip banking types but also some medical and technology ones. Depends on your research and which industries you think will grow with the changing population.

e) Do you make use of 3rd party paid services for their share recommendation reports? Which ones? (eg Barefoot Investor, Morningstar etc)

Have watched Barefoot Investor and used their recommendations for a "set and forget" SMSF starter but don't follow their month to month recommendations because I don't agree with them. I prefer Motley Fool.

f) Are you doing your own fundamental analysis

Sometimes. I definitely read other sources.

g) Do you include some technical analysis

I have the software but am not trading so don't look at it often. I'm happy with my selections for investment purposes.

h) Are there any specific analytically tools that you use and will recommend

Not analysis but for tracking: I use Sharesight. It is awesome! Tracks trades, dividends, rights issues, etc and has links to market news on each share you hold. Also has great reports for end of year.

i) Which brokers do you use (online, bank ?)

ESuper set us up with CommSec and ANZ. They are all much of a muchness fee wise so no problems with them.

j) Do you make use of margin loans and through who?

No not with super money

k) Do you invest mainly in Australian shares, international shares (which countries/ stock exchanges)or both

Australia and US

l) What typical % growth did your portfolio achieved year on year over the past 3 years (local or off shore)

Haven't been running our own fund for 3 years but have doubled the return that my big name fund got us so happy with that.

m) If you have to start from scratch what best lessons learned can you share.

Do it sooner. I read a lot of books on super (Noel Whittaker is good) so did a lot of learning before diving in.

Sorry for all the questions but I need some pointers

[ottg]

@RYLC thank for taking the time to reply. Some very interesting responses and concepts to work through before asking more questions (perhaps a separate thread)

Asked the same questions elsewhere and received good responses: http://forums.whirlpool.net.au/forum-replies.cfm?t=2407142

[JK in Brissie]

Question © reinvestment of divvies - my accountant advised me NOT to reinvest dividends in my SMSF as it makes the audit tedious and time consuming (i.e expensive) to bring all the fractional values into account.

As matter of interest, the statisticians say that you do not need more than 15 shares to be effectively diversified in the market, in terms of statistical risk of individual shares. This makes a nonsense of managed share portfolios with hundreds of shares held - they may as well just be index tracking funds - why pay fund managers to run a tracking fund?. My financial adviser assures me I am quite wrong but I believe the mathematicians.

My own portfolio of 13 buy & hold shares has done OK, with about 5% return in dividends plus some modest growth. I think it as good as a managed fund.

[RYLC]

We use ESuper who do all our end of year super fund accounting (audit and tax return) for $699 each year. The story about dividends being too hard is just nonsense. All good accountants use specific Super fund software that is more than able to handle dividends. Your accountant must be doing it all manually or something. Fancy telling you not to reinvest (which some pundits think is an excellent idea when done over a long time) because growing your portfolio (through dividends) is too hard for him. He's valuing his ease of work over your return on investment - how rude!! to say the least.

*better hop off my soap box - jeesh!!*

[RYLC]

to bring all the fractional values (of dividends) into account

This bit also tells me that he doesn't understand how dividend reinvestment works because you don't receive fractional shares - only whole shares. All of this information is detailed on the dividend statement and expertly handled by the super accounting software.

The software is usually connected electronically to the broker (eg Commsec) and all buys, sells and dividends are sucked into the software behind the scenes. Smooth as - not tedious.

[ottg]

In Australia dividends are either franked or unfranked. This means the company has either paid tax on it or not. If unfranked it provides a further benefit to the investor as you can deduct the tax on the dividend from your capital gains. Your capital gains are both your capital growth and dividend income. In a SMSF this is taxed at 15% flat rate (I think - still learning)

However another question: Is it good to put your after tax "savings" in a SMSF or should you keep it in a private fund and pay personal tax at your marginal rates on it. The question is slightly more complex - keep in mind that if you have a property portfolio you can get you personal marginal tax way below 22% but this will change as your property becomes positive geared and then your personal marginal tax rate increases proportional. Perhaps I answered my own question?

In your SMSF all capital gains are taxed at a flat rate of 15% irrespective of gains. This is difficult to beat from a tax view. However you cannot roll losses over (I think - need someone to give me the mechanics around this) while you can do that in your private investment account (I Think??)

[ottg]

you do not need more than 15 shares to be effectively diversified in the market, in terms of statistical risk of individual shares.

In fact a quantitative analyst (who happen to be an engineer) published his works in the South African magazine Smart Investor way back in ~1995 that you only need 8 different shares to be adequately protected and that any additional shares add very little protection when things do go peer shape. However this number is different for different countries and stock exchanges, due to the correlation and "closeness" between the industries. The South African investment services RCIS always promoted 8 different shares balanced in one portfolio till about 2-3 years ago and then up the number to 10 since then. Usually you could add one sweetner (i.e 1 very high risk fast growing share) however I have learned a very expensive lesson with that.

Unfortunately I don't know if that would be any different for Australia.

[monsta]

Hey Guys,

Sorry if this is hijacking the post, but I think this question was asked earlier but wasn't answerd.

Has anyone run a SMF over a few years and can tell us what it returns for them? I am getting over 11% on my super at the moment, so I am wondering if I should bother..

Edited May 24, 2015 by monsta

[ottg]

Hi @monsta -

Please share your composition of your super in showing how you achieved getting >11%

Perhaps still using applicable questions in the original posting or info we can learn from!

[monsta]

@ottg You miss understood. My super is not a self managed super. So, I have no idea what its composition is. I can tell you its on a high growth option if that helps.

I was asking if it was worth my time to manage it myself and get a better return. But I think the barefoot investor has answered me already. Its probably not going to be. I have only been here for 3 years, so my super isn't large enough yet. If I consider the money I would loose on fees vs the extra I would make then its not worth while.

Edited May 26, 2015 by monsta

[ottg]

Thanks for clearing it up - the >11% growth does that includes the employer's contribution?

[ottg]

Two links I found to be very helpful

a. Sharemarket rules to keep in mind: http://www.smh.com.au/money/investing/keep-taking-the-tablets-20150217-13cmnf.html

b. From a member of this forum who did home work years ago: http://www.saaustralia.org/index.php/topic/26714-growth-investment/#entry236508

[Singita]

Hi

I have been in oz for 2 years working as a physio with PR. I do have my superannuation with HESTA. I have no income protection cover or life insurance at the moment. I would like to start a share portfolio. I do know that it would be best to start with bluechip shares. I would also like to buy an apartment next year so i don't have to rent anymore. I am single and have a full time job at the moment. Oh and i'm 36.

Thanks in advance. Your advice would be greatly appreciated.

[ottg]

Not sure I understand your question - I assume you asked when starting a share portfolio if bluechip shares are the best way to go?

Firstly it depend what your definition of a bluechip share is - from investopedia: "A nationally recognized, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which helps to contribute to their long record of stable and reliable growth"

Now that is not exactly my definition because - companies with high capitalization market value arent necessary high growth, high dividend paying companies. end!

So what is the definition then - or better what parameters should quality shares have?

• Companies remain profitable irrespective of economic cycles
• History of consistent dividend payments year after year
• Consistent rise in value of dividends to maintain real worth during high inflation
• Debt to asset ratio is reasonable
• Attain highest average dividend growth rate over extended time period
• Chairman reflects optimism in annual report
• High tradability of shares

How do you find them? By using fundamental & technical analyses.

I'm still searching for tools that can assist me. However I know what the tools need to tell me!

Here we go:

• Average annual growth of dividend in % terms for 10 years
• Average annual growth of dividend in % terms for 5 years
• Average annual growth of dividend in % terms for 1 years
• average annual growth of Earnings per share in % terms for 5 years
• average annual growth of Earnings per share in % terms for 1 years
• Check exponential div growth and mark accordingly
• average annual growth of Earnings per share in % terms for 5 years
• average annual growth of Earnings per share in % terms for 1 year
• market capitalisation value.
• the volume traded over past 90 days (don’t have that so use 1 year)
Sort in descending order based on 5-years Earnings growth and pick top 100

• Check how they performed over the next 3 years per category (Fourier Analyses) Those with high cap performs better over downturn!!

There is the recipe - simple but not easy :-)

[ottg]

Selecting quality shares - Many of these methods and strategies I learned from others through many books, past experiences, trading, investments and experiments however not in the ASX market.
Received in March 2015 from S & P Capital IQ the entire ASX share market database for the past 15 years for 1900 shares. (It included some S & P shares as well)

Per share the database included the following fundamental parameters:
Capital employed; Dividend per share (final); Earnings per share; intrinsic value per share; shares in issue; current liability; ordinary shareholders interest; after tax profit; EBIT; annual profits; interim earnings per share; interim dividends per share; special dividends declared, share price

For each parameter calculate the growth per year for year on year = (previous year – current year)/previous year

Lets use BHP as an example.

For each parameter calculate the average growth for the past 5 years. Do for all shares
For each parameter calculate the average growth for the past 10 years. Do for all shares

I will reveal some of them:

1st column left: Score: 5 yr div = Avg 5 yr Div Growth = 0.233
2nd column left: Score: Div, Eps, Cap = Avg 5 yr Div growth (0.233) + Avg 5 yr EPS growth (0.439) + Avg 5 yr Cap Ret growth (0.180) = 0.852
3rd column left: Score: 2xDiv, Eps, Cap = Avg 5 yr Div growth (2 x 0.233) + Avg 5 yr EPS growth (0.439) + Avg 5 yr Cap Ret growth (0.180) = 1.085
4th column left: Score: 2xDiv, Eps, Cap, 10yrDiv = Avg 5 yr Div growth (2 x 0.233) + Avg 5 yr EPS growth (0.439) + Avg 5 yr Cap Ret growth (0.180) + Avg 10 yr Div growth (0.177) = 1.262

Now combine all the indexes together with capital employed to categorise shares per capital employed (business size)

We are now ready to observe some of the results.

[ottg]

We verify the results based on the above indexes by sorting on different combinations of indexes and filters to optimize share performance. (Now this is the first time for me as well to check results!!!) ( I blocked out the company names due to a little bug but the tickers are correct)

Evaluate ASX share performance based on above index filters.

Note that data is as if we are at end of Dec 2014. So how did we do in 2015?

Enter the tickers into Yahoo Finance

iShares Trust - iShares Europe ETF ARCA:IEV - Excellent growth from 1/2015 till 15/5/2015
Fortescue Metals Group Limited ASX:FMG – not good
Infratil Limited NZSE:IFT – Excellent growth from 1/2015 till 15/5/2015
Premier Investments Limited ASX:PMV - Excellent growth from 1/2015 till 15/5/2015
Whitehaven Coal Limited ASX:WHC – short term rally then stagnation
Goodman Fielder Ltd. ASX:GFF - Excellent growth from 1/2015 till 1/5/2015
OZ Minerals Limited ASX:OZL - Excellent growth from 1/2015 till 1/5/2015
New Hope Corporation Limited ASX:NHC – bad performance
Spark Infrastructure Group ASX:SKI - short term rally then sharp decline

So we have a score of 7/9 good calls. You must review this weekly in case a wrong selection was made - as this is not an exact science. Hopefully this can be done by means of a computerised program

As a general rule I will not select mining and resources due to high volatility but that may leave out a few very high and fast growing shares. Thus this rule is not fixed as you can add one share as a portfolio sweetener.
However the conclusion is that we will need to investigate further but are on right track

Further investigation and a few principals:

a. Expand investigation by categorising the market into segments of capitalisation eg: <$200m; $200m <$1b; >$1b < $5b; >$5b < $10b;> $10b < $30b; >$30b. Let say 5 categories.

b. Split out all those with capitalisation >$5b that don’t trade often into another category.

c. These categories provide different level of risk. As a general rule - very large and stabile companies are less risky and provide consistent dividends but not good capital growth. While smaller companies are more risky but provide much higher capital growth or losses and lower dividend returns.

d. Calculate the average index score for each group.
e. Then look at their individual growth trends over a short, medium and long term. Compare that against the overall market growth trend and group growth trends

f. Select highly tradable shares only for portfolio liquidity.

There are in fact 38 parameters identified that needs to be put into an index with different weighting factors for decision making

We are now ready to pick 8 to 10 shares for long term investments. We know exactly why we have chosen them. My mindset has been adapted to accept losses while ensuring following with consistency a set strategy and with specific set of my own rules I’m comfortable with. I only spend 10 minutes a week to see if the trend of the shares are still ok and if I have hit any stop losses to exit.

That is it!

[Shampoo]

When i was still in Cape Town, my accountant who was an active investor himself gave me some advice.

It is imperative to keep a file for each stock you hold.

The 1'st page should be your Base Cost.

This you can update as you buy more with your dividends later. Your year end Holdings Analysis will not reflect your Base Cost so it is important that you do it yourself immediately upon receiving your Contract Notes as time erodes one's memory.

It makes it easier for your accountant as he need not unscramble your documents himself

The next page should be your "Sells". This must reflect your Base Cost, Amount Received and Capital or Trade Loss/Gain.

This is the only page you need to send to your accountant.

The rest of the pages of the file are only to hold your contract notes.

You will find that you would not need an accountant if you stick with doing this.

Also, if you use the "Due From You" and "Due To You" amounts, then you would need to ignore the costs. This makes it even simpler.

.

Edited June 28, 2015 by Shampoo

[ottg]

There are two risk aspects now to consider:

• the position (investment) size and
• which capitalization category group to select from

If you have $100k and you select 10 shares of $10k each and your maximum stop loss is 10% then the maximum risk per share is 1% of the total portfolio size. A good risk value is 1% to 1.5%. Thus the risk for each share is 1k to 1.5k of portfolio size. Another risk is your total draw down that you can tolerate. If all the shares go peer shape simultaneously before hitting the stop loss the total draw down can be 10% to 15% of total portfolio size. Most people can tolerate up to 20% comfortable. This $20k risk from $100k portfolio.

The capitalization category groups mentioned in my previous post above then forms different risk level groups.

Depending on your risk profile you select shares then from those groups or a combination of groups eg:

a. If you young and have many working years left then you can afford higher risk

b. If you middle age with few working year left you risk should be medium

c. If you nearing retirement your risk should be even more low

d. If you orphan or widower the your risk affordability should be close to zero

All the 38 parameters then eventually find their way into various indexes which forms all part of a heat map.

Each group a-d have an average for each parameter. If the share's parameter is better than the group average its coloured green and if worse then the groups average then coloured red.

You select the category group a-d from above according to your risk profile. Then select say the first 15 shares of that group and then check the heat map for those with the most green 'numbers'. From those once you pick the 10 best shares.

Then you know you selected the best from the best.

I have a few tough questions now for you!

1. If you are interested in share investments, how will you decide if this is a good share selection strategy?

2. What will be required to convince you to give such a selection tool a chance?

3. How much are you prepared to pay for such a tool?

4. If a trail is offered, how long must the trail period be?

5. If you want proof of the effectiveness of such a selection tool, over what time period must the proof stretch to establish trust for you?

6. How urgent will such a tool be for you?

[Shampoo]

It is important to keep your trading and LT gains separate for tax as they are taxed differently. Any stocks sold within a year will be revenue and those held longer will be Capital. Your broker will give you a yearly summery of your activities as a tax aid.

The method I gave above is more for the occasional sale for Income or Capital Gains.

Here is a simple method if you have churned your account to the extent that you are totally confused. If all the stocks sold are less than a year in the report or all longer, then you good. If not, separate them yourself.

1. Cost of Sales.

Opening stock at cost (this could be zero if you only started in that tax year)

ADD Purchases at cost.

LESS Closing stock at cost.

This is your COS (cost of sales)

2. Gain/Loss.

Sales

LESS Cost of sales

This is your gain or loss.

3. Balance Sheet.

The Closing Stock will be here for next years Opening Stock.

That's it. If the stocks were held for less than a year, then it must be filed under the "trading" section and normally only the COS and SALES figures are required.

Now you can deduct internet costs, charting fees etc. (These costs cannot be deducted from LT stocks). No brokerage, VAT etc as it is already computed into the annual report.

Edited June 29, 2015 by Shampoo

[ottg]

@Shampoo - yes a person need to keep track of shares for both performance and tax. Not there yet. I still try to get the basics sorted out.

When you do trading this is even more important. I stumbled across this some time ago. Again we can learn from traders and adapted for long term shares investments Here http://trading-journal-spreadsheet.com/tjs-elite/

[monsta]

@ottg. Do you think this is a bit like that old Gary Player motto, "the harder I practise, the luckier I get". It seems the more research you do, the luckier you become with investing in the long run.

Or should you listen to Warren Buffet and find a strategy where luck has little to do with it?

[ottg]

@monsta - it has nothing to do with luck. The market is what it is, you cannot predict it however you can determine the market trend and the trend is your friend. Let your profits run and cut your losses early (your exit plan)

Read about market randomness here http://www.saaustralia.org/index.php/topic/45221-lt-investments-taking-risks-and-market-randomness/?p=410388

Buffet says select only undervalued shares and never sell. I agree with the first part, as the only way to determine undervalue shares is from the Annual/Interim Reports aka fundamental analysis and that is what I attempt to show how others have done it. I disagree with the latter part because it will only work if you have 20 to 30 years left. But with back testing I can prove that by active managing your portfolio you may achieve 30-60% better results. Never ever just sit on your shares and trust the market. You need to have a plan, be agile and prune regularly. Yes there are tax rules that penalize you if you sell early. That you need to weigh up against cutting the losses and move on.

[monsta]

Fundamentally, to make good money you need to invest in opportunities that nobody else wants to take on or get in early to the good opportunities.

Warren Buffet does it by buying into infrastructure like train lines. He then sticks it out. So, he is effectively taking in investment opportunities that few others will.

Oh and luck has everything to do with it. For all you know, you are buying into the next Enron. Good research just reduces the odds if that happening. The unfortunate reality is the other people who invest in shares and drive the market are just too unpredictable.

[ottg]

As a general comment on SMSF here is a thread that provide great insight in what is achievable. This person is getting 30% - 40% pa with proof given. Its all about what shares and timing.

http://www.aussiestockforums.com/forums/showthread.php?t=25070

Now more interesting is to go to his 2015 performance thread here http://www.aussiestockforums.com/forums/showthread.php?t=25070&page=4&p=874305&viewfull=1#post874305

He achieves 100% exposure through approximately 14 shares. A large percentage of ASX shares are in high risk small cap mining companies.

He is doing approx 12 trades per share per year. Remember for each sell you need to buy again to get maximum exposure. However his average stay per share is 900+ days (~3 yrs) His average wins are 75% and his losses he limit by managing the exits.

Thus he benefits from the volatility of the high risk market and try to maximize tops and bottoms with longer rides i.e momentum following. One strategy is to sell 30% of your one share holding as " you anticipate the top" of the cycle and to buy in 30% tranches as you anticipate a rising cycle.

Edited July 3, 2015 by ottg