Table Of Contents
Investment principles
Thank you to those readers of the Wentworth Courier who took the time to email or call me over the last week. Your questions provide me with a guide on how retirees of the Eastern Suburbs are currently thinking, which gives me direction on what I need to address in my financial advice articles. Last week I wrote on my three Investment Principles that have been
the foundation of my advice since 1989:
1. Don’t chase yield;
2. Don’t invest any money in the share market that you will need to use in the next five years;
3. Purchase equity in companies that are growing their earnings rather than paying out the majority of their profits as dividends.
Securing an Income Stream
In my article last week titled Securing a 6% to 8% IncomeStream I wrote about the second principle. The way that I successfully structure an income stream was developed from studying famed US investor Warren Buffet ,now aged 90. A lot of Wentworth Courier readers who are retired really enjoyed what I explained about Buffet and how he advises shareholders that they can generate a far higher income stream, than if he paid dividends, by what he calls the“Sell-Off Approach”. This is almost identical to the Draw Down Approach that I developed in
1994. By using this approach my clients have comfortably drawn an income stream of between 6% and 8% over the last three decades.
Income Return v Income Stream
Understanding the difference between receiving an income return and an income stream is critical. When I started advising at a well-knownChartered Accounting firm in the 1980s, all I had to do was mix buying shares in companies like BHP and Western Mining, with deposits into
Government guaranteed Aussie Bonds, that paid 18% per annum.I’m sure you’ll
agree that retirement planning was a lot easier back then. With term deposit rates at less than
1% for the foreseeable future, a retiree can’t just live off the income return.
This is where structuring your investment allocations to receive an income stream is the key to continuing to enjoy a fruitful retirement.
Don’t Chase Yield
One of the most important risks that I have been able to ensure that my clients haven’t fallen into over the last three decades is making sure that they don’t chase yield. I recall one gentleman, from my neighbourhood in Woollahra, who came and saw me in 1990. I’ve never forgotten the numbers or the outcome. He had $3m to invest and needed income to provide for a cost of living of $30,000 per month. I spent days documenting strategic advice that would provide him with a monthly income to meet his cost of living, while paying no tax, and growing
his wealth by at least the inflation rate. Instead he decided to place the funds into a three-year term deposit that was paying 14%at that time. He would pay tax, but would still have an income of nearly$30,000 a month. What could possibly go wrong? Next week I’ll explain what did go wrong, and how you can ensure that you do not fall into the trap of chasing yield.
An Invitation
If you would like to discuss your financial situation with me, and look at ways to improve your income stream by utilising our Draw DownApproach, please phone or email to arrange an initial discussion with me that I will provide without cost or obligation.
Disclaimer: This information is general advice only, & has been prepared without taking into account the objectives, financial situation, or needs of any individual. It is not a specific recommendation to buy, sell or hold any product or security. Readers should seek financial advice before making a decision & should consider the appropriateness of this advice in light of their own objectives, financial situation, & needs.
Peter Lanham
