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The best strategy to build income for life

(Editor's introduction: Peter Thornhill is well-known to our readers as an author and speaker advocating a multi-decade investment strategy of holding industrial companies for income. His previous articles in Firstlinks are here. In this update, he again checks the long-term return from industrial shares, adding comparisons with listed property and term deposits. He argues that for investors with the right risk capacity and investment horizon, there's only one place to invest).


Another year has passed and it’s my favourite time. I get to update my presentation material highlighting, yet again, the inexorable creation of wealth by investing in productive enterprises.

Let’s now look at the major indices, price only index first.

As always, digging stuff out of the ground clearly remains at the bottom of the wealth creation ladder. By adding the resources to the Industrials index we can drag it down to the All Ordinaries. Please note the proximity of the Resources Index to the All-Ords Index, both at around $1.4 million.

The difference between the Industrials and the other two indices is due to TIM! That is, the Technological, Intellectual, and Manufacturing inputs that convert resources into almost everything.

There is a critically important element missing from this chart and you will not be surprised if I said it was the dividend stream. Refer below to see the impact of reinvested dividends. Note that the All-Ords index now jumps up from the Resources Index reflecting the ever-poor cash flow from many resource companies, and the Industrials Index soars.

This next chart now compares the annual cash flow from deposits to the dividends from the industrials. The huge gap continues to widen despite the GFC and the Covid intervention. It is important to remember that a large proportion of the dividend reductions were simply due to companies reducing or cancelling dividends during the uncertain times where government intervention cramped economies. We are now seeing the normalisation of dividends which was to be expected.

The opportunity cost of investing in alternatives

I feel for those people who are still using cash as a ‘safe’ haven for their money. It frustrates me that the industry I left in 2000 still uses volatility as a measure of ‘risk’. Volatility is simply a function of liquidity; the ability to buy and sell shares on a daily basis.

The reason for fear is that share prices are the constant daily disturbing factor with shares whilst the cash flow is ignored. The result is to add cash, bonds, and property to a portfolio to smooth the returns.

If you refer to the chart below it compares shares, property and cash; the Industrials index, Listed Property Trust index and term deposits. So, the constituents of a ‘balanced portfolio’ looks something like this, with cash and property to reduce the overall volatility of the portfolio.

No one in all my years (50) in the industry has ever advised investors of the huge opportunity cost that this exacts. The result of this balance above means a return of roughly half what the industrials would have delivered.

Are you prepared to pay that?


Peter Thornhill is a financial commentator, author, public speaker and Principal of Motivated Money. He runs full-day courses in the major capital cities explaining his approach to investing "in the vain hope that not everyone is frozen with fear".

This article is general in nature and does not constitute or convey specific or professional advice. Share markets can be volatile in the short term and investors holding a portfolio of shares will need to tolerate short-term losses and focus on a long-term horizon, and consider financial advice.


February 05, 2024

While a sharemarket investor for a while, my investing 'style' was pretty much turned on it's head after hearing you speak and then reading your book.
I have followed your advice / investing mantra while tweeking it with small companies with increasingly positive metrics (including growing dividends) and the occasional growth focused small / mid cap.
We were able to stop full time employment at a relatively young age as the dividends and annual franking credits refunds from our SMSF share investments giving us more cash in hand than one of us working full time and the other part time.
Having the option to sell all/part of a growth company is also an added bonus which adds to the 2 yrs of cash as extra 'income insurance' but I always find I invarioubly reinvest it; can't help it!
I am a huge fan and thank you for your many years of sound, simple yet so very powerful strategic advice.

February 04, 2024

Hi Peter, tq for graphs. May I request a graph ( term deposit, bonds, equities, property ) over say 20 years, so that I can show to my adult children that leaving funds in bank is a poor choice. Or is there a link for such graph. tq kindly.
( pls have it in next week's article ).

John Edwards
February 05, 2024

Michael, Vanguard have an interactive index chart you can customise:

Regards, John.

Big mike
February 03, 2024

AH THE OLD PROPERTY V SHARES DAVID . No average Joe could afford $100k on a house in 1979 , whereas shares can be accumulated slowly with Div reinvestment . It also is costing you rates , Insurance with an asset that depreciates ie the home , think home repairs . gardening costs etc . Don't think I spent $50k on a new Kitchen in my share portfolio or with a nagging wife say fix this , paint that etc . Also land tax etc on investment properties , no way to eject non paying renters is why everyone is getting out !!!

Robbo the Rude
February 16, 2024

On the other hand, you cannot improve the value of equities, and neither is there an equivalent to a government-backed home loan equity scheme (HEAS) for shares that will allow you to receive income for life without ever having to relinquish your investment, while you or your partner are alive. With real estate that is your primary residence, you are living in it - not possible for equities. With the HEAS, as part of an appropriate strategy, there is no drawdown risk or volatility at all, and potentially a much better lifestyle on offer. Also, a much easier handoff to a surviving spouse who might be less savvy. So, retirement strategies need to be about much more than just cash flows. For the majority of people over 60 years old, currently, a paid-off investment-grade home that is suitable to grow old and infirm in, is the single best investment possible given the risk/return. If you are 30 years old, perhaps not. Horse for courses.

Phenix C
February 18, 2024

@Big mike. I had been giving that view a thought. My conclusion was that all those costs (insurance, new kitchen, gardening, taxes) are also being spent by the companies I invested in (I just don't have visibility or say in the matter). Nevertheless (maybe for that very reason), shares for me instead of property.

Fund trustee
February 03, 2024

I won't repeat the details of what I wrote in response to this version of Peter's argument a year ago, but the gist is: a diversified portfolio that includes global shares and at least some corporate bonds does better than Australian industrials. It's not political pressure on super funds like the one I work for that leads us not to just put all our members' money in local industrials, but sound research and analysis of the best mix to achieve optimal results.
Regulators and our members would crucify us if we just followed Peter's advice; if we only compared our investments to a property index and a resources index. That approach is simply not good enough.
Peter's approach has merits and may well be appropriate as a strategy for many individual investors. But you can and should do better.

February 04, 2024

Sound research and the best analysis.To quite K Packer,find the horse in the race called self interest,it always wins $3.5 trillion@ ~ 1%,would that be $35 billion of self interest.

February 04, 2024

I heard Peter speak some 25 years ago, and his theme impressed me.
If you include franking credits to income, the Industrials result improves ... AND global + bond investments do not throw off franking credits. My SMSF clients in Pension mode are v happy to receive franking credits refund from the ATO.

Horses for courses, I sleep well with likes of BHP and RIO.

Fund trustee
February 05, 2024

BeenThereB4, please read what I actually said. Do superfunds leave Australian shares out and thus fail to earn franking credits? No, that's not the argument at all. But:
- the Australian share market's price performance is influenced by the fact that franking credits are earned. It means, for instance, that there's probably excess demand (from the Thornhill fans of the world) for these shares and thus their prices are already inflated to take franking into account. So the price performance of Australia's franking credit paying companies is less than what it otherwise would be.
- and apart from that, many of the great growth stories that help to build wealth are found in overseas markets. Ignoring them because you might get a bit of tax relief results in below optimal outcomes.
- so the optimal portfolio mix isn't based on earning 100% franking, but having the right amount for the risk profile of members. Those that have the tolerance for the volatility of shares select to be in our growth portfolios, which might be something like 40-70% Australian shares, 40-70% international shares, a bit of property and infrastructure and less than 10% corporate bonds but with a total mix of growth assets in the 80-100% range. This mix generates a better outcome over the long term for our members than just a domestic fund.

It's great if your clients are happy. There's no doubt that Peter's strategy is a very, very good returning one and your clients who don't compare what more diversified approaches could deliver them will have no reason to complain. But no one will let a professionally managed super fund get away with that simplistic sort of approach. Better is expected of us and we aim to deliver better.

And Kevin, yes, like everyone who expects to be paid for their labour we charge fees. Not 1% like your throwaway comment says, and coming down all the time as we put our members' interests first. 

February 05, 2024

Fund trustee,your advert is so wrong.As a long term shareholder in NAB your super fund hasn't outperformed them,DRP price July 1992 was $7 a share,compound that at 11% for 32 years and you are at roughly what ~ 6000 shares in NAB are worth.This would of course be using the DRP and spending $7K to buy 1,000 shares in them.The worst performing bank over that period,throw in CBA,ANZ,and WBC and the return is better.The return would be in the region of 14%. As for looking after members,they don't they maximise fees. I had two super funds with the same fund due to a takeover.After 6 years of being told I have to fill forms in to merge the two accounts I closed both of them.We will post the forms out to you,it will take 10 days.Flat refusal to post the forms out,you can't fill them in online,the online form tells you the super fund doesn't exist.Please call us,so we can tell you to fill the forms in that we will not post out to you. Reported in all the newspapers, I think there was something in the region of 380,000 members who were "well looked after",we bend over backwards to do the best for our members. So that would be $1.50 X 380,000 every week for years.We do look after our members don't we,rubbish . So you can't match the worst performing bank in Australia.Royal Commission into super funds,and a complete lack of any service to members. I get a letter from said super fund,we will refund money to you as you were a member. We should have merged the two funds way back in 2011. Please accept our apologies,we try our best for members.

Fund trustee
February 06, 2024

Ah Kevin, now I know you're just trolling. Sorry, but that comment doesn't deserve a response. I can see you've had a bad experience and want to paint us all with the same brush. That's your prerogative, but not something I wish to engage with publicly.

February 06, 2024

I think to take the Thornhill approach literally is a mistake too many people seem to make; what about this index or some other index, they do better....etc....etc. It is not ASX Industrials are the best option, it is investing in productive businesses that add value that matters. One of Peters oldest investments is a UK LIC, not part of the ASX Industrial sector, so clearly international investments are within the scope of his philosophy. Perhaps it is an artifact of the long period Peter has been advocating his philosophy that the ASX Industrials has become a default, maybe Peter has considered updating his message (maybe he has already). Unfortunately in Australia the default indexes (ASX200 etc) have too much exposure to miners, so for the sake of Peters argument (which avoids miners) the next best index looks to be Industrials. But you could use S&P500, MSCI etc and get a similar conclusion. Nothing really surprising, but it is getting the basics right that matters. Of course there are plenty of international companies that value-add, so sure, have 20% Aussie shares and 80% international shares, or some cash/fixed interest to act as a buffer in down markets (to avoid selling at a low price for income). Chuck in some simple quality screening (ROE, debt etc) and you should be good. The thing that makes Aussie shares good is the high dividend which means you don't have to sell shares/units to cover income to the same extent.

February 15, 2024

Steve, i think your use of the word mistake is actually the mistake, because clearly he has done well, as has anyone who has compounded Aus shares over a decent period of time, which is the nub of the strategy. I do the same, but buy shares in Aus companies myself, because I enjoy finding opportunities [eg. Medibank being sold down due to recent data breach]. The financial industry will always try and convince you that you need their expertise "to do better" [although many do worse] and pay their fees [which they claim are not high, but remember they are reverse-compounding], and you need to diversify away from Australia. The argument is a bit like saying I need to employ a chauffeur [I will get there more comfortably, less stressed and faster]. Maybe or maybe not, but frankly, it's not necessary for me, and ditto with investment, provided you are willing to learn the basics of saving and compounding for yourself. Sometimes it will be safer [usually I follow up with a list of 30 or more charlatan financial advisors like Melissa Caddick, Bernie Maddoff, etc but I can't be bothered to list them all again].

Paul C
February 02, 2024

What is the best (and most cost effective) way to invest in the Industrial index then? For example, does Vanguard have such a low-cost EFT index fund that tracks the Australian Industrial index?

February 03, 2024

Hopefully Peter will respond but I think the Whitefield LIC (WHF) is the closest

February 06, 2024

WHF adjusted for dividends:
= (5.25 / 1.3) ^ (1 / (2024 - 2004)) - 1
= 7.2%

Best Bank Deposits Capital Guaranteed:
= (2.23 / 1) ^ (1 / (2024 - 2004)) - 1
= 4.1%

During the Baby Boomer Savings Glut:

February 02, 2024

I like volatility - it presents opportunity, especially when extreme.

February 02, 2024

"volatility - it presents opportunity, especially when extreme":

Should be easy, then, to construct an automated trading system that buys at anomalously small prices and sells at large prices.

Many have tried.

February 02, 2024

It would be interesting to compare Peter’s strategy to a high growth diversified fund, say Vanguard High Growth, over the long term.

Comparing a 100% share portfolio to cash over the long term is not meaningful. No one of sane mind would be invested 100% in cash over the long term.

February 02, 2024

"No one of sane mind would be invested 100% in cash over the long term.":

Some collect bit-coins, some bank-notes:

Others collect bank-accounts in which to stuff bank-notes on which interest is paid.

Share certificates once were useful as wall-paper.

February 03, 2024

There is All Industrials vs MSCI index since 1980. It's an interesting slide. Global is lower yield, about 1.5% at best and growth similar to All Industrials.

February 02, 2024

Ah, the annual dose of Peter Thornhill's wisdom – straightforward and refreshing. Now sprinkle in regulations, individual tastes and the like, and suddenly it's all more intricate!

February 02, 2024

Inflation rate 1979 to 2022:
= (532079 / 100000) ^ (1 / (2022 - 1979)) - 1
= 4%

Time from now to save real $532,079;
15% earnings tax, 10% investment return, 4% inflation, 15% contribution tax, $27,500 super concessional contribution:
= NPER((1 + (1 - 15%) * 10%) / (1 + 4%) - 1, (1 - 15%) * -27500, 0, 532079)
= 16.18 y.

Commence maximum contributions to super age 26, intermediate $532,079 goal at age 41.

Retire age 67:
= FV((1 + (1 - 15%) * 10%) / (1 + 4%) - 1, (67 - 41), (1 - 15%) * -27500, -532079)
= $2,685,471

Tax tolls.

February 01, 2024

I will call Peter as an expert witness when I am prosecuted by asic for inappropriate advice!

Diversification is usually implemented to reduce the licensees risk.

February 01, 2024

Dan if you are selling a financial product then you cannot do what Peter says,it does not prove he is wrong. Diversification produces average return minus costs.

I have questioned the $100K start and then realised it gives an easy to work off base,$1K,$10K etc.If the spectacular returns bring people in then great,a larger number at the start will make the end number look spectacular.

Nobody in finance would be allowed to say put it all into BRK and get spectacular results.A woman in the US died and left a fortune to her own charity that she created in her 90s.She worked for one company all of her life and spent around $200 in the 1930s to buy a single digit amount of shares in that company.She did nothing else for the rest of her long life .All dividends were reinvested and after stock splits she had ~ 110,000 shares in that company worth around US $9 million. The last time I had a look they had had 2 further stock splits and the value of her trust was coming up to $40 million,obviously the dividends are no longer reinvested as they are paid out in grants to fund things.

Diversification does reduce risk,it also reduces returns and increases costs.At the recent WES AGM returns were given as a member of the board is retiring. The accumulation index was given at 1500 in 1984,now around 95,000?.The same 1500 put into WES was worth over $1 million.

Staying the course is very difficult,and very rewarding.The financial industry also sells a product call rebalance,I don't believe in that either.

Using the WES numbers if the share price halves and you sell then you will never be known as the person that turned $1500 into $500,000. You will be known as the person that lost $500K ,started with $1 million and lost half of it.Such is human nature

February 06, 2024

Re: balancing. If you are on a winner stick with it. My wife bought several thousand COH when they
floated at $2.50. We still have them, at times a bumpy ride, now worth 7 figures and we spent the income.

david edwards
February 01, 2024

$100,000 in 1979 was the price of a pretty good house in a good area. It would be worth at LEAST $2m today. Tax free. Speaking of taxes, the graphs above do not account for the individual's Income Tax, which, like any cash withdrawals for living expenses, would markedly skew your final figures downwards. And, I have never understood the Accumulation Index mentality. Sure, if you want to accelerate your savings, re-invest those dividends, but a lot of us need share income to live on, pay for a child's wedding, unforeseen medicals, repairs, new car, etc. This would also bring the final 2023 return figures down a notch.
Anyway, I remember 1979, and to have a sum of $100,000 plonked on my desk to start my financial life would be unimaginable. The trick for the Young Investor is how to get your first $100,000 ($5-$10 per hour being the going rate for a student back then) in time for the multiplying effect of re-investment, profit-taking, avoidance of zonks (like One Tel, ABC Learning) to kick in.
Overall, the graphs above give an idea of the way the Share Market has moved upwards, but in a vacuum. One's individual wealth-building portfolio would have a number of critical setbacks, Capital losses, taxes and so forth.

Pete G
February 01, 2024

Agree totally with this response based on my lived experience. However I do admire Thornhill a lot for his observations over the years which I found fascinating on my first encounter and it did have an impact on my investing approach.

February 02, 2024

David - absolutely fair points ... but wouldn't they all apply to any investment you make (i.e the need for 'short term expenses' contrasted with the desire for 'long term investment)? Surely the nub of what Peter is saying is that there is an opportunity cost of investment - regardless of your short term / living finances which are always there - if you don't elect for an industrial share portfolio.

May 26, 2024

David what you fail to account for is the money poured into the upkeep of that property. Rates, maintenance, and renovations are all going to eat into that return as well as interest paid on your home loan (although minimal). Last I checked, there were zero costs associated with holding LICS and you don't need to sell them to extract wealth from them so the "tax free" argument is irrelevant. Peter's strategy is about generating cash flow which you can use to fund retirement. Last I checked your PPOR doesn't pay you anything and the only way you can get that tax free money out of it is to sell it and then pay commission to an agent and stamp duty on your next PPOR.

Mal W
February 01, 2024

You make some very good points and it's very hard to argue with your logic.
I'd question the last statement around opportunity cost though. Any adviser worth their salt would explain to a client the impact of 'diversification', and the truth is that most investors could not stay on the horse for the ride - otherwise the market would be a whole heap less volatile if pretty much everyone was happy to buy and hold.

February 01, 2024

Hi Peter,
I saw one of your presentations a number of years ago and it was certainly an illuminating moment. Thanks! A couple of queries if you have time to answer. Accumulation allows compounding no matter how the market is (sometimes better if the market has fallen as you buy more shares/dividend at depressed prices when you reinvest). However once in pension mode you need to remove some cash to live off. If your capital base is not overly large such that the dividends comfortably cover your living needs, you need to have some sort of buffer to avoid selling assets at depressed prices to pay your pension. This is what I see as a valuable role for cash in a portfolio, to supplement dividends in bad times and keep your assets invested to reap the likely gains when the market eventually recovers. So, do you see this as a prudent course of action, and if so how big should the buffer be (5%, 10%, 20% ??). Also my hobby horse is to include franking credits when calculating "total" returns as they are real sources of income as much as the cash dividend itself. What do your charts look like with franking credits included?

Peter's Disciple
February 02, 2024

I believe Peter Thornhill keeps 2 years of living expenses as cash.

February 02, 2024

I believe offset by the same amount invested in shares, with a loan against home equity, so still effectively 100% industrial shares!

Peter Thornhill
February 04, 2024

James is correct. Plus, I have drawn even more dead money from our property to invest. Fully tax deductible and a wonderful stream of dividends. Funnily enough, from time to time i"m ticked off by people who slam me because the dividends don't cover the interest. Seems negative gearing into property is OK but a potentially marginal negative gearing into shares is a no-no. Oh, I forgot to mention the franking credits I receive and on the property side the multiple costs associated with ownership.


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