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Four simple strategies deliver long-term investing comfort

(Editor's introduction: Peter Thornhill is well-known to many of our readers, mainly for advocating a multi-decade investment strategy based on the long-term merits of industrial companies for income versus nearly every other asset class. For example, two of his previous articles in Firstlinks are here and here. In this new piece, he checks what he calls his 'mothership' chart, which shows the long-term return from industrial shares versus term deposits. It's his way of explaining that for investors with the right stockmarket risk capacity and investment horizon, the poor returns on term deposits represent a greater risk).  


It was with bated breath that I waited for the year-end results and now that they are in, I can only say how pleased I am and how affirming they are. Let us begin with the ‘Mothership’ chart, the S&P/ASX200 Industrials Index compared to term deposits, which I have monitored since 1979 (when obviously interest rates were much higher).

Although the ASX200 Industrials Index fell by 35% to March 2020, by year-end it was only down 2%. Thus, at first sight, the large drop in the dividends of the index, -44%, is a bit daunting. Quite understandable though as every business was facing an uncertain near term with the impact of COVID.

But remember, we have been here before in 1991 and 2008, and we will go there again.

Massive opportunity cost of cash 

It is also worth noting that whilst media commentary is dominated by shares, we should not ignore the other asset class, cash, the bolt hole for all frightened potential investors.

Whilst I acknowledge that cash doesn’t go up and down, the opportunity cost of holding it is large and often totally discounted in most people’s minds. If you thought the dividend drop above was hard to swallow, the income returns from deposits (the red) have fallen from their peak in the late 1980s by 80%. Not many headlines about the cash crash and death by a thousand cuts for investors.

I have a personal preference for Listed Investment Companies (LICs) over managed funds, i.e., the difference between a corporate structure and a trust structure. The flexibility of the corporate structure enables LICs to retain income and capital gains for reinvestment and reserves, whilst trusts (managed funds and ETFs) must distribute all gains and income.

You can see below how the ability to retain profits provides flexibility and has enabled some of the major, long-established LICs to not only soften the dividend blow for their shareholders by using those retained profits but, in some cases, increase their dividends to shareholders this year.

Now let’s look at some of the major index ETFs and their dividends.

With no ability to retain income in ETFs, their dividends reflect the full brunt of the actual dividend reductions.

Our personal portfolio

Now consider our personal portfolio. Our super fund has 27 holdings and roughly a quarter of them are LICs. Aided by the resilience of the LIC dividends, our total dividend income dropped by only 15% in 2020. I intend to go on winding down individual stock holdings, under advice from my financial adviser, and moving the proceeds into older-style LICs. The structure is a blessing as it increases our diversification and requires less involvement on my part.

A purer example is my personal fund in the UK, a legacy of our 18 years there. It has only four holdings and all are LICs. I’m talking ‘hardcore’. Most of them are very old and two of them over 100 years old. Of this pair, one maintained its dividend whilst the other, founded in 1861, increased its dividend. This happens to be its 54th consecutive year of dividend increase and here’s what that looks like. It's a sight for sore eyes and minds ravaged by senseless media commentary.

In the midst of all this carnage, the result for us, from old blighty, was a small overall increase in our income for the full year.

Comfort from a simple strategy

I put my comfortable feelings down to several things.

First and foremost, we hold sufficient cash in our super fund to meet the next three years of Government-mandated minimum pension withdrawals. This ensures we are never forced sellers and provides dry powder for bargain-hunting on market dips.

Secondly, my investment philosophy is ‘benign neglect’, that is, stick to doing only what I am good at and outsourcing the rest.


Finally is the consistency of the objective of the old LICs I invest in. For example, Milton’s Investment Philosophy is clear:

“Milton is predominantly a long-term investor in companies listed on the ASX that are well managed, with a profitable history and an expectation of increasing dividends and distributions. Turnover of investments is low and capital gains arising from disposals are reinvested.”

Another of my domestic favourites is Whitefield, particularly as it is industrial shares only, no resources:

“Whitefield Ltd is an ASX-listed investment company holding a diversified portfolio of ASX-listed Industrial (non-resource) shares. An investment in WHF Ordinary shares provides an investor with a stream of fully franked dividends as well as the potential to benefit from growth in the underlying value of the investment portfolio over time. The company was founded and listed on the ASX in 1923.”

None of the "we are a value, top down, bottom up, thematic" etc, etc.

The investment objective of City of London is a pearl:

“The Company’s objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange. The Board continues to recognise the importance of dividend income to shareholders.”

City of London as been around for over 160 years, with a simple investment discipline. How comforting that umpteen changes of staff over the decades have dedicated themselves to maintaining the discipline, unlike much of the fluff that has entered the market in recent decades.

A Happy New Year to all.


Peter Thornhill is a financial commentator, author, public speaker and Principal of Motivated Money. 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.


January 11, 2022

As a former accountant/financial advisor and now investor, nothing made me happier than in a full market downturn, my long term investing clients would call me excited to invest money in equities, salivating about the dividend yields on offer. These people got it, they understood that by investing then, they would reap a great return on invested capital for the coming decades. I saw Peter present earlier in my career, it cemented in my mind the strategy of dividend based portfolios. I’ve seen little old ladies with portfolios 50+ years old, LICs, banks, they didn’t Achieve market beating returns, but they stayed invested, diversified, kept turnover to a minimum.
I had our data guys graph the dividends / share of the asx200 v share price over the long term. Whilst the share price wobbled a bit, the dps was surprisingly stable, I taught clients to focus on the dps trend.

February 24, 2021

Great article Peter; reminder to tip more into core LICs as the opportunity arises. High ETF dividends have been tempting but the the recent COVID drop seems to show they are a slightly more vulnerable to maintaining worthwhile dividends in downturns than LICs. My favourite LIC, ARGO has served me very well, particularly through the GFC, since i bought my first portfolio 20 years ago.

February 22, 2021

Hello Peter,
You mentioned you were slowly moving from Stocks to LIC.
In a ball park figure, roughly, I wonder what percentage of Stock you might consider eventually moving to LIC in the fullness of time?

Kind Regards

January 24, 2021

Thank you for the article Peter. It's tempting to jump onto the latest hype train but these old LICs prove the the slow and steady approach works just fine. For us interested in following this approach, could you please share the other three UK investment trusts that you are invested in?

Peter Thornhill
January 25, 2021

The 4 are CTY, LOW, MYI, and STS

January 25, 2021

Thank you Peter. For anyone else following this strategy this is a good list of UK 'Dividend Champions'. City of London is top of that chart.

January 25, 2021

Website link attached.

January 23, 2021

Yes Peter, that is pretty broadly accepted, but still ignores or doesn't acknowledge the point J.D. has made . Unless someone has spent time educating themselves on these matters, and even then, they may not be psychologically equipped to handle a nearly all equities portfolio. And as JD points out, it is easier to handle psychological impact with a larger portfolio where income needs are easily met even with smaller dividends, then with a smaller portfolio - hence panic is more likely to grip you at the crisis point. The regulator admonishes advisers who take a one size fits all approach to investment advice, so any decent adviser will explore the impacts of tolerance before recommending strategies. Anyone seeking to follow the strategies you follow, without understanding the real impact ( you only learn your tolerance to pain when actually punched in the face) could really bring themselves undone.

Peter Thornhill
January 25, 2021

Thanks Phil. Sadly, the focus on the size of our portfolio is irrelevant to my comments. Our total dividend income on our return to Australia in 1988 was $950.00. Investing the "spend less than you earn" cash flow and gearing against property we wish we didn't have to own allowed us, like anyone else, to accumulate. I was 41 on our return and the intervening years (time) has done all the hard work. Our three sons have followed in my footsteps and, under our tutelage, having started in their teens are already years ahead of where we were. Will they be subject to the same criticism as I face?

January 27, 2021

So you were living/retired on $950 per annum in 1988? My point is with respect a retiree/near retiree with say 500K. Invested at a yield ( even growing) of 4% is 20K per annum, fully invested in Australian equities. Assume the market corrects 20-30%. The client in my description is not experienced enough or psychologically equipped to handle this and sells out or reduces the equities at the wrong point. This has major implications for the clients long term wealth. They would have been better in a portfolio with risk they could handle. Your philosophy is correct on all grounds, except one - you have to understand and be able to accept market corrections - many people can not. Therefore it is not a one size fits all solution. It would be great and easy if it were. It is not a personal criticism, just an alternative opinion.

SMSF Trustee
January 27, 2021

I agree with Phil. Personally, I've got a more balanced portfolio that includes an amount of cash that will cover 3 years living expenses with no risk of loss and then the rest is in risk assets that include high yield ("junk") bonds, investment grade corporate bonds, property and shares - about 40/60 in terms of 'income' vs 'growth' investments. It means that I've got less drawdown when markets tank so that I'm not facing a capital decline that is more uncomfortable than I personally choose to live with, but that the income component is solid - not low yielding government bonds. The shares in the portfolio are crucial, but they're complemented by the other assets. And, when markets tank, I rebalance so that I buy into that cheaper market. Suits me just fine. I take Peter's arguments as a strong reason to make sure you have a decent chunk of shares in your portfolio and don't just go for the old-fashioned arguments about retirement meaning you can't have your capital at risk, but they don't convince me that 100% shares is the way I want to go.

January 29, 2023

I hear what Phil is saying, but feel that Peter has covered this in other interviews when he has referred to the need for emotional intelligence. If you are advising a client whom you feel is rash or poorly equipped to ride out a market correction then heavily investing in shares of a long term nature is obviously not sound. 

Peter Thornhill
January 30, 2021

Phil, I did not retire on my return to Australia at 41 years of age. We did not officially retire until 2007, just in time for the GFC to reduce our dividend income.

March 01, 2021

I personally believe risk tolerance is less affected by the size of the investor's portfolio, but more so by his/her knowledge of the risks and how to manage such risks. That's why, as you said, spending time educating oneself on these matters are important. Unfortunately many people miss this important step or fall back to common misconceptions in investing (e.g. investing in property is less risky than investing in equities), which is the main cause of "risk ignorance" itself. Having said that, I acknowledge that there are people who simply don't have the stomach to invest in shares, and I agree that those people should stay away from it if it would cost them their sleeps.

If portfolio size has anything to do with risk tolerance, I reckon people with smaller portfolio should be able to tolerate short term volatility better (not the other way around) because even if their whole portfolio is wiped out, the nominal value of such portfolio is smaller than the bigger ones - assuming the investor has emergency fund set aside of course. That's why starting small makes more sense, instead of going all in. Unfortunately most people don't have the patience to grow their portfolio over a long term period, and think the return on smaller portfolio is not worth it. These people are usually the ones who are not aware of compounding.

January 22, 2021

As a newcomer to this post, I am impressed by the robust commentary. Pete's valuable experience comes to the fore and his views are backed up by the performance proof he offers over the long term of his lifetime. It is heartening to see someone Exposing the myths of investing. Particularly, the differentation of investment vehicles such as LICS, LIT's, Unlisted Funds, Property & REITS. The emphasis on choosing the older LIC's he mentions here and on his website, I found significant, given the reasons.

Out of curiosity Peter, there are six or so City of London LIC'S or LIT'S . Could you indicate in which of these you refer to and are invested.

Peter Thornhill
January 25, 2021

Not sure where you are finding these? City of London Investment Trust PLC. The code is CTY

January 22, 2021

Can you share your thoughts on Miltons recent dividend cut ? The benefit of a lic or corporate structure is so that dividend can be smoothed. It seems Milton is not doing that

Also, what is the point of retaining all the franking credit on the balance sheet when it does nothing for the company but hugely beneficial to shareholders?

If now is not the time to utilise that cash and smooth the dividend then when is the time ?

January 23, 2021

These numbers may not be exact, but they are close....MLT normal payout is about 85-90% of NPAT. The recently declared dividend is about 104% of a reduced NPAT (down about 40%), so there is definitely some level of smoothing going on in this half year.

January 23, 2021

assume their payout ratio is 90%... that’s 10% retained every year...

Surely they can use that reserve to soften the dividend cut for this couple of years

But it seems like that make very little effort in doing so... whilst claiming the importance of dividends to their shareholders in their report every year

Peter Thornhill
January 25, 2021

Peter, LIC's don't guarantee to increase dividends, they use their discretion. If you refer to the Milton chart in my article you will see that there have been periods where dividends were reduced. Also, they do not retain all franking credits. As a company they can use them to frank special dividends as they see fit. Every dividend paid by Milton since listing has been 100% franked.

January 21, 2021

Thanks for the update Peter. Just a couple of thoughts generated. On ETFs, if the dividend drops are that substantial then I am wondering why would one want to be invested there when the 'good old' LICs have provided such reliable and growing income streams over many many years? The related thought is then is that the 'optimum' investing solution in retirement is then to hold only a diversified portfolio of LICs/LITs complimented by enough cash to allow you to sleep at night?

Peter Thornhill
January 21, 2021

Spot on Randall. Having 'officially' retired in 2007 we've been through the GFC and all that followed without a problem.

January 21, 2021

LIC’s dividends are not however bullet proof. MLT’s Feb 2021 dividend will be some 36% less than Feb 2020, as one example. Plenty of others have reduced their dividends too.
I still like them as well diversified, set and forget, largely inflation proof, dividend payers but they are not the only options IMHO.

Ken Perry
January 20, 2021

You are my mentor , i spoke to you in the mid 1990s. You have not changed your philosophy since i spoke to you. You have made retirement for me and wife quite comfortable by sticking to your beliefs. thank you so very much and continuing to walk the walk over an extended period

January 20, 2021

Agree with Peter. I have been a long time investor with AFI. I add to it when it trades close to par or at a discount which is very rarely. Profits are partially retained to smooth div payouts in good times and bad, but the divs have a history of growth over the years. They have just had a 42%reduction in profit due reduced divs. in the underlying portfolio but because of the smoothing effect of retained profits they can pay the same div as last year. Also paid a special div last year. The share price is on a tear at the moment as well. A truly set and forget investment. Although i do invest in individual stocks they are usually for trading on the sidelines. Profits just go into more AFI. Its been a good strategy for me.

January 20, 2021

Peter, just to let you know that while it used to be the case that Trusts had to distribute all gains/income that is not true anymore, as we see with Magellan's LIT's as well as VanEck's ETF's. These are not insignificant products with FUM in the billions. I'm sure this innovation will spread over time across other ETF's also.

Peter Thornhill
January 20, 2021

Try this for size on ETF distributions:

January 20, 2021

Thanks Peter, yes the AMIT changes mentioned in that link have been used by some managers such as Magellan and VanEck to retain profits and smooth/guide distributions in the same way that LIC's do. So my point was really just to inform you that it's not really accurate what you've written above, managed funds and ETF's can do this also and I think it's fair to expect more will follow in time.
Asides from this I agree broadly with your overall message and strategies.

January 20, 2021

Who invests in Term Deposits? You can earn 4.34% to 6% in cash, if your know where to look for it.

SMSF Trustee
January 20, 2021

Steve that's absolute rubbish. If it's paying you 4% then it simply isn't cash. It might be capital stable (unless something goes wrong) and it might be paying high interest, but that doesn't make it cash.

SMSF Trust
January 20, 2021

give Steve the benefit of our doubt. I wonder if Steve will share with us this institution that offers 6% for cash deposits

SMSF Trustee
January 21, 2021

Sorry, SMSF Trust, there is no benefit of the doubt here. The RBA cash rate is near zero and bank accounts (which are cash) and short term term deposits and money market instruments (which are the holdings of cash funds) are paying very little. There simply has to be credit risk or term risk or structure risk (eg backed by commercial mortgages) for any investment to pay income of 4% or more. That means its not cash. Cash in investment terms has a very clear definition and anyone who tries to pretend that they have a cash investment that has any of these risks in it is almost certainly breaking the law.

Peter Thornhill
January 25, 2021

Steve, I refer you to my newsletter, My Say No 60. Yield is an irrelevance, not income. The last paragraph says it all "Experience has taught me that chasing the highest initial yield will almost certainly result in the worst possible income over the long term. Oh, and by the way, shares are not growth assets, they are income dynamos".

January 20, 2021

Thanks, Peter, if only I had the mental fortitude to set and forget and ignore the daily news. We are all to blame and sensationalism attracts eyeballs when for investing, it would be better to turn it off.

January 20, 2021


The problem is that Peter Thornhill ignores "risk tolerance" and promotes "risk ignorance". If you ignore your tolerance to risk as he promotes and then panic-sell, which is entirely normal for most people, he will blame you and call you a "little princess" even though you listened to his advice.

Risk tolerance is the amount of risk that you can tolerate both financially and emotionally.

Financially - Peter Thornhill has an 8 figure portfolio drawing down sub 2% per annum, if the market halves, he is drawing down so little that he can financially tolerate even long periods before it recovers. For anyone else they would have to work another 10 years, away from enjoying retirement, to achieve that.

Emotionally - Peter Thornhill has been in investing for decades and understands the volatility in equities deeply enough to not sell when the market falls hard. He isn't able to relate to people who are not in the same situation as he is and he has said repeatedly that thinks they are just being a spoiled princess.

The reality is that not having the financial and emotional tolerance to be 100% equities outside of 3 years cash is not something to be ashamed of. It is something you should understand about yourself and adjust your asset allocation to suit it. If that means having more money earning a lower return, so bit it. It is better than panic-selling after a 50% fall and having Peter Thornhill say it's your own fault because you're a spoiled princess.

January 21, 2021

J.D - good point on financial / emotional risk tolerance needing to guide you into your personal investment strategy that passes the 'sleep at night' test. Any decent financial planner would start there with (new) clients of course. But I think you're being a bit harsh on Peter since I think, as Graham Hand notes at the top of the article, he's simply using the stats of the 'mothership' chart to show the financial implications of shares versus cash / term deposits performance over many years. I'm not sure he'd berate anybody for doing what they're comfortable with (albeit whilst pointing out the financial opportunity cost) ? Of course, on the other hand if he's personally called you a spoiled Princess then I get it 100% !

Peter Thornhill
January 21, 2021

Risk has been based on volatility since its promulgation in the 1940s. I do not accept this and is the reason I left the industry. Volatility is a measure of liquidity. I can buy and sell a share 100 times a day and whilst its price will fluctuate it doesn't measure the investment risk. Just because property is illiquid doesn't make it riskless. For an investor, volatility is your best friend.

January 24, 2021

I AGREE. Many of us seek the guidance of financial planners for a fee, and then blame you when things go bad. They are good when things are going well. Stick to your risk tolerance. Do you want to sleep well? Mine is in a conservative Aus super fund 50% equities and 50 % fixed assets

Peter Thornhill
January 25, 2021

Too true George. All these responses have reminded me of one thing I didn't mention in the article: DISCIPLINE. If you are waiting to be punched in the face to learn then I don't hold out much hope. Gentle English work colleagues who took me under their wings and educated me by osmosis, just as I am vainly attempting to do in my writing.


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