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In share investing, perception is reality

Some years ago, as my wife and I contemplated the transition to full retirement, we decided to take charge of our future and opted to manage our own super. One of the primary reasons for this was to ensure that the assets reflected our conservative nature; that is 100% shares. This may sound contradictory to many but after more than 45 years in the financial services industry, I had learnt some important lessons.

What does risk really mean?

The word 'risk' is bandied about but many do not understand the investment risks associated with retirement. Still today, the definition of investment risk remains the volatility of share prices. So, leaving our future hostage to an industry still wedded to this outdated dogma did not appeal to us. We refuse to accept volatility as a problem. Our primary risk is not losing money but outliving it.

In many presentations I have tried to curb this unhealthy focus on prices by offering an alternative view. The chart below is the All Ordinaries Accumulation Index plotted monthly over 35 years. One can see the constant volatility which gives mindless speculators, day traders, hedge funds, computer traders etc. and the media, a fertile environment for spreading their germs.

As 'perception is reality', consider my perception of this same picture.

You will note that in both cases we arrived at exactly the same point. I have simply chosen to ignore all the dead ends, shortcuts and deviations along the way! I know what I paid for the shares and I know what they are worth at the end of each day as every one of them is publicly 'auctioned'. The revelation for me, some years ago, was that all the noise in between purchase and today was just useless chatter. Unless of course you are a 'chartist'. It is difficult to draw trend lines on my chart and identify the 'double tops' and 'head and shoulders'!

In retirement, it’s income that matters most

When discussing whether we could afford my ceasing full-time work, the consideration was not how much money we had but how much income we needed. We looked at the three assets available (cash, property and shares), considered their income prospects both present and future, and opted for shares.

The income they generated would meet our immediate needs without having to rely on selling, thus maintaining the integrity of our asset base. Also, over the long term I knew that the dividends from a diversified portfolio of shares had and would grow in a relatively stable way and being linked to the productive efforts of the nation, they would be superior to the income from other sources.

The chart below is worth a thousand words. This shows the Industrial Share Index and cash broken into their two separate elements, income and capital. The income streams (the vertical bars) have been available to every one of us for the last 35 years and beyond. It is regrettable that those people who required the most income often chose the asset (cash) that produced the least income because shares were classified as risky due to their price fluctuations.

The dividends, during the 80's and 90's whilst I was still working, were being reinvested. When I quit the industry and wound down my business in 2007/2008 it was simply a matter of redirecting the dividend stream from reinvestment to pension mode.

A real time test of the strategy

With nearly a decade behind us now and the GFC to add some spice, we can now look at our strategy being tested in real time. As painful as it was to watch our portfolio almost halve in value, the income only dropped by 20%. However, as we held enough in cash to cover two years’ worth of pension withdrawals, we simply followed our parents example who, when times were tough, tightened their belts.

Today, too many retire with too little, too early and leave themselves exposed to the disaster that is cashing assets to produce income when prices have retreated. As we drew down on our cash buffer the dividends replenished the account which avoided us having to cash any of the holdings. In fact, with cash available, we were able to take advantage of the turmoil generated by the GFC to modestly enhance our future income.

During the GFC, our biggest bank, CBA, fell from $64.00 to below $30.00. Credit markets had frozen so the only way companies could raise capital to bolster balance sheets was through a rights issue, usually new shares pro rata to existing shareholders, or a share purchase plan. CBA did this at $26.00 per share. Similarly, one of Australia's larger conglomerates, Wesfarmers, fell from around $40.00 and issued shares at $13.50. This was repeated with all of the major banks and many of the country’s leading companies.

The following table shows the current situation with those share parcels that were purchased.

Those and other new share issues that we were able to take up have paid off handsomely with their cash flow and continue to do so. These figures do not include the recently announced dividends.

Bearing in mind that we were able to purchase shares at the lowest point in the market, our personal portfolio benefitted substantially when compared to the cash versus shares comparison chart above. It is now seven years later and our income is above where it was and the portfolio value has more than fully recovered. The importance of never having to rely on cashing your asset base to provide income cannot be overstated.

Focus on the dividend flows

I can think of no better 'longevity' insurance than that indicated by the yellow bars above. How do we get people to stop following daily share prices and, more importantly, paying heed to mindless media commentary? By focussing only on the income and not the prices of our shares, we have avoided much of the angst associated with the GFC. Also, as longevity appears to be a potential genetic advantage that we enjoy I need to be sure that the asset base remains intact and the income stream will continue to grow for decades to come.

I have watched as my parents, in-laws and many of their peers were reduced to living totally on the old age pension because they had initially relied on bank deposits in what they thought was the 'safe' option. The nail in the coffin (no pun intended) as far as I was concerned was watching as the two respective family homes were sold as neither widow (the husbands having pre-deceased their spouses) could afford to maintain them.

As the probability is that my wife will outlive me, we will continue to invest solely in shares, the conservative option, as I am determined that she will continue to live with dignity.


Peter Thornhill is a financial commentator, public speaker and Principal of Motivated Money. This article is general in nature only and does not constitute or convey specific or professional advice. Formal financial advice should be sought before acting in any of the areas discussed.


March 24, 2017

Hi Peter, you're back. Any chance of answering some of the unanswered questions in the responses?

Luke S
March 25, 2016

Great Article Peter.

Can I ask as someone just starting to build my super at 34, do you have a MER (management expense ratio) limit on the LICs that you invest in? For example a maximum MER of 0.5% or do you invest irrespective of the MER? Do you also invest in the international LICs with much higher MERs?

March 21, 2016

Peter, you were a great inspiration when I participated in a presentation ((CBA bank evening)) back circa 2001. The graph that you displayed (similar to your perception graph) combined with your "definition" of the sharemarket => " a reflection of the nation's creative output", made so much sense. One of the best financial presentation that I attended. This has guided me within my investments to adopt growing income stream for my retirement (not yield ! ). I differed by combining real properties and equities. Both are growth over time and rent/dividends also grow. Your counselling was invaluable in giving a more mature approach and ignoring the "noise". As usual the problem is selecting appropriate equities that are relatively sound. Please write some more..... :-)

March 15, 2016

Forgive me Peter as I have not read all your literature. I would be interested to see a more in depth look at the buy and hold income approach. Point to point estimates that include (depend on??) not just one of the best multi decade periods to have ever invested but also bring 100% exposed to one of the best equity markets on the globe unsurprisingly does wonders.

How does such a strategy play out over rolling periods? How does it play out for those that have not accumulated enough of an equity balance to fund the majority of expenditure from portfolio,income alone? How does it play out for those not lucky enough to have Australian equities as there home market?

These aren't criticisms per se, but rather important points to address for any empirical and pragmatic look at the potential future success of this strategy for the wide range of investors potentially attracted to it.

March 15, 2016

can you invest in the Industrial Share Index ? Or are individual Industrial Shares cherry picked for performance in articles such as these?

Geoff Warren
March 12, 2016

I also broadly agree with what Peter has to say except for one thing - the portrayal of the investment industry as substantially focused on volatility as a measure of risk, and rooted in out-dated dogma. This is a disingenuous generalisation, and quite frankly incorrect. I have read numerous articles from investment industry sources on the shortcomings of volatility as a measure of risk, and encounter a wide recognition amongst many intitutional investors that risk is a multi-faceted beast and differs for different investors. Further, as the super industry is turning its sights to developing retirement products, a central issue it is grappling with is how to balance the risk of out-living your money versus the risk of losing it on the way, viewed over the course of a lifetime. Sure, volatility (and risk of underperforming a benchmark or peers) is the focus of attention in some parts of the industry, often driven by the incentives they face. It is just wrong to tar the whole professional investment industry with this brush.

peter thornhill
March 13, 2016

Geoff. I'm delighted to say the 'entire' industry isn't wedded to the volatility argument and more and more professionals in the industry are applying more realistic principles. Thankfully, my advisor is one of them!

March 12, 2016

by my calculation, since you hold 2 years spending in cash, that is not 100% in shares.

Great article though, some good insights

Peter Thornhill
March 12, 2016

Aha. I have geared share portfolio outside super and the gearing roughly equates to the amount of cash we hold in super; net result we are 100% equities.

March 16, 2016

Just curious Peter, why the geared share portfolio outside of super to offset the cash in super? I assume the LIC's you refer to also are the likes of ARG, AFI?

March 11, 2016

Really. From an author with a book to flog, +++. Momentum investing outperforms buy and hold, according to research studies, so that is what I will keep doing as a self funded retiree.

Peter Thornhill
March 12, 2016

Well done David. Can you tell me the audited returns you have achieved since you started?

March 14, 2016

Hi Peter. Performing roughly at 12-13% compounding for the last 5 years, ie, increased portfolio equity (including pension withdrawals and dividends) by about 85%.

March 13, 2016

I abandoned momentum investing for LICs that are actively managed. I cannot outperform (at least without taking excessive risk of capital loss) the professional active managers. They can use strategies and access opportunities that I can never access. Best of all, I have much more free time to enjoy my retirement.
Peter makes one important point in the article. When income is reduced, he has to curtail his living expenses to suit. Often we see that we must invest with returns that beat inflation. Sometimes that is impossible Curtailing living expenses is a better solution than increasing investment risk of losing income or capital to gain inflation-protected returns.

Peter Thornhill
March 24, 2017

David, I don't need to flog a book and your assumption is irritating.
If you can confirm that your 'momentum' process has outperformed our 'benign neglect' I may pay attention

Andrew Peters
March 11, 2016

Excellent article from a 20 year fan of Thornhill.

In our Financial Planning firm we've given countless clients copies of his book, Motivated Money and I love seeing his updates every year.

Peter's best comment for me is mandating the printing of your house price on your TV screen every 5 seconds - just to see how liquidity and volatility are linked.

We have many clients today working less than full time as their passive income provides the difference.

The Falcon
March 11, 2016

I believe Peter is mostly in LICs and some direct stocks.

March 11, 2016

Peter doesn't say if he uses index funds or index ETFs to get the market return. Neither were available 36 years ago so readers may want to know what his actual returns were.

Peter Thornhill
March 11, 2016

HI Alex. I do not use index funds or ETF's for the simple reason that there are stocks in the index I don't want to hold; resources and property. I use listed investment companies as a core holding with one basic rule: They must have been going for at least 50 years. Added to this is a smattering of direct shares.

Peter Thornhill
March 11, 2016

Sorry Alex I forgot about the performance issue. According to the portfolio management system my advisor uses (PRAEMIUM); our fund has returned over 15% p.a. compound for the 15 years since establishment in 2000. Double the index suits us and we feel justified in our strategy.

Happy Self Managed retiree
March 11, 2016

I applaud Peter's comments as his insights on investing for income have helped me nurture a portfolio in our SMSF that generates approx $92,000 in dividends pa, plus franking credits of approx $39,000; totaling approx $130,000 income - without having to sell a single share!
This is our second year in early retirement ( we are both 58 yrs of age) and I am amazed at the flexibility this allows us. Not all my companies have been winners, but I research before I buy and focus on sustainable dividend and growth; which by definition usually results in capital growth.
As we now have plenty of disposable cash, I am having some fun with investing in companies for pure capital growth and you don't need a high percentage of big winners to add even more flexibility (cash) to the fund.
We have two year's worth of income as a form of 'GFC 2' insurance; approx $50,000 pa for 5 years, to top up dividends if required.

In all honesty, we have gone from being worried about having enough to retire financially independant, to now realizing that we may never have to touch our capital base! I pinch myself everyday and am still coming to terms mentally with what we have achieved as we have only earned modest wages.

I thank Peter Thornhill who opened my mind to this general strategy when I attended a talk he gave.

Tim Richardson
March 11, 2016

Good article. I agree that long-term equity investors should have a very high exposure to equities. Also you are correct that risk should be viewed as running out of funds in retirement rather than short-term price variation.
However does your suggested strategy of using only dividends for retirement income lead to investing in an unbalanced portfolio that favours mature high-dividend stocks (concentrated in just a few certain sectors) and excludes growth companies that re-invest their profits?

Peter Thornhill
March 11, 2016

Hi Tim, quite the contrary. I have devoted an entire chapter in my book to the yield trap.
Yield is an abstract number derived from two 'real' numbers. Income is the dollars in your pocket. Our best 'income' stocks are usually the lowest yielding, CSL and COH being classic examples.

Randall Kingsley
March 11, 2016

Thanks Peter. We have been using the 'Motivated Money' approach fairly seriously since about 2010 and are fortunate enough to retain a good amount of DRP in a portfolio that contains a large concentration of LICs. So our income line is very similar to that in your article and we are getting more confident about our continuing retirement income as time goes by. No bonds or hybrids, just equities and cash to cover pensions. So far we are happy little campers.

Geoffrey Gibson
March 10, 2016

I agree entirely. You find established businesses that you trust; you acquire an interest in them; you sit back and let the managers do their work; and you ignore everything said by anyone in the financial industry and 90% of what is said in the financial press. Your only worry is being deflected by those who make money from doing just that.

Dancing Homer
March 10, 2016

Awesome read - thank you.


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