What to do with left over income?

Discussion in 'Share Investing Strategies, Theories & Education' started by Ecomiant, 6th Jun, 2017.

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  1. Ecomiant

    Ecomiant New Member

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    I am looking for is an investment option that will ultimately pay an income each year. For the next 5 (or so years) I'd like to have the investment returns re-invested. Then at some point, I'd like to turn it into an income generating stream. Each month I'd probably be able to put about $5k into the fund. I am not averse to risk as it is a medium term investment. I don't need the cash to be easily accessible. I'm not sure what the tax implications are of having the fund automatically re-invest.

    My wife and I are 40, with 2 young kids. We own our house, and we both put the maximum amount into super each year. We live in the house we own and have no plan on moving for the next 10 years (at least). We have shares in a single US company, but they do not pay dividends. They are getting reasonable capital gains, and we don't need the cash now, so I intend to leave them untouched, keeping them for a year off at some point.

    The obvious put it into super is not an option for two reasons. I don't want to wait the 25 years till I have access to it, and we currently put the maximum tax efficient amount into super.

    I don't really know where to start with this. So any suggestions would be appreciated.
     
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  2. Simon Hampel

    Simon Hampel Founder Staff Member

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    A lot of people here are keen on Listed Investment Companies (LICs) - the older, well established funds have a good track record and typically offer dividend reinvestment plans.

    The only trick you'll really have to watch out for is that the income paid out is taxable - even if you reinvest it automatically - so you'd want to keep that in mind.

    Alternatively, aim for growth assets while building your portfolio and then later on, start converting it to income producing assets. You don't pay tax on unrealised capital gains - so no tax to pay until (or if) you sell.

    How much money do you have to start with? How much equity do you have in your house?

    Are you prepared to use leverage (borrowing money) to increase your long term returns? Have you considered investment properties?
     
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  3. Ecomiant

    Ecomiant New Member

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    Thanks for the feedback.

    At present, there is no debt on my family home. But, until I have a better idea of what I am doing, I don't want to use that as any form of security.

    In effect, I am starting from 0. Any extra capital I've had has gone into the home loan. I can easily pull it out if i need to, but if I wanted to use borrowed money for investment I'd take a new loan so the path is clean and simple for tax reasons.

    I have no fear of borrowing for investing, but I'll probably leave that for 12 months till I have a better understanding of how things work. At the moment I'd like to find something that I can add to at about $5k each month.

    I haven't looked into property seriously yet. I wanted to start with a more gradual approach, I.e the monthly contributions, before I commit to a larger investment. I've had property in the past, and it has taken a lot of time, which is one thing I am lacking at the moment.
     
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  4. twisted strategies

    twisted strategies Well-Known Member

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    Ecomiant ,
    could I suggest you learn about franking early , and how to best utilize it ( or avoid it if it is unhelpful )

    currently it is probably not a good time to invest anywhere ( land/property , shares , nor interest bearing equities )

    but ideal for education and research .

    we might be on the edge of a cyclic downturn or a bigger correction . anything between 5% and much, much worse

    also the finer points of DRP schemes might help you ( or not )

    also compounding might interest

    The Effect Of Compounding

    but please remember to diversify a little ... say two different new stocks every year ( and DRP the existing holdings ) as an example .

    please remember timing is everything ( even for 10 year holds )

    if nothing is attractive put the excess cash into a interest bearing deposit until an opportunity appears ( traders need to make money every year , but you would be better to keep losses and risk lower )

    and always Do Your Own Research ( on top of any advice/recommendations given )
     
  5. SMSFCoach

    SMSFCoach Member

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    Have you considered an Education Investment bond for your children's education costs. Tax effective and internally taxed at 30% with tax refunds on earnings used for education costs. Access your capital without penalty at any stage.
     
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  6. Hodor

    Hodor Well-Known Member

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    IMO best places to start are exchange traded funds (ETFs) and listed investment companies (LICs).

    For ETFs broad index huggers provide the fewest pitfalls and low expenses. Vanguard offerings such as Vanguard Australian shares (VAS) and Vanguard global shares (VGS) provide broad diversification.

    As Simon mentioned the old and low expense LICs are a good place to start on that area. Australian foundation investment company (AFI) and Whitefield (WHF) offer reinvestment of dividends without paying income tax with the downside of larger capital gains tax if you sell. Others have dividend reinvestment however you will pay income tax.

    If you want to set and forget the Vanguard wholesale funds are another option. They pay income, are diversified and allow BPay for automatic contributions. Downside is you need $100k to get started, the retail funds without the initial capital requirements are similar however the higher expenses are prohibitive IMO.
     
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  7. big max

    big max Well-Known Member

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    What company do you have shares in?

    I would suggest putting half into an etf index fund and keeping the other half as cash ready to deploy as firepower in the event of any serious market correction.
     
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  8. Ecomiant

    Ecomiant New Member

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    Thanks for the comments. I was having a look at these before, but I thought they required a minimum $500k investment. Investment Products

    Am I looking in the wrong place?

    I agree with the idea of selling out half the shares that I have and moving them to an ETF, but I haven't done the numbers yet to work out how much I'd have to sell to them move. Once I sell them, I then have to pay the CGT on them -- and my preference would be to wait until I had a year with less income.

    A downturn is a fact of life, I accept the fact that it will go both up and down, but this isn't my day-to-day living money, so I am happy to just leave it there and wait for a recovery, and hoping that the given LIC or ETF don't go broke in the process.

    My position is pretty simple, I don't really have a debt at the moment, but at the same time, I don't have any capital. I have more income than expenses, and I'd like to do something a little more creative than "put it in the bank". I am happy to try a few different things (at a higher cost, I understand) to get a better understanding of how they all work.

    I do like the idea of the LIC/ETF, but I am worried that because I am only doing it in small chunks each month, I'll be paying too much on brokerage. The Vanguard retail funds look interesting (the wholesale need >$500k -- more than I have!), they allow drip feeding into the fund, but at a high cost.

    I guess what I am looking for is something similar to the Vanguard retain funds, which has a minimal initial investment of up to $10k but has a competitive way to doing ongoing contributions
     
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  9. Hodor

    Hodor Well-Known Member

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    I should have added, although Vanguard advertise $500k minimum if you call them up they will accept $100k to start with (I have never done this). So that does break down the barrier somewhat.

    IMO brokerage is not too much of an issue with $5k investments (or even smaller in some cases). Sure it is great to minimise, something like NABbroker offers $14.95 brokerage - at $5k that's a once off 0.3% expense - so it is hardly breaking the bank. Some people suggest holding off for bigger amounts, I figure that VAS pays quarterly dividends which on $5k should cover the brokerage easily so getting in the market sooner will hopefully be beneficial.
     
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  10. twisted strategies

    twisted strategies Well-Known Member

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    i bought all of my ETFs on market preferring flexibility ( of purchases) and timing to swing the benefit my way .

    novices should be aware some wholesale managed funds ( the insto versions of ETFs ) pay monthly ..

    i prefer not to put ( in excess of ) $100k in one place at one time , but others will decide differently .

    the concern on small chunks is valid , but bigger buys at the wrong moment are equally costly ( say one month too early or too late , certainly if nothing is attractive that month leave it in the bank until a tempting target appears
     
  11. Lilou Pieto

    Lilou Pieto New Member

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    I would suggest you to try Contract for Difference trading, also known as CFD is one of the best options for left over income. Unlike options CFD doesn't have an expiration date. The reason why go for CFD trading is because it offers the ability to bet on the rising and falling of a currency, assets and shares.
     
  12. hobo

    hobo Well-Known Member

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    @Ecomiant did say he was time-poor, so I wouldn’t imagine any of the “trading” variants would be a good option for him.
     
  13. Hodor

    Hodor Well-Known Member

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    You recommend someone who is time poor and had little experience to use a product that typically has huge leverage?
     
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  14. Rakhi Withanage

    Rakhi Withanage Member

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    Hi Ecomiant,

    I do agree with most of the above posts regarding ETFs and managed funds. You could also utilize a “dollar cost averaging” (DCA) strategy which essentially refers to investing a fixed sum every month to purchase shares. The number of shares purchased on each month would depend on the share price at the time. The basic benefit of this is that you don’t have to worry about timing the market- the “perfect” time to buy or sell which takes out the emotional component of investing.


    I too would certainly not recommend CFDs given your limited experience in investing and also your time constraints.


    The dividends or distributions of the auto re-invest facility is still counted as income for the year in which they are paid. The price at which you buy extra shares/units (via the distribution) is used to calculate your future capital gain or loss.


    In terms of the appropriate tax structure, it depends on yours and your wife’s income and your personal circumstances and the information you have shared isn’t sufficient to provide information on the best way to go forward.
     
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