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Best Way To Generate Income?

Discussion in 'General Investing Discussion' started by MF35, 20th Jun, 2007.

  1. MF35

    MF35 Member

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    Hi All,

    First post here. Researching investment options available to generate income to support the out of pocket costs of IPs. I have some limited experience / knowledge re property investments, none really in Shares, Funds etc. To generate income in property I think I'd have to get into commercial. I'm looking at options with Shares / Funds to see if they better suit.

    Although the investment would be focussed on producing income I'm not sure if this means it needs to be an income focussed share / fund. That is, if I'm not in desperately in need of regular distributions is it an option to invest in CG focussed fund and cash in the CG when it's needed? Or is there a reason this is not a good idea?

    In the case of an Income Focussed investment is it reasonable to expect to be able to achieve 15%-20% income distributions pa and at least modest CG greater than the inflation rate?

    I'm particular interested in what people think is the best way to generate income for the above stated purpose. Are there any particular investments / funds that would do this?

    Thanks for your help,

    MF35
     
  2. Smartypants

    Smartypants Well-Known Member

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    Don't know what attracted you to this site (not meant to sound sarcastic), but your above comment is the exact reason that Steve started up the Navra funds.

    Check out NavraInvest.
     
  3. MF35

    MF35 Member

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    Hi Smartypants,

    You said, "Don't know what attracted you to this site (not meant to sound sarcastic), but your above comment is the exact reason that Steve started up the Navra funds.

    Check out NavraInvest."

    Don't know if it's just me getting confused, but if you were not being sarcastic about the statement, "Don't know what attracted you to this site" then that means you genuinely don't know why I would be here. Which seems contrary to the following statement "your above comment is the exact reason that Steve started up the Navra funds". Maybe you were being sarcastic. Not trying to be a "smartypants", just trying to work out what you mean.

    I have had a read of some of the other posts and I'm aware of the basics of the Navra Funds. Although the Navra Funds may be a legitimate option I'm trying to research all the options so I can come up with the investment, or mix of investments, that are best for me. What other options are people are aware of that they believe would perform this function?

    I've had some people suggest that the returns I'm talking about, 15%-20% distributions pa while still achieving some CG at or above inflation, can only be achieved by investing in high risk investments (funds or shares etc). Now these comments aren't necessarily from people who know any better than I do. But they raise the question of how risky an investment do I have to use to obtain at least the stated returns?

    Perhaps someone can comment on the risk profile of the Navra Funds as compared to other Funds / Investments?

    Thanks for your help,

    MF35
     
  4. Smartypants

    Smartypants Well-Known Member

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    Hi MF35.

    No, I am not trying to be sarcastic. When I wrote the first statement, I thought it may have looked a bit narky, which was not the intention.

    Anyway, IMHO, the Navra fund is an excellent way of generating income to fund the shortfall of neg. geared I/P's or for whatever use.

    Once again, IMHO, it is a little less risky than other funds out there due to the way it trades and also the fact that the fund carries a lot of cash within it.

    If you are looking for a conservative fund to help with expenses of -I/P's, then the Navra fund should be of consideration.

    I am definately not an expert in the mgd fund field and the above is not advice, just my opinion.

    Once again, I apologise if my initial reply was construed as me being smart.
     
  5. Simon

    Simon Well-Known Member

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    Why do you believe that all shares and funds are high risk? It hasn't been my experience over the last 16 years of direct investing in them and 25+ years of investing via my super.

    I think you should consider addressing this limiting belief.

    Plenty of people have found that buying property in a rush at the end of a boom because they are scared they will miss out is very risky. Likewise buying off the plan too far into a boom etc.

    Seems to be a commonly held belief passed down through generations that bricks and mortar = safe and investing in quality business = high risk.

    We can all find examples to prove this generalisation wrong. I would rather hold bank shares than a property in a mining town west of nowhere.....

    Go figure .....

    I hold Navra Funds and CFS Funds and am considering buying more.

    Cheers
     
  6. MF35

    MF35 Member

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    Thanks for the replies.

    No worries smartypants. I thought that's what you meant, just wasn't how it read to me thats all.

    Simon, I don't think that ALL shares / funds are high risk. Certainly with the right knowledge and advice I think the risk would be manageable to an individuals comfort level. Provided the individual has the required level of knowledge and advice. The issue I raised regarding risk was that it had been suggested to me by others (again not an expert in the field) that I would have to invest in a High Risk investment in Shares or Funds etc to achieve the returns I'm after. I didn't say I believe this to be the case and I don't necessarily agree with this suggestion, in fact I'm looking for evidence to the contrary. I'm looking to confirm that the returns I'm working off are actually achievable without engaging in High Risk strategies. (I realise that one person's perception of High Risk can be different to another's).

    At a basic level my calculations tell me that if I could find an investment (or multiple investments) that would achieve at least 15-20% pa in distributions, and still maintain the real value of the capital invested through CG (keep up with or exceed the inflation rate) then each 100k I put into that investment would cover the short fall on 1 NG IP in the early years of owning it (roughly and based on the type of IPs I target). If I can achieve this then in terms of long term planning I'll be able to easily work out how much I need to invest in the Income focussed investments to support the Capital Growth focussed investments. Thereby keeping the overall portfolio somewhere near cost neutral in real terms and eliminating / minimising our out of pocket costs.

    Does anyone think the stated required returns are achievable? If so what type of investment would you invest in to achieve these results? Answers may well include Navra Funds but I imagine there are other options that should be considered as alternatives to, or to be included in a portfolio with, Navra Funds.

    I also agree that Property Investing requires the right level of knowledge and advice to reduce risk and maximise returns. I'm certainly not here to suggest one type of investment is better than the other (that argument has been had by many before). It's horses for courses as far as I'm concerned and there's no reason I wouldn't consider a mix of the two. Its the end result I'm concerned about.

    Thanks for your input,

    MF35
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I wouldn't count on 15-20% pa as a sure thing ... especially if you are very dependent on that income ... if the market performs very badly for several years in a row, you might find yourself with substantially lower income during that period - which could cause real cashflow problems for you. That is, unless you have decent buffers in place to cope with the shortfalls you may face.

    Personally, I aim for an average of around 12% in distributions (mostly from Navra) - which is enough to keep me afloat, and anything above that is used to build buffers to keep me going through the down periods.
     
  8. Nigel Ward

    Nigel Ward Team InvestEd

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    Ditto Sim's thoughts.

    Given the long term average on the Australian stock market is somewhere around 11-12% pa (dividends and growth) then I think it IS unrealistic to expect 15-20%. NI has managed to do that to date, but we've been in a bull market since March 2003.

    Whilst I'm not calling the top anytime soon, I think it would be very unwise to bank on getting those sorts of returns (altho I hope we can :D ).

    I'd suggest you model a number of scenarios to ensure you can handle the downside scenarios - the upside will then take care of itself.

    Cheers
    N
     
  9. MF35

    MF35 Member

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    Thanks for the replies Nigel and Sim. If that is the case then I'd have to count on receiving less income in terms of the % return and consider putting in more capital to generate the net dollar return I require from the investment. Working out what is realistic in this sense helps greatly in terms of comparing investment options and planning. Thanks for your help.

    Do you have any opinions on Funds likely to perform well over the next 3-5 years? (Not to be taken as advice of course, personal opinion only).

    In relation to funds that are CG Focussed. If I want money available at relatively short notice but may not necessarily need to use it regularly, and CG Funds are likely to achieve better overall returns is there a reason these funds would not be suitable? That is, is it difficult or disadvantageous to cash in some of the Growth?

    MF35
     
  10. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Not at all ... in some ways growth funds are better than income funds - there can be tax advantages !!

    The problem with income funds is that you pay tax on the income in the year it was earned - regardless of whether you reinvest or not.

    With growth funds, most of your return is by way of capital gain, which is not taxed until you sell. If you do sell, and you've held the fund for more than 12 months, you get a 50% discount ... so there's two ways you're already better off with growth. What's more if you use margin loans and aren't afraid of increasing your debt ... you could simply access the increased equity in your growth fund by drawing down on your margin loan when you need cash (this is essentially what you do if you capitalise the interest on your margin loan - using equity to fund the interest bill).

    There is generally no difference between growth and income funds in how quickly you can access your money ... although you must check the PDS for the individual products to check whether there is the possibility of a delay (some funds invest in illiquid assets like direct realestate, which could mean that a withdrawal may take time to process - sometimes months! ... but this is not that common).
     
  11. Nigel Ward

    Nigel Ward Team InvestEd

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