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Discussion in 'Investing Strategies' started by AndrewG, 3rd Feb, 2007.

  1. AndrewG

    AndrewG Well-Known Member

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    G'day guys,

    While I am not new to investing in property, I am new to investing in Shares/Managed funds, in that I have never done so as yet. I have some questions, probably basic, that I would be keen to have some experienced people answer if possible;

    1. Several commentators have suggested that property and the sharemarket quite often act as opposites, in that when one side is going up, the other is going down. "If" this is true, would it be correct in "guessing" that I have left it a little late to be looking at shares/mf's considering some property commentators believe some property markets are at the bottom of the cycle (meaning the share market may be getting close to its top)?

    2. I would like to get started with an amount of $10,000.00, and have been curious about two different funds. I have signed up with InvestSMART.COM, and I'm interested in CFS Property Securities. I'm not sure about the figures though? It stated that 3month return is 14.43%, 1yr is 39.17%, and 3yr is 27.9%. So this means that if I invested $10K 12 months ago, based on their 1yr return, it would now be worth $13,917.00! I take it the extra money just sits in there and compounding goes to work?
    (Just on a side note, what would stop someone borrowing $100K @ 7.5% ($7500 interest) and investing this $100K into the above fund @ 39.17% ($39,170 earned) then paying back the bank and walking away with $31,670?) - just sounds a little simple and odd to me that this could happen?

    3. A lot of people in here are talking about Steve Navra's investment option, the Blue Chip Retail Fund - 3month is 6.25%, 1yr is 15.93%, and 3yr is 19.45%. This is significantly less than the CFS property fund, does this also mean the risk is significantly less also? (I would have thought that the property fund above would have been fairly safe, being property?)

    4. How does it work, in regards to some funds being referred to as "income funds" and others as "growth funds"? Doesn't any money that you earn remain in the fund by default, and you have to manually withdraw some should you require some cash?

    Basically, I have 40K in a bank account earning me 6% interest, as safe as can be. If the risk is not substancially more, I would like to see what better return I could get. I am fairly conservative at this stage, simply because I am only just learning about this aspect of investing. For this reason, I'd be a little nervous in putting in any more than $10k of this (to start with anyway), as neither of us are working and so this $40k is what we're living off. How safe and reliable are mf's in general, when you see % figures over 1 and 3 years etc? I guess you can't "lose the lot" like shares?

    Thanks for your help,
    Andrew.
     
  2. voigtstr

    voigtstr Well-Known Member

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    Welcome to the forums!
    I'm pretty new here as well. I'm in the process of paying of debts before investing, but I'm interested to see the answers to your questions as well. I think that the navra funds are perceived to have less risk because of the way the the fund invests in blue chip stocks.

    Borrowing money to invest in funds sounds like a goer! For safety I think the consensus is to only borrow half the amount you want to invest. Eg if you have 10k in savings, borrow 10k in a margin loan and you have 20k sitting in your fund.

    Others will explain it better I'm sure...

    check out these articles (hosted at the articles section above)
    article 1
    article 2
    article 3
    article 4
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Welcome AndrewG - glad to have you here. We'll see if we can answer your questions between the wealth of experience amongst the forum members.

    This of course, is a very difficult question to answer - my crystal ball is broken at the moment, so I can't tell you what will happen with the sharemarket or real estate market over the next couple of years :rolleyes:

    From my point of view, there are two main factors driving the market right now - interest rates and superannuation.

    Real estate is significantly affected by interest rates - when they go up, fewer people look to buy more real estate, prices stagnate or even drop back a bit. The question you really need to ask yourself is - have interest rates peaked, or is there a way to go yet ? To answer this - you really need to delve into economic theory and understand the factors that cause inflation, which is the main thing that higher interest rates are used to combat. Do you see inflation above the Reserve Bank's targets continuing in the short to medium term ? If so, interest rates are likely to go up a bit more, and this will have a negative impact on real estate prices. However, if you think that inflation is under control and perhaps the economy is even slowing too much - we may well see interest rates drop. Personally - I'm skeptical that we've seen the last of the inflation monster - I think it will be back with a vengence over the next year or two, and I think we'll see higher interest rates. I am NOT an economist - and this is just my own gut feel. I could be very wrong. I hope I'm not - because I'm about to start buying property in Sydney sometime in the next couple of years, so I'd like the real estate market to be in tatters at that point :D :D :D Don't you love how personal bias affects our predictions :eek: !! Take that into account when asking people's opinions about the future !!

    The second factor, superannuation, is impacting the sharemarket (and to a degree, the real estate market) in a number of ways.

    First, there is the 9% super guarantee ... every single employee (non-casual) in Australia has 9% of their salary poured directly into the sharemarkets - with the vast majority going into our local sharemarket. All this extra capital flowing into the markets has had a pretty bouyant effect - and while this won't stop it going backwards, all this extra liquidity will keep upwards pressure on the local sharemarket into the future.

    Secondly, as interest rates get higher, some people get nervous about the cost of their real estate portfolio, and may well sell some of it down and roll that money into the sharemarket - which is performing well. People typically want to put their money into the asset class that has been performing well (despite there being no guarantee that it will continue to do so). This has a negative impact on the real estate markets and a positive impact on the sharemarkets.

    Thirdly, in the short term, the government has made changes to superannuation which will possibly see quite a few people sell off real estate assets and roll their money into super for the tax advantages.

    Fourthly, with the increasing numbers of baby-boomers retiring, or approaching retirement, many are liquidating their real estate portfolio and either moving that into super, or just investing it in the sharemarket for liquidity.

    I see all of these factors continuing to have a positive impact on the sharemarket over the next few years. I fully expect the markets to slow down, and we may even see a negative year if we face a significant slow down in the economy - but I see too much positive pressure on the markets to see it lasting too long.

    Naturally, none of this is advice - it is just rambling thought, and I am not qualified to make predictions about the direction of the economy or the markets, and I am way too young to have lived through enough market cycles to speak with any authority on the subject really.

    I'm sure plenty will disagree with me on this analysis - as is their right ... and only time will tell who made the best predictions.

    Right now, I'm rapidly increasing my exposure to the sharemarket - which I do feel carries a higher element of risk than it possibly did last year ... but I really think the market has a while to run yet ... just no where near as strong as it has been over the last 3 - 4 years.

    Those figures for the property securities fund sound about right - it has been one of the best performers locally recently. The "extra money" is usually paid to you as a distribution (which you pay tax on), and you can choose to reinvest that back into the fund for more units, or take it as cash and invest it elsewhere (or spend it :eek: ). Some of it will be unrealised capital growth though - which does indeed just sit in there compounding. Leave it long enough and you'll have a small fortune on your hands.

    The first thing to stop someone borrowing @ 7.5% interest is the cost of borrowing. Margin loans cost around 9% or so (unless you are borrowing large amounts) ... so unless you are going to only use equity from your real estate portfolio (which is not a very efficient use of that equity in my opinion), your interest rates are going to be higher. But the theory still works - your net return would just be slightly less.

    This is exactly what I've been doing. I have a large sum of money in the wholesale version of that property securities fund, and the returns I make on the fund vastly outweigh the cost of the interest. That's the whole point.

    The trick (and there is one ...), is that you can't guarantee that the fund will always go up in value. Look back historically - there have been times where the fund went backwards for over a year ... in this case, you would need to pay the interest on the loan (or worse, face a margin call), without any (or minimal) returns from the funds to help you. If you don't have the capital behind you to cope with this situation (or a sufficiently diversified portfolio), then you will go backwards quite quiclkly. Borrowing money to invest in high growth assets is risky.

    Read up on Dollar Cost Trading in the Articles section - it explains the concept behind the trading system that NavraInvest uses. In theory, the fund should be relatively low risk, and should continue to distribute income, even in a poorly performing market. It's never going to return the stellar results that some of these other funds will - but then, it also shouldn't have the volatility that they will see in a down market.

    Listed property is not necessarily as "safe" as it once was - you need to research the property trusts that these funds invest in ... many are now using higher levels of internal gearing and investing overseas in a bid to increase returns. This increases the risk. Don't always assume that property = safe.

    No - when you invest, you indicate whether you want distributions paid out as cash, or whether you want them reinvested. These funds are all (or mostly) structured as unit trusts, and as such, they are required to distribute all net income to the unit holders each year. This income may come from dividends from the shares they hold, or from realised capital gains from selling shares, and various other income sources.

    Of course, there may be unrealised capital gains, which are reflected in a higher unit price, and this is not distributed until those gains are realised (the shares sold).

    NavraInvest primarily makes capital gains from selling shares at a profit - but because of the nature of their trading, the ATO lets them treat that as income, which is what it pays out to unit holders.

    The term "income fund" may mean a number of different things - but most people use the term to indicate a fund that pays regular (quarterly or monthly) distributions of income, and tends to see higher levels of income rather than unrealised capital gains.

    You can indeed "lose the lot" with a managed fund - but it would be an extremely unlikely (and unlucky) event. More likely - if you chose the wrong fund, you would see your capital eroded away (or simply return less than you were getting from your bank account), which would put you in a worse position than you were before. You should in generaly be able to hold onto that investment and eventually it should go up again ... but there are no guarantees, and you are wasting that capital while it is there.

    There are a huge number of factors you need to consider before choosing a managed fund (or indeed deciding whether to invest in managed funds at all). I wouldn't consider managed funds "safe", unless you are prepared to leave that money sit for 5-7 years minimum (time generally heals all investing mistakes) ... meaning that if your fund has a bad year or two, over a 5-7 year period you should still be ahead (in theory).

    Given that you don't have a lot of money - and don't seem to have much income, my personal suggestion is to think very carefully before putting your living capital at risk.

    If you are needing to live off the returns - you want to be sure that there will continue to be returns - otherwise you may well go hungry !!

    At this point, I think you need some very good financial advice ... unless you are living on less than $10Kpa (are you living in a tent ??), that money in your account is not going to last you very long. Unless you have other sources of income or capital - you would want to be careful how much you put at risk ... lest you run out of money to put food on the table. Or have I misunderstood your situation ?

    Hope this helps.
     
    Last edited: 3rd Feb, 2007
  4. Redwing

    Redwing Well-Known Member

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    Sim

    Sim


    You're a legend there's always a wealth of information in your posts and some interesting insights..THANKS for the time/effort you put into responding to the posts here
     
  5. Alan

    Alan Well-Known Member

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    Ditto......great post Sim. :)

    It seems I'm flat out even reading great posts like that lately......


    Hmmm........now is today Gymnastics, Swimming, Little Athletics, Keyboard, hospital, work, homework, reno, paperwork or one hunded other things day? :eek:

    I just started reading 'Value Averaging - The Safe and Easy Stategy for Higher Investment Returns' by Michael E. Edleson. It will be interesting to see how long it takes me to get through that if the last few months are any indicator! :eek:

    Where has my time gone? I'm sure I'm not alone. Time to take control again! :D
     
  6. AndrewG

    AndrewG Well-Known Member

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    Firstly, Sim, thanks for your MASSIVE post to answer my initial questions!! As a couple of others commented on, thats the sort of response that keeps genuine interest going in forums like these.

    I hope you are right also. I'd like to be able to seize the opportunity to get some more real estate over the next few years and ride another boom cycle (although I'm not convinced we're going to have a "boom" as such anytime soon, just gradual price rises). In the mean time, I really would like to invest in a small way into a managed fund and experience this aspect of investing. So far, all my eggs are in the R/E world, and there's a lot of those. So having a few in the MF section I am prepared to have a small gamble.

    Sim just on this, why would you get a "margin loan" at 9% when most people can easily setup a LOC for less? I already have a LOC in place, as an example, for deposits on R/E. I can take money from there at 7.5% no probs.

    Is there anything stopping you from borrowing a heap, investing in a high return fund, and so long as it performs over your interest bill, cashing on the return in say 6 months, then getting out? i.e. Funds state a "minimum suggested time frame" but really that to me seems more like a safety buffer in case there is a short term lull?

    Yep I have read all what Steve Navra has said about his fund. I'm always very cautious about what the "originator" has to say about their own creation tho, so I tend to take it purely as a sales pitch (and I don't trust sales people). Instead, I would rather read this forum and hear the opinions of those who are investing in the fund, and there's been some quite mixed reactions as of late. Never the less, one thing I can say though, is that while several people have been complaining about the lack of performance/communication from this NavraInvest Fund, they have stated that the fund is performing at the 5-10% above rule - so at least it seems reliable even if people have been expecting more.

    Its OK, breathe easy, I have a LOC for my R/E with a bit over $100K available should I require any R/E maintenance etc. With 7xIPs my LVR is about 50% so I'm sitting really nicely with R/E. All up, I have $100K I can access @ 7.5% and $40K I can access at 6% if I require funds. Yes we're currently living off the $40K I have in the bank a/c, but its costing only around $1K/month as I have no personal (bad) debt.

    Yes it does, and hopefully others can benefit from my questions and your really good answers. I have watched my super do quite well in the last couple of years, and have had an increasing urge to do something else other than R/E all the time. I'm seriously thinking of putting 5K into the CFS property fund, and 5K into the Navra fund just so they're different market segments. I realise these are pathetically small amounts compared to you folk, but I'd like to ease my way in, see results, and then channel more in. Gotta try to keep the wife happy too as she thinks I'll lose the lot tomorrow if I invest in shares :(

    Thanks,
    Andrew.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Sure - you can do that, and there is nothing wrong with it at all.

    However, the reason I wouldn't do that myself is that it is wasted equity.

    Consider this ... if you have $100K of equity available in a LOC, you could redraw this and use it to buy $100K worth of shares or managed funds. That's fine.

    ... but as an alternative, consider also adding a margin loan to that original figure - at a conservative 50% LVR, you now have $200K ($100K from your LOC plus $100K from the margin loan) working for you - doubling your potential returns.

    Note that the LVR figure refers to your margin loan only - you are in effect 100% geared (all your invested money is borrowed from somewhere). This does introduce a higher risk (higher leverage always does) ... but the rewards are potentially much higher too.

    Margin loans are easy to set up and easy to operate - and they make good use of equity because they are secured against the shares themselves - meaning that your real estate portfolio is not tied to the shares - at worst you will end up losing the money you took out of your LOC, but the margin lender can't take your property away (although your LOC lender may if you can't make the repayments on your LOC anymore !!!).

    Yes, there is one thing stopping you ... common sense !!

    What is a "high return fund" ?? Is it one that will perform well for the next 6 months ? How do you know it will ? What if the market crashed ? Can you guarantee it won't ?

    Look at the historic returns of these high performing funds in chart form - they all have negative years - some of them significantly so. Over the longer term, they will continue to outperform everything else, but you need to be able to live through the down years.

    By gearing high and expecting a return over a short timeframe like 6 month, you are (in my opinion), gambling.

    You need to ask yourself - why invest for 6 months ? If you have a specific goal in mind for that money, surely the capital is more important than any potential windfall return ? If someone was counting on windfalls to meet their goals, then I think they have unrealistic expectations.

    Risk isn't just about losing money - it's also about not achieving your goals. If your goal is to buy a house in 6 months time and you need to put your deposit money into the sharemarket to have a chance of reaching that goal ... then if the market drops and you end up with less money than you started with, not only have you not achieved your goal, you are indeed worse off than when you started. That sounds like a very high risk strategy to me.

    Let's look at is this way. In 6 months, for a fund returning 40%pa, you could expect to perhaps get 20% return.

    Let's say you have $10K to invest and it is currently sitting in a bank account earning 6%. Over the next 6 months, you'll earn just over $300 in interest from that account.

    Let's say, based on historic returns, that you consider there is a 20% chance of the market going backwards over the next 6 months, a 20% chance of it returning 0, a 20% chance of it returning less than 6%, a 20% chance of it returning 10% and a 20% chance of it returning 20%.

    You now have a 60% chance of the market returning 6% or less, and only a 40% chance of it returning more than you made from your very safe bank account.

    So, let's break it down:

    If you leave the money in your bank account, there is a 100% chance you will earn $300 on your $10K in the next 6 months. This is your "risk free" return, since there is virtually zero chance of not making that return (ignoring the potential for major changes in interest rates).

    If you put it in the sharemarket, based on our scenario, there is only a 20% chance you will earn $500 and a 20% chance you will earn $1000.

    To me, these aren't good odds.

    If you stretch the timeframe out to 2+ years, the statistics are much more in your favour, with many of these high performing funds showing negative returns in 1 out of 5 years, and high positive returns in 3-4 out of those 5 years. Time gives you a much better chance of reaching your goals. Over a short timeframe, most funds can be quite volatile - thus dramatically increasing your risk of not achieving your goal.

    I may do some analysis of the CFS Property Securities fund as an example ... I'll post it separately.

    The biggest problem with an analysis of the Navra funds is that we haven't seen them perform in all markets yet. We've had some down periods, but they lasted less than 6 months, mostly, since the fund started, we've only ever seen positive returns in the market. I'd like to see what the fund can do in an extended side-ways market, and how it performs (relative to other funds) in a down market. These funds should (in theory) perform much better than other funds in such markets - making them a great defensive fund to hold as part of a diverse portfolio.

    I have a large exposure to the Navra W/S Aus fund.

    Ahh good - I was hoping it was something like that :D

    Read up on the Living on Equity articles that voigtstr linked to earlier in the thread - I think they will be very interesting to you.

    I think that's a good way to start - the best way to learn about an investment is to invest in it (assuming you can cope with the possibility that the investment may show negative returns in the short term ... and cope with the possibility that you may make a mistake in choosing a particular fund ... I know I have).
     
  8. Nigel Ward

    Nigel Ward Team InvestEd

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    Me too Alan! We must compare notes.

    With respect to Andrew G's queries, I echo Sim's thoughts.

    All investments in the share market (or commercial property given the specific fund Andrew mentioned) entail risk of losing the lot! That risk is lowered substantially by the relevant managed fund in question owning a portion of more than one company (or several buildings in different cities etc).

    One may take the view that a portfolio of twenty to twenty-five odd blue chip Australian shares (such as the NavraInvest funds are comprised of) is actually much LOWER risk than a single house in the suburbs... After all, I imagine capital growth in Baghdad, or say Chernynobl, or that village in Indonesia where a Santos JV partner has tapped into underground mudflow which has buried most of the houses is going to be pretty lousy ... :eek: :( :rolleyes:

    Andrew says he needs the $40k to live on. Personally I'd say you are taking a big risk to take 1/4 of the money you need to live on and place it into an investment where there is potential to lose the lot or at least have substantial variability in the value over the short term.

    By definition, this is money you need to live on. Thus you can't (unless I've misunderstood your post) invest it with the minimum 3-5 year timeframe which equity investments require...

    Just my 2.2 cents worth.

    Cheers
    N.
     
  9. AndrewG

    AndrewG Well-Known Member

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    Hi Nigel,
    I think the way I have worded my post has made my situation appear risky? Please breathe easy, I have a substancial portfolio of Real Estate with a low 50% LVR, and the $40K I am referring to is effectively "lazy money" which I am trying to work out what best to do with it. Yes, we are living off this amount at the moment, but only for a few months longer. So if $35K disappeared tomorrow, yes it would be annoying, but we'd be fine.

    Having spent over $1M in Real Estate, I'm kind of curious as to why I haven't invested in Managed Funds in the past? For some reason I always believed it was "SO" volatile you never knew if you were going to lose the lot next week. Having read a lot more, and having the understanding that Funds do diversify into multiple markets or companies, the chances of this are greatly reduced.

    Of course, I understand that the Fund can go backwards, just as it can go forward. At the moment, I am learning the concepts and accertaining risk factors and my own "risk profile". At the moment I'd consider myself to be "balanced" after building up my Property Portfolio - but I'm eager to get back into things as I have been a little slack lately. Thus my questions, to gain knowledge.

    Hope this alleviates any concerns you may have :)

    Andrew.
     
  10. AndrewG

    AndrewG Well-Known Member

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    Hi Voigstr,
    These articles refer to a "part 5" which apparently has case studies and examples etc. Problem is there is no part 5 listed online??? Or if it is here somewhere, I cannot find it. Anyone know where this mysterious part went?

    Andrew.
     
  11. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    It hasn't been written yet :(
     
  12. Glebe

    Glebe Well-Known Member

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    I propose Sim writes it! :D

    Who needs that Navara guy ;)
     
  13. Redwing

    Redwing Well-Known Member

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    I thought it was the Nirvana guy ;)

    PS- I'm sure Sim could do a great job on Part 5
     
  14. voigtstr

    voigtstr Well-Known Member

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    They are inspirational articles (even without part 5). How many people here are following the principals of those articles?
     
  15. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Actually I propose Nigel writes it - or at least helps to write it. He did most of the work on getting the first 4 ready for publishing ... and deserves a lot of credit for the quality of the final product.

    However, the 5th article was originally intended to be a series of case studies based on Steve's own client base (with names and details changed for privacy). We'll have to try and get Steve to free up some time to work on the final article so we can get it published.
     
  16. Alan

    Alan Well-Known Member

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    Hi Sim.

    OR........maybe we just rename this to being a Four Part Series and leave it at that.....

    I wrongly assumed it might be almost done.

    I'm afraid the 'time' reason doesn't really ring true for me any more and by using this reason it almost cheapens the fantastic time and contributions many of the 'Forum Founders' have been able to make, especially in the formative months of the Forum. I think there would be many very busy contributors to this and other Forums.

    As much as it would be great input, Steve should never be made to feel he has to contribute to this Forum and quite frankly it doesn't seem to be a priority to him.

    Live and let live.......it's all good.

    Perhaps just rename the Four Part Series the 'LOE Unfinished Symphony' which will give it an air of mystique. :D
     
  17. Dr Lobster

    Dr Lobster Well-Known Member

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    I think I am pretty much, though part of the application is kinda temporary as I am in between jobs. At least its given me breathing space to find the right job rather than the disaster I was recently in (oops, must stay positive).
     
  18. AndrewG

    AndrewG Well-Known Member

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    I found the series of articles quite interesting to read. Without previously knowing of the articles, I have completed a couple of stages already, mainly borrowing to invest in multiple IPs (the easy bit).

    What I have lacked to do, is investigate the sharemarket/managed funds arena in the past and therefore my knowledge is very limited in that field. I guess I've always had it good in real estate, made good money and just didn't really feel I needed to branch out. What I have unfortunately done, is created a comfort zone with real estate, and by that very nature kept the sharemarket and managed fund market "out of" that comfort zone by default.

    Now its time to bring the managed fund market into my portfolio. I can't forsee that it will ever be close to the amount I have invested in real estate, but I would like to get it to maybe 20% of my overall portfolio over time.

    A question for some other investors then, is how much % of their overall portfolio is in
    1. Shares
    2. Managed Funds
    3. Property
    4. Other?

    Andrew.
     
  19. bundy1964

    bundy1964 Well-Known Member

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    1 20% and growing
    2 5% and growing
    3 75% holding
    4 0% not a great fan of holding cash in current market.

    Future plan.

    1 70%
    2 10%
    3 20%
    4 0%

    1 is activly traded as well as buy and hold.
    2 is mostly yield and regualy too (monthly paying)
    3 holding and inheritance will have a part.
    4 cash pfft holding that.
     
  20. Glebe

    Glebe Well-Known Member

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    1. Shares - 0%
    2. Managed Funds - 50%
    3. Property - 50%
    4. Other? - 0%

    Up until a month ago it was all managed funds.