This month: Mar­cus Padley

Re­tiree in­vestors don’t stress about money so long as those juicy franked div­i­dends keep fill­ing the jam jar

Money Magazine Australia - - CONTENTS - Mar­cus Padley Mar­cus Padley is a stock­bro­ker with MTIS Pty Ltd and the au­thor of the daily share­mar­ket news­let­ter Mar­cus To­day. For a free trial go to mar­cus­to­day.com.au.

Did you know that many in­vestors sim­ply don’t care about the share price? Let me say that again: in Aus­tralia there is a very large chunk of re­tiree in­vestors who sim­ply don’t care about the cap­i­tal value of the shares they hold, be­cause they are en­tirely fo­cused on liv­ing off the in­come and the frank­ing.

Here are the traits of the in­come in­vestor that al­low them to ig­nore share prices:

In­come in­vestors are gen­er­ally not in­ter­ested in the stock­mar­ket, be­yond milk­ing it for in­come. It might pro­vide some in­tel­lec­tual stim­u­la­tion once a week­end when they read the news­pa­per or chat about it at a din­ner party but they do not wish to be watch­ing the stock­mar­ket, mak­ing de­ci­sions about the stock­mar­ket or wor­ry­ing about the stock­mar­ket. There is tremen­dous value in avoid­ing stress and this pocket of in­vestors has worked that out.

In­come in­vestors are gen­uine in­vestors, not traders. They are long term, not short term. They gen­uinely “set and for­get” and are dis­ci­ples of the “it’ll be all right in the end” mantra which, de­spite re­lent­less crit­i­cism for its head-in-the­sand ap­proach, can work. There is some­thing to be said for iden­ti­fy­ing long-term qual­ity stocks and stick­ing with them through thick and thin. It is a lot less stress. And there are some fan­tas­tic ex­am­ples but only with the ben­e­fit of hind­sight. Those in­come stocks that are not all right in the end are con­ve­niently for­got­ten.

In­come in­vestors are rich. To turn a blind eye to the stock­mar­ket and the share prices of the stocks they hold, in­come in­vestors have to be rich. They have to have enough money in­vested in stocks like the banks or hy­brids to be able to live off the in­come alone and not care about the share price. If you don’t need the cap­i­tal to fund your life­style you don’t have to worry about share prices, just so long as the div­i­dends are not cut and con­tinue to be paid. The trick is to buy stocks that will keep pay­ing in the long term. If you can find those, who cares what the share price is to­day or to­mor­row or on the day you die. Your kids can worry about that.

In­come in­vestors as­sume that the banks are bul­let­proof in the long term. It’s not a bad as­sump­tion. While the Aus­tralian banks re­main an oli­gop­oly, they are. Un­til the banks get dis­rupted, re­tirees can stay on the golf course and ig­nore the mar­ket. Un­til the dis­rup­tion ar­rives, if it ever does, Aus­tralian re­tiree in­come in­vestors are bet­ting that the big banks will re­main highly prof­itable for their life­time and on that ba­sis they need not worry about the share prices. If you have faith in that, the royal com­mis­sion, tighter lend­ing stan­dards and a cool­ing prop­erty mar­ket are just blips in the long-term share price tra­jec­tory and not some­thing you need to re­act to. They could even be wel­comed as cre­at­ing a long-term buy­ing op­por­tu­nity.

In­come in­vestors are gen­er­ally hold­ing stocks in su­per in a tax-free en­vi­ron­ment. They have no cap­i­tal gains tax but they also get no ben­e­fit from cap­i­tal losses. So there is no pres­sure/ben­e­fit in sell­ing loss-mak­ing stocks to off­set cap­i­tal gains. They get the full ben­e­fit of any cap­i­tal gain and any in­come and frank­ing.

In­come in­vestors fo­cus on frank­ing cred­its. Re­tiree in­vestors liv­ing off stock­mar­ket in­come are very in­ter­ested in the cash re­fund of frank­ing cred­its. If Bill Shorten does change the rules to re­move the cash re­fund of frank­ing cred­its, then things will change. Re­tiree in­vestors will be look­ing to re­place that in­come some­how. My hum­ble ad­vice, should a La­bor

gov­ern­ment hap­pen, would not in­volve tak­ing more risk in low-yield stocks to re­place frank­ing in­come but to ac­cept the loss and carry on as you are with less in­come. There is no easy way to re­place frank­ing if it goes – not with­out more volatil­ity, which means pay­ing more at­ten­tion and suf­fer­ing more stress in the process, which you don’t want to do. If hap­pi­ness is ex­pec­ta­tions met, then the way to be happy, af­ter a La­bor gov­ern­ment screws it all up for you, is to lower your in­come ex­pec­ta­tions.

Some in­come in­vestors write calls. The very wealthy in­come in­vestors im­prove their yield by sell­ing out-of-the­money call op­tions over their share­hold­ings. Rolling writ­ten call op­tions ev­ery few months takes ad­van­tage of time de­cay. Most op­tions users are a vic­tim of time de­cay. This small edge has turned into an in­dus­try of char­la­tans promis­ing rivers of ef­fort­less gold if you write calls over naked po­si­tions. Good luck with that. This is not for poor peo­ple; it is for peo­ple hold­ing big chunks of big op­tion stocks, and it only in­cre­men­tally im­proves the in­come from the stock – it doesn’t rev­o­lu­tionise it.

It is your choice whether to be­come an in­come in­vestor. But it is a priv­i­lege of the wealthy and is not for peo­ple be­hind the eight ball who are try­ing to grow their cap­i­tal and can­not af­ford to lose any. It is for peo­ple who are fi­nan­cially com­fort­able, have enough cap­i­tal to gen­er­ate an in­come that meets their an­nual re­quire­ments and want to have a life. In or­der to get to that stage, there are two op­tions: get rich or live off less. Lower your in­come ex­pec­ta­tions and you, too, can be­come an in­vestor who doesn’t care about share prices.

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