Rudi’s View: Don’t Settle For Default Inferiority

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Every now and then a question is being asked which potentially has a wider interest among readers and subscribers here at FNArena. This is why we reproduce below the recent communication between FNArena Editor Rudi Filapek-Vandyck and a subscriber.

Hi Rudi,

I hope you are well. You've been very helpful in the past with your honest, direct feedback and I'd greatly appreciate your feedback once again.

Rather than go through the whole story, I'll just give you the basics. – I am 60 years old in failing health. – I have an 8 year old darling son whose future I am trying to plan for.

My plan is to have a secure line of income for him until he is 25 years old (i.e. completes educational studies) and hopefully still have some principle left to disburse to him at this time.

My current asset base could possibly achieve the income side of my plan without investment but would likely not have any principle left to give to him. My goal is to have about 4-5% net income p.a. and hopefully at least 2% appreciation p.a. of principle over this period. (The income is the most important feature.)

I don't need massive appreciation of principle. I don't need high risk. I do need to feel that the companies I invest in will not go bust and will most likely "be around" for the next 20 years. (They don't need to make huge growth. Just be around, keep the cash flow coming in, and most likely have a higher share price in 20 years time.)

I don't have the energy or expertise, or health to be chasing the trends and trading my funds. ( I just want to set and forget. And I realize there is comment against this policy.)

I currently have a fairly large portfolio predominantly in the 4 Big Banks, Telstra, Woolworths and Wesfarmers.

Rudi for the objectives I'm trying to achieve, is this a reasonable portfolio? Should it be changed? I greatly value any comments, suggestions you can share with me.

Much appreciated, Rudi. Stay well.

Kind regards

John (FNArena subscriber)

Dear John,

Thank you very much for your trust and your honest feedback. I'll try to repay in the same manner.

After receiving your question, I have given this some thought and what bothers me most is that you might be limiting your portfolio's performance for the coming decade or so. I do understand you don't want to be seen making portfolio adjustments on a day-to-day basis, and you probably feel you cannot trust an as yet unknown and unproven expert either, but does all this mean you should seek comfort in an inferior set-up? I'd say: negative.

We do not know what exactly the future might bring. It is possible the large cap blue chip stocks you currently own will outperform and deliver excellent returns, however, I believe it is far more likely you can, and will, achieve superior returns by not limiting your scope to the Big Four banks and the blue chips you mention.

Yes, chances are they all will still be around in twenty years from now, though that is by means guaranteed. More importantly, and as painfully proven by the likes of BHP Billiton, Woodside Petroleum and your own portfolio's Woolworths, a high chance of still being around in 10, 15, 20 years does by no means guarantee a higher share price by then, let alone a satisfactory investment return.

The dilemma I am struggling with is this: the world is going through a lot of changes, and I am talking about profound, deep cutting, transformational changes. There should be no doubt that in 15 years' time, the world will be a different place. Traditional blue chip companies will increasingly be challenged from numerous corners. They are not by default going to be successful in dealing with the many upcoming challenges. Again: see BHP Billiton, Woodside and Woolworths.

Even when trying to weigh up your objectives, I cannot bring myself to the point where I am resigning to the fact that your portfolio seems condemned to a potentially lousy performance. I do understand you are content with a moderate income/return and you value simplicity, steady income and capital preservation, but my advice is: don't let this make you feel comfortable with a sub-par prospect. Aim higher, without necessarily raising risks substantially. You do not want to risk your ultimate objective.

What comes to mind is the old wisdom that for most people in life the problem is not that they have goals they cannot achieve, it is that they set the bar too low and never achieve their full potential.

I am certain you didn't achieve your current wealth by deliberately setting the bar low during your active career.

Here's what I would do.

I would seriously consider adding fixed interest to the mix. If you do, you need to find a trustworthy, experienced and knowledgeable expert in the field. I am not that person.

Regardless if you do decide to add fixed interest (capital preservation + income), I'd re-balance my equities portfolio by adding exposure to yield/income stocks with better growth prospects. You don't have to turn yourself into a full-time market analyst to do this and you don't have to pin yourself down with loads of paperwork and management fees to watch out for.

One potential, easy to manage option could be to add a few Listed Investment Trusts (LICs) to the mix. You can buy their shares in the same way as you buy into individual companies on the ASX. This way you add some expertise on stocks you currently do not have, without substantially lifting your overall risk profile, and you can still enjoy dividends/income. Before choosing, make sure you get acquainted with the specific strategies and investment methodologies used, as well as past (consistency in) performance. Also, you don't want an LIC that simply replicates the shares you already own.

Have a look at this overview: http://www.morningstar.com.au/LICs?gclid=CMvzyYrN_swCFVMAvAodfUcD7w This could serve as your starting point for further research into your external options.

A few options to consider (that offer true diversification away from your current portfolio):

– Blue Sky Alternatives Access Fund ((BAF))

– Cadence Capital ((CDM))

– Wilson Asset Management (WAM) – specialised in small cap stocks

As a paying subscriber to FNArena, you'd be aware of the fact we manage an All-Weather Model Portfolio which aims to reduce risk, has been outperforming the Australian share market and contains virtually no overlap with your portfolio, though I am the first to acknowledge we have by no means the same extended track record as the above mentioned managers.

I get a sense you do not want to be looking at your finances every other day, or even every other week. You'll still need to take into account that things do change, if not in financial markets then certainly in the real world of global companies and economies. I'd say, once you've restructured your portfolio, make it your personal target to sit down twice a year to update, re-assess and potentially recalibrate. You don't have to make changes, but sometimes small & timely interventions can have a major impact, in particular over a longer time frame.

Your son might be eternally grateful by the time he turns 25 and this is, after all, your main objective.

Kind Regards,

Rudi Filapek-Vandyck
Editor
FNArena

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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