Income Investor - Just Starting Out

gadgetmind

BLB53 wrote: »

real returns on equities (after inflation) over the past 50 years are over 5% p.a., and over 20 years are 4.8% p.a.

Yup, 5% real return is the figure I tend to use for my upper bound in my plans, but it does depend on your equity/bond split.

thelawnet

BLB53 wrote: »

Discounts on ITs will fluctuate, but over the longer period the better performing ITs will tend to average out more towards a premium and the less well performing ITs remaining more at a discount to NAV.

This isn't really true. Currently Income is in vogue and these funds are at premiums. In the future it is certain that it will be out of fashion and they will be trading at discounts. When that will be, we don't know, but it's happened in the recent past and will happen again in the future.

Obviously it is better to purchase when at a discount but I think it is a mistake to rule out buying a trust just because its trading at a premium.

That depends. It's pretty silly to buy 'Sexy Vietnam Trust' because it has gone up 50% in the last year and is trading at a premium, because chances are it will fall in the future and will trade at a substantial discount, amplifying your losses.

While Equity Income is not so volatile, it's still a fashion at present.

The main consideration should be charges and TR performance and the evidence is pretty compelling on both counts that ITs are generally better than OEICS.

It's not as simple as that. IT expenses are often 1%+, and while 1.5%+ is more common for UTs, that's because they are kicking back a commission, which most providers trouser. However that's going to change in the near future. Minus commission, I'm not sure ITs are cheaper.

As for performance, over 5 years the UT UK Equity Income sector has outperformed the IT Growth & Income. There's no reason to suppose one is worse than the other really.

The other factor to bear in mind is the introduction of RDR later this year which will mean ITs will get a lot more coverage from IFA platforms etc. What effect this will have on discounts I don't know but RDR will create more of a level playing field.

The RDR will make UTs much cheaper!

koru

I notice from your signature that you have a large mortgage which you are attempting to reduce by making regular overpayments. Sorry to be boring, but it might well be more sensible to use this money to make further mortgage overpayments. This will save you whatever interest rate you are paying on the mortgage and is 100% risk free.

Think about it this way. Would you increase your mortgage in order to raise money so that you could gamble on the stock market? Most of us would say no. If so, then it makes no sense to use this spare money to gamble on the stock market instead of reducing your mortgage.

Thrugelmir

koru wrote: »

I notice from your signature that you have a large mortgage which you are attempting to reduce by making regular overpayments. Sorry to be boring, but it might well be more sensible to use this money to make further mortgage overpayments. This will save you whatever interest rate you are paying on the mortgage and is 100% risk free.

Think about it this way. Would you increase your mortgage in order to raise money so that you could gamble on the stock market? Most of us would say no. If so, then it makes no sense to use this spare money to gamble on the stock market instead of reducing your mortgage.

Sound advice.

Only speculate with what you can afford to lose.

For a good read. There's the fable of the hare and the tortoise.

mbbetter

Hi all,

Sorry for bumping the thread, but I've been away for a while. Many thanks for all your advice it has been so valuable and really helped frame my further research.

I have also listened to around 40 hours of podcasts - no that it has helped that much, but I will continue to learn.

I've taken out an ISA with iii with a view to fund £100 a month on my selection of dividend based shares. At £1.50 a month for each trade, its an initial hit but I'm seeing this as an education investment.

Hi Koru, regarding the mortgage;

koru wrote: »

I notice from your signature that you have a large mortgage which you are attempting to reduce by making regular overpayments. Sorry to be boring, but it might well be more sensible to use this money to make further mortgage overpayments. This will save you whatever interest rate you are paying on the mortgage and is 100% risk free.

I agree entirely, and have been a massive advocate of overpaying the mortgage and we have tried our best to slaughter the beast. The offset mortgage has been such a great thing for us as we didn't really have to plan our investments. Our savings returned our mortgage rate tax free - sweet.

The challenge (nice challenge really) is that if I keep punching the mortgage in the face at the maximum rate (assuming we don't upsize) is that once its paid (3.5yrs) the tax man will then punch me in the face to the tune of 40% tax (income) for our surplus cash.

So rather than paying off my mortgage in 3.5 years why not pay it in 7 and pay less tax? That's the plan I'm formulating at least.

koru wrote: »

Think about it this way. Would you increase your mortgage in order to raise money so that you could gamble on the stock market? Most of us would say no. If so, then it makes no sense to use this spare money to gamble on the stock market instead of reducing your mortgage.

My thinking was 'no' for the past 2 years.

But it is getting close to the point where I am asking myself if I would rather guarantee a 40% payment to the tax man or have a long term investment in stocks that may be more risky.

I bought my first long term income shares today - 58 vodafone shares. Will they perform better than my 3.49% mortgage? I have no real idea - probably not. Small stakes I know, but the £100 outlay is educating me on buying assets, dividends, tax, PE ratios etc.

As a higher rate tax payer (only fricking just) the intelligent investor would probably tell me Pension, Pension, Pension! But I just can't get my head around locking my liquids away until 55.

Cheers again all!

Perelandra

mbbetter wrote: »

As a higher rate tax payer (only fricking just) the intelligent investor would probably tell me Pension, Pension, Pension! But I just can't get my head around locking my liquids away until 55.

Cheers again all!

Possibly, but this depends on whether your income in retirement will be above the tax-free allowance. If it's above that, pensions aren't necessarily more tax efficient than ISAs:

Under the current rules, you can always "catch up" on pension contributions as you approach retirement age and still get the tax break. Not so with ISAs, since they're the current "use-it-or-lose-it" retirement option.

Rules can of course change.

*very* long debate on the subject here, if you have a spare week's worth of evenings to go through it all!:

https://forums.moneysavingexpert.com/discussion/375217

Thrugelmir

mbbetter wrote: »

As a higher rate tax payer (only fricking just) the intelligent investor would probably tell me Pension, Pension, Pension! But I just can't get my head around locking my liquids away until 55.

Retiring at 55 is a dream for most people.

Don't underestimate the benefit of 40% tax relief

mbbetter

Sorry for starting the retire debate.

For me 'Retire' is an an antiqueted and redundant old word. At 55 (assuming I make it that far) I don't think I'll be working 45 hours a week for 5 weeks holiday. But I won't be 'retired'.

Back on topic, I'm just very comfortable with the way the dividend share fits with my overall philosophy. You have to realise despite being ok educated and having an ok understanding of the modern world, I didn't really clock what dividends were all about.

For me, income investing sits so comfortably against my philosophy.

markwilkinson

Thanks for starting this thread OP - very interesting reading. I've recently started thinking about doing something similar myself, so this has been helpful and I will continue to read new posts on this thread.

Thrugelmir

mbbetter wrote: »

For me 'Retire' is an an antiqueted and redundant old word. At 55 (assuming I make it that far) I don't think I'll be working 45 hours a week for 5 weeks holiday. But I won't be 'retired'.

Many people struggle to find well paid employment at this stage of life.

So retirement (ceased to work) is forced not a choice.