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Financial Happenings Blog
Tuesday, March 18 2008

Over the past few weeks Scott and I have been conducting client seminars talking to our clients about the current market volatility and how we see the investment world in this context.  A large part of our presentation was reminding clients about the importance of the income produced by investments.


This point was nicely reiterated in today's Australian Wealth lift out through an article written by Tony Negline.  Tony suggests that most investors focus too much on the movement of the capital value of shares and not enough on income.  In our presentation we likened this distinction to the difference between a speculator and an investor.  Speculators aim to benefit from price movements (changes in capital value) compared to investors who aim to benefit from earnings over time (income).  Some other distinctions between investors and speculators are outlined below:





Tax and Costs

More tax and cost effective

Less tax and cost effective


Long Term

Short Term

Downside Risk

Generally contained to market falls - 35%

Possible great losses of capital (eg because of use of borrowing)

Success (Chris Leithner, Intelligent Australian Investor)

More Likely to be Successful

Less Likely to be Successful


To show the importance of income, Tony looked at two hypothetical investments of $100,000 invested in March 1982.  Over the next 26 years until this month the capital value of a $100,000 investment in the ASX200 would have been worth $1.1 million by early March 2008.  Over that time it would have created $530,000 of dividend payments (before considering franking credits).  The average income has been about 4% a year before franking.


On the other hand, a sum of $100,000 invested in 12-month term deposits for the same period would have received $200,000 in income and would have a capital value of $100,000 based on average income of 8% a year.


Not surprisingly, shares have provided a better total return over the 26 year period, but have also provided greater levels of income due to the growing income stream that is created.


It should also be noted that we are especially fortunate in Australia that there is a culture of income provision to shareholders by listed companies, in a large part thanks to our imputation (franking credit) tax system applied to dividend payments.


This discussion points to the need for investors to focus on income planning as a strategy for determining asset allocations and investments within their portfolios.  Income allows investors to receive some value from their investments without the need to sell assets.  Making sure they have enough income being produced from cash, fixed interest and shares is crucial to ensure that they can ride out particularly difficult periods on equity markets and not be forced to sell when prices are low.



Scott Keefer

Posted by: Scott Keefer AT 09:38 pm   |  Permalink   |  Email
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