Pod Insights Talking Wealth Podcast: Stock Market Trading and Investing Education | Wealth Creation | Expert Share Market Analysis Buying Stocks for Income? Think Again About this episode This week on Talking Wealth, Janine considers income from cash, dividends and trading income using CBA, warning why a fixed income strategy can be risky.
Transcript 0:01 Speaker 00 This podcast is brought to you by Wealth Within, a global leader in stock market education. For more information on our courses, head over to wealthwithin.com.au. Please note that the information in this podcast should not be considered personal financial advice. Enjoy.
0:19 Speaker 01 Hello and welcome to Talking Wealth. This is Janine Cox, Senior Analyst at Wealth Within. Today, I really wanted to chat with you about something that is going to become so important to people who are chasing income or looking for an income strategy, simply because when markets change, that just creates a different risk environment that can have a drastic effect on people who are wanting to receive that income but are not willing to spend the time to really consider the risk that they're taking. And that's the danger. It can be fine while markets are going well, but then when things change,
0:58 Speaker 01 it can be a complete disaster. So today, we'll look at my thoughts on chasing an income strategy, whether it's dangerous, what's important, what are the risks, and how do you tell if you have the right strategy before it's too late? So, income can be generated from many different sources. So, you can obviously get, put a deposit in a bank, and they will pay you a certain amount of interest. That's considered the lowest level of risk. Now, putting your money into one of the big, big banks is seen as stable, safe. And when the crunch happened in the GFC, governments came out to tell
1:40 Speaker 01 investors that we're going to guarantee a certain amount of money in bank deposits. Now, this was up to 250,000, I think. Now, you need to do your research on all of that. But it's good to understand what actually can happen when a crunch occurs and situations that you had never even envisaged could unfold, do unfold. And this is a cyclical thing that happens. Now, in the early 90s, Pyramid collapsed. Investors had their funds in this building society. And there are lots of companies that are essentially banks in Australia. There are listed ones, smaller ones, and there are the larger ones as well.
2:25 Speaker 01 Now, I'm not suggesting that these smaller ones are necessarily high risk, but you do need to understand the risk that goes with putting your funds anywhere, doesn't matter where it is. And they say that, you know, no bank is, or no is a bank too big to fail. You know, those we had, I think we'd done podcasts on that sometime. I mean, that's not the point of this discussion, although the rising concern that we have as we head into this next part of the cycle is for people who are chasing income and not fully understanding what their risk is. So cash in a bank considered to be the safest.
3:08 Speaker 01 Of course, it depends on what bank you've got your funds in now. The next thought on that is, well, can you put your funds in something else that's secure? Is a bond secure? And there's a whole lot of research that you can read up on online to understand how corporate bonds rank versus shares versus subordinated debt and other investments like hybrids that the banks offer from time to time. Now, prior to the GFC, hybrids were a lot more secure than what they were after the GFC because it's all in the fine print, devil's in the detail, as they say.
3:52 Speaker 01 So it's important to really read up on these things, regardless of whether you're seeking advice on these type of investments. You must read up on it yourself and understand it. And the great thing is now that we have AI, and I'm not saying that ChatGPT is a reliable source, but it's one source that can provide good information for your research. Make sure you do it. It doesn't matter what you're investing in, whether you're investing in the stock market or whether you're investing in bonds.
4:24 Speaker 01 Now, I would suggest that if you don't understand what a bond is, then you don't invest in it. If you don't understand how it works, don't put your money there. It's the same thing in the stock market. You need to have a good understanding of how risk is managed in the stock market. Now, a lot of managed funds, they are required and it's very different for you as an individual to a managed fund, because a managed fund has a mandate that they have to follow. An individual can be very nimble and move money into different areas, different stocks. Stocks with different risk criteria, stocks that will allow you to
5:08 Speaker 01 trade for income, buy and sell to generate that income. Now, the danger is that when people invest for income, they become fixed in their thinking. You might receive
5:22 Speaker 01 a distribution from, say, a property stock, or you might receive income from out of, from interest from the investments that you have. But, you know, is that guaranteed? When the GFC hit, banks stopped paying their dividends. That's just something that investors never thought would happen. So, this is where you need to be aware of what you're choosing, because there is a way of, the debt is ranked differently depending on, or the, or the shares are ranked differently to, to debt. So you can Google that and understand where stocks sit versus shares. The thing with that is that if you have some knowledge about
6:09 Speaker 01 how to manage your risk, how to set stop losses and keep your money safe, even if your strategy is an income strategy to get dividends, you can still manage your risk using some simple strategies on a long-term timeframe.
6:26 Speaker 01 Now, another strategy for income, of course, is by trading, by going in and out of the equities, or whatever it is, it could even be ETFs on the market. Now, we've explained to people before that ETFs have, generally have a lower volatility than a lot of the stocks that actually are, are invested in to create that ETF. So it's a smoothing effect that it has, so therefore the upside's not going to be as great as some of the best stocks that are picked in that ETF. But also the downside will be, the volatility will be softened out of that. That doesn't mean that ETFs can't fall 50%.
7:09 Speaker 01 If the stock market falls 50%, which history has proven happens over time, then the ETFs are going to fall. Now, you really need to understand how those ETFs are structured if you're looking for those, and how the, the, the income side of any ETF works. And the risks, any risks associated with that would need to be documented in the fact sheet. But again, make sure you do your research and you fully understand what you're investing in, because ETFs will not be immune when there's a crunch. And more than likely, you could be in a situation where they lock payments.
7:49 Speaker 01 I mean, will they, in a crunch, will they have to guarantee that liquidity that they're required to provide in an ordinary market? Fine print, read it. So the first thing is with stocks, one of the reasons why they can be really good for income is because if you're trading the bigger ones, that they're really highly liquid. You can get in and out of those without any major concern. The key is though, to have a good set of rules, so that when the rules trigger, you're actually out of these stocks. Before they go into a big free fall like this, a GFC where the market fell fifty
8:33 Speaker 01 five percent, but stocks can fall ten, fifteen, twenty percent from their tops before any exit occurs. So that's quite normal, depending on the strategy that you have. And especially if you're trying to hold stocks more medium term in order to get those dividends, which could be anything from four to eight percent is probably in that normal range. Eight percent's probably getting a bit on the high end, could be higher risk in terms of the stocks, but somewhere in that range, you'd be able to find some good stocks paying good dividends that could be fully franked or partially franked and provide that income. Now, the
9:15 Speaker 01 issue with the danger here is where people aim to get income out of whether it's a bond or whether it's out of an investment, like a fixed income investment, or whether it's out of shares. Now, the risk is in not fully appreciating whether the capital is secure and which one is secure. We know that cash in the bank, capital is theoretically secure, but as I said, is that the case in every bank or will that be? And you don't want to be there to test that theory, do you, if you don't understand it? So therefore, it's really important to think about what would you do with your funds if you had your
9:59 Speaker 01 money in the stock market and then you had a long term trend line on the chart and it told you that the market was likely to implode or start to fall away, then of course you're going to be putting your money into something safer like a cash deposit with a bank and maybe spread across multiple banks rather than having all of your eggs in one basket.
10:25 Speaker 01 If you're concerned about that. So the risk is that you could end up riding the market all the way down if you've got your money in stocks. But this is where changing your mindset about getting income from the market can be really valuable at this point in time. Because we could see some really great growth occur in the short to medium term. Because often the market has the best growth in that final phase of its run. But we could also be in line to get some good dividends along that rise, which would also provide income. Now, we just have to change our thought process
11:06 Speaker 01 about that capital growth because we can convert that into our own income. Once we sell, we deposit those funds into the bank. Of course, we need to set aside some funds to pay the capital gains on that growth. But the rest of it is there to be used as income and to be drawn down. And there are many clients who choose to do that and have that strategy. Because if, for example, you buy shares just for income and you leave the downside risk just totally open to whatever could happen on that share, just letting it bob around like a cork in the ocean.
11:48 Speaker 01 No idea about where that's going. That's really leaving yourself exposed. So it's about saying, well, if I know that, for example,
12:00 Speaker 01 CBA has certain movements in the market over a period of time. Let's say over a given three to six month period, CBA could rise by X amount or X to Y could in a range. Now, I'm just going to give you a few examples. If you were able to study CBA and know that it could rise anything from, and I've just got my charts here and I'm just having a look at the way CBA unfolded from below in 2016 when it moved up.
12:37 Speaker 01 I can see there that there were multiple opportunities to make really significant gains on these rises that BHP had. And this is not the first time that it's done that in history. If your strategy was income, there were a number of rises, so 60%, 45%, 27%. And this is where that thought about having an income can really be turned on its head. But from a risk point of view, you're managing your risk because you're going to set a stop loss for the strategy that you set to trade CBA for income. But
13:19 Speaker 01 what you'll be locking away in that capital, even after capital gains tax, is likely to be more than you'll receive in dividends over that same period, a lot more. So, you know, it's a question of which would you rather? And do you need to look at it every day? No, you don't need to look at it every day. You can actually set a strategy that allows you to manage your positions without doing that. Now, BHP, if I look at BHP, I can see that there were mul- oh, this is BHP I was talking about, sorry. So don't get too excited about CBA. So, CBA also had some incredible rises. Now, if we're looking
14:00 Speaker 01 at CBA, and I'm looking from the COVID pullback, I can see that not long after the COVID pullback, there was a big rise in the CBA share price. It was pretty much similar to what I looked at on BHP, but at a different point in time. So, BHP and CBA are not always going to boom at the same time, which is an advantage for you. If, let's just say that you had those two stocks, and that's all you were using for an income strategy. In the period after COVID, it actually rose for a while, pulled back, and then took off again. And that was where it rose around 60 or 70%. That timeframe, let's say over
14:45 Speaker 01 an eight-month or 12-month period.
14:50 Speaker 01 You bank that money, what are you going to get when you also hold those shares? You're going to get some dividends through that timeframe as well. So let's say you got four percent, four or five percent over that time, but you got sixty odd percent from the capital growth. So you have to pay capital gains tax on that. But whatever's left can be put into an account and then you draw down on that as your income. Now, some people take a little while to catch on to this because it's not what you've heard. Generally, when people talk about income, you're thinking that you're going to be getting dividends, which is only going to happen twice a year.
15:37 Speaker 01 So it's not really income, is it? It's just a, I guess, a share in the profits to keep you interested in holding the stock. That's the way I'd like to look at it. But if we look at CBA and how it's unfolded, what's really interesting is that it repeats what it's, you know, what I've just talked about. So where, where did it do that? And, and before I go into that, let's just have a look at another period on CBA. Now, when CBA rose strongly at the end of 2023, it went up another sixty to seventy percent, let's say seventy percent. Okay, so it did it again.
16:19 Speaker 01 Now, if we go back in time once more, I'm going to look at another period on CBA just to show you what's possible, even if we, after the GFC, even if we waited a few months to get into CBA, eventually it rose sixty percent. And the same thing happened after the low in 2011. So let's say that we waited for CBA to bounce around for a few months. Then we look to get in. There were a number of pullbacks, obviously, along the way with the CBA share price. But ultimately, the high that it made was about eighty-five percent up
16:58 Speaker 01 from the point where it actually confirmed that it was more likely to keep rising. So this is where, you know, then that was over, how many years was that? Let me just see, that was over. Um, probably two and a half years roughly, let's say. So, so that's, let's say about thirty five percent or thirty percent. Let's just say thirty percent, to be fair, over that timeframe. Um, it's probably more like forty percent, but um, let's just bring it down a little bit. So, you know, that, that level of return is obviously significantly more than the dividends that the company pays, but you're going to be getting the dividends as well on top of that.
17:44 Speaker 01 And then what that does is that allows you to bank that return so that when there are times of, when the stock shows that it's more likely to, to fall away, then you can be out of it. So, a, a nice um, trend line on a, on a stock like CBA could be part of your income strategy. People don't often think about it like that, but if you grab a copy of Dale's book, you know, he's got two books on the website, go and have a look. I'd suggest you get both of them. What um, he shows is that you could trade stocks in the top twenty for income and have
18:26 Speaker 01 a totally different way of um, generating your wealth out of the stock market than just focusing purely on trying to get stocks that have good dividends and hoping that you might get a bit of capital on the side as well in that process. But this, this process of using a trend to tell you whether the trend has changed and this trend line is a really good way of doing that and suggesting that the risk has increased, therefore, let's just wait and see what happens and then look to get back in at a different point in the process. Now, that may not have been possible to use a, a trend line to get in just after COVID,
19:10 Speaker 01 but there were other rules on the chart that triggered. Rules that we teach in our trading mentor course that could help you if you were trying to set up an income strategy where you're banking that capital gain, putting aside some funds for, to pay for the capital gains, pay the capital gains tax, and also banking those dividends along the way. Now, you might think that, you know, you'd need to be, you know, have a PhD in finance to be able to. Come up with this strategy, but as an individual, you can be so nimble and flexible with what you do.
19:49 Speaker 01 An ETF is not going to give you the same sort of flexibility and it's going to actually lock you into thinking that you need to continue to hold, even when a major crunch is actually underway. As was the case in the GFC, the ETFs really came to prevalence and popularity after that. When people were looking for a cheap alternative and getting back in the stock market after being given advice in the GFC that was really quite odd. In some cases, we had a client telling us that his advisor told him to put all his money into Telstra. You may have remembered me talking about that.
20:31 Speaker 01 But what this, you know, and what this demonstrates, and you don't have to believe what I'm saying. You can go and do this. This is the beauty of it. Because the chart will show you, you get a long-term chart, monthly chart, and just have a look at where some of the best runs were in the CBA share price. Get your pencil, print out a chart of CBA on the monthly chart, long-term, and just draw lines up under the rises. And just note what happened when CBA crossed the lines that you've drawn. It's a real eye-opener and it's one of the best things to do when you're first starting to look at the stock market. And whether, you know, what's got, what's got more risk attached to it?
21:14 Speaker 01 Is it just assuming that if you put your money into something and you leave it there, that it's going to rise? You can't do that because the volatility on the market changes. And at times, the market will take some money off the table before it then gives another opportunity to get going again. So there can be periods of time with CBA that it travels sideways for years. And, you know, if the focus is on those big stocks, while people might be getting dividends. When CBA is travelling sideways, it actually doesn't show you what could occur if the share price were to fall significantly, which people didn't believe could occur in
21:56 Speaker 01 the GFC. I mean, if you had a scene how strong the rise was in the CBA share price prior to the GFC from March 2003 all the way to that top, it went up 169%. Now, if you're holding CBA and your stock's just gone up 169% or thereabouts over, say, a four-year period, are you going to be wanting to give it away or close out your shares? You're going to be thinking that this is the best decision you ever made to buy CBA shares, but what happened after that? Well, if this paints a picture for you, CBA shares
22:37 Speaker 01 started at, and I'm going to give you the price for the low on my chart here in 2003, which my chart is adjusted, but it's March 2003, 2293 was the low. Where did it come back to in December 2008? Well, January 2009, sorry, it came back to 2390. That is a nightmare for any investor. Even if you are getting dividends and you could say to people, I'm getting good dividends, you know, I'm not going to give that up. What have you actually given up? You've given up all of that growth and, in fact, someone else has taken it when
23:20 Speaker 01 it was your opportunity. Now, following the GFC, yes, CBA did come back up to those highs, but then went sideways again. So how long did it take to come back up to those same levels again? Well, it got there in November 2007, and it didn't get back through that level until around 2012. So that's early 2013.
23:49 Speaker 01 So that's waiting for at least four years to get back to those levels, which is a long time to wait. Now, there are cycles and patterns in stock markets that tell you that eventually stocks will come back to long-term lows. Now, that's, that's really interesting to me, having looked at lots of stocks over time. So if we're, we're looking at CBA in the chart of CBA now.
24:21 Speaker 01 People will be wondering, well, what does that really mean? Could CBA come back to the low, lowest lows that it's made in the past? And, and I can't completely rule that out. It's done it once before. So, you know, you can't rule it out, but it's unlikely to happen at this time. But could it come back to around 120, 130? It's possible, but do I think it's going to do that now? No, not right now. There's still further upside for CBA now. Where could CBA run? And that's the thing that you've, you know, you can determine without having a, you know,
25:02 Speaker 01 a huge amount of knowledge from the point of view of a financial degree. That's not what they're going to teach you. What you can do is actually inquire about learning with us because that means that regardless of whether you choose to do this yourself or whether you have someone else do this for you, you can always be looking at what's going on. So if you put your money in a managed fund or you put your money in an ETF, you can always be bringing up a chart to track what's going on and then be putting your trend lines on there to see whether that, that market or that ETF or those shares are actually trading above the line or below the line.
25:47 Speaker 01 How good is that as a guide to know whether your risk is really significantly increased or not? How simple is that? So in terms of managing that risk. In the current environment, looking at what CBA is doing at the moment, it's actually below the line right now. In terms of the longer term trend, you know, and I'm looking at right back to that COVID low. If we, if we draw one of our lines right up under that low, it's actually well above it. So, you know, there are arguments here for staying with it right now.
26:32 Speaker 01 If you're still in it. But CBA really has to go through certain levels. So this is one thing that you're going to learn to understand if you're wanting to increase your knowledge about the market is that once CBA goes to a new all time high, in most cases it'll keep going until it's run out of time. And I know that's going to sound strange, but there are, there is analysis on any chart that you can do, which is we've, you've heard us talk about it before, price, pattern and time. And when all three meet or match up to show you what the future direction is going to be, then you really need to pay attention to that.
27:15 Speaker 01 It's so important because when, before the GFC, we saw an explosion of two story houses being built everywhere. It was just a massive explosion of construction happening. And then there was the introduction in Australia of CFD's contracts for difference, where people could get access to a huge amount of leverage, right? For, to try to make an income for themselves, which is interesting because that's what we're talking about. Now, another area that's similar right now is, okay, we've had rising share prices,
27:58 Speaker 01 we've had inflation going up, we've had interest rates rising. And the interesting thing is we've had this explosion of private credit, which we've heard some interesting stories come out overseas about this.
28:20 Speaker 01 So when we think back to what happened before the GFC and the ability for investors to get access to to capital and our contracts for difference is a is actually a contract on the underlying, which if you just want to look at it simply, if you've got CBA shares and you wanted to, you had $10,000, if you had a CFD, you could have exposure to 100,000, let's say, just to keep it simple. So it's it's just leverage. Now, private wealth, private credit, for example, used to be in the old days, and
29:01 Speaker 01 I've talked about this on one of my podcasts, but it used to be about going to a solicitor and then I could actually put my money up so that someone who couldn't get a loan from a bank could get could, you know, borrow funds so that they could do a project or could be a property, could be, they needed the money for something else, right? So but what's happened is we've seen this explosion of private credit and the availability via technology through platforms for people to get access to these things. So more people find out about it and you see this bubble forming. So even though they're different
29:46 Speaker 01 products, it's still an explosion of available credit. And these are all the signs that that we see along the way to a top in a market. Now, it's quite possible that in the case of if you were to invest in CBA, which is still, our banks are amongst the safest in the world. And the beautiful thing about it is it's really transparent. What's going on is you can see it. You don't have to read an article about it. With a little bit of knowledge, you can make that assessment yourself. To me, that's a no brainer.
30:27 Speaker 01 And I was having a chat with someone only today who was talking about their knowledge in property. So they had to have knowledge in property before they were willing to invest and to go down the path of investing substantial money in that area. The same thing they see it makes sense to do that with the stock market. So, but it just depends on how you think about it. If you're looking at this through a lens of fear, then you're going to see a different picture to someone who's looking at, well, I can't go, I need just, just need to know how to manage my risk and you can do that. And that's really what I wanted to chat with you about today, but it's just
31:08 Speaker 01 thinking about this income side of thing and being so fixed on that is going to expose you to some significant risks in the current, coming years if you don't stop and actually have a really good look and build your understanding about exactly where your risks are and how you can mitigate those. Regardless of what you're investing in, whether, you know, it's cash bonds or shares, you have to put yourself in the best possible position to know what that is and to be able to take action yourself. Even if you choose to have more of a hands
31:48 Speaker 01 off approach at some point, you still need to know how to step up because it's your life savings at the end of the day. Now, investments will go backwards. Sometimes they can. The stock market shows you that's what's possible. But I've heard people who invested in the stock market, in the GFC and wrote it all the way down, or they had leverage and they lost the lot. And, you know, that's not going to happen to you if you actually do something about it and build your knowledge now. So if you want to find out more about that, and I suggest you do, then you're welcome to contact us and have
32:28 Speaker 01 a chat, discuss what could be the best option for you in terms of gaining that knowledge for yourself, depending on the time that you have available and the funds that you have to invest in your own education. I'm going to leave that thought with you. I hope you enjoyed my podcast today. Take care. I'm Janine Cox, Senior Analyst at Wealth Within. Bye for now.
32:52 Speaker 00 This podcast is brought to you by Wealth Within, a global leader in stock market education. For more information on our courses, head over to wealthwithin.com.au. Please note that the information in this podcast should not be considered personal financial advice.
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