My suggestion would be to make your "core" as big as possible and your "satellite" as small as possible: if you have an effective long-term investment strategy for your core, then why not apply the same strategy to the whole portfolio?
The answer of course is that investing long-term in conservative businesses (LICs and index funds) is dead boring, and when people ask you over a barbecue what you think of Westfield or Woodside, your answer is "don't know, don't care". Buying and selling speculative mining stocks on an intra-day basis is much more fun...but a lot less profitable. But if you must, only use a small part of your portfolio for gambling!
I think both index funds and high-quality LICs should have a role in your portfolio. Their pros and cons are:
INDEX FUNDS + Can't argue with the pure logic of index funds. All shareholders as an aggregate, achieve the market's return less fees (brokerage, management fees, etc.) - in other words, investing in shares would be a zero-sum game if there were no fees associated with investing; but in reality, the share market is a loser's game. Investing in a low-cost index fund is a guaranteed way to get your fair share of the market return at the lowest possible cost, year after year. Have a read of the books of John (Jack) Bogle who founded the Vanguard Group and pioneered index funds, especially "The Little Book of Common Sense Investing" (pure genius). + Low cost - STW has admin expenses of <30 basis points per annum if I recall correctly. - Distributions are unpredictable and not fully franked. - Tax time is reasonably complicated as distributions comprise all manner of components which make filling out your tax return somewhat difficult.
LICs + The high-quality LICs (ARG, MLT, CHO, AUI, DUI, AFI) have been around for decades and have excellent track records as conservative investors. ARG, MLT and CHO have no debt and have plenty of cash sitting in bank accounts waiting to pounce on any investment opportunities that the directors see fit. AUI, DUI and AFI are all geared (though only very slightly) which theoretically should enhance their returns. + Excellent diversification so they are partly protected against catastrophic falls in the value of any particular stocks in the portfolio. Each LIC has a slightly different portfolio, but if you spread your money across a few of the LICs, you get such diversification that you're approaching that of an index fund (though the weighting of stocks will obviously be different). + Opportunities to participate in share purchase plans or other special issues (e.g. rights issues) that companies offer from time to time. The recent SPPs from MLT and CHO were priced at discounts to the prevailing market price, allowing shareholders to top up their holdings at a discount, or to sell some of their holdings on market and then buy shares back through the SPP, generating an instant cash profit. Generally speaking, SPPs offer you the opportunity to accumulate shares in these companies at a small discount, without having to pay for brokerage. + Dividends are more stable and predictable than those of index funds, and they are fully franked. For example, MLT lowered its dividend this year for the first time since it went public (in the 1950s I think) - quite a record. The dividend statements are very straightforward so easier to deal with come tax time. + Amazingly, management fees are even lower than those of index funds (and the MER theoretically should get lower every time these companies issue new shares, e.g. through the SPP or DRP, or by acquiring other companies). Argo's MER is somewhere in the region of 10-15 basis points per annum. - Because LICs' portfolios are not weighted according to the index, they can outperform or underperform the index. Historically, however, their performance has generally exceeded that of the ASX200 (even though logic tells you it probably shouldn't!)
Make sure you read some good books, including anything by Jack Bogle, and "The Intelligent Investor" by Ben Graham (a classic written by Warren Buffett's mentor).
And keep us posted on your decisions!
ITB08
ARG Price at posting:
$6.78 Sentiment: LT Buy Disclosure: Held
(20min delay)
