I don’t care about the share price
I was playing golf over Easter with a few retirees.
Post their annihilation, as usual with this demographic, our bar chatter turned to the hot topic of franking credits and Labor's plans to ban cash refunds. But of even more interest was the reiteration by my retiree golfing buddies that all they are interested in is the income from shares, not the share prices themselves.
My retiree golfing buddies are far more interested in the income from shares, rather than the share prices themselves. “The kids will get those, I don’t care what the share price is when I’m dead”. There is a large chunk of retiree investors that don’t care about the capital value of the shares they hold because they are focused on living off the income and the franking credits and Labor's policy disturbs that core function of thier investments and their expectations of income.
Here are the six traits of an income investor that allows them to ignore share prices:
Generally not interested in the market
They don't want to watch the stock market, make decisions about the stock market, worry about stock market. There is tremendous value in avoiding stress – these investors have worked that out. They are only interested in milking the share market for income.
Are genuine investors, not traders.
They invest long term, not short term. They “set and forget” and are disciples of the “it’ll be all right in the end” mantra which, despite criticism for its head-in-the-sand approach, can work. There is something to be said for identifying long-term quality stocks and sticking with them through thick and thin. It is a lot less stress. My humble advice is to learn to sell occasionally. Your results can be improved significantly, not by stock picking, but by stock culling.
To turn a blind eye to the stock market and share prices, income investors have to be rich. They need to have enough money invested in stocks that they can live off the income alone and not care about the share price. If you don’t need the capital to fund your lifestyle, you don’t have to worry about share price, just as long as the dividends are not cut and continue to be paid. The trick is to buy stocks in mature, generally large, reliable companies that will keep paying out in the long term. If you can find those, who cares what the share price is today?
Assume the banks are bullet-proof.
While the banks retain an oligopoly, they are. Until they get disrupted, retirees can stay on the golf course and ignore the market. There is no sign of disruption now but we have to keep the big US tech companies in our peripheral vision, just in case they provide a banking service alternative that sucks the population away from the big banks.The tools to disrupt the banks are there (mobile devices), but the product isn’t. Until disruption arrives – if it ever does – income investors are betting that the banks will remain highly profitable for their lifetime and, on that basis, they need not worry about the share prices.
Are generally holding stocks in super in a tax-free environment.
They have no capital gains tax but they also get no benefit of capital losses. So, there is no pressure/benefit of selling loss-making stocks to offset capital gains. They get the full benefit of any capital gain and any income and franking.
Focus on franking credits.
Retiree investors living off stock-market income are very interested in the cash refund of franking credits. If Labor changes the dividend imputation rules to remove the cash refund, things will change. Retiree investors will be looking to replace that income. One option is hybrids. If you lose the franking on stocks then the yields on volatile stocks come closer to the about 6 per cent return available in some hybrids. It makes hybrids more attractive on a risk/reward basis than sitting on more volatile shares.
It is your choice whether to become an income investor and stop worrying about share prices but it is usually for people who are financially comfortable already and have enough capital to generate an income that meets their annual requirements.