Question: Now that it’s time to buy stocks due to a dip in the market, what would be your top 10 picks other than banks and Telstra as a long term buy and hold strategy?
Secondly, what are your thoughts about Vanguard Australian shares index vs. AFIC? I have invested in Vanguard so far. With a long-term view, is one better than the other, or should I just stick with Vanguard?
Answer (by Paul Rickard): Thanks for the question.
Dealing with the second part first, AFIC and Vanguard are quite different – AFIC is an active manager, Vanguard is passive (index).
Based on AFIC’s track record over all timeframes, I would purchase AFIC ahead of Vanguard if the purchase price on an AFIC share is at or around NTA (Net Tangible Asset Value). If it was more than a per cent or two above NTA, then I would probably go with Vanguard. AFIC, like most LICs, publishes its NTA on a monthly basis. On 31 July, AFIC’s shares were trading at about a 3% premium to its NTA.
In regards to the first part of your question, my approach is to invest in sectors first and then choose the stocks. I don’t like eliminating almost half the market (banks and Telstra), and while you have said that you are in for the long term, I don’t really know what you investment objectives are. With those caveats, here are some names by sector that I would consider:
Materials: BHP, Amcor, Orora
Healthcare: Ramsay, CSL, Resmed
Consumer Staples: Coca Cola
Consumer Discretionary: Crown, JB Hi-Fi
Industrials: Brambles, Transurban
Question 2: Are corporate bonds suitable for an SMSF and how safe are they? What rate of interest do they pay? Where do you buy them?
Answer 2 (by Paul Rickard): Corporate bonds are suitable for an SMSF – however they carry risk, and hence you may want to think about establishing a diversified portfolio of bonds.
The interest rate depends on the market benchmark (the government bond rate for the term), and the risk rating of the corporate issuing the bond. The higher the risk of the corporate being able to repay the bond, the higher the interest rate.
Credit ratings are one way to express this risk. The higher the rating, the lower the risk of default, and conversely, the lower rating, the higher the risk of default.
Buying corporate bonds is not that easy for a small investor – some bonds are only available in parcels of $500,000. FIIG is a specialist bond dealer [1] that offers a service that has parcel sizes starting from $10,000 (minimum portfolio of $50,000).
Another option is to invest in a corporate bond fund. For example, see AMP Capital’s Corporate Bond Fund. [2]
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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