The boys are only seven (DS1) and one (DS2), so their portfolios are truly "long term". They are also very static - once I buy a stock for them it probably won't be sold unless there is a massive and unexpected change in the company's prospects for the long term. There also won't be any additions to the portfolios after the initial stock purchases, apart from small additions due to dividend reinvestment plans (DRPs) or bonus share plans (BSPs). The main difference between these two plans is that DRPs buy additional shares at current market price (sometimes sans a small discount eg. 5%) using the taxable dividend income, whereas BSPs issue "bonus" shares at no cost in lieu of any dividend. The value of the issues bonus shares is the same as the dividend would have been, but isn't taxable as income. However, as the bonus share had a zero cost base for CGT purposes, there will be a bigger capital gains tax hit when the bonus shares are eventually sold. However, over the very long term the cost base will most likely be a small fraction of the total sale price, so this will not have much effect on the amount of CGT paid. Another way to look at it is that the while the starting value of the shares will be eventually be taxable for bonus share issues, the tax isn't due until the shares are sold - by which time the real cost of the tax will be much reduced due to inflation. There's also the benefit of only paying CGT at half your normal marginal tax rate for long term capital gains (assets held more than 12 months before being sold).
Anyhow, here is the current valuation of the boys' stock holdings:
When I bought QBE for DS1 they were undervalued due to the temporary concerns around their exposure to claims arising from the twin towers destruction on 9/11. ANZ bank was also reasonably cheap at that time, with the outlook for bank stocks being rosy. Five year's later, when it was time to buy some stocks for DS2, the banks were still highly profitable in Australia, but, with the current credit concerns resulting from the US sub-prime loans problem and rising inflation and interest rates in Australia, they don't currently appear to be such a bargain. So, for DS2 I've gone with CSL which is likely to benefit from continued growth in the medical products field in the future, and CPU which as a provider of stock administration services globally is well placed to benefit from economic growth in developing countries and the increased investments of the baby boomers and subsequent generations to provide for their own retirement plans. That's the theory -- we'll see how they perform over the next 10-20 years.
Copyright Enough Wealth 2007