Questions of the Week – The Reject Shop and falling knives

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Question: We hold the Vanguard Australian Shares Index ETF (VAS) in our SMSF. Distributions don’t show franking credits, so can you please explain the advantage of this investment versus investing directly in the shares they hold.

Answer (By Paul Rickard): The VAS distribution statement dated 2 October  (which you can access here) shows the expected level of franking for this distribution.

This will be confirmed when they send you their annual tax statement (sometime after 30 June 2019).
As a broad based index based fund, you should expect a dividend yield of around 4.5%, franked to about 75%

Question: I don’t hold any Reject Shop (TRS) shares but TRS has fallen sharply. Is it overdone and a buying opportunity for a potential recovery by maybe 10/15% short term? Or is it a dog with fleas and best left alone?

Answer (By Paul Rickard): It issued a profit warning last week. Invest warily – discretionary retailers are some of the hardest stocks to follow. Watch the short interest.

Question: My question is about the concept of not catching a falling knife and buying once an uptrend has formed. How do you know when this has happened? As far as I’m concerned, you are just buying a stock 5% higher than you could have, as the chances at that point in time for it to go lower or higher are not known.

Answer (By Paul Rickard): I am not sure that I can answer it because there is no science in this.

Some of the technicians have definitions around this – for example, when shorter-term moving averages (e.g. 50 days) cross longer-term moving averages (200 days), but I am not aware that there is any universal position on what is the best indicator.

Sorry, it’s more “art than science”.

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 regard to your circumstances.

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