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Chapter 1: What is an ETF and how does it work?
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Welcome to the Australian Finance Podcast, a podcast for people who want to learn more about their personal finances and get the most from their money. This series is hosted by Kate Campbell from HowToMoney and Owen Rascovitch from Rask Finance.
The Australian Finance Podcast is provided for educational purposes only. The information is general in nature and does not take into account your needs, goals or objectives. What that means is the information does not apply to you specifically. So consider getting the advice of a licensed and trusted professional before acting on the information.
Hi Owen, welcome back to the Australian Finance Podcast.
Thanks, Kate. It's wonderful to be here.
Yes.
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Chapter 2: What are the benefits of using a robo-advisor for investing?
Well, I think you can start investing. There's apps now for $5. You've talked about them in the past. Yeah. So you can invest through brokers, which is where you can buy and sell shares and exchange traded funds from as little as $500 in some cases. So it's not really an excuse anymore. The barriers to entry have never been lower and it's easy to get started.
Cool. I think there's a quote that says the best time to plant a tree was 20 years ago. The next best time is today. Yeah. One of the little case studies or little scenarios that we just did or we just put together was used one of the calculators which you can access on our site or on the Money Smart site. I mean, the RAS Finance site, there's a compound interest calculator there.
Hmm.
Just a little example of someone that saves $50 a week to invest and they invest it at 10% per year and they do that for 30 years. The question is how much would you have? So $50 a week, 10% return, 30 years. The answer is around about $428,000. So $50 a week. It's not a lot for some people. It is for others but it's not a lot. So what we have there, we've got the amount that you're saving. Yep.
That's the 50 bucks. We've got the return that you're getting, which is 10%, which is reasonably high, especially if you have to think about tax, but 10%. And then you've got time, which is 30 years. So those are the three ingredients. How much do you save to invest? What return do you get? How long do you let it work? And those are the things. And if you...
And half a million dollars can drastically change your life. Well, that's it.
And this is only this one example. If you're doing this, you might also have super, which would be saving probably that amount or more if you're working.
So that's the compulsory savings from your employer, essentially.
We've done an episode on that. And then you would also have probably a property, like a home that you live in. So there's that. So this is not your only retirement or nest egg. But if you were just saving 50 bucks a week and you just did it rain, hail or shine, you would be left with a pretty good lump of cash.
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Chapter 3: How can I start investing with a small amount of money?
It can seem really scary and nerve-wracking, but once you've learnt the basics and you understand what you're doing, just give it a shot.
It's funny. I run another podcast called the Australian Investors Podcast and I ask the guests in the show what is their number one lesson if they could go back and tell themselves when they're younger and that's just to start. Yeah. And it's a huge thing, right?
Yeah, and yeah, you're going to make, you'll probably make some mistakes at the start. I certainly have and I'm still making mistakes. But if you do it yourself, you actually learn from those mistakes and you can change the way you do things. And 30 years is a long time. So you can make mistakes and change course and change your investment strategy.
But you can just, as long as you keep putting some money away every week, every month, and that nest egg slowly grows in the background while you're working, traveling, living life.
Two of the reasons why people would invest are dividends and distributions, and you get those from each of the things that we're talking about in this episode, which is index funds, ETFs, and managed funds. And then you've got capital growth, so the increase in value. So if you were invested in, say, a managed fund, so let's say you put $20,000 into one that you find,
You would expect to receive some sort of check or direct deposit or how does that work?
Yeah, so most managed funds that I have seen will pay you a distribution usually once yearly and you have an option. You can either reinvest that money back into the fund the fund, your investment. So that just grows in the background. You won't receive any money in your bank account, but it just keeps growing and compounding.
Or you can have the money paid out into your bank account if you've got a better use for it. Or some people often are living off those distributions from funds and exchange traded funds.
Yes, I might pay 2% or 3% just as an example.
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Chapter 4: What are the differences between ETFs, index funds, and managed funds?
So can you explain to listeners what that is?
Yeah, so the robo-advisor I use actually invests in a handful of different exchange-traded funds and a real estate investment trust, which we mentioned in the previous episode. But the experts are selecting the exact percentage in each fund and the exact funds to use, and they're managing my money for me.
So the exchange-traded funds and real estate investment trusts are still in my name, but I'm not executing the buys and sells of this.
Right, so you don't have to – maybe it's even easier than an ETF. You don't have to pick, say, three or four ETFs.
You could just go to this one robo-advisor, which is actually people that put – Yeah, so there's an investment committee there and they make the decisions on which exchange-traded funds to build this diversified portfolio. I've told them my risk profile. And then they make the decisions. They set up the brokerage account for you. They set up the cash management account.
So they do all the heavy lifting for you. The only thing you have to do is give them money. And they take a management fee for that. So that's another fee on top of the fees that the exchange trader fund itself.
So we'll get to fees in a minute, but effectively you can invest in shares or whatever, like a diversified portfolio. And you just visit one of these robo-advisors and you put in who you are, what you own, your risk profile, you answer some questions and they set up the account for you. Yep. All right. And then you can just BPAY money in or is it direct deposit or something like that?
Yeah. So just transferred money into that. So sort of off the calculations I ran at this stage, it's more cost effective for me. But down the track, it might be more cost effective for me to do it myself. But as I'm getting started and just at that entry level, this is a solution that I've chosen for myself.
So what you mean is that when you're starting out, it's good to just maybe consider handballing some of the responsibility to one of these low-cost providers.
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Chapter 5: How do investment fees impact long-term returns?
Yeah.
I would differ slightly. How do I say it? But I would buy an ETF straight away. That's what I would do. And the way I'd do that is I'd open a sharebroking account, which allows you to buy ETFs or shares. Yep. And a few other things. And then I would buy an ETF and the exchange-traded fund. Because it's just like you buy one thing and it gives you exposure to a whole range of things.
Yeah.
If you've got $500 or $2,000, you could put it all in one or you could put it in a few different ones because the minimum is normally $500. So you could do some research or pay someone to do it for you and then you could pick the three that you want and just click buy in your brokerage account. And, like, I take your point about the robot visors. I think it's a really good way to do it.
But I also think if you have to save the $10,000, it's going to keep a lot of people out.
Yeah, and you want to get in if you can as quickly as possible.
Yeah, that's it. I mean, and the thing is you are learning again. You know you're going to make mistakes, et cetera. But if you do it, I think if I was new today, the way I'd probably do it is I'd go to an ETF provider. Like, I'd learn about the ETFs.
Yeah, their websites have full education sections now, so there's –
And we've got some stuff that we'll put in the show notes, of course. There'll be heaps of information there. And we've talked about it before on Investing 101. I would probably put – I'd consider putting money in an ETF and then I'd go another ETF and another ETF. And then over time, I would probably look at –
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Chapter 6: What strategies can help mitigate investment risks?
XYZ country is invading XYZ country, like blah, blah, blah. There's so many things to think about. But I found this fascinating when I did a bit of research on this is that On average, and I think this comes from a Deutsche Bank, so an investment company did this study and they found that the share market corrects on average every 357 days or once a year.
So if you think about that, once a year, you can expect something bad to happen. Yeah. Right. On average, it doesn't happen.
And some people see that as an opportunity to add some additional funds to their investments.
That's right. So if you were the person that was building up an ETF portfolio for the first time, you've got to be prepared that that's going to happen.
This is going to happen, but don't be the one that then goes, oh my God, the world's going to explode and everything's... And it does sound pretty scary, especially when you don't know what you're doing, but it's important to stay the course here. And this comes back to what we said at the start of the episode, which was there's three things.
The amount that you save, so you're starting with whatever balance, the return that you get, And how long do you have to invest? If you deny yourself any of those three, you're not going to be successful. So one of the things is if you just sell out, then you're never going to be able to compound your money because you're not giving it the opportunity.
And there's repeat offenders who just keep selling out, investing at the top of the market, selling it out at the bottom just because they never sort of understand that concept that there is market volatility and the market will go up and it will go down. And you have to be prepared to ride it all out.
Absolutely you do. Absolutely you do. So that's what we call, you know, that's market crash. It's about as bad as it gets. But my philosophy is, Prepare for the worst, expect the best. And so if you go back 30 years and you take the share market's performance from then until today, on average you'll find that it's grown at a rate of, say, between 8% and 12%, somewhere in there.
And in that time, we've had September 11, the dot-com crash, the Asian crisis. That was a bit earlier. We had the global financial crisis, Donald Trump getting elected. We've had all of our Australian prime ministers who had just –
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Chapter 7: How can I build a diversified investment portfolio?
So don't take our word for it. Just go and look at that chart and it will change your world. Okay. So one of the things we touched on earlier on is about fees. The fees are typically coming down across the industry. And we did this example at the beginning of the show, which was save $50 a week, which is pretty reasonable.
You invest it, you get a 10% return and that's not excluding, like that's after fee. So it's a pretty good return. It may or may not be achievable, but anyway. And then you do that for 30 years. And we said that you come out with $428,000. Yeah. We just did another example using the same calculator, but we did the same thing but with 1% in fees. So instead of returning 10%, you return 9%.
It's a very small difference in the face of it. You think, oh, 1% of fees, I've only got $5,000 invested, bugger all. Well, under the same scenario, that $428,000 becomes $355,000. Yeah. So all of a sudden you're paying 1% in fees, but you're getting 17% less at retirement or whatever this goal is that you have for yourself after 30 years.
So the point here is that the smallest, smallest little difference can have a huge impact down the line. And the way I think about that is imagine like if you have a set of binoculars and you're looking a long way away at your financial goal, it might be retirement or whatever, and
If you tilt those binoculars down or you shake a little bit, you're going to be looking at something totally different to what you were looking at in the distance. And that's the way I think about it is that if you just make a tiniest little change, it can have a huge impact on what you're actually looking at.
And it's the Money Smart calculator. You can actually compare two different interest rates side by side. So put 7% and then take off your 1% fee, put 6% and actually see the difference between what you might have in 30 years with 7% and what you might have with 6%. And that really sort of illustrates the point of how nasty high fees can be. It might not look like anything in a year.
You might, oh, that's hardly anything. But over 30 years... And they don't send you a bill. It's all automatic. All these fees are automatic. So if you got served a bill for $1,000, $10,000 just in fees, you'd probably go, what am I actually getting out of these fees? You would question it.
But because you don't get a bill, because it's not really highlighted how much you're actually paying in fees, you don't notice it until it's too late.
So from the British comedian John Oliver, he said, think of fees like termites. They're tiny, they're barely noticeable and they can eat away at your fluffing future. And that's fluffing is obviously... I put that in there. Redacted was the word I should have used. So they can eat away at your future. And that's true. They're like termites.
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Chapter 8: What are the key lessons for successful long-term investing?
It's just reality. So there's always going to be some laggards, but then there's going to be fees that are detracting from the future.
And often active funds will underperform the benchmark by their fees. That's right, yeah. Because they're 1% or 2%.
Yeah, and that's 1% or 2% extra that professional has to be better just to make up for their own costs. So we're seeing fees come down, but this is an issue with managed funds. It's less so with ETFs because they're mostly index funds. They're not active.
Yeah, but there are active exchange-traded funds out there. There are active ETFs, so you have to be careful. Yeah, so just know what you're buying before you buy it because the active ETFs will be following an actively managed strategy and they'll often charge you a higher fee to do so.
Yeah. So what we're saying is when you invest in an ETF, don't just go and just throw a dartboard of names. Actually look at what they do. Find the fees. It's my opinion, but anything over, say, in an ETF, anything over 0.5% or what we call 50 basis points, 0.5% is too much. You don't need to spend that amount of money.
And if you want the ASX 200, but for some reason you buy an active ETF, you're not getting the ASX 200. You're getting some actively managed strategy.
So if you want to see the performance of the ASX 200 reflected in your portfolio, what Kate's saying is that an active investor doesn't do that, whereas an index investor or passive investor does do that. So it's an important distinction. I've got a video that I've done on the RAS Finance website for this if you want to know more about the differences between the two.
Yeah.
Just remember that index is normally what you see on the news, and active is where an individual is picking and choosing what's good. But the statistics are stacked against them. Okay, so we've covered a few things. Kate, let's just go action points.
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