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Chapter 1: What is the main topic discussed in this episode?
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This podcast contains general financial advice only. That means it's not specific to you, your needs, goals or objectives. So don't act on the information until you've spoken with your financial advisor. You'll find our full disclosure, disclaimer and link to our financial services guide in the show notes. Welcome to this episode of the Australian Finance Podcast.
Kate, it's always a pleasure to be with you. Wonderful to be back, Owen, and recording in person. What a positive start to this episode, I might add. That was very, like we came out of the blocks, very positive, lots of energy.
I mean, I've only had one coffee, but I'm feeling it.
Yeah, you're feeling it. It's good. It's because it's a Q&A episode. This is where we take your questions, we try and answer them, and we have a bit of fun doing so. So if you ever want to ask a question, Kate, where can people find us?
I'd love you to send your questions to our podcast inbox, podcast, podcast, I can't even speak this morning, at rask.com.au. We can't answer everyone's emails, but I do look at them all and our team does. So we'll pick the best ones and the most interesting ones and the ones we haven't covered before and pop them in the Q&A or you turn them into a future episode.
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Chapter 2: What are margin loans and how do they work?
And typically they take the cards away from you at the best time to invest. So when things have fallen, it's often- And the worst time to sell. The worst time to sell. And so in investing, probably the number one rule is never be a forced seller. Never be someone that's forced to sell an investment because if you are a good investor, you don't want to put yourself in that situation.
And we saw this during COVID when even companies that use debt, they were like way down by this anchor of paying interest at the same time as companies without debt were able to invest more money. So you do not want to be in that situation. That's just my kind of overall opinion. But Kate, what are some of the pros if we're trying to be balanced?
As Bryce said, we do try and take an objective lens to these things. If we're trying to be balanced, what are some of the reasons why people would consider a margin loan?
Yeah, the first thing, which I think it's not as relevant now that ETFs are available, but diversification. When you could only buy individual shares, if you only had $20,000 to invest, maybe you could buy a handful of different shares. But if you wanted to diversify your portfolio even more and buy 20 different shares, maybe you don't have enough capital to do that.
So by having a margin loan, you've got more funds to play with and invest. The second one is leverage. If you know what you're doing, amplifying your gains and you do need to take into account the fees. We haven't even mentioned fees, but the bank doesn't do this for free. The bank is taking on risk and it generally costs more than a loan for a house, the interest you're going to pay per year.
It's riskier for them to lend it to you.
Yeah, access to that larger pool of funds. It doesn't need to be secured against the property. So sometimes when you have loans, they'll secure it against.
they'll say, we'll only give you a loan, but if something goes wrong, we get your house.
Yeah. So you don't have to do that, but they are secured against the equity and the bank or the lender does have a lot more control to sell it underneath you. So you do lose a bit of control. It can be a good tool.
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Chapter 3: What are the risks associated with margin loans?
You've got the security of share registries that you know. I would honestly just go with an Australian one. There's so many in Australia. You don't need to buy a US listed ETF right now. That could change. Like if there's certain products like crypto, ETFs have been around for a long time, not in the States, but overseas. Maybe people wanted those in the past.
And there are some particular thematic ETFs that you can't find on the Australian market. I was looking at one the other day, which is a millennial consumer goods ETF, which was quite large in the US and investing in particular trends of people that fell into that millennial age category.
And so there's a lot of interesting ETFs that can look quite attractive and shiny listed over there that aren't here. But I think if it's something as simple as the S&P 500, like the top 500 US companies listed,
i would probably just stick with australia investing it by the australian stock exchange because it's just a bit simpler and it's simpler at the end of the day simpler with tax simpler of administration yep for sure cool that's a great question from ross thanks for that mate we've got another um listener starting with ah renee
Renee writes in via email says, is it worth having a DRP? And this is the comment. I think the question is here. As I have mentioned before, Barefoot Investor was what got us into improving our personal finances and investing. So when I started buying some shares slash ETFs, I followed Barefoot's advice and elected to do the dividend reinvestment plan or DSP where it is available.
But now I'm hearing a bit more, now I'm learning a bit more, I'm wondering if I should be thinking about the share price when I do this. Our portfolio is still in the beginning stages so if there is a share price in the hundreds, it's going to take some time, years for the dividend reinvestment plan to build up to the full amount of a share and be reinvested.
I'm thinking it would be better just to be paid the dividend and add it to my investing bank account to then be used when I make a regular monthly investment. Would love to hear your thoughts on this. So basically what Renee is asking is, I've elected to take my dividends instead of in cash to be reinvested, but I don't get enough of a dividend to get one new share. So what can I do?
I think this is quite topical because some of the ETFs and especially the popular ones, I think A200 is nearly $200.
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Chapter 4: How does hyperinflation impact investment strategies?
Yeah, right. So when it comes to, it doesn't really matter with ETFs what the price is apart from when it comes to dividend reinvestment plans because If, say, your ETF was around $100 unit price, it was paying 5% in dividends this year, so you're going to receive around $5. To reinvest that, it's going to take a long time before you get a whole individual another $100 unit.
And so what they do is they kind of hold the residual amount until it accumulates enough to buy you another unit and reinvest that. So... For someone with a smaller portfolio with something that doesn't pay very high dividends, it could take many, many years before you get issued another unit or share in that particular product.
So in terms of that, I think sometimes it can actually be more worthwhile to get it paid out in cash because you don't have these residual amounts sitting around doing nothing. But it could be many, many years before you get actually that additional unit.
You may as well take it, yeah.
So you may as well do something. And sometimes when you sell, when you haven't actually had a full dividend or unit reinvested because you didn't have enough, it gets donated to charity or the money just gets lost. So you don't always get that money back. So I think sometimes with smaller amounts it is easier, especially with those larger unit-priced ETFs.
For sure. So I guess at the end of the day here, Renee, if it's going to take you many, many years to get another unit, you may as well just take the money and go and invest it. Purely from a compounding perspective, you can go and do something with it, whatever you want to do.
There are benefits to some of them, like we've talked in the past about how some listed investment companies have particular tax benefits to being DRP'd, but for the most part, and they're not even called DRPs, they're DSSPs, aren't they? So in that case, you might want to consider the tax benefits. But honestly, for small amounts of money, you could probably just take it and reinvest it.
Yeah, I think the bigger risk is that the money just gets lost in the system if you don't have that $5, $10 paid out into your...
cash accounts so you can do what you want with that you can build it up into your next thousand dollar parcel that you invest in another etf or share and i think it's just really worth considering whether it's worth it whether it's worth the administration of having to keep that rolling over um yeah so yep cool okay maybe i'll let you ask this last question it's a it's from renee by email as well
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