October 7, 2020
Welcome to the latest Strong Money Q&A session!
Think of this like you and I sitting down having a cuppa together and I share my thoughts on a bunch of different questions.
These posts are simply to provide more detail on certain topics where a whole article may not be necessary.
This week, we’re talking about:
Friendly Disclaimer: Remember, nothing on this blog is personal advice. I’m not an expert on tax, investments, or anything really. Please do your own research before making any financial decisions.
As I look around, every investment looks unpredictable given covid-19. Do you still see index funds as a good place to be?
Investments are always unpredictable, welcome to investing! Nothing really new has happened this year in that regard.
If everything was breezy and guaranteed, there would be no risk. If there’s no risk, there’s no reward. If there’s no reward, there’s no return. We earn higher returns in the markets over time because of the risk and uncertainty.
So yes, I still see the sharemarket and index funds as a good place to be. The world will keep turning, companies aren’t going anywhere and most other ‘safe’ assets offer near-zero return from here because interest rates are so low.
Good evening Dave. Been an avid follower for a long time now and enjoy my weekly sit down read and now the new podcast which is awesome.
Been branching out lately and doing more research to future-proof my investments. I’ve come across some of Ray Dalio’s research, and articles about the long and short-term debt cycles with regard to rise and fall of world powers stretching back to early 1700’s.
His research always sees the patterns repeat in their different stages and it appears this cycle is maturing with current world, economic and political tensions. Just wondering your thoughts on this, if you’ve read about it?
Great to hear you’re enjoying the content!
I have read some of Dalio’s stuff and he’s a very clever guy. By the way, his video on how the economy works is a great piece of content which everybody should watch…
Anyway, his comments and concerns are very interesting, but they don’t change how I invest. After all, there’s no real way to ‘future-proof’ your investments against all the risks. You have to invest in something and all investments have their own version of risk.
As far as I’m aware, Dalio invests in ETFs, bonds, gold, specific countries and currencies in a mix which is constantly changing. His approach is beyond the realm of my understanding (or interest).
For me, the key factor is, I can’t be confident of getting decent long term returns from gold, bonds, or other assets which have little or no earnings and have no built-in growth component like shares and real estate do. So I choose not to bother with them.
Also keep in mind, Dalio is constantly watching things so he can and does change his mind from month to month. Even if he’s right, how can you replicate that knowledge and those actions in a way that is easy to follow?
You can’t. So in that sense, no big macro predictions (even from Dalio) are all that helpful to the everyday investor. And even if you follow his every move, there’s no guarantee he’s going to outperform.
Here’s what makes sense to me: Keep it simple. Focus on saving. And invest in the asset classes that have the best chance of good long term returns. But others may see it differently.
Hey Dave, loving the podcast. Just wanted to know what your opinion is on equal weight etfs?
For example, MVW – Van Eck Equal Weight ETF. Sure, the management fee is a little more and there’s some rebalancing etc.
But the performance seems to be better than a regular index fund like VAS. And you seem to get way better diversification, not so much concentration in one industry like banking.
The equal weight fund is interesting. Turnover doesn’t seem that high (since the distributions aren’t huge), so it’s tax efficient. Fees aren’t horribly high either. The fund is also over $1 billion, so it won’t be getting shut down anytime soon.
I guess the thing is, this fund won’t always outperform. It has outperformed in the last 5 years because large caps like banks have underperformed.
By definition, it underweights large companies, and overweights mid sized companies, compared to a broad index fund. So if and when that reverses (which it has to at some point), the opposite will occur.
It’s also been helped by overweighting tech (but some of these have zero earnings and are still up 5-10x!) Also, some day the big winners become large caps themselves, at which point, you’ll then be underweight these winners and have to hope the next batch of mid cap stocks do the same thing.
Imagine underweighting large caps in the US. You would’ve probably been crushed, because the largest companies have been performing the best. These things go both ways.
I don’t like that the fund has a rule of ‘minimum of 25 holdings’. Theoretically, the fund could be running a very small portfolio at some point, which would make me nervous. So I wouldn’t want to use this as my entire Aussie shares exposure.
If you’re buying it because you expect it to keep outperforming, I don’t think that’s a great idea. But if you’re buying it alongside a broad Aussie fund, and you feel more comfortable having both, then it could be worth considering.
Part of me suspects that recent performance could be creating the attraction though. If it had underperformed recently, would you still be looking at it?
As far as investing in an ETF other than a plain index fund, this is one of the few I’d consider. But it might be hard to keep holding it when at some point large caps outperform again.
Hi Dave, hoping you are well. I was hoping you could expand on Peter Thornhill’s position on ETFs, regarding the trust structure and liquidity.
I am trying to decide on whether to sell my ETFs and consolidate into LICs as Peter’s arguments are compelling! Keep up the great work!
I can’t speak for Peter, but I have briefly spoken to him about this. He doesn’t like the trust structure because any realised capital gains from turnover in the fund has to be paid out. That can be pretty tax inefficient.
But this concern is not a problem with broad index funds like VAS, because turnover is extremely low (less than 5%). In fact, it’s similar to the old LICs, sometimes lower.
However, this concern is valid for unlisted managed funds (which have to deal with people redeeming their money), and ETFs which change their portfolio around regularly.
Peter is also concerned about liquidity – being able to buy and sell when you want or need to. But this is also not a problem with broad index funds.
When we buy LICs, we’re buying from people who are selling. When we buy index funds, the same is also true.
But in addition to this, if there are no sellers, a ‘market maker’ will step in to create units for Vanguard, which will take your money and then replicate the index for you. This is not available with LICs. So there is actually more liquidity with something like VAS, not less.
I’ve talked to Peter about these points but he’s not convinced. He’s happy sticking with LICs (they’ve served him well and I still like them too). But these two supposed negatives are not really an issue for broad index funds, so the fears aren’t warranted.
Here’s my investment strategy outside of super: throw all my spare money (minus the occasional whisky bottle) into Vanguard high growth index fund.
I use the managed fund version – even though fees are higher, I am more committed (tried the ETF route, but it’s easier to find $100 than $2000).
However, I may be having crypto FOMO. I’m still erring on the side of it all being voodoo and I should stick to my plan. But there is that sneaky voice on my shoulder saying just throw some coin in, what’s the worst that could happen?
What are your thoughts on crypto and do you think it will ever form part of your strategy towards wealth creation? Cheers and keep up the awesome work (love the podcast).
I like your approach and that you’ve found a good workaround for your mindset, making it easier to invest regularly. This is a great example where it’s not all about fees – our habits and behaviour are equally important.
And there’s good news: As of 1 October, the retail funds will move to the same low fee as the wholesale funds. Most people will be able to access these by opening a Vanguard’s new Personal Investor account. There is an account fee but this will still work out far cheaper than the old retail funds.
Okay, crypto. Well, the worst that could happen is whatever you buy goes to zero and it was a complete waste of time (and money). Additionally, crypto could take off and you think it’s the best thing ever so you start tipping more and more in, and then it collapses.
I think crypto (the currency, not the technology) is rubbish to be honest. It will never form part of my wealth strategy. It may become a store of wealth like gold, but gold is also useless in my view. It does nothing, it’s a lump of rock which produces no earnings or dividends, and has no fundamental value other than what people are willing to pay for it.
Yes, you can make pretty things with gold and I get that people like gold because it moves differently than stocks, so it offers a ‘diversification’ benefit. But I have no interest in using an asset with no fundamentals and low expected returns to help me diversify.
Compare that to real estate which provides housing or a place for business to operate from. Compare it to companies which make real cashflows providing goods and services, software, food, medicine, telecoms and so on which keeps the world running.
There is a fundamental reason that business and real estate have value today and will remain valuable in the future. They produce cashflow. What do metals and crypto provide? They go up if other people want to pay more than you did?
Anyway, I’m clearly not a fan. But if you want to put a tiny bit of cash in to participate and not ‘miss out’, then that’s up to you. But have a very strict limit and be honest with yourself that it is 100% speculation, not investing.
Hi mate, can you help out a newbie? Can you please explain franking credits and how they work etc?
Sorry for the boring, simple request. Thanks for your writing, I am working my way through your content and learning heaps.
Here’s the basic rundown…
Franking credits are essentially a tax credit. Aussie companies earn money and then pay tax. Then from what’s left they pay shareholders a dividend. But because they’ve already paid tax on this money, you get a credit known as a ‘franking credit’, for the tax that has already been paid on this money.
You’ll receive a cash dividend with a franking credit ‘attached’ to it. Your dividend statement will show both the dividend and the franking credit.
At tax time, you declare the dividend and the tax credit, and the ATO works out if you have to pay any tax or you get a refund. There’s a franking credit calculator on this page which can help estimate the tax outcome of your dividends.
Hello. Could you please write about what security is behind ETF investments?
What happens if Selfwealth disappears? Or if Vanguard goes bankrupt? What happens with the money invested? Is it backed up by real shares?
First, Selfwealth are simply a broker, like Commsec or anyone else. The holdings we’re buying are CHESS sponsored. That means our ownership is electronically recorded with the ASX (Australian Securities Exchange). Selfwealth (the broker in this case) is simply the place where we do our shopping.
If Selfwealth or another broker was to disappear, your holdings don’t disappear. Your holdings/trading account can simply be transferred to another broker at that point.
Vanguard is the manager of the actual funds you’ve invested in. But in the unlikely event that Vanguard went broke, this still isn’t something to worry about. If you google this, it has been written about at length many times.
Vanguard takes your money and invests it directly into replicating the ASX 300 share index (using VAS as an example). If Vanguard disappears, the management of the funds could be transferred to someone else, but you still own the underlying shares. Hope that makes sense!
That’s it for today! A lot of comments about the podcast… is anyone still reading the blog? Haha 😉
I hope you found this Q&A session interesting. If you have a question you’d like me to answer, send it through via my contact page and I’ll do my best to get back to you. I can’t reply to everyone unfortunately, but I do try.
How would you answer these questions? Do you have any thoughts on these topics? Let me know in the comments below. Thanks for reading!