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Bruce Brammall, The Australian, 10 September, 2023
One of three things tends to get blamed for stopping us getting through all the important things we want to achieve in life.
The things we blame are time, money and energy. If only we had more of these, the whole to-do list would get done.
But you know that’s complete rubbish, right?
There is only one thing that stops you getting through the important stuff. Making it a priority.
It doesn’t matter what you know you should be doing. If you don’t make it a priority, it does the equivalent of falling down the back of the couch.
Losing weight, more family time, couch time, cooking, earning more, exercising, housework, relationships, study … what you deem important gets done. The rest? Well, have a figurative look under the cushions on the chaise lounge.
Staying on top
And your investments. You know you need to invest for your future. It needs to be a priority. But do you have the time and energy to be on top of what you’re doing?
Let’s start with: Do you have an investment portfolio? Then, are you across what’s currently in it and what it’s doing?
If you’re managing your own investments, picking your own stocks and moving money around, do you really know what’s going on?
For most, good intentions and plenty of research precede the starting of a portfolio. But like so many DIY projects, once the dust settles, it all gets a bit boring and time consuming and other priorities rocket up the charts.
Start it right?
Let’s go back a step. In hindsight, did you have enough knowledge to build the portfolio in the first place? What do you really know about investing? Do you really understand much about diversification?
What am I getting at? I get to see a lot of portfolios built by people who had good intentions, but little to zero understanding of what they were doing.
On rare occasions, the investment gods smiled down on these novice investors. But more often than not, it doesn’t turn out well. Or even close to average. Particularly those who act on a stock tip into a tiny company that “sounds” like it’s got a winning strategy, or concept or is ahead of the curve.
If the aim was to support an idea, and if you still feel good after your investment dives 90 per cent, then other investors thank you for your sacrifice and dragging down the average to make their relative performance look better.
But if your aim was to make money – and that has to be all but a handful of investors – then how many bad ideas, or poorly run companies, are you happy to donate your cash to?
All on black!
Nope, not all on black.
If you’re buying individual shares, all the research in the world before buying a stock matters for nothing once you actually own it.
It doesn’t take long for the fortunes of an investment to change.
Regular “mum and dad” investors tend to be big fans of buy-and-hold strategies. The thought process is: “How far can you go wrong buying Australia’s big blue chip stocks and holding through the good years and the bad?”
It can go wrong. It does go wrong. (And Australian shares are but a small part of the investment universe. More later.)
If you’re not going to stay on top of your investments – and that means keeping up on what they’re doing and what they’re getting right and wrong – because of time, energy or it slipping down the list of priorities, then you need a change of strategy.
There are options. All will reduce the risk in your portfolio. And reduce the time you need to devote to it. Which means more time for the other parts of your life that you probably do place a higher priority on.
Outsource it
Warren Buffett has a particular skill set in stock picking. He seems pretty confident it hasn’t passed via genes to his kids. As a result, he says his children should use whatever inheritance he gives them to invest in index funds.
Why? Because while he has achieved above-average returns over a lifetime, despite mistakes along the way, he knows how hard that is.
Index funds, however, will get the average return of the market for his kids, without them having to know anything at all about investing.
What are index funds? They just buy every stock (or bond or property) in an index in the same way it makes up the index. As a result, they will get the return of the market they are mirroring. Good, bad, indifferent.
Using index funds (whether managed funds or exchange-traded funds) is one way of outsourcing investment risk.
Core and satellite
If not for all of a portfolio, then perhaps for some parts of it.
If you want to have a crack at buying your own Australian shares, either because you enjoy it or your track record suggests you might be outperforming the average, then consider managed investments for the part of the portfolio that you know you don’t know much about, but know you should be invested in.
Way too many Australian investors end up having, in their portfolio, only two different asset classes – Australian shares and cash.
What are they missing? Most importantly, international shares, which outperform Australian shares, in general, over longer periods.
Take the 10-year returns from index manager, Vanguard. Vanguard’s Australian share fund returned 8.18 per cent over the last 10 years. Not bad. But Vanguard’s international share fund (currency hedged) returned 10.41 per cent (its unhedged version, which includes benefits from the general fall in the Australian dollar), returned 12.69 per cent.
There’s an extra 2.2 to 5 per cent, compounding each year, that Australians have missed out on over the last 10 years, if they didn’t have a portion of their investments invested in offshore markets.
Take just this year. Australia’s overall market returned around 7.4 per cent to the end of August, while the rest of the world returned a tad over 18 per cent.
Index v Active
Diversification into international shares is an important concept to grasp. But if a lightbulb has just clicked on for you, then morphing the same theory through to other asset classes, including property (both Australian and international) and fixed interest can make investment diversification that much easier also.
Index funds (whether managed funds or exchange-traded funds) aren’t the only answer.
While index managers just buy the index as it makes up the index, the bigger portion of the investment industry in Australia is actually via active fund managers, who take positions on what companies and industries to invest in more heavily or not at all.
Active managers invariably charge higher fees, on the “promise” that they will deliver better returns than the index. (Plenty of research proves, on average, they don’t. Check out the research by Googling “SPIVA Australia”.)
And even though I’m an strong advocate for index funds because of their lower fees, inexpensive active funds are usually going to be better as a diversification tool than trying to pick your own stocks, particularly if you’ve found, well, you’re not that good at it, or you want to pick specific themes such as technology, cloud, heath, security or electric vehicles, to name some that are available.
Turn full pro
And then there’s turning everything over to professionals – such as financial advisers.
If you really won’t find the time or don’t have the inclination to look after your investments yourself, including decisions on regular additions, making tax decisions, and how to manage both your super and non-super portfolios, then hiring someone whose full-time job it is to look after this for you is really no different to what you’re probably already doing in other areas of your life.
You might already pay a cleaner, accountant, gardener, to do critical jobs to give you back your time for jobs you can’t be bothered learning enough about, or simply don’t wish to do.
Don’t compound pain
But if you’re looking at whatever portfolio you’ve built, or haven’t started yet, and something in your gut is telling you this isn’t right, don’t make the issue worse by letting it slip down your list of priorities.
Sometimes you need to accept there are some things you’re just never going to be good at, or know that need to be done but you aren’t going to find the time to do properly. My list is long.
If it turns out you need to admit that you’re no good at investing, that’s actually okay. Get help. Efficient, cost-effective, solutions are out there.
Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: bruce@brucebrammallfinancial.com.au.