Pearler are big on long term investing - which is lucky, because Friends with Money were big on discussing it. In this episode of Money Magazine's podcast, Nick and Tom explored why so many younger Australians have flocked towards investing. They also discussed dollar-cost averaging; the key differences between ETFs and shares; and how automation ties into investing strategies.

Would you rather read the episode than listen to it? Easy - you can follow along with the entire transcript below the podcast link.

Friends with Money podcast transcript

Tom: Hello, and thanks for joining us for another episode of the "Friends With Money" podcast. My name is Tom Watson, a senior journalist here at "Money Magazine." And it's great to be with you once again. It's no secret that over the past few years, there's been a massive surge in interest in online investing. Millions of Australians have placed their first-ever trade during the pandemic period, according to research firm investment trends. And while there's been a bit of a drop-off lately as a result of the relatively topsy-turvy markets that we've been seeing, overall, enthusiasm seems to be holding up relatively strongly.

To be honest, though, for plenty of newcomers, getting to grips with some of the basics of investing isn't the easiest thing in the world to do. And I'll freely admit that I found a lot of the concepts and terminology hard to get around when I first started. So, if you're relatively new to the investing game or you're thinking about jumping in for the first time, or perhaps you're an old hand just looking to brush up on things, today's episode is for you because we are going to try and make sense of some of the terminology and strategies involved.

And to lead us forward on our journey, and hopefully, to share some tips and tricks along the way, I'm pleased to say that I'm joined by Nick Nicolaides, the co-founder of investment platform, Pearler. Good day, Nick, it's a pleasure to have you on the pod.

Nick: Hey, Tom, thanks for having me.

Tom: You are very welcome. Before we get into things in earnest, I'm curious to know, Nick, what do you think has drawn so many first-time investors to I investing in the past couple of years?

Nick: Yeah, sure. I mean, I think there's some really, really big-picture things and then there's some really, really personal things, practical things that have drawn people. So, let's start with the big-picture, right?

We are all out there working hard, earning money, and, you know, let's just say there's a few things going on in the world that are causing us a bit of stress about just what that future looks like, whether it's house prices, the length of time it takes to build a deposit, or even just paying for lifestyle that you want. And so I think there's been a huge pool for people to really think about, "Well, what am… I'm turning up to work every day, where is it getting me and where is it gonna get me?"

And so that's really sharpened people's focus on this idea that, "Well, in order to have a good life in the future, I'm gonna need to invest." And that's the first hurdle, right? This idea that you can't just sort of sit around and work for the rest of your life. That's been really brought into focus. And then at the other end of the spectrum, technology helps, right? So, you know, we see a lot of automation and technology driving, making things simpler for us, saving us time, saving us money.

And, you know, that absolutely has driven some cool innovation in terms of investing platforms. We're part of that story. And so, I think, life getting a little bit more serious and at the same time technology getting a little bit more easier, to put these things in the hands of people, put those combinations of things, and the stock market seems to be the first cab off the rank in terms of where people might dip their toe in the water with investing.

Tom: I think I've seen a lot of, you know, my own friends really kind of come to that realization in the last couple years as well and start to come in. So, yeah, it's very relevant for me.

What is an ETF, and how do they differ from shares?

Tom: Let's get into some basics. So, I think one of the major questions that I come across all the time, and, you know, it's so relevant to a lot of people, is what an ETF actually is and how they're different from shares. So, can you maybe provide us with a bit of a lowdown on that subject?

Nick: Yeah, absolutely. I think the place you've gotta start there is, you know, typically when people first hear of the stock market, people focus very much on buying shares of companies you know. So that's, I think, a place to start because I think we all have an understanding of some big Aussie companies, household names, they do whatever it is they do, they make a huge profit, and you can go and buy a share in that company.

So, the stock market is made up a lot of those companies. And what an ETF is, it's a wrapper, a wrapper for 10, 50, 100 of those companies. So what it allows you to do is, in one trade or investment, own little bits of many, many companies. And so a practical example is you can go and buy an ETF that wraps up the top 300 companies listed in Australia.

Tom: And so, it ultimately sounds like they provide, you know, a little bit of diversity for people then.

Benefits and drawbacks of ETFs

Tom: What are the other benefits, and what are the drawbacks of ETFs then?

Nick: Yeah. So diversification is a key one. So, if we think about practically what it is, it's a service and a vehicle provided by a company, and they provide this wrapper. And the pros or the things that have drawn many, many people to ETFs include diversification. So, you can go and, as I said, own little bits of many, many companies. And I think we're all kind of familiar with the idea of not putting all your eggs in one basket. And so it automatically does that for you. Some other things that it does though, is, automatically buys and sells companies that grow and sometimes those that fall through.

So, I mean, maybe we're all familiar with the idea of a big-name company going bust through scandal or some unforeseen event. When you own 100s of companies through an ETF and that happens to one of these companies, it will drift down and one day fall out of that ETF, and you don't have to do anything.

So, a benefit obviously is the diversification, but a benefit is you really have very little to do. And that's what's drawn, you know, lots and lots of money towards the whole ETF market. You know, we should point out, it's not a new thing. It's been very, very popular, particularly in the States for decades now. And I think I read recently something like $130,000,000 of the Australian stock market is allocated towards these ETFs.

Tom: Wow. That's a lot. So they're really living, breathing kind of vehicles in a way then.

Nick: Yeah. It's sometimes easy to get caught up in the complexity because at the end of the day, all you are doing is still just buying little slithers of real companies with shop fronts and services out there every day doing their thing, but you've got this wrapper or this layer that makes things really simple for you. You know, if we talk about the benefits, you know, which we've just mentioned a few, we should also mention, there's definitely some things that, you know, involve costs and some things to look for in ETFs.

So, obviously, for the convenience of not having to go and buy the shares of 300 companies, you are going to pay something. And so a key difference between an ETF and a share is, let's say you walk down the street and buy some shares in a big bank, you buy them then and there, you have nothing to do other than sit there and hold them, and collect dividends. They won't charge you any more to hold them, there's no costs involved. You go and buy an ETF that holds that same big bank, it will cost you something to hold that ETF.

Now, they're not gonna come and ask you for the money, it will be taken out of the profits and dividends of that company. So you don't feel this, but one of the things that people do research when they're looking at different ETFs is the costs. So, I think that's probably the main thing to look for in terms of ETFs or the con, if we call it that, is there is an ongoing cost, but with technology and the scale of these things, it's generally accepted these days that that cost is a fairly fair exchange of value.

Dollar-cost averaging

Tom: Moving on from ETFs, this is something that, when I first started looking at investing, I kept coming across this term, and that term is dollar-cost averaging. So what actually is that, Nick, and why might someone want to, you know, employ it as part of their strategy?

Nick: Yeah, absolutely. So, I think, you know, one of the hard things for people to get their head around with financial education is there are so many different financial positions we can all be in. So, let's just pick one, and I'll answer it for that one, right? So, let's just assume you're a young person, you're somewhere between 20 and 40 years old, you're earning a salary fortnightly or monthly. So, you have savings that could be invested regularly, right?

You haven't won the lottery, you haven't got some huge windfall that you're trying to invest. You have only a few options, right? You can save your money in the bank and then invest it every year or every six months, or you can wait for that perfect time, or you can say, "Well, I'm getting money every month and I don't want that sitting in my bank because inflation or I might spend it, or whatever else," you can go and make that choice to invest it every month.

And in its simplest sense, dollar-cost averaging is a technical term given to investing in equal amounts in equal time increments. So, practically speaking, if you are saving $1,000 every month and investing $1,000 every month, you are dollar-cost averaging.

Tom: Right. So that's pretty straightforward.

Nick: Yeah, it is pretty straightforward, but what's really interesting is the theory behind it. So, there's been a lot of studies, and what you might hear from time to time is it's really hard to time the market and pick the market. It's a human nature kind of element where you will be trying to factor in the best time to do something, you will try to factor in the news, market's down, and wondering, "should i be investing?"

Dollar-cost averaging is a theory that is meant to help you always be buying in the market, avoid all of the stress and second-guessing, and then, therefore, help you invest and stay in the market longer. And by staying in the market longer, history will suggest that you will do better.

How (and why) auto-investing works

Tom: I know Pearler has an auto-investing feature. So, I guess I'd, you know, hope that you might be able to tell us a bit about how that works and whether it might be useful for someone who is looking or thinking about using dollar-cost averaging as part of their strategy.

Nick: Absolutely love to talk about that. What we've always gotta do with these things is try and isolate what type of investing we're doing.

So Pearler's main product is asx and u.s. share investing, which means you have a brokerage account, you buy and sell any share you like. There are other ways we are all investing, like micro investing is a common term, and that is much easier to automate because they can take your money each month or fortnight and spread it across their fund. That might be another conversation.

And then the best example is your super, right? So your super is automated every time you get paid, and that is automatically investing every time. So you don't even think about it. And it just keeps bubbling away, it's fantastic, right? So, with that said, when we were building Pearler, we looked at the market and we thought, "There's lots of trading apps out there, but there's lots of danger and risk involved with trading."

And there's also, beyond all the risk in trading, there's also a lot of friction. I've gotta transfer money from one bank account to another, I've gotta wait for it to arrive. I've gotta log in during the market hours when I'm probably at work, and then I've gotta pick the stock that I thought I was gonna pick, but then I don't know if I should pick it. And then, you know, it's just there's so much friction, right?

Tom: It's very familiar, that scenario as well.

Nick: Yeah. And then you sit there, and you're like, "I was gonna go buy these shares, but yesterday the price was a bit lower. Now the price is a bit higher." So, look, I could go on all day, but basically, when we were developing the idea for Pearler, one of the key things we wanted to do was actually improve share investing. And one of the ways we thought we could improve share investing was to give everyone all of the controls.

So, not limited so that you can only invest in a handful of things, but give you the entire market, but also give you the tools to remove that friction, to remove all of that second guessing.

So, Autoinvest is super simple. You can pick one, two, however many shares or ETFs, and you put them in your target portfolio, then you give us some rules. And those rules will be, how often do you want to deposit, and then how do you want to invest in your portfolio? Do you invest one share at a time or do you rebalance across the whole portfolio? To break it down more simply, it's just a way of going, if you make a decision to invest in a handful of companies, you're probably not gonna second-guess that every month.

And if you are, you sound like a professional trader. So we just thought, "Well, once you make that decision, there's not that many more decisions to make." The best thing you can do is focus on saving and, you know, enjoying your life. So that's what auto-investor is really built for.

Tom: I can definitely see the appeal of that. And personally, as well, just taking out one of those steps and considerations, you know, definitely does it for me.

An overview of dividends

Tom: One final question for you, Nick. it's a biggie though. what are dividends, and are they something that are relatively new or casual investor should be thinking about?

**Nick: **Yes. So, I think the last part of your question is particularly important, right? So, if we go back to the start of our conversation and we go, we all kind of get across this idea that buying a share, you are actually owning a company and that that company hopefully is making profits, and that company is then paying out those profits as dividends.

So it's real, right? These are real businesses and real money. Now, for myself and people in their 20s, 30s, and 40s, the dividend checks that might come through might seem really small and inconsequential, but it's real money. And so, the way to think about dividends is really simple, it's the profits that are allocated to the share you own in the business.

I think for people earlier on in their investing journey, you gotta bring it back to what am I trying to achieve? And what am I doing today with this money, and what is it buying me in the future? So, does a handful of dollars of dividend, is that gonna fund my lifestyle today? No, not necessarily, but what would those dividends do if they were reinvested year after year and then decade after decade?

And I think that's, for our generations, the most important thing to think about with dividends, is, you know, we shouldn't talk about interest in a bank, and shares, and dividends in the same conversation because we'd never wanna say they were the same thing, they're very different, and one's much more sure than the other.

But, I think we can all talk about compound interest. And what dividends do are give you back some value. It's up to you what to do with them. What I can say is that, you know, across the Pearler community, most people are investing in ETFs. So it's about 70% of money goes into ETFs. And the only reason I bring that up is because almost 100% of those people are choosing to reinvest the dividends.

Tom: Interesting.

Nick: So, you might often hear that as DRP or dividend reinvestment plan, and that's where the ETF or the company, instead of giving you cash deposited into your account, they give you more shares or units. So, just to summarize, most people in our cohort of passive investors who are thinking long-term are asking for the dividends to be given to them in more shares, then those shares will continue to earn more dividends, and it snowballs into the future.

Other tips for casual investors

Tom: I promised that that was the last question, but I lied. I'm conscious of time as well, but before we call it a day, are there any other general tips or tricks for casual investors that you'd maybe like to leave us with?

Nick: Right now, at the moment, one of the big questions that everyone's asking themselves is, what's happening in the market? And you just can't avoid it. So, even the most committed long term investors who have been doing it for years, you can't help but be distracted by what's going on in the world. And all you can do is control how you react. The things that drive that anxiety are things like obsessively checking your app or always thinking you need to be considering selling out, or should you be buying something different?

And, you know, what I would say is, you know, practically you can do some things like maybe getting rid of some apps off your phone, maybe avoiding checking your portfolio or setting a calendar entry, to do it once a week or once a month. You can control that, right?

But, I think more than anything, a tip and a trick would just be simply, keep reminding yourself why you started investing in the first place. And if you started investing in 2020 or 2021 when things were going up and you were feeling really happy and good, ask yourself, has anything changed in your life? Has anything changed with your goals? Has anything changed with your earning? If the answer to all those things is no, then you really gotta question, well, should anything have changed with my investing? If I was happy back then, why aren't I happy now? And if it just comes down to, well, the world's scary, then you can probably control that and you can use that, and over time get on top of it.

Tom: Listen, again, I think that's very relative. And I've gone from someone who checked their app almost daily to once a month, and it's done me a world of goods. So, yeah, definitely good advice and a good note to end on as well. So, Nick, thank you so much for joining us today. It's been a pleasure having you and thanks so much for doing such a stellar job explaining everything to us.

Nick: Thanks, Tom. Happy to help someone.