In this online workshop, the award-winning financial adviser covered his strategies for long term investing. Over 1,000 members of the Pearler community registered to attend the workshop live - but if you missed out, no worries. You can now watch a recording of the workshop here.
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Disclaimer: The author's views are entirely his own and may not always reflect the views of Pearler. Please also remember that this is not to be considered as financial advice and to always make sure that you do your own research!
Transcript
Today I'm going to give you guys some tips and some ideas that can help you make smarter decisions around investing in your money more broadly. Look, I'm calling out that I think when it comes to this stuff, that, unfortunately, there's no one set of steps that every person can take that's gonna lead them from where they are to money success, because the right moves for each one of you guys, it really depends on you. It depends on where you're at now. It depends on what's important to you. It depends on what's coming up.
So, today, instead of me telling you about the magical 17 steps to make a boatload of money, instead, what I'm gonna do is help you understand the things that you need to know, the questions that you need to ask and answer to make sure that you're making the smartest moves for you.
Big shout out to our event partners, Pearler, for collaborating with us on this event. I assume that most of you guys are pretty familiar with these guys that are making it easier for people to invest smarter. If you're not, you should totally check them out. They're up to some really good stuff. Love their tech, really easy to use, really easy to navigate. And they can help you implement some of the tactics and strategies that we're talking about today. So, check those guys out.
How to build that sweet passive income life and reach FIRE
Guys, please don't rush out and make any life-changing decisions off the back of what I cover. I strongly suggest you seek out personalised advice before jumping in if you're making big money decisions, you probably should be doing that anyway. Look, I thought… Today, I've been doing a bit of content around basically how to replace your income from investing recently. And I thought it'd be good to start with an example around that now. I'll throw a few numbers at you. So apologies about that.
Essentially, what I've got here is, in Australia, the average income is $92,000. So, I think that, ultimately, the goal for investing and for money success more broadly is essentially replacing your salary with investment income, whether it's your actual salary, or it's your ideal salary, whatever that might be. But, to me, that's a definition of money success and financial freedom. It means that you've got enough money coming into your bank account that can allow you to live the lifestyle that you want and it means that you're not forced to work.
Not about retiring, because, you know, who wants to retire at 35? Or maybe some of us. It depends on, I suppose, what day of the week you ask the question, but it gives you the option that you can work out of choice as opposed to working because you have to because you're dependent on your income.
The maths to get there
So, basically, to replace an income of $92,000, you would need a total wealth pool of about $1.84 million. How we get there, and this is a rough rule of thumb, which is a little bit rough, but it is helpful as a starting point, is that essentially, if you want to replace a certain level of income for yourself, if you divide that number by 5%, or, on the flip side, if you multiply it by 20, it gives you a good starting point as a number. Now, the 30-year return on the Australian share market is 9.8%.
Well, how we get to this 5% number is you essentially start with 9.8%, you take off 2.5% for inflation, you take off 2.3% for taxes and fees, and you're left with 5% that you can draw from a portfolio of assets year, on year, on year without actually eating into your capital without drawing that down over time. So, what that means is that if you had $1.84 million invested into a diversified share portfolio today, you should be able to draw an income about $92,000 this year, and then next year you draw $92,000 inflation adjusted.
Yeah, Chris got a question that says 5% as opposed to 4%. Look, like I said, it's a rough rule of thumb. Some people say 4%, some people say 5%, some people say multiply by 20, some people say multiply by 25. But we're talking about long-term timeframes here. So, there's a lot of things that can change. But, yeah, either number is good. If you wanna be a bit more conservative, 4%, you know that that's gonna be rock solid. But 5%, if you look at the past and what you would have needed if you'd been in this position 10 years ago, or 20 years ago, or where I think you really need to be today is about that 5% mark.
It makes sense when you're planning to be a bit pessimistic because then you're more likely to be pleasantly surprised and fall short. But either of those numbers gets you to a pretty good starting point. Good question, Chris. So, I looked at, well, how much do you need to save and invest to get there? So, if you start when you're 20, you need to save $10.10 a day in order to build $1.8 million. This is by age 60. If you wait until you're 30, though, you see that that number increases to $27 a day. If you wait until you're 40, it's $80 a day. And $80 a day, that's a pretty decent chunk of change, you know, you're talking about 600-ish dollars a week. That's a big chunk out of, certainly, if you're on something like the average income, that's a big chunk of your income.
And if you wait until you're 50, it's $296 a day, which is actually more than what the average income would allow you to actually do. So, what you see you see, you see the power of time in that, like, starting small, consistent, incremental investments. You don't need a lot of money, but it also shows you the power of getting started. And that's what I got here. Like, a lot of people get great ideas about investing. But I found that there are some challenges that stop people from actually taking action.
The three main ones that I see is this information overload. So many options, so much information to drink from the firehose. People struggle to find a good balance between getting ahead with their investing and getting ahead with their money and living a good lifestyle. And the third is the FOMO, fear of missing out. But probably more than that is the fear of making a mistake, the fear of doing something dumb that cost you a bunch of money. And what happens, as a result, is you end up stuck, and you're stuck, not stuck doing nothing, but you're just stuck in this doing the same thing that you've been doing in the past, and you're missing the opportunity to be getting better results and getting more out of what you have today.
So, what I've found is that there's actually three elements that you need to get right if you want to be a successful investor, if you wanna be successful with your money, which is structure, strategy, and solutions. And they're the three areas that I'm gonna cover as we go through the content today. The first is your structure. And that's all about making it easy to save and manage your money, and making it really clear how much money you've got to work with when it comes to you're investing, you're saving, you're paying down debt, you're buying property, whatever the case may be.
Strategy to FIRE and retirement
The next is your strategy. And that's all about understanding the different pathways that can take you from where you are to where you wanna be and choosing the best path for you, breaking that down into a clear action plan so you know what your next steps are and when they're actually happening, so you feel like you're really on top of things.
Solutions to back up your strategy
The next one is solutions. And that's the investments that you use to back up your strategy. And here, you wanna make sure you're getting reliable, consistent progress over time, and avoiding the setbacks or downsides and those momentum-killing mistakes. Now, you guys might have heard me say this before if you've been following along with this event series, but, essentially, if any one of the three elements is missing, it drags down on the others. If your structure is missing, you're working with the leaky bucket, it's hard to know what your numbers are that drive what make the best decisions. It's also really hard to plan and go into the strategy piece and do that with confidence.
But if your strategy is missing, you're leaving money on the table, you're leaving peace of mind on the table. And if you don't have good investments, you block your cash. And, you know, obviously, that's a total disaster.
So, you need to nail all three areas. It's not just about choosing great investments, and it's not just about being a good saver, and it's not just about having a great plan. You need to get all three of them working together. And the good news is that the power of the three together is much more than the power of any one individually on its own. So, that's exactly what we're gonna cover as we go through today. But before we do, I wanted to get into the different stages that I found that people go through with their money.
The stages to reaching financial enlightenment
Essentially, what I found from talking to people about it over a long time about their money is that there's four clear stages that people go through, ranging from really bad to really good. What defines where you're at is how quickly you're getting ahead with your money, your ability to live the life that you want, but like having the money to live the lifestyle that you want, and how you feel about your money, your peace of mind levels, confidence level, stress levels.
The first stage - distress
The first stage that I see people in is distressed. And for people in the distressed stage, that's where they're making no progress at all with their money, or in some cases, they're even going backwards. From a peace of mind point of view, they're pretty stressed out, and, understandably, because of the fact that they've got no money to make the personal or lifestyle choices that they want. And they're essentially trapped from a lifestyle perspective because they don't have any money to do the things that they wanna do. What I found is that it's actually impossible to get out of this distressed stage without making a real commitment to your money because money is one of these things that is really important, but it's also never really urgent.
The stalled stage
So, it's really easy for it to go on to the back burner and put off for some magical tomorrow that never seems to come around. The next stage that I see people in is a stalled stage. And people in this stage, that's where you're making some progress getting ahead, but it's slow, and it's slower than you'd like it to be. From a lifestyle balanced point of view, you're able to make some of the personal lifestyle choices that you want, but it often comes at the sacrifice of getting ahead with your money at the rate that you want. And from a peace of mind point of view, you're not fully stressed out, but you do just have this nagging thought in the back of your mind that there's something more that you can be missing out on, something more that you are missing out on.
The final stages - being comfortable and killing it
The next stage is comfortable, and people in the comfortable stage are starting to build some good momentum from a financial perspective, finding a good balance between lifestyle and getting ahead with money, and building real confidence. And then the fourth stage is…this is what I very technically label the killing-it stage. And people in the killing-it stage, that's where rapid acceleration from a financial perspective, no limits on the lifestyle that you can live, and feeling completely carefree.
Now, I won't make anyone volunteer, but I wonder if any of you guys can identify with any of the stages in there. And as I say, it is a clear progression. And there are some things that you can do to progress through the stages. The first is making that commitment. The key to getting from a stalled stage to the comfortable stage is about taking action. You've gotta do stuff, like… And, like, for all of you guys here listening in today, I hope you get some great ideas. I hope you get some good motivation. But good ideas and great motivation in itself is not gonna make you financially successful. What you need to do is you need to go and make that investment. You need to set up that savings account. You need to get rid of that credit card. You need to buy that property. Whatever it is, you need to actually do the things that are gonna start building the momentum and start driving the results.
Once you've done some stuff, and once you've taken some action, you need to do that on an ongoing basis, because, unfortunately, these days, everything is changing so quickly. That means that you need to be on the front foot with your strategy if you wanna be getting the best results. So, basically, there's three things that drive when your plan needs to change. One is what's going on with your money. Two is what's going on in the world, financial markets and investment markets, etc. And three is what you want and how you feel about stuff, where you wanna leave, what sorts of things you wanna do from a family career perspective, all of those sorts of things.
When any one of these three things changes, that's where you need to look at what you're doing with your money and say, "Well, does my money plan, does my money strategy, my approach, my tactics, do they need to change as well?" If you do that, that's what really takes you to the next level. And then the key to putting yourself in the best position possible is about maximising every single opportunity that's available to you. That's about making sure things are optimised from a tax perspective, that you're doing the right thing with your debt, your investments, you're on top, you're super and not paying too much in fees, all of these things, because the power of all those combined is what gives you the rapid acceleration starts getting the rapid results.
What about when the markets are in freefall?
So, yeah, I think no matter where you're at, there are some things that you can do to take it to the next level. And one thing I would say, and I'm just gonna come to a question in a second, but if you start maximising every opportunity, if you're in the earlier stages, then you start getting results more quickly. So, you don't need to wait until you're in the, say, the comfortable stage, to start doing everything. If you start doing that when you're in the distressed stage or the stalled stage, that's when you start really accelerating things as well. Got a question that says, "What is the historical data on investing in ETFs when markets are in freefall, i.e. in an extended recession scenario, does the investor win in long-term if sticking to investments?"
It's an interesting question. And I'm not 100% sure. Certainly, I don't have the data, you know, in here, but I'm sure that the data does exist. But I think anecdotally, what you could say is that if you looked at, say, 2008 was the last serious recession that we saw, and if you're investing from throughout 2008, from 2008 to say 2011 when markets strongly recovered, your investments would have recovered in a much stronger position. And it's funny, like, I'm actually writing my second book at the moment, which is super exciting. I had to submit my sample yesterday. So I've done the first three chapters, which I felt a little bit like I was back at uni.
But part of that was talking about when you invest in shares and what that means for your investing journey. And when you invest in shares, and maybe this will sort of come up a little bit later on as well, but getting a bit off-topic, which I think is relevant to this question is that, like, when you invest in shares, they say that your investment time frame should be 7 to 10 years or more. The reason that they say that your suggested timeframe should be 7 to 10 years or more is essentially to protect you from an extended recession, that if the economy goes down, if the share market goes right down and stays down for a long time, it could stay down for years.
Inflation
Now, I talk to a lot of people that they start hitting their straps from an income and savings capacity perspective and they're looking at making the money moves that they want for the future. Often, for a lot of people, a big part of that is buying a home or an investment property. And if you don't necessarily have the support of family to do things like a family guarantee and you have to save your deposit and buy that property, that is a ton of work. Take you some time to get there. And if you're saving money in a bank account, particularly with what we're seeing at the moment with the super high inflation, but even if it's not super high inflation, your bank money isn't growing very fast in a bank account. And when you take even regular inflation into account, it's like your money is really going backwards.
So, people start getting frustrated if you've got $50,000 sitting in a bank account. You can see it's not really working that hard for you. And then they reach out to us and say, "What should I be doing?" We talk about this stuff with investment markets and the fact that if they invested into the share market, they need to be prepared to leave it there for years if the share market goes down. But if the share market goes down, then you have the ability to just keep contributing more. And while you might really want to buy a property, you don't really need to buy a property. And if you have the opportunity to invest more while the share market's down, then you wait for the recovery that is eventually coming, and you're gonna be in a much stronger position that you've got a bigger deposit, smaller mortgage, or you're able to buy a bigger property.
It’s all about that long term perspective
You know, the odds are with you that share markets are up in years more often than they're down in years. So, hopefully, in 18 months, if that's when your property deposit is gonna be saved, share markets are up, then you cash out and ride off into the sunset happy days. Sorry, I know that I didn't exactly answer your question from a data perspective, but I would say that, yeah, if you're investing while markets are down, it's great. Like I said, at the start, like, I'm investing today, I'm buying some U.S. shares today because after watching it go down by 5% last night, I know that the companies that were good value yesterday is still good value today, they're just 5% cheaper.
And I think that markets will probably continue to go down in the shorter term. For me, that's a positive thing. That's an opportunity. It's never good seeing the value of your investments go down. But I'm just gonna keep investing more and then wait for the share market to come back up. And maybe I'll cash out or maybe I'll just let it ride. It depends on the other things that I'm doing. Fee levels are higher, but the opportunity levels are higher with that as well. Thanks for all the comments that have come through as well. But a bunch of people talking about comfortably stalled, a lot of stalled on there, or some people talking about being in between. So, yeah, it's pretty common around that middle band for people as well.
Phil says… Someone did some analysis on if you brought every peak and held, you'd still end up massively up looking at the entire stock market history. Yeah, well, of course. Of course, you would end up massively up. I appreciate you calling that out, Phil. But this is the thing, like, investing in… Sometimes these investment gurus make investing seem really complicated, but if you look at the fact that the share market has gone up over the long-term for the last, like, 100 years, then yeah, even if you buy at the worst possible time, 100 years ago, you're gonna be making piles of money today.
So, the key is just doing it. The key is just you just gotta get it done. But I get that it is really scary if you don't understand investments. And I'll get into that in a little bit more detail as we go through today as well. So, I'm gonna talk about structure for a minute. And, look, I totally get that budgeting and savings is the least sexy part of anyone's money strategy. I don't think a lot of people other than maybe me and maybe a few of the advisors in our team get super excited helping people do budgets or doing it budget themselves. But it's the starting point for how much you should be investing, what you should be investing into, and what your money plan should be.
Investment bucketing
So, I'll start with the big picture and then I'll get into the details. So, look broadly, when you're allocating your money, you've got two choices, you can allocate it to your spending today or your spending in the future. This works with your regular salary surplus savings capacity or it works with money that you might have saved up in a bank account. You can choose to allocate it as today and your spending today or you can allocate it to the future. Your future allocation is your savings and investments. There are only six options, really six vanilla options when it comes to building wealth, save money in cash, you can pay down debt, you can buy shares, managed funds, or ETFs. I put them all in the same bucket. Buy crypto, buy property, cranky or super, and retirement accounts. That's it. It's the same six options.
It doesn't matter if you live here or Uzbekistan, like, the same options are available to everybody. Now, the first two, saving money in cash and paying down debt, are important things to do. But they're also not really things that are gonna build your wealth significantly. They're not gonna shoot the lights out, like, yes, you save on interest costs and paying down debt, yes, you do generate a little bit of interest in a cash savings account. But you're not gonna shoot the lights out from a wealth-building perspective with that. So, that means that the other four options are the four key options that are gonna be the things that are gonna move the dial when it comes to your asset building and wealth.
The thing is, though, that with those four options, that all of them are medium to long-term investments in line with what we were just talking about, investment timelines, and being able to recommend, like, keeping your investments there for, you know, years potentially, means that so long as you choose good investments, and I'm gonna talk a little bit about that when I get to the section on investments, but so long as you choose good investments, if you're never forced to sell good investments at the wrong time, you're able to allow your good investments to do what good investments do over the long-term, which is make you a bunch of money.
Expenses
So, how you make sure that you're never forced to sell investments at the wrong time is just making sure that all of the spending that you wanna do on the today side of things is provided for. Now, there's only so many types of expenses that people have. These are our labels, don't get too caught up on the labels.
But, essentially, you've got your fixed costs, that's your rent, bills, and borrowing stuff, easy to predict, easy to automate, just need to get paid. You're spending. That's you're walking around money, meals, entertainment, clothes, shoes, eating out, you gotta feed yourself, medical expenses are in there as well. There's some necessities. But there's also a lot of… Most of it is discretionary. Debt, everyone's least favorite category. Lifestyle, that's your travel fund, tech toys, renos for the house, savings to spend, essentially.
Priorities
Now, the key to a good savings plan, budget, and investment plan, and financial plan is nailing the right priorities here. So, like, making sure that you're spending enough so that you're enjoying the lifestyle that you've got today, but making sure that you're saving enough so that you're gonna make the progress that you want for the future. So, when you're doing this, you need to look at what is your ideal spending, and then what's left over for savings and investments.
If you're like me, or like most people, when you lay out all the spending that you would ideally like to do, you probably find that you're not saving as much as you'd want. So then you need to go back and prioritize. And so, what are the most important things to me? Prioritize those and then ruthlessly deprioritize the rest. So, you make sure that the spending that you are doing is the spending that brings you the most value and benefit in your life.
Savings plan
Once you've got that set out in a way where you're happy with how much you're spending and you're happy with how much you're saving, you've got a great savings plan. But a savings plan on its own is not gonna lead to savings success. I think everybody, myself included, has done a budget that hasn't worked in the past. So, the key then is where the rubber hits the road, you need a savings system. And some people, this is probably like 0.01% of the population, they're just naturally good savers, and they can save without having a good system. For everybody else, I found that you need segregation. You need an automatic savings system where you've got money moving in a way that you don't have to do very much to get the savings results that you want.
Now, I'm a big fan of the bucket system of banking. Again, don't get too caught up on this system. The important thing is that you have a system. But what I found work, and I use this for myself and we use this for all of our clients, income coming into one bucket and then filtering out to the other different areas so they got the right money in the right places at the right time. When you do that, you basically set your default outcome from your day-to-day money management as your saving success. You have total clarity, which drives conscious spending choices, which is really important, particularly for your discretionary spending day-to-day and your bigger ticket discretionary spending. You get your savings and investments separated where you know that everything else is provided for in a way that anyone sitting in your savings account is pure, pure savings.
That gives you the motivation to put in the work to keep going. Because, let's face it, as much as I hate that this is the case, like, being successful with your money does require you to put in some work. It requires you to save money today that you could otherwise be spending on today so that you don't have to work forever, and so you can save for the future.
Forming good habits
So, it's not easy… Necessarily, it's not something that comes naturally. Our brain wants that dopamine hit that comes from spending all of our money and a little bit more for good measure. So, if you're not doing that, you've gotta hack your psychology and thinking, and a big part of that is keeping you motivated as you follow the journey to your money success. So, put a system around this, get out of the way, use the power of small barriers, i.e. different bank accounts to get in between you and blowing your budget.
Now, a great system is never gonna stop you from blowing your budget. It's never gonna guarantee that you hit saving success, but it is probably gonna help… Well, it's definitely gonna help. And it's probably gonna mean that you're gonna succeed more often than you fail.
It helps you as well to change your habits to build good spending habits and behaviors. And when you have the system, the other big benefit, which ties in with the next section around strategy, is you know 100% how much money you've got to work with that you can direct to that ETF or, you know, that micro investing option that you're using or whatever that investment is, or paying down debt, you get a ton of confidence around that so that you know that you're making the right moves. And that goes a long way to reducing the fear that comes when it comes time to pull the trigger on an investment. As I said, boring, but super, super important.
Setting up your investment plan
The next piece is strategy. And for this one, I just thought I'd talk you through. This is the process that we guide people through when we help them set up a plan. But it's the same process that anybody really needs to use. If you're planning with your money. The first step that you wanna do is focusing on what's actually important to you. So, what does a great result look like when it comes to your money? What is bothering you about your money? What are the frustrations? What are the roadblocks? That becomes a hit list for you to work towards. From there, if you're making decisions, and particularly if you're making investments, which you probably should be, then you need some understanding and clarify all of the moving parts, all of the things that are gonna impact your plan.
You need to know what money is coming in, what money is going out, where is it going, what's left over? Make sure you're happy with that. And what savings have you got? What investments, what assets, what fees are you paying? What interest rate are you paying? All of those sorts of things. And that gives you the baseline that you can say, "Okay, if I keep doing exactly what I'm doing today, this is where I'm going to be in a month's time, in six months' time, in six years' time." From there, you can then look at different strategies around your investments. So, if you buy shares, what does that look like? If you buy a property, what does that look like? If you crank your super, what does that look like? If you do some sort of combination, what does that look like?
Now, each of those different options are gonna have different financial impact, different financial outcomes attached to them. Their financial impacts, they relate to your cash flow today. So, like, what does your savings capacity look like? And that's something that's really important because that makes sure that you've got enough money to live the lifestyle that you want and save at a rate that you're happy with. And then you got to look at what it means for your asset growth over time, essentially? So, how does your net asset position increase? And then you start to get a sense of, like, okay, if I go down this path, I should be at this point in, you know, X amount of time. How do I feel about that? Is that good? Is that bad? Do I need to do something else? Can I do more? Can I do less? Can I enjoy myself a bit more? Whatever.
So, understanding those different strategies and pathways is gonna give you a sense of the numbers. And then you think through what's not in the numbers. So, how do you feel about the strategy? How do you feel about buying an investment property instead of your own home? How do you feel about buying shares instead of buying property or property instead of shares or all of those things? And then you wanna balance the money and the feelings. You gotta educate yourself as part of this because sometimes our feelings come from, like, either myths or just from a place of not knowing. But when you do that, you end up choosing a broad direction that you're happy with and being comfortable with all of the things that are making up your strategy.
From there, you just need to make sure that you get the results. So, you need to put it all together into an action plan so you know exactly what your steps are when they're happening, so you feel like you're on the front foot with this stuff, then try to automate as much as you possibly can, again, so that you can get out of the way and just get the results that you want. And one through to five, that's helping you have a plan set up and a track to run on those steps. From there, it's about the ongoing refinement, ongoing action where you're checking in on, you know, what's changed with your money, what's changed in the world, what's changed with what you want, and making sure that the decisions that you've made are still consistent with that.
I was gonna say something around that, but it's gone. So, yeah, the end result though in going through this process is you have a clear path from where you are to where you wanna be. You have clarity on where you're headed, and you know what you need to do, like, how much you need to push to get to where you wanna be. Sorry, that's the thing I was gonna say, like, when it comes to this strategy piece, this is something that if your situation is super simple and you're just saving, or maybe doing a little bit of investing, it's something that you can potentially do on your own.
The more complicated your situation is and the more stuff that you've got going on, then the harder it is for someone to do on their own. Now, obviously, I'm a little bit biased as a financial planner, and given this is the stuff that we help people with day in and day out, but I would say that if you've got a level of complexity, or you're working with decent amount of savings and investments regularly, you're probably gonna get value from having someone guide you through this process to set up the plan, at least in the first instance, so that you can understand what the best moves are for you.
And then from there, as you learn more and you build your money muscle, then you can take over more elements of it yourself potentially, or you might find that someone can keep adding more value, and, in that case, it's great, you save you a bit of time and process as well. So, that's essentially the process. As I said, it's what we do, but it's what anybody needs to do if you're making decisions. You have confidence in what you're doing, know where you're headed, and making the most of the opportunities that you've got today.
The next element that I wanna go through today is around the solutions, which is the investments that you use to backup your strategy. Again, I just wanted to put another example in here on the power of time and show you an example where you save and invest $1,000 every month into the share market, I've used the same… Actually, I just updated the numbers, but I've used that same 9.8% return on this. I need to update my slide. Sorry about that.
Essentially, if you save $1,000 a month over 12 months in the year, you're gonna save 12,000 a year. Over 10 years, you would have saved $120,000. But because you would have got some dividends from your shares and some growth on those investments over time, your $120,000 would be worth $220,000 today. You keep that going for 20 years, you would have put in 240K, but your portfolio would now be worth $739,000. If you keep it going for 30 years, you would put in 360K, but your portfolio is now worth 2.1 million. And 40 years, you put in 480,000, but your portfolio's worth $5.9 million or $6 million, a pretty massive amount of money. And what you'll notice, excuse me, is that the returns in each 10-year period, they significantly increase.
So, the first 10-year period, what your investments generate versus what you put in, your investments, generate $80,000, you put in $120,000. In the next 10 years, you put in the same $120,000, but your investment's generating, like…just trying to do some quick mental math here, like $420,000. So it's gone from $80,000 in the first 10 years to $420,000 in the next 10 years. In the next 30 years, basically, your investments are, like, making you $1.5 million, and then it's in the millions of millions. So, it really is… You know, Einstein called compound interest the eighth wonder of the world. I think he was probably understating it.
You see that, again, like, the longer you leave it, and the biggest benefit that you get from any investment is in the last year that you own it. That means the power of starting sooner is potentially gonna make you millions of dollars or a million dollars or hundreds of thousands of dollars.
So, starting today, instead of starting 12 months from today, gonna seriously, seriously benefit you. I'm trying to pump you guys up here. So, I hope you're getting some motivation from this. But really, it is just about getting started and, you know, that time in the market saying. I got a question that says, "Where do you get a percentage return value?" So, that 9.8% return is the 30-year return on the Australian share market. It's from Ken Starr. If you wanna google it, just Google Ken Starr 30-year investment return or long-term investment return, and it should come up. It's actually a pretty interesting piece that they draw in the stats on the U.S. shares and international shares and stuff as well, which are a little bit different. U.S. share is a bit higher. International share is a little bit lower, but all broadly the same.
Four main investment options (well… three and a half)
So, when you invest, there are four main investment options that you can consider…well, three and a half. I'd say start with startup investments being sort of essentially a type of share. Now, the first one that I've got is shares, managed funds, and ETFs, then you got property, crypto, and startup investing. I'm gonna unpack each of them in turn. So, with share investing, and when I say shares, I don't necessarily mean direct shares, although it could be direct shares, but what I mean is shares, managed funds, ETFs, listed Investment companies, micro-investing apps. With any of these investments, you can start really small. Particularly with micro-investing apps, you can invest as little as, like, five bucks or in some even less than that, I think. And you can start with $0 today. I think that's the kicker.
The returns are better than cash, because as you see, they're the long-term return on a share investment, the expected return is 9.8%. Their long-term return on cash, the 30-year return on cash from that same piece is 4.5%. So, significantly higher. And share investing gives you good flexibility. So, with that, when you do your budget, if you think that you can save $100 a week or $200 a week or whatever that number is, you can do that today. And then if you get a pay rise in a month's time or a couple of months' time, you can increase that number, no problem. There's no issues with your strategy there. Also, if you change jobs, lose your job, decide you wanna quit your job and start a business, then you can stop your investing at any time. Generally a good idea to plan in a way that you're gonna be able to be consistent, but if you wanna stop, you can stop.
Shares
Shares are good for income as well. Having a big share portfolio is probably better than a big property portfolio from an income perspective. I'm gonna talk about property in a second. Property does have some really big advantages. But from an income perspective, better. And also, with shares, you can sell one share, which is gonna get you, you know, 10 bucks or 100 bucks or something like that. You can't do the same with property. You also get solid growth if the share investing is consistent over time as well. So, that stuff all helps.
Now, what I'd say with shares, and I draw this one from my writing that I was just working on yesterday, but what I put in there is that, like, I think anybody can start investing at some level, and this is not financial advice, but I think it's really important that If you just get started, even if your budget is really tight, and you've only got a small amount of money to invest, given that you can invest, you know, very, very low amounts of money, like, five bucks, everybody should be able to do that, even if things are tight.
And I guarantee you that if you were to do that, you're gonna then start paying more attention to your investments, you're going to invest more, and then you're going to get more interested, and you'll start building momentum faster. So, no matter where you are, I'd say figure out a way to just make it happen. You start learning and start building that investing muscle that's gonna benefit you for years into the future.
Property investing
The next piece is property investing. So, property investing is great. Property does tend to win over shares when you look at them head to head because of the power or gearing. Excuse me. Broadly, the returns are very similar between share investments and property. In fact, when you add up, the long-term growth rate on property in Australia is 6.8%, or 6.3% if you look at 150-year growth rate, a little bit more in the recent past, but even using 150 growth rate, 6.3% being conservative, the gross, sorry, the net rental return average, so total rent less total ongoing expenses is about 2%.
So, that means that around 2% after all council rates, insurances, property management fees, etc., net 2%, depending on where you buy your property, but you got 2% plus 6.3%, 8.3%, shares is %9.8. So, it is a bit of a winner. But with property, where I'm going with this is that it's not like you save up a million dollars and buy a million-dollar property, you save up $100,000, or $200,000, or a smaller deposit, and then you go and borrow money from the bank, and then you go buy a million-dollar property. You've combined your money with borrowing so that you're gearing, so you're borrowing to invest, and you've got a much bigger asset that's working for you.
More on shares
So, an awesome $200,000 share portfolio is never gonna compete with even an average million-dollar property because the property is five times the size. So, from a wealth-building perspective, property tends to win, but there is a clear cash flow impact with property. It's very different to shares where when you buy shares, and if you decide that you hate your job and wanna change jobs next month, that you can and you just stop your share investments.
If you got a property that you need to fund, you need to fund that property, you need to keep making your mortgage payments month, on month, on month. You know, interest rates go up, you need to keep making your payments. So, like, there is a clear cash flow impact which needs to be really carefully managed. And that means that risk management is crucial when it comes to property investing. Both have their place. I think for most investors, you should have shares and property. But, yeah, the right move at the wrong time is the wrong move. So, you gotta get your timing right on this.
Crypto
Crypto investing. So, I'm really interested in crypto. I think that the future is bright for crypto, but it is incredibly volatile. Last night, we saw a big sell-off on the U.S. share market with markets down 5%, crypto was down 10%. So, the volatility, which means the ups and downs in the value of crypto is significantly higher than the share market. Given the adoption of cryptocurrency by a lot of major players, I think the future is pretty bright for crypto. But I think it's really important for any investor, that you have the right foundations in place for your investing. And this is why I love the guys at Pearla, they talk about boring investing for the long-term. In my view, if you want excitement, go and play video games. If you wanna make money, pick some boring investments that work and then hold them for the long term.
Now, I think investing is exciting. I think making money is super exciting. Even if the investments are not, you know, cutting-edge investments. So, yeah, just sort of put that out there. And you've gotta think about as well, like, my last point here is how much risk do you need? You can see that if you got 9.8%, 30-year return on the Australian share market, similar for U.S. but a little bit higher, similar for international shares, like, do you really need 15% that crypto can give you when it's gonna create, yeah, really massive results by just investing in the more boring investments? So, something to think about.
Startup Investing
Startup investments, and I see that question, they actually turn off… I'll come back to that in a sec, because it ties in actually with this next piece on startup investing. With startup investments… And I've just really included this here for completeness because I know that a lot of people get interested in startup investments again, similarly, like, the excitement factor around this, they do have strong upside potential. There are a lot of stories out there, obviously, about startup investments that have shut the lights out and made all their investors piles and piles of money, and I think that's fantastic.
But the stats show us that the majority of these investments fail. And even for the ones that do well, these investments are not liquid. They're long-term investments. So, you think, particularly in the tech space, you see a lot of startup companies, even for the ones that have made a bunch of money for their investors, it often means that you're potentially having to hold those investments five years or more until they list. At the moment, there aren't gonna be a lot of listings on the stock exchange over the next little bit because the market is so choppy.
So, even for investors that have made good money, they're gonna have to wait for their payday to cash out. And I've seen clients that have had startup investments where they've made lots of money, but been unable to exit their investments because they hadn't yet listed and there's no resale market for these investments, and then it stopped them from doing things like buying property or other things that would have moved them further along their wealth journey faster. Again, you think about with startup investing, how much risk do you need?
How do you decide which crypto to invest in?
Now, I have a question here from Cheatana [SP]. I hope I'm saying that right. It says, "How do you decide which crypto to invest in?" And the reason that I've waited after this slide is because the reason that I decide which crypto to invest in for me and the philosophies that we advocate with our clients as well, with crypto is exactly the same as it is with shares, and it's exactly the same as it is with property, and it's exactly the same as it is with super.
I found that the bigger, more stable companies, you know, are more stable, they call them blue chips for a reason. Like, you consider Commonwealth Bank, for example, like, it's almost a $200 billion company. They've got $30 billion in annual revenue. They have assets of $1.2 trillion. The stability that you get from investing in CBA is very different to investing in a startup company. I call that good risk versus bad risk. And what I know is that if you invested in the 10 biggest companies in Australia who do actually make up the majority of the share market, then you're gonna have a smoother return than if you invest in the smallest 10 companies in the stock exchange.
Similarly, with cryptocurrency, there's only a few big players really, but if you invest in Bitcoin and Eth, like, you're going to have a smoother return. It's still gonna be pretty volatile, but much, much, much smoother than it would be investing in ICOs and some of the more speculative smaller coins essentially. When it comes to property, we tend to favour blue-chip suburbs, investing within five kilometres of Sydney, Melbourne, Brisbane, CBD, strong population growth, limited demand. You might not… When you invest in big established companies, big established premium suburbs, big established crypto investments, you may not get the same upside that you get with the smaller companies, but you don't face the same downside either. So, it comes down to a preference thing and what you're trying to achieve, but I would say stick to the bigger players and you get a much smoother return over time. I hope that makes sense.
What are your thoughts on investing in ETFs versus LICs?
James says, "What are your thoughts on investing in ETFs versus LICs, listed investment companies? Also, if investing in ETFs, what allocation would you give to Australian versus International?" James, I'm really glad that you asked that question because I did mean to say this before. When you're early on in your investing journey, it actually… And some of my buddies in finance might find this a little controversial, but, like, the difference between a managed fund and an ETF and a listed investment company, there's a little bit of a tax consideration, there's a little bit of an income consideration, but if you've got $10,000 invested into these, into an ETF versus listed investment company versus a managed fund that's broadly the same, your return is gonna be almost identical.
If you've got $50,000, it's gonna be about the same. If you've got $100,000, it's still gonna be about the same, maybe a little bit different. If you've got $200,000, it's still not wildly different. Half a million dollars, you might notice, you know, few $1,000 differences potentially. So, again, I was writing about this when I was writing my book where it's like, don't let… Like, I see people, they're agonising and going, "Oh, do I use an ETF, or do I use micro-investing, or do I use a listed investment company?" Like, doesn't really matter that much. So, you're gonna benefit much more from just making a choice and doing it today rather than agonising on this decision for a month, a year, and then you're missing the opportunity to be getting better results.
Now, what I was saying, I was looking at these, like, some of the stats, in the past, micro-investing options were better for people that were, like, really, really early on and then they got a little bit cost-prohibitive when your balance got above a certain level or there were better options out there. But these days, the tech is so good and the fees are so competitive that they're good for significant portfolios for serious investors. So, what I suggest is, pick an option that is easy for you to use, and importantly, easy for you to automate so that you can automate your regular investments because that's gonna be so much more powerful than the investment return on the tax things that you get. From there, when you get to $100,000 in your portfolio, you should take stock. So, you should look around and see what's out there and make sure that what you've got, you still feel is the best for you.
But it's probably unlikely that it's gonna change at $100,000. When you get to $200,000 or plus, then, yes, it might change and you might choose to make some changes as a result, but it actually doesn't matter that much. So, I hope that helps. And that's a really great question.
Property vs Shares
Adrian says, "Biased against property having got burned before." Yeah, I get that. "However, the beauty of shares over properties, if I need 50k of the 200k invested for an emergency, I cannot get it back out from the property, whereas I can have it within two to three days from shares." That's a good point, Adrian, and I appreciate you calling out your blindness at the front end, because that's not always easy to do. But here's the thing, if there is a full-on market meltdown and you need to cash out your share portfolio, you could be suffering a significant loss. We saw this in the COVID meltdown where it was like really quickly the market was down 40%, it was all within a matter of about two weeks.
So, then, you know, it's gonna be a stressful ride if you've got your emergency funds sitting in a share account. In my view, it's good to have an emergency fund on both sides. So, like, whether you're investing in shares, or property, or both, or anything, or even if you're not, having your emergency fund in cash is something that's important so that you can access it easily and you can access it regardless of what's going on in the market. So, yes, I agree. Yes, it is more flexible. Yes, you can access the money in two to three days, but it doesn't mean that it's gonna be a good idea.
Isabella says, "With investing, do you ever sell off a portion of your portfolio to realize some of the gains or just buy and hold strategy until retirement?" Look, I think if you choose good investments at the front end, there's not a lot of reasons to sell. One of the reasons that you might sell though is if you're cashing out your shares to, say, go buy an investment property or your own home. That's the reason that you might wanna restructure your investments. But if you've got a great index fund, like, you wouldn't sell it because you're just gonna buy another great index fund or another great other fund. So, I think if you choose investments that you can hold for 10, 20 years, then you'd probably find that you'd have to ask the question as to why you would do that. But that's a really good question as well.
You're very welcome, Isabella. Dupas [SP] says, "Do you mentor young investors in their early 20s trying to navigate their way through investments and build their financial foundations for the future?" Yes, we do. We do that with the professional service that I like to call Financial Advice. That's what we do day in and day out when I'm not making TikTok videos and doing webinars like this. But, yes, that's essentially what Financial Advice does, or part of what it does. I'll talk about that in a little bit more detail.
Can you still make good investment returns with sustainable ethical ETFs?
John says, "Can you still make good investment returns with sustainable ethical ETFs?" The answer is absolutely, yes. There is no…what do they call it? Statistically significant difference for socially responsible investments positively or negatively from market index investments. And there's a lot of anecdotal evidence that suggests they can perform better. You just need to be mindful of the fees on those but, yeah, socially responsible investments.
You can only manage the risks you understand. That's something that's really important when you invest. And it's the thing that is a barrier for a lot of people when it comes to investing as well. So, understanding where risks are coming from and how it can be managed so you know what risk is left over and you can choose what risk is right for you. You also need to focus on your after-tax return. That's something that's outside of the scope of what we'll cover today, but knowing that you've got the right returns in place, super, super important. Who owns the shares? So, yes, an index fund is the right investment, or yes, an ethical fund is the right investment, but do you own it? Does your partner own it? Do you own it through your super fund? Do you own a trust?
All of these have significantly different tax consequences and they are significantly different from how quickly you're going to accumulate wealth when you look at your after-tax return. And I'll give you a tip, guys. Your after-tax return is the only return that matters.
There's a few mistakes for you to avoid here. Now, the first one is that good investments don't equal money success. People think that choosing good investments is gonna make you rich. It's part of the picture, but it's not all of the picture. So, you wanna invest, you know, the right amounts at the right times to get your, you know, shit together and make it actually happen. That is gonna have a bigger difference than just choosing great investments, the right strategy, the right tax approach, all of those sorts of things. That's super, super powerful and beyond just choosing a great ETF or managed fund or micro option.
The wrong foundations I've spoken about, so where people, I think, go too wrong is that they get too speculative with their investments as the foundation and then they're trying to build, you know, from there. That's gonna be super volatile and super risky. And you see from some of the examples that I've shared with you guys today that you don't need to shoot the lights out with every investment, but you do need to avoid the setbacks and the failures. So, when you stock your portfolio and your foundations with rock-solid investments that you can hold for the long term, you know that you're gonna get that consistency and avoid trouble.
Making investment choices
Making choices in isolation is a big one as well. So, when you make investment decisions or any money decisions, you need to make sure that they fit in with your bigger picture. They need to fit in with how your situation is going to look like, you know, a month from now, a year from now, three years from now, and be part of a, like, working together and in the same direction. Where you can go wrong is if you go, "Is this a good investment? Okay, great, I'm gonna invest in it."
If it doesn't fit in with the other things that you're doing, then that can be a problem. Where that happens a lot is with property where people buy a property and then they realise that they're having to change everything to make this property fit. You gotta make sure these things fit in with the life that you wanna live and the other things that are going on with your investments money as well.
Going into loan is another one. You know, there is so much that when it comes to money and your money success, that it is really hard to figure it all out on your own. You have fear, you are indecisive, you lead to missed opportunities, you don't have the confidence to be aggressive when you should, and you'll be stressed about your money as well.
So, guys, next steps from here: I have a couple of things to call out. Like, money isn't easy. It's not something that comes naturally to most people. To some people, it comes more naturally than others. But it isn't easy. You've gotta be consistent and you've gotta build your muscle. Now, good habits and your constant practice and focus make it seem easy, but it's really…yeah, it's the habits, and you've gotta work it out over time. The foundations of money success is being good with your savings and investments. But the things that will take it to the next level is using expert frameworks like some of the ones that I've shared with you today around your money management, around you're planning, around your investing, that's gonna drive serious results and what you should focus on if you wanna get really the best results possible.
I'll leave you with this model, which talks about progressing from where you are today to the future state when it comes to your money. And I think when most people think about getting to where they are to what the future looks with their money, they think of it like a straight line. But because of the compounding impact of time and money, it's actually a curve.
So if you're not 100% on track to end up exactly where you wanna be, you need to do some stuff and jump align. You need to do that investment savings, be smart with your tax, whatever. And once you do, then you just need to take the next step, and the next step, and the next step, which is easy because you're already on the path. But the longer you leave it, the more time goes on.
Jumping alone becomes more and more painful and putting yourself in the best position can become impossible. So, this is my motivational talk. If I haven't given enough of a pep talk already, if you want to save, and you saw this in this example that I shared with you at the start, that if you wanna build a $2 million portfolio, you need to save 10 bucks or something today, or you need to save X dollars today, depending on what your timeline is. If you wait a month, a year, 5 years, 10 years, you need to save X plus, plus, plus, plus. So, the sooner you do it, the easier it is, the less you need to sacrifice to get there.
So, guys, I hope you found that helpful. Got a couple of questions here, and we've got a couple of minutes for questions if anyone's got anything else that they wanted to ask.
Do you think crypto is akin to the tech bubble in the' 90s?
Adrian says, "Do you think crypto is akin to the tech bubble in the' 90s, possibly a good investment but difficult to pick which crypto will survive and come out the other side?" Potentially, but not quite the same. I think that the bigger players will be solid. So, basically Bitcoin, Ether, they're massive now, so there's not a lot of, you know, doubt in my mind that they will exist in the future. To what level? We're not sure.
How do I invest a big lump sum initially?
Sonny says, "I understand how the dollar cost average for buying ETFs monthly when I get my pay, how do I invest a big lump sum initially? Do I just dollar cost averaging over a few weeks or months?" Yeah, it really depends on how much you've got to work with. But you could look to do it weekly over a few weeks, or even daily potentially as well, depending on what that number is. If you've got a decent lump sum, you might wanna look to potentially get some good advice around that.
So, guys, hope you found that helpful. Please, I'd love to see you at the next one, and, yeah, good luck implementing the learnings!
