From Pearler: we do our best to share general resources so you can do your own research. When it comes to tax, this is personal to your investing and financial position. We are not a tax advisor, and don't have any information about your personal situation. When investing, there may be tax implications and you should get advice from a licensed tax adviser.

Investing is a broad subject with lots of different things to learn.

To help simplify tricky questions and clear away confusion, we’re running an ongoing Q&A series. We hope these little discussions provide you with helpful insights to further your thinking as you progress towards your goals :)

Just so you know, in many cases there’s often not a ‘right’ answer, so be sure to think carefully how to adapt any information to your own circumstances.

If you have a burning question you’d like answered, feel free to leave it in the comments below, or post it on the Pearler Exchange.

In this Q&A session, we’re tackling:

• What happens when a company goes bust inside my ETF?
• What tax deductions can I claim with share investing?
• Can you provide some thoughts on selling shares to buy a home?
• What happens to leftover money when using a dividend reinvestment plan (DRP)?
• If the stock market is near all-time highs, shouldn’t you wait for a pullback?
• Should I cash out long service leave to invest, or take the time off?

Alright, some great questions there – let’s get started!

What happens to an ETF when a company inside it goes bust?

In short, not much in most cases. If we’re talking about the more popular ETFs which have diversified portfolios with hundreds (or thousands) of companies, each company isn’t all that important to the value of the ETF.

That said, there are extreme exceptions. Let's say for some crazy reason BHP went belly-up overnight. That would have a sizeable effect on an Aussie index fund, given around 9% of the fund is likely invested in BHP.

In practice though, most companies tend to die slowly. So what happens is, the company loses value over time and falls down in ranking, making up a smaller percentage of the fund. As time passes, it’s replaced by other companies that are doing better, which overtake it in size. This constant change in rankings is happening all the time, and we don’t even notice it.

If a company disappears, do you have fewer shares? No. The shares you own are in the ETF, which stay the same. They may just be worth slightly less per-share if one company disappears immediately. This is because an ETF’s value is based on the collective value of the shares it holds.

Which brings us back to why diversified funds. One company struggling or going bankrupt has next-to-no effect on your overall investment in most cases. By diversifying broadly, we remove the risk and reliance on individual companies driving our performance.

What kind of tax deductions are available for share investors?

Despite share investing being a low-cost and hassle-free way to generate passive income, there are a decent number of tax deductions we can take advantage of.
Now, the below is simply a list of possibilities. Whether they’re deductible for you, and to what extent, will depend on your situation and particular investments.

Phone and Internet

The portion of your phone and home internet used for managing your investment portfolio, including the depreciation of your computer/phone.

Fees for advice

Must be related to running your current portfolio, not a new financial plan.

Subscriptions

If you have special newsletters or premium subscriptions related to investing, these may be deductible.

Seminars and meetings

If you go to annual meetings or presentations for the companies you own, travel and related costs may be claimable.

Interest

If you borrow money to invest in income-producing shares, interest on loans is typically tax deductible.

There may be other things, but these are the most applicable for the majority of investors. The deductions aren’t worth a huge amount, but given the simplicity of shares and few costs there are, it’s still nice to know there are a few deductions.

What are your thoughts on selling shares to use as a house deposit?

This is a super common question. Many times, investors will be a few years into their journey, and are considering buying a home. Now they’re unsure if it’s wise to sell their shares and put that cash towards a home, or save a fresh deposit.

After all, they’ve worked hard to build up this portfolio, and (even ignoring tax) it hurts to sell and start from scratch. Like many things in the world of money, this is more of a psychological barrier than a practical one.

The strategy itself of selling shares to buy a home is perfectly reasonable, mind you. It’s just a matter of re-framing it in our minds. How can we do that?

Firstly, remember that the money you put towards your home, including any cash or shares you sell, doesn't disappear. This money goes toward reducing your future housing costs. The more you put into the home up front, the smaller your mortgage will be. So while you ‘lose’ the share portfolio and its income, you regain that benefit through lower mortgage repayments.

It will hurt to sell shares to end up with a home, a mortgage, and no shares. But if going down this road, keep in mind that eventually you won’t have to pay rent or a mortgage. That dramatically lowers your living expenses and how many investments you need to become FI in the future.

Should I cash out long service leave to invest, or take the time off?

Interesting one. It’s more of a lifestyle-meets-investing question.

The answer will depend on the individual and their priorities. Is more money important right now, or would more time be preferable?

For a family or someone with young kids, I would probably lean more towards using leave to have more time off, one chunk at a time if possible. This way, you get more parenting time while the child (or children) are at a young age, while also enjoying a better work/life balance.

Yes, the money invested would create more future time – but not dramatically so. Even if someone tripled the value of their leave by investing it all (say $20k to $60k), that isn’t going to greatly move the needle in the grand scheme of things. Plus, in this example, you can’t replicate that time with young kids again.

In other situations where you're desperately trying to increase your portfolio faster and you don’t have anything super important to use that time for, then I’d opt for the cash. Over the years, I did a combo of both. I left my warehouse job with a bunch of leftover annual leave, so I received a nice payout. But before that, I was using extra days here and there to test out what it felt like to have extra days off (it was awesome!).

What happens to money that’s leftover after a dividend reinvestment if I’m using a DRP?

Most of you will be familiar with how dividend reinvestment plans (DRPs) work. It’s where you elect to have your dividends reinvested and receive more shares in the fund or company, rather than receive a cash dividend. This can help you grow your shareholding without incurring brokerage.

But here’s the issue: you might receive a dividend of $450, and the shares (or fund) you own trades at a value of $100 per share. So, with your DRP you’ll get four additional shares ($400) and there’ll be $50 leftover.

What happens here? That money is held onto and carried forward on your behalf to the next dividend date, where it contributes towards the next dividend reinvestment parcel. And as far as I know, if you sell your shares in the future, any leftover money will typically end up being paid out to you in cash.

If the stock market is at an all-time high, shouldn’t you wait for a pullback?

As the market climbs and it approaches an all-time high, it might seem reckless to keep investing. Indeed, you’ll see many headlines and a few experts suggesting exactly that.

It’s funny how nobody seems to take this view with property. Prices are very often at all-time highs, and everyone assumes “this is great, it’s probably going to reach X in 10 years.” Instead, the worries are about it continuing to go up, rather than fall.

Why the extreme nervousness when the share market rises? Both are asset classes which are fundamentally built to rise over time, with the increasing wealth of the population. So what’s an investor to do? Well, here’s what I do. I keep investing every month because I have no idea when the next market fall will be. Nobody else really does either, despite the confident predictions every year.

Trying to time the market is a recipe for disaster.. We’re nearly always better off investing whatever we can on a regular basis. When prices do fall, that will be a bonus to buy at lower prices, but there's no point waiting for it. That's my view, anyway.

The reality is, markets deliver positive returns most years. And ironically, all-time highs are usually followed by more all-time highs. That means it’s usually not profitable to wait around for the ‘right time’.

Besides, markets are supposed to increase over time as companies grow their profits and become more valuable. We will have many falls in the future, but markets reaching 'record levels' is not quite the story it's made out to be.

Final thoughts

I hope you enjoyed this Q&A session, and these answers gave you food for thought.

Remember, if you have a question on a topic you’d like some more information on, feel free to post it on the Pearler Exchange. They’ll be answered by fellow investors in the community – like myself, someone more knowledgeable, or one of the Pearler team.

You can also post a question down in the comments selection and we’ll cover it in a future Q&A article.

Until next time, happy long-term investing!

Dave