NOTE 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. This does not constitute financial advice and we would urge you to speak to your financial adviser and/or tax accountant for further information.

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 on 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.

Alright, this time we’re tackling:

• What if something happens to my ETF provider?
• How to minimise brokerage when investing in lots of things.
• I’m not on a high income; is FI still possible?
• My shares are going down; what does this mean?
• How do I minimise tax when selling?
• How could ESG affect the market?

Let’s get started!

What if something happens to my ETF provider?

People often wonder whether it’s worth investing in ETFs which are run by different fund managers. “Don’t put all your eggs in one basket”, so the theory goes.

If a big chunk of our wealth is with a single fund manager - even if the fund is invested in hundreds or even thousands of companies - isn’t that kind of risky?

What if that manager decides to jack up their fees? What if something goes wrong with the running of the fund? What if there’s some type of legal troubles or dodgy dealings?

These are all very valid questions. Let’s flesh them out a little.

Fee raises

This is highly unlikely. In the (almost) 50 years since the first index fund was created, fees have come down on a regular basis. In fact, as index funds get bigger, fees are more likely to get closer to zero than go back up. Given low cost is essentially the business model of big index funds, it would be self-destructive for a fund manager which runs the likes of A200 or VAS to jack up fees. People would simply stop investing in their funds and they know it.

Legal or technical issues

I can’t imagine what issues could occur here so I won’t bother making stuff up. But again, this seems wildly unlikely. Most large funds have been running for a long time, and are audited every year, as part of a strong regulatory environment. Each fund operates as a trust with you as the beneficial owner. There are many billions of dollars invested with these managers, so if something large and systemic were to happen, it could even affect all of them, meaning ‘hedging your bets’ may not actually help.

Ongoing manager risk

Risks are never zero, and we can never be certain what the outcome will be. But that’s the reality regardless of what we invest in. Individual companies, managed funds, LICs, ETFs, real estate, and so on. Risk is a reality of investing, so we do need to accept that. Let’s remember that our investments in ETFs are overwhelmingly driven by the performance of the underlying companies. If a fund manager fails or runs into issues, the assets can/will be transferred to another manager, which seems like the most likely scenario if anything serious were to happen.

We need to think about how likely these things are, how much they bother us, and what impact the risk might have. At the end of the day, we each have to do what we’re comfortable with. Having multiple versions of the same fund doesn’t cause any problems except for some extra admin, so if an investor prefers doing it that way, that’s perfectly fine.

How do I minimise brokerage while investing in a portfolio of ETFs?

To more experienced readers, the answer to this question might be obvious. But it has come up more than a few times, so it needs to be covered for the new investors among us.

The concern often comes when new investors hear they should aim to buy on a regular basis. By the way, I think monthly is a great way to approach it. Soon enough that it keeps you engaged and building momentum; but long enough that it keeps brokerage very low.

So what do you do when you want to invest monthly, yet you have (say) five holdings? Well, you don’t buy a bit of each every month, as that would be lots of unnecessary brokerage!

If you have multiple holdings, the easiest and cheapest way to invest across these is to buy one each month. It doesn’t matter which order you do it in as the prices will even out over time. But there's no need to buy everything every month.

You could simply take it in turns over which holding you buy, or buy the one which has had the lowest performance that month (so is likely offering the best value). You can do this by checking manually before investing or by setting up targets via Autoinvest to do it for you.

This keeps things simple, allows you to top up everything over time, and keeps fees low.

I’m not on a big income; is it still possible to reach FI in my 30s or 40s?

Yes, it is possible. That doesn’t mean it will be easy. It won’t. But you can absolutely make huge progress towards financial independence without being on a high income.

If someone starts in their 20s and consistently saves and invests, it’s very realistic to expect they could (at the very least) semi-retire by 40. That’s an incredible achievement in itself, and something almost nobody manages.

The trick, of course, is managing your finances in such a way that ensures there is always surplus cash to do smart things with. Like paying down a mortgage, or investing into a portfolio of assets.

If you’re just starting, figure out where all your money goes. All of it. Then figure out how you can create a lifestyle which is just as enjoyable (or even better) for a lower cost.

There's no secret. It's really about building better habits, spending mindfully, and finding ways to save in every category, while simultaneously increasing your income over the years. As you do both of these things, your surplus cashflow available for investing will get bigger and bigger, which speeds up your progress even further.

Things may seem small and slow at first, but remember this: many people who are a few years into their wealth-building journey are saving and investing amounts they never thought possible when they first started.

My shares are going down. What does this actually mean? Should I do anything?

It's important to note that you haven't done anything wrong. Ups and downs are a completely normal (and healthy) part of markets and just something we have to deal with as investors.

Markets move in waves of optimism (stocks go up), pessimism (stocks go down), and boredom (stocks do nothing). It doesn’t necessarily mean anything. If prices are falling, the collective mood and expectations of investors is not as rosy as it was before. This happens to specific companies, investment themes, and markets as a whole.

Either way, we're best served by focusing on the long term and continually adding to our investments when we can afford to. I think of it this way: if we believe our investments are going to provide income and be worth more in 30 years than they are today, then it's really helpful to build our investments at lower prices.

So while anything can happen in the next year or two, tuning out and focusing on the bigger picture is the healthiest approach. In terms of actions, sticking to the plan is key.

The reality is, during the first 5-10 years of our investing, how much money we invest will drive our progress far more than our investment returns. It's also the thing we can control the most, making it easier and more helpful to focus on.

Can I choose which shares to sell to minimise tax? If so, how?

Excellent question, and an important one.

Yes, you can choose which shares to sell for tax purposes. You simply have to keep a record of it, with perhaps a simple spreadsheet and the transaction statements to be able to show the ATO. By the way, the ATO has an information page with a good explainer on this here: identifying shares or units sold.

In practice, there’s nothing different you do when selling your shares. It’s only with regards to record keeping. So when you go ahead and sell any shares, you do so as per normal in your brokerage account. That said, it can be easiest to sell shares in similar quantities that you’ve purchased them in. This can make it a bit ‘cleaner’ to keep track of which parcels were sold.

If your Pearler account is linked to Sharesight, it might be even easier. Sharesight has a feature which helps you record all your sales, while also giving you a few ‘sale allocation methods’ to choose from. Keep in mind though, I think this may be part of the paid version of Sharesight so not applicable to everyone.

How could ESG investing affect the market?

Another interesting one!

In the last 10 years, companies have developed certain standards to hold themselves to. This is (at least) partly in response to shareholders, governments, and the general public wanting to see more action on certain issues such as climate change, environmental care, gender equality and so on.

Personally, I think this trend will continue for the foreseeable future. As for market impacts, a few things seem likely. Companies of all kinds will lean into these things and make more effort due to pressure from shareholders and outside forces. This seems likely regardless of whether ethical investing itself gets more popular or not.

As for how it'll affect returns, it’s hard to say. If ESG investing gets a lot bigger, then share prices of those companies meeting the ESG criteria will rise more than average (all else equal). Yet if that doesn’t eventually translate into profits, via more customers or more sustainable earnings, then those prices will probably come back to a normal range.

It also means that companies not exhibiting strong ESG traits could become much cheaper, relative to everything else. This may be happening already as ESG is on people’s minds. That leaves opportunities for active investors to come in and buy those shares on the cheap. The market (which is simply a huge collection of people) is pretty clever at evening itself out with things like that.

Overall, I don't expect it to make much long term difference to be honest. For companies who roll out more ESG initiatives, some projects will lose money, others will add value. And as always, some companies will die and fall out of favour, while others will flourish. Companies who are able to sustain and grow their earnings will prosper into the future, whether they’re ESG-friendly or not.

Markets are amazing at adapting over time - what we see today will morph into something very different 30 years from now. It’s kind of silly to even pretend we can guess!

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 receive responses from 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