The journey to Financial Independence comes with many things to learn along the way.

To help simplify tricky questions and clear away confusion, we’re running an ongoing Q&A series.

We hope these provide you with 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 before you adapt any information to your own circumstances, and reach out to a financial adviser if needed.

If you have a 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:

– Dividends when prices fall
– Two questions on property vs shares
– Is VAS too risky?
– Investing through a business
– VGE or VEU?
– Aussie shares inside or outside super

Dividends when prices fall

Q: What happens to dividends when prices fall? Do they stay the same even if the actual price of your assets has fallen?

Dave: Long-time readers will have heard me speak about dividends quite a bit. I wrote an article explaining why I enjoy focusing on dividends more than prices .

You’re correct. Dividends don’t fall because prices have fallen. Companies choose to pay dividends – and how much – based on their profits, not share price.

That said, dividends do fall in environments where markets are down heavily, such as a recession. So although dividends and prices don't go up and down together, they are often affected by the same things.

In any case, most investors will mostly focus on the fluctuating value of their portfolio rather than dividends. So, a psychological component will always be at play on either side – for both the price-watcher and the dividend-enjoyer.

Of course, it’s worth remembering that more dividends isn’t always better. Companies need cash to fund growth, and when money leaves the company, the company is worth less than it otherwise would be. The tricky part in Australia is that money is often worth more in the hands of investors rather than the company due to franking credits, so there’s that too.

Investing through a business

Q: Dave, assume you have a highly profitable business, a paid-off house, and you just started investing in shares. With the business profits, would you invest in shares through the business? Open a new company structure to invest with? Or just invest in your personal name with your spouse?

Dave: Firstly, I’m no expert on structuring, so anything I say has a decent chance of being incorrect. So for anyone reading, if you have a more complex situation, it makes sense to get professional advice on structures and what’s the ideal option for a given scenario.

A friend of mine got advice on investing in shares through his business (using the profits) and he was told it's probably not the best idea and to invest in his personal name instead. From memory, the main two benefits to investing outside the company was retaining the CGT discount, and having less of your wealth tied to the business. But this is just one example, and your situation may have different considerations.

Whether one opens a new company (and possibly a trust) for investing will depend on personal tax rates, desire for simplicity/complexity, ongoing costs, how much one values the CGT discount, etc. But again, advice from a tax accountant or licensed financial adviser is highly recommended.

In a scenario where personal incomes aren’t high (say, under $100k per person), then investing in personal names may be easiest. Super may also be an efficient choice if you don’t mind locking up some money.

Ultimately there are pros and cons for whichever entity you want to invest this money in – personal, company, super, or a combo of all three. It really depends what you're trying to achieve and which pros/cons matter the most.

Personally, I'd probably just invest the money in personal names to create a portfolio for FI and accessible income. Then, with any money I didn't really need above that (or if I was happy with my lifestyle and didn't need access to additional investment income), I'd add it to super.

Only at high levels of income and personal wealth would I bother with an additional trust/company setup. But I prefer simplicity over optimisation, so I might be different to others in that regard. That's why it's important to do your own research on this to know what's right for you.

Aussie shares inside or outside super

Q: Should I hold Australian or international shares inside super or in a taxable investment account? I'm a high-rate taxpayer with a buy-and-hold strategy until retirement. Considering tax on dividends and CGT, I'm thinking of putting VGS in the personal account and Australian shares in super for franking credits. Thoughts?

Dave: People tend to approach this very differently from one another for various reasons, so you won’t find a universal answer.

But in a scenario like this – high tax rate, holding until retirement, not planning to use the portfolio for a long time – it makes sense to have the higher income assets in a lower tax environment, and vice versa.

If, however, there’s a plan to use the portfolio earlier than that, then a more even split could make sense.

This could be especially in a situation where one expects to be in a low tax environment – like early retirement – possibly decades before official retirement (at age 60+). In this case, it can actually make sense to hold the higher income assets outside super.

For example, in my own case, and many others, if you reach FI and leave work, you're often on a lower overall tax rate than what your super fund is paying. That ends up making it more efficient to have the Aussie shares and franking credits outside super.

But most people end up earning additional money after reaching FI, making that choice less efficient once more. And it’s hard because you can’t exactly predict how your life will play out. For that reason, I think a more balanced approach often makes sense, rather than over-thinking and over-tinkering. But only you know what's right for you.

Property vs Shares

Q: I'm wondering which is better for Financial Independence: having a good property portfolio, or owning a sizable amount of shares and ETFs?

Dave: This is probably the most debated question in all of finance! The real answer is: both can work, and they have different features.

Many Aussies choose to invest in property to build wealth using high levels of leverage, which is unique to residential property. The downsides can be long periods of negative cashflow; large transaction costs such as stamp duty and selling fees; and uncertain growth with periods of flat or poor performance.

Plus, most property in Australia also has pretty low rental yields after all costs are accounted for, so it’s not a great income generator for living off. For this reason, many investors later choose shares for an income stream, regardless of whether they’ve invested in property or not to build their wealth.

There are basically no costs, and it’s simpler and more tax efficient. The main downside of course is the occasional big market decline, which by itself is enough to put some people off!

It’s really a huge discussion, with many different variables to consider. If you’re interested, I explored this topic in detail in my book (shameless plug), and I’m writing a thorough guide on it soon.

Is VAS too risky?

Q: I looked at the long-term returns of VAS and VTS and despite the tax benefit of franking credits, VTS still beats VAS. The dividend yield is less, however for investors with positive cashflow for the foreseeable future that shouldn't be an issue.

Further, our home market is quite skewed to resources and financials. Since now the world is leaning to renewables and our financial markets and Big 4 are dependent to a large extent on these, going forward it seems quite a risky option to keep investing in VAS. What are your thoughts?

Dave: This question is a little odd if I’m honest.

Yes, our market is skewed to resources and financials, just as the US is skewed to tech. So they're different and in fact, they complement each other.

The US has greatly outperformed the world since the GFC, but over the last 100 years both Australia and the US have performed about the same.

What does the next 50 years look like? The truth is, nobody knows. So, I personally choose to invest in both, while also choosing global shares rather than just US.

But riddle me this: if the world is leaning towards renewables, and Australia can provide a near-unlimited amount of minerals for renewable technology, how does that make it riskier?

That’s like saying the world is leaning towards AI and the US is heavily involved in AI so that makes it riskier. I don’t get the logic there.

Plus, there’s the highest population growth in the developed world, which leads to huge demand for home loans, insurances, etc, over the next few decades.

The US is said to be 'overvalued' on a variety of metrics, and there are questions as to how much longer the performance can continue.

To be clear, I’m not saying anything will/won’t happen – I’m just questioning the logic.

We could argue that the high-quality, high-growth nature of US companies is now fully 'priced in', meaning no more big returns. I honestly have no idea, but that's the point – we can't know. This is why I just invest in both, shrug my shoulders, and get on with life.

I'll be watching with interest, but I don’t mind what happens.

Property vs Shares (Again!)

Q: I recently listened to your interview on the Australian Property podcast. I have to say, what you've achieved really intrigued me. Since then, I've started listening to your book, which I really like. You really demonstrate the simplicity in achieving FI.

I've recently moved to Melbourne, from Ireland. I currently have quite a bit of capital built up, with the intention of using it as a deposit for an investment property. I was going to proceed with a buyers agency, given my current lack of knowledge of the property market.

However, I've recently been having doubts as to whether this is the best option for me, given the potential of investing in shares. Additionally, there's a lot of extra costs that come with a property, as you know.

I'm currently 31 and aim to be retired in 15 years. With a continuous savings rate of 60%, as well as my current assets, I'm confident I can achieve this. However, I want to make sure I'm making a good decision by proceeding with property. Any suggestions would be greatly appreciated.

Dave: Interesting scenario. It's good you're weighing things carefully before going ahead.

I agree with you – at your current savings rate, you'll comfortably achieve FI within 15 years (12 years, actually!). A simple early retirement calculator shows us that. And that’s starting from zero, which you’re not doing, so it will be much faster than that.

So clearly, there's no need to use leverage or do anything fancy to achieve your goal. But if you wanted to try and add a bit of juice, you certainly could.

10 years or so is a pretty good timeframe to work with. You'll likely need to sell at the end to reinvest into shares to get a decent income (or sooner if it booms), but I don't see anything wrong with doing that if you wanted to invest in both.

I think a lot of people believe I’m anti-property, but I'm truly not. It’s just that leverage, high costs, and poor cashflow reduce the margin for error. That's why I believe it has to suit one's specific goal and timeframe while being aware of the drawbacks.

VGE or VEU?

Q: Alongside VAS/VGS, which is better for diversification – VGE or VEU?

Dave: Great question, and one that I’ve seen before.

It really can be quite overwhelming looking at all these different ETFs and trying to figure out which one’s which, how they combine with each other, and where they overlap!

Here’s my take…

VEU has greater diversification, since it’s a ‘Total World Ex-US’ index fund, which includes emerging markets.

VGE, on the other hand, is only emerging markets. Based on this, it sounds like VEU is ‘better’ for diversification, but there’s an important distinction to make.

VEU also invests in a lot of the same countries and companies as VGS – Japan, UK, Canada, France, etc. So, there’s a lot of overlap. VEU even has about 5% exposure to Australia, meaning it also overlaps a little with VAS.

Because of all this, I believe VGE is the better addition to a VAS/VGS portfolio. But that's me – your preferences, circumstances, and risk profile may differ from mine.

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