BBB Postcard #47: Does the Australian Govt hate investors and a revealing Vanguard report? — Transcript

Full transcript

1. 0:11All right.
2. 0:12Hello there. Welcome to your latest Boom
3. 0:14Bust London postcard.
4. 0:16It's Darren here with you from Canberra
5. 0:18this time, back from Thailand.
6. 0:20Very interesting 10 or 11 days there,
7. 0:22let me tell you. Um
8. 0:24and the seminar I went to with Tim and
9. 0:26the the group
10. 0:28was fantastic.
11. 0:29Um now going to have to go through the
12. 0:31the video recordings to um
13. 0:34help me um
14. 0:36remember everything that we learned.
15. 0:38Uh but
16. 0:40trust me, if there's any real keys or
17. 0:43gems of wisdom um
18. 0:46in those tapes
19. 0:48and I find them I'll you know I'll bring
20. 0:49them to your
21. 0:50attention. I know a lot of you are are
22. 0:52very keen um keen students.
23. 0:56So
24. 0:57uh
25. 0:57for this video it's it's two parts.
26. 1:00I'm just going to speak just
27. 1:02briefly here to
28. 1:04uh Australian investors um
29. 1:06or traders
30. 1:08specifically and then we're going to get
31. 1:10into a more broader topic that um
32. 1:12doesn't matter where you live might be
33. 1:14of some use to you.
34. 1:16So
35. 1:18I'm going to bring up a slide here. Now
36. 1:20this slide relates to
37. 1:22uh the May budget that was handed down
38. 1:23here in Australia.
39. 1:25Um it was immediately attacked
40. 1:28by people who believed it was um
41. 1:32the government really cracking down on
42. 1:34investors, be them share or property
43. 1:37investors,
44. 1:39um with the changes to negative gearing,
45. 1:42which was um for all assets, not just
46. 1:45property, but also capital gains tax as
47. 1:47well.
48. 1:49Um
49. 1:49so
50. 1:51what I've learned over the
51. 1:53the many years that I've seen changes
52. 1:55like this
53. 1:56um come come down or be handed is,
54. 2:00just wait for
55. 2:02things to settle.
56. 2:03So, it's been May.
57. 2:06So, it's been a couple of months now.
58. 2:07We're entering November.
59. 2:09All right? That time period generally
60. 2:11allows for people who are much smarter
61. 2:15than myself
62. 2:16to go through
63. 2:19ascertain what the truth is and then
64. 2:21they start producing work of their own
65. 2:23to explain it.
66. 2:25So,
67. 2:27what I've done is uh I've been doing
68. 2:29research for many months now. I found
69. 2:32one particular video.
70. 2:34Now, it's on YouTube and if you're
71. 2:36interested in watching it, have a look
72. 2:37in the description box below this video.
73. 2:40I'll put a link in there for you.
74. 2:43But it's one of the best breakdowns I've
75. 2:46seen done by anyone. The chap in uh who
76. 2:50does it is a chartered accountant.
77. 2:53But it's a very very good breakdown for
78. 2:56the people who hold individual stock
79. 2:59portfolios.
80. 3:00Now, again,
81. 3:02apply a level of nuance to what's being
82. 3:04said.
83. 3:05A lot of the advice in that video is
84. 3:08aimed specifically at those in Australia
85. 3:10on the highest tax bracket. All right?
86. 3:13So, just bear that in mind.
87. 3:15The
88. 3:16the examples may not be as draconian for
89. 3:19you given what your uh applicable tax
90. 3:21rate is.
91. 3:23But as I said, it's it's down below. I
92. 3:25encourage you to watch it because the
93. 3:27best way
94. 3:28to carry on if you're an Australian
95. 3:30investor is to get yourself
96. 3:33informed [clears throat] the best you
97. 3:34can. All right? And this gives a great
98. 3:36breakdown for it.
99. 3:40All right. So,
100. 3:41to today's real topic.
101. 3:43Now, I mentioned this in the previous
102. 3:45video. So, we're going to look at uh
103. 3:47I think an excellent um bit of research
104. 3:50done by Vanguard. Now, Vanguard's one of
105. 3:52the world's preeminent
106. 3:54uh exchange traded fund and managed fund
107. 3:58um operators. Been around for donkey's
108. 4:01years. They do have an extremely good
109. 4:04track record of returns for investors.
110. 4:08So,
111. 4:09this report, again, if you look in the
112. 4:11description box below the video, I'll
113. 4:13include a link also to that report.
114. 4:16It's quite a big one.
115. 4:18Um I think it's about 10 or 12 pages
116. 4:20with a lot of information.
117. 4:22But if you'd like to take on what we
118. 4:24cover off here and have a look yourself,
119. 4:27uh I'll provide that for you.
120. 4:30But we'll start with the disclaimer.
121. 4:32This is just a thought bubble from me.
122. 4:34This is information only. It's not
123. 4:35financial advice whatsoever. It's just
124. 4:39it's just me going through the um the
125. 4:42research the Vanguard did and presenting
126. 4:44a few ideas to you.
127. 4:47So, as I said, this was released in
128. 4:48February uh 2023. It was entitled Cost
129. 4:51Averaging.
130. 4:52Invest now or temporarily hold your
131. 4:54cash.
132. 4:56So, what they were trying to explain is
133. 4:58the
134. 5:00an example of someone who comes into a
135. 5:02lump sum of of money,
136. 5:04you know, lottery, inheritance, whatever
137. 5:06it is,
138. 5:08and that person wants to make a decision
139. 5:10how to invest that money.
140. 5:12So, in the report, they give three
141. 5:14examples. One, holding cash.
142. 5:16Two, lump sum into equity markets.
143. 5:19And then three,
144. 5:21dollar cost averaging or what they call
145. 5:22cost averaging here
146. 5:24uh into the markets instead.
147. 5:28Now,
148. 5:29figure one on this slide,
149. 5:32just to explain,
150. 5:33it shows
151. 5:36that their research assumes for lump sum
152. 5:40you are fully invested in the markets
153. 5:43for 12 months. So, the the day you get
154. 5:45this lump sum, it goes straight in the
155. 5:46market and it's held for 12 months.
156. 5:49And they also explain the cost averaging
157. 5:52is
158. 5:53the first three months you put in 33% of
159. 5:57your lump sum, followed by 33% followed
160. 6:00by 33%.
161. 6:02Thus, it is fully invested for the
162. 6:04following nine months of that 12 month
163. 6:07period.
164. 6:08So hopefully that makes uh a little bit
165. 6:10of sense. This is how um Vanguard have
166. 6:13laid out their research.
167. 6:17Now there are some important
168. 6:19distinctions here when they're trying to
169. 6:21determine what's the superior method
170. 6:23being lump sum or the dollar cost
171. 6:25averaging method.
172. 6:28Number one is they overwhelmingly agree
173. 6:31that either strategy is far more
174. 6:34preferable than simply taking a lump sum
175. 6:36putting it in cash.
176. 6:38Now a caveat with that please remember
177. 6:40when was this written? 2023 all right?
178. 6:43Interest rates today are much much
179. 6:46higher across just about every country
180. 6:48you care to choose.
181. 6:50So that does make a difference but for
182. 6:52the purposes of this video we'll we'll
183. 6:54carry on with their research back in
184. 6:572023.
185. 6:59So Vanguard have
186. 7:01obviously a vested interest in in
187. 7:03pushing this sort of stuff and you
188. 7:05should always have healthy skepticism.
189. 7:08But I will say this this is a very well
190. 7:11researched piece of um
191. 7:13uh piece of data.
192. 7:16Vanguard do have access
193. 7:19to an enormous amount of information
194. 7:21thanks to their own business.
195. 7:24So when that they're drawing figures and
196. 7:26numbers about the ideal mix up for a
197. 7:29portfolio I think it stands the test of
198. 7:32scrutiny. They would know in other words
199. 7:35they would have the data.
200. 7:37So
201. 7:39in the uh report
202. 7:42your lump sum is 100,000.
203. 7:45They calculate the return over a 12
204. 7:48month period
205. 7:50through three different types of
206. 7:52investment strategies. So one is 100%
207. 7:54stocks
208. 7:55two is 60% stocks before 40% bonds
209. 7:58and the third one is 40%
210. 8:00stocks and 60% bonds.
211. 8:03So figure two just shows you their the
212. 8:06historical probability of
213. 8:08outperformance.
214. 8:10Um
215. 8:11first one lump sum versus uh dollar cost
216. 8:14averaging.
217. 8:16Then dollar cost averaging versus cash
218. 8:18and then lump sum versus cash. So as you
219. 8:20can see I mean
220. 8:21any way you cut it up
221. 8:23that 12 months in the equity markets
222. 8:25will will definitely make your money
223. 8:26work harder than if if it's in the
224. 8:28savings account.
225. 8:30Uh
226. 8:31figure three
227. 8:32I know it's a a little bit uh squashed
228. 8:34up here but all you need to to know is
229. 8:37there are three columns.
230. 8:40The first column is 100% equity.
231. 8:42Second column is 40%
232. 8:44equity
233. 8:45uh sorry 60% equity, 40% bonds and then
234. 8:49the third column 40% equities, 60%
235. 8:51bonds.
236. 8:52All you need to look at you can see that
237. 8:55there's a couple of bars above those
238. 8:57uh three columns.
239. 8:59Uh one's green, one's orange. They
240. 9:01relate to each column and basically the
241. 9:04thicker the the bar
242. 9:07uh the greater the return. And straight
243. 9:09away you can see how 100% equity
244. 9:11outperforms the other two strategies.
245. 9:13And of course you can see there is a
246. 9:16uh a meaningful gap between the green
247. 9:19which is lump sum and the orange which
248. 9:20is your dollar cost averaging.
249. 9:28So
250. 9:29when you read the report no I do
251. 9:31encourage you to do so
252. 9:34uh one thing becomes very apparent.
253. 9:36Doesn't matter who you are you have to
254. 9:38accept some level of risk if you ever
255. 9:41want to get returns on your money
256. 9:44that's better than cash. All right?
257. 9:46That's that's just a given. There is no
258. 9:48such thing as a free lunch. You're not
259. 9:49going to be able to do any of these
260. 9:52strategies that Vanguard Vanguard uh
261. 9:54layout without accepting uh some risks.
262. 9:58So this is when it comes down to a very
263. 10:01very important question is you have to
264. 10:03know you.
265. 10:05What type of investor are you?
266. 10:08What type of trader are you?
267. 10:11What type of risk are you willing to
268. 10:14accept in your investing and training?
269. 10:17How much experience of this do you have?
270. 10:20How emotionally neutral can you be when
271. 10:22your money is on the line? All these
272. 10:24things can only be answered uh by
273. 10:27yourself.
274. 10:28All right?
275. 10:29Now,
276. 10:31if you are a little bit risk averse, you
277. 10:33might be more inclined to do the dollar
278. 10:36cost averaging. Again, nothing wrong
279. 10:38with it.
280. 10:40And I have noted here,
281. 10:42November 6th, we had a massive
282. 10:45bit of volatility in markets um thanks
283. 10:48to the mid term election results. Market
284. 10:51went up, market went down even
285. 10:54with much more violence than it went up,
286. 10:56and now it's starting to close that gap
287. 10:57up again. So it's an intense volatility
288. 11:00uh right now.
289. 11:02And if you were to start today and you
290. 11:04saw that, maybe the dollar cost
291. 11:07averaging method would be easier for you
292. 11:09to start than pushing everything in and
293. 11:11watching that over
294. 11:13three or four days, hm?
295. 11:16If you knew this information in advance,
296. 11:18you know, you knew November 6th was
297. 11:20going to happen,
298. 11:22well, sure, the risk would be low cuz
299. 11:23you wouldn't put your money in, but we
300. 11:25have to assume that you don't know that.
301. 11:28So I've quoted here from the report,
302. 11:32another takeaway from our historical
303. 11:34analysis is that the longer the dollar
304. 11:36cost averaging horizon or the time it
305. 11:39takes to fully invest your capital or
306. 11:42your cash,
307. 11:43the greater the opportunity cost
308. 11:45incurred.
309. 11:46Splitting investments across a longer
310. 11:48period further decreases the dollar cost
311. 11:51averaging performance versus lump sum.
312. 11:53So this is, if you go back a few slides,
313. 11:57that's basically what Vanguard were
314. 11:59laying out that
315. 12:01the lump sum method gives you
316. 12:04um the less the least cost in terms of
317. 12:07opportunity and the maximum time in the
318. 12:09markets compared to a dollar cost
319. 12:12averaging uh strategy.
320. 12:15Uh but they also have um a comment about
321. 12:18prevailing interest rates. And remember,
322. 12:20this is written in 2023, so I think this
323. 12:22is important. Quote, we also varied the
324. 12:24cash interest rate to find that,
325. 12:26unsurprisingly, as cash cash interest
326. 12:29increases,
327. 12:30lump sum advantages
328. 12:32diminish,
329. 12:33all other things being equal. Now I
330. 12:35think that's a very important caveat
331. 12:37when you consider it's been three years
332. 12:39since this report was done.
333. 12:41Interest rates today are much much
334. 12:43higher than they were when this report
335. 12:46was done. And therefore, you can say
336. 12:50that
337. 12:51there is a um significant tailwind
338. 12:55for lump sum investing
339. 12:57given the risks, which we saw like a
340. 12:59couple of days ago there with the the
341. 13:01midterm.
342. 13:03When you can put your money in the uh
343. 13:05online savings account, uh I've seen
344. 13:07some at 6.25 %, and it's as bad as
345. 13:10risk-free as you can get. So it's
346. 13:12definitely something to strongly
347. 13:14consider um when you go through this
348. 13:16report
349. 13:18and you're thinking about perhaps
350. 13:20onboarding some of these strategies for
351. 13:22yourself.
352. 13:24The bottom line is both methods have
353. 13:25merit.
354. 13:27And I always ask you,
355. 13:29whenever we do these videos, whenever I
356. 13:30write a Boom Bust Bulletin edition or
357. 13:33you read the PCE stuff, put your real
358. 13:35estate cycle lens on. Now, ironically,
359. 13:38Vanguard spells this out themselves.
360. 13:41Quote,
361. 13:42lump sum in most case yields greater
362. 13:44wealth after one year
363. 13:46than dollar cost averaging, but
364. 13:49lump sum strategies exhibit more
365. 13:51drawdown in the worst market
366. 13:53environments in which the dollar cost
367. 13:55averaging strategy has greater wealth
368. 13:58after that same 12 months.
369. 14:01Now I ask you, what are we expecting
370. 14:02should history repeat for equity
371. 14:04markets?
372. 14:056 months time, 12 months, 15 months time
373. 14:08from now.
374. 14:10We're not expecting a roaring 10-year
375. 14:14long bull market.
376. 14:16In fact, we are expecting
377. 14:19uh quite the opposite to that.
378. 14:22So,
379. 14:24what does this research leave us?
380. 14:27Very simply, I've put it down in three
381. 14:29dot points. So, lump sum
382. 14:31almost always the superior method.
383. 14:34It maximizes your time in the markets,
384. 14:36it maximizes the return you get.
385. 14:38You get the um greatest greater um
386. 14:43well, you get the less opportunity cost
387. 14:46of waiting, sitting on the sidelines.
388. 14:50Second one is dollar cost averaging.
389. 14:53According to Vanguard's research, and I
390. 14:55think it holds up,
391. 14:57it does produce less returns over any
392. 14:59given 12-month period, but it can suit
393. 15:02those who are risk-averse
394. 15:06and it can still produce a very healthy
395. 15:09return
396. 15:10in the markets compared to in 2023
397. 15:13putting your money in cash.
398. 15:16Which of course was the point of um
399. 15:20number three here just to say it's now
400. 15:22been three years since this report came
401. 15:24out.
402. 15:25It does not accurately represent where
403. 15:27interest rates are today.
404. 15:29I dare say if they ran this experiment
405. 15:31again today,
406. 15:32uh I think the results between
407. 15:36the uh
408. 15:38equity or equity and bonds splits, those
409. 15:41three portfolios up against cash, um
410. 15:44there'd be much much less variance
411. 15:46between them, right? I think that um
412. 15:49cash at the moment given the rates would
413. 15:52nullify a lot of the advantages that
414. 15:55equity um investing had for you three
415. 15:58years ago.
416. 16:00So, it brings us to to right now. So,
417. 16:02what's the way
418. 16:03forward?
419. 16:06With our real estate cycle lens on, with
420. 16:08an appreciation of of history and the
421. 16:10likelihood of the markets trending down
422. 16:14over the next few years as opposed to
423. 16:16up,
424. 16:17do we avoid the markets?
425. 16:21Do we then wait for this uh inevitable
426. 16:24stock market collapse?
427. 16:27And then do we re-enter the markets when
428. 16:29when we think
429. 16:31that the bottom is in?
430. 16:34Or do we just keep our money right now
431. 16:37in a high interest savings account
432. 16:41that is basically risk free
433. 16:43but except that inflation
434. 16:47keeps moving up incrementally year by
435. 16:49year and it is eroding the purchasing
436. 16:51power of that same money in an interest
437. 16:54rate account.
438. 16:56Remember it's
439. 16:58you know you're not getting really any
440. 16:59capital gain
441. 17:01uh on the lump sum in the bank. You're
442. 17:03just getting interest as as a stipend as
443. 17:06a a a form of income like a like a
444. 17:09dividend.
445. 17:11Equities can give you the chance to
446. 17:13capture some capital growth that can
447. 17:16offset
448. 17:18the effects of inflation and also if you
449. 17:21buy them you can also get income in the
450. 17:24form of a dividend as well.
451. 17:27So
452. 17:29that's
453. 17:30a couple of ideas about how we move
454. 17:32forward but I've added
455. 17:35uh one myself.
456. 17:37Can we use Vanguard's research and come
457. 17:39up with a potential way to play the
458. 17:41upcoming downturn? So in other words
459. 17:45is there merit perhaps in combining
460. 17:49the um realities of
461. 17:52uh your capital in cash
462. 17:55of lump sum investing now to maximize
463. 17:58its time in the market
464. 18:00but also
465. 18:01uh
466. 18:02applying a dollar cost
467. 18:04uh averaging strategy as well.
468. 18:07Can we meld all these three things to
469. 18:09maximize
470. 18:12the markets in the future should history
471. 18:14repeat and we have a downturn?
472. 18:16Now
473. 18:18we're not going to cover today.
474. 18:20I have some ideas.
475. 18:23I need to obviously do some testing on
476. 18:26them,
477. 18:26but
478. 18:28and I reiterate again the disclaimer,
479. 18:30this is not financial advice, this is
480. 18:32just a thought experiment.
481. 18:34But
482. 18:35I'm happy to come back to you in a
483. 18:37future video with uh what I find
484. 18:40using uh Vanguard's methods there and
485. 18:42just see is there potentially a strategy
486. 18:47that you can use during the upcoming uh
487. 18:50stock market downturn
488. 18:52that enables you to actually be
489. 18:54far far better off
490. 18:56when the markets do bottom and start up
491. 18:59again,
492. 19:00or in other words, the next 18.6 real
493. 19:03estate cycle begins,
494. 19:05and get you in a much much better place
495. 19:06financially than where you are say even
496. 19:09today.
497. 19:10Now, I don't know. I've got to run the
498. 19:12numbers, but it'll be um quite
499. 19:14interesting,
500. 19:16and I will
501. 19:18in the future do another little video
502. 19:19and we'll have a look at it because I
503. 19:21just think it's really really good food
504. 19:23for thought.
505. 19:25As I mentioned in the last video,
506. 19:27one of the greatest gifts
507. 19:29knowledge of the real estate cycle can
508. 19:31give you, because it's given it to me,
509. 19:35is you have time.
510. 19:37You have time on your side to be
511. 19:39thinking like this,
512. 19:41to be
513. 19:42red teaming, blue teaming ideas,
514. 19:45bouncing them off each other, trying to
515. 19:47determine what's the best method for you
516. 19:50today and and moving forward
517. 19:52before the [clears throat] emotional
518. 19:54weight of everything just going over the
519. 19:56top
520. 19:57rushes in
521. 19:59and you're frozen by inaction because
522. 20:02it's you don't know what to do.
523. 20:04The time to plan what happens at the end
524. 20:06of the real this real estate cycle and
525. 20:08preparing for the next is now.
526. 20:11So that's why we're looking at this type
527. 20:12of stuff.
528. 20:14All right.
529. 20:15So
530. 20:17please have a look at the video,
531. 20:19particularly if you're Australian,
532. 20:21and also please read through that
533. 20:23Vanguard
534. 20:25report. Very, very interesting.
535. 20:27A lot more detail in there than I went
536. 20:29into. I wanted to go a little bit light
537. 20:31with the
538. 20:32the minutiae of it. But if you're
539. 20:34interested, I mean they even they even
540. 20:36include the mathematical formulas for
541. 20:38how they came up with the the figures
542. 20:40too if you're so inclined. So yeah,
543. 20:42check that out.
544. 20:45I'm going to start November's Boom Bust
545. 20:47Bulletin.
546. 20:49What happened in the midterms and
547. 20:50particularly the way the
548. 20:53uh AI stocks
549. 20:55turned down very badly on news that the
550. 20:57Democrats had swept the house and the
551. 21:00Senate and they're thinking of
552. 21:03stopping or halting future data centres.
553. 21:07Really intrigued me.
554. 21:09Uh I don't think uh the news really gets
555. 21:12to the heart of the matter. So that's
556. 21:14what I'm going to try and do for this
557. 21:15month's edition.
558. 21:17All right. So I've kept you enough.
559. 21:19Thank you very much. Thank you very much
560. 21:21for being a member. You know that we
561. 21:22appreciate your patronage and your
562. 21:24support
563. 21:26and uh I will see you here in a week or
564. 21:28two. Cheers.