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RTC42: The two main investing strategies explained · The Curve

• 0:00
  Welcome to the Curve Podcast, a conversation for women who want to learn more about money.
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  They are money for the future they want to have.
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  We're all busy in the pursuit for financial confidence and increasing your wealth should
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  be a simple one.
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  This podcast is for women to learn about investing in a non-scary or intimidating way, so thank
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  you for being here and for listening because together we really can raise the curve.
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  Good morning, good morning.
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  Morning.
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  Are we running perky?
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  Yeah, we're recording.
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  It's still Sunday morning for me that I'm feeling tired, so I'm going to do my best here
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  to be perky.
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  It feels like Sunday morning for me as well.
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  It's been a long day.
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  You're hung over me.
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  It's very different.
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  No, I know.
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  Yeah, 30 on a Sunday though.
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  That's pretty much perusal.
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  Yeah, that's brutal.
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  Hey, I would like to know what you're going to do today.
• 1:03
  I was like, it's so excited to say this again.
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  I have no idea what we're talking about today.
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  I really need to start putting some kind of schedule in place where you can be like,
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  why?
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  I quite like talking about.
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  Because I can just surprise you with something really interesting or something really boring.
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  Index funds.
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  Oh, yes.
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  Okay.
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  Amazing.
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  This is something I've been wanting to learn about.
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  And a lot of people message us into the curve that in our Instagram, DMs or seeing
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  us emails and they're like, can you please talk to index funds?
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  So I'm really stoked we're talking about this.
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  And here we are.
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  We're talking about index funds.
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  We do as we're told.
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  You dictate the podcast.
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  Yeah.
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  No, but it's true.
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  I think it's really.
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  We obviously want to produce what you really want us to learn.
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  So it's really good when people seem to have ideas for what to do.
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  Because it's amazing and can't be bothered to hear something to talk about.
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  Yeah.
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  That's the real reason.
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  Yeah.
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  Guilty.
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  No, but in all seriousness, yeah.
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  If you do like you read something or you're listening to another podcast that's talking
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  about something and you're like, I don't know what that means, definitely get in touch
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  with us.
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  Because if you're wondering what it means, there's probably lots of other people also like,
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  what the hell's an index fund?
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  Yes, exactly.
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  So it's a really good place to start when talking about index funds and to talk about
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  kind of active and passive and besting.
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  And so passive and besting is when you are just in besting in the market, you're just
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  getting the market return, there is no fiddling around, no playing, no buying or selling
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  certain stocks.
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  You're literally just buying the index.
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  I think a great way to think about passive, like because the word passive sounds very much
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  like you don't care, you know, it's like, yeah, yeah, I'm passive, I don't care what's
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  happening.
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  It's the same kind of thing, right?
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  It's like, it's almost lazy investing, it's not lazy, but you're essentially investing
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  in something, leaving it and it's just following what the market does, right?
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  There's no kind of element of pulling your money out of things that are looking terrible,
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  it's just in there following the trajectory rather than the up or down.
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  Yes, it's kind of, it is a lazy way of investing really, it is like, and it's not bad, it's
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  just, yeah, that suits some people, some people really, really love passive investing.
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  And then there's active, which is, again, like the name suggests is when you get in there,
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  you're like, I can pick really great stocks that are going to do better than the market,
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  and then you try and buy them at right time, sell them at right times, buy other ones,
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  so you're constantly looking for new investment ideas and monitoring the ones that you currently
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  own, finding new ones.
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  So this is exactly what I do every single day.
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  So this is, I am an active investor, not a lazy investor.
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  So what Vex trying to say is she's not lazy, she's always on the ball, far from it, very,
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  very not lazy me, I'm really constantly rating yourself, and do you know what, I'm proud
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  of that because I think I need to do that more.
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  I'm always like, I'm okay at this, I need to just be like, no, I'm good, not investing,
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  obviously, but other things.
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  You are good at investing, I'm getting better, I honestly invested it first solar, which
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  is done so well, I hope in like a couple of years, I'm like the success story that can
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  be like, I once knew nothing, you'll be on the billboards and magazines and like, the
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  girl that grew $1 million to $1 million, it's just so fast, so fast, me standing in front
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  of my footballer, you can take full credit for that as well, you'll be like, well that
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  was my problem.
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  You'll be like, hey, you lost a job actually, I'm like, anymore, I'll be like that, have
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  you watched Monsters Inc, with the little guy, and he was on the cover of the magazine
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  and he was so excited, and then they put the barcode over his face and he was so stoked
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  though, he was like, oh no, and he was like, but I'm on the cover, it was so cute, so
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  you're going to be that, you're going to have the curve over your face, and you're going
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  to be the big hairy beast of a monster guy, oh my god, from active and passive investing
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  to Monsters Inc, gosh, okay, active investing, so active and passive, so everyone surely
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  understands that's quite straightforward, I feel, essentially you're a passive investor
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  investing in the market, so it might be like the S&P 500, it might be the NZX50, you're
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  investing in the market, and as you've said on average, it's like returning around
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  78% a year, yes, yes, that's what the US market, and when we say the market, like when you
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  talk about the US market, you're usually talking about the S&P 500, if you're talking
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  about the NZ market, you're talking about the NZX50, so when we say, yeah, when we refer
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  to a market, we are referring to an index, it's kind of like an index is a representation
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  of that country, so the S&P 500 is the top 500 companies in the US that are publicly
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  listed, and so it's a representation of the US as a country, so it's got healthcare
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  names, it's got banks, it's got retailers, it's got media companies, it's got telecommunications
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  companies, it's got such a broad range of companies, and that is, so there's an ETF, which
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  is an exchange traded fund, is how you invest passively, you invest through ETF, so you
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  can't actually buy the actual index, you buy an ETF that tracks the index, if that makes
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  sense. I thought you were buying the index. Well, you are, because it's exactly mirrors
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  the index, so you are effectively buying the index, but you will be doing that through
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  an ETF, and there's a ton of companies that create ETFs that track index, so when we talk
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  about index funds, we're talking about ETFs, so exchange traded funds that follow an index.
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  So does that make sense? Okay, hold on, can I just repeat this back to you? So is an index
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  fund essentially a ETF that is tracking an index, so it might use a New Zealand index,
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  it might be the England index, it might be the US index, but an index fund is essentially
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  an ETF, which is mirroring, all of the mirroring, gosh, that was very English, everything
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  that's in that index, so they've basically gone through and they've got all top 50 companies
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  in New Zealand, for example, it's the NZX, and when you buy that index, you know you're
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  getting essentially the New Zealand index, or is that right? So you could effectively, and
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  I'm just kind of thinking about this now, you could effectively create your own index fund
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  by buying the same percentage of each company, it would be an absolute shitshow, an absolute
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  nightmare, but like you could effectively go in and buy a certain percentage of each of the top
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  500 companies in the US, that it indexed the 500, and you could mirror the index, so you could
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  effectively kind of create in your own fund. I would you have to go through five top companies
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  in the mall, and then the index gets rebalanced, so you know some companies will do well, some
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  companies will do not so well, and so they'll fall out of that top 500 bracket, and others will
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  go in, so there's a rebalance, a recorder, or four times a year, so you'd have to do that,
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  like it would be an absolute shitshow, but this is what these computers do, is that they do it
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  automatically, and because there's no thinking in it, it's all kind of done automatically through
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  computer, that's why the fees of ETFs are so low, but ETF is just a way to get access to an index,
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  or a sector, or a theme, or a country, by just buying one share. I googled this earlier,
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  did I actually do some research, there's over 2000 ETFs in the United States alone,
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  so 2000, so there's been 2000 ETFs that have been creative, which mirror a ton of things,
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  it could be the S&P 500, it could be the NASDAQ 100, it could be a small cap index,
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  you know there's so many different, it could be just a health care index, hold on,
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  I'm just going to pause for a second, because there might be some people that don't follow that,
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  so small cap index is essentially like companies that are considered small, which is as of
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  around two billion, two billion, two billion, yeah, is a small cap, so there's essentially small
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  medium and large, and large would be something like an Amazon, small would be something like a,
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  what's an example of a small cap company? Oh there's, they really, you wouldn't have heard,
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  like they really are not well known names, because they're tiny, two billion, I love it,
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  that's small as well, but anyways, sorry, so you're basically saying there's 2000
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  index funds in the US, ETFs, ETFs, and within those, there's ETFs that track the index,
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  which is called an index fund, there's ETFs that track, yeah, so they track,
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  an index fund is essentially an ETF that tracks the index, and so am I right in saying an ETF,
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  like a clean energy ETF, so for example, what's that one, what's the one that we've spoken about
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  before that, is it the issue as one? I actually was clean energy ETF, yeah, but what's the,
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  what's the ticker? Oh, ICLM, yeah, and so that is essentially like a collection of companies
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  that are in the clean energy space, so that wouldn't be considered an index, that's just an ETF,
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  right? Yes, yeah, for all types of purposes, yeah, so when we talk about index funds,
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  we're talking purely about an ETF that's marrying an index. Yes, it's not every ETF,
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  like the 2000 you've just spoken about, they're not all index funds. Yes, so when we talk about
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  an index, we're talking about a main index of a company, sorry, of a country, which is, yeah,
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  it's a P500, the NASDAQ 100, the FTSE 100, the FTSE for everyone that hasn't heard
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  our last episode, the FTSE 100 is the British index. The UK, yeah, how cool is that, it's called FTSE,
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  FTSE, I saw it in an email, you sent me, you wrote FTSE, FTSE, that was cracking up, I was like,
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  oh, bless. Yes, so when we talk about an index fund, we are talking about an ETF that is tracking a
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  market index, so a the ESP500, the NZX50, ASX200, they're all the main indexes of those
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  respective countries, so the US, New Zealand, Australia. Why did they take us 15 minutes to explain?
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  Well, because then you've got managed funds, you've got mutual funds, you've got huge funds,
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  I thought I had it, I was like, I've nailed it, I get this episode. No, there's a deeper dive.
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  That's the active side, so the active side is managed funds, which as the name suggests,
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  it's a fund that's actually managed by someone, so these are a lot of our retirement funds here
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  in New Zealand, so Kiwi Saver is a managed fund, and then you've got mutual funds, which are the
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  same as managed funds, but the called mutual funds a lot more commonly in the US, and then you've
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  got huge funds, which are funds that just take, they're a type of managed fund, but they are,
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  they take really big bets, so they might buy a really large stake in a company,
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  because they're taking a huge bet on that company doing well. So there's mutual funds,
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  there's and hedge funds, which are kind of the same, and then there's hedge funds,
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  and they're all kind of active, active investing, ways of active investing, and then you've got
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  under passive investing, you've got ETFs, and the subset of those is index funds.
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  Should really do like a flow chart, maybe. Yeah, like a fun little bubble chart or something.
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  I love that idea. Yeah, so can you just explain mutual funds one more time?
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  Their managed funds, the name is kind of used interchangeably. So why do I need to use that word?
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  Because you might hear the word mutual fund and be like, oh, what was that different to a managed
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  fund? And so it's just different parts of the world, they use different names for things. So
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  yeah, so I guess that with passive investing, the great thing about it is that it's really cheap,
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  because there's no human involvement at all, you're just checking the index, so therefore
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  it's that the fees are like super, super cheap, and that's why people love passive investing,
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  is because the fees don't really eat into your returns, whereas with active investing,
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  because you're constantly trying to find ideas, monitor the ones that you've invested in,
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  buying, selling, all that, those fees add up, you're paying for that human oversight of the fund,
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  as well as all that trading as well, that's why active investing is slightly more expensive.
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  Is there any research around whether or not active or passive investing in the long run
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  is more beneficial if you take into account fees and all that kind of thing from active investing?
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  There was actually, well, it is one of the biggest debates, but there was quite a famous bet
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  that Warren Buffett did, good old Warren, we love Warren, and if we met him and we were like,
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  was it so good to meet you? And he bet the hedge fund industry, so remember these are the
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  these are the ones that take big bets, they also chart the other thing I didn't mention with
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  hedge funds is that they charge super high fees, like a lot higher than manage funds, and he
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  bet the industry, the hedge fund industry that over the long run, the S&P 500, so the US
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  market index would outperform the hedge funds after fees. And so that's essentially saying the
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  pass of like passive investing, if you were just putting a money in S&P 500, he was saying in the
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  long run that will do better than what you're doing in the hedge fund world essentially? Yeah,
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  and his main argument was around the fees side of things, and anyway, it was a 10-year bet,
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  and I think it was like year nine, year nine, that, or year seven, that like the hedge fund
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  just kind of tapped out and said, you know what, I don't want to I don't want to do this anymore
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  because he cried, he had a little scratch, didn't want to take it to the end, and anyway,
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  it was like in every year Warren would kind of update the update on which which is doing better,
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  and he kind of just had the whole argument, I mean, he invests actively, but he is very much
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  a buy and hold kind of person, so he is probably a bit more, he's probably a combination of the
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  both really. And buy and hold you mean essentially, just buy something and hold it for a long time,
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  like a long time. Yeah, yeah, yeah. So actually, there's a bit of an argument around,
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  you could actually put your money in passive like S&P 500 and the NZX 15 and you know,
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  like these passive funds and potentially do better or as well as a fewer with active management.
• 17:19
  Yes, yeah. And I mean, I do a combination of both, you know, there's no you don't have to be
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  solely doing one or solely doing another, you can do a combination of both. And so you do get
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  the market return as well as you're like, hey, I actually want to invest in some stocks myself,
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  so you can do both. But yeah, it was just an interesting bit because there's been such a debate
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  for so long. And obviously, if you said in one camp, you're like, no, active investing does
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  better over the long run and if you're sitting in passive, you're like, no, passive does better,
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  so it's kind of like everyone has kind of got their own agenda. And so yeah, I want both.
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  Like for me at the moment, sorry, just quickly, like for me at the moment, there's some stocks
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  that I feel confident picking where I'm like, oh no, I understand this company and I want to invest
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  in that. Like the first solo was a good example of that. I wanted to invest in that myself.
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  But I don't, I'm definitely not there yet in terms of actively managing an entire portfolio.
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  So buying a clean energy ETF or the S&P 500 feels like, I don't know, it feels more secure for
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  me right now. And I think there's probably a lot of people who first start investing. And that's
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  probably the how you dip your toe on is through passive. And then when you start understanding
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  how to pick companies a little bit more confidently, you might head more towards the active route.
• 18:40
  Yes, yeah. And a lot of people, the great thing with ETFs and like passive investing,
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  is that you can buy, firstly, great advantage is you get diversification, you can buy a whole
• 18:53
  little company's at once. But I think it's really a really good way to get to invest in an area
• 19:00
  or a region or a thing that you really want to get exposure to. But you're like, I don't actually
• 19:05
  know, I don't want to sit down and research all these companies in cyber security. I just want
• 19:11
  to buy an ETF because I know we're all being more digital. We're going to need a lot more
• 19:16
  protection in terms of, you know, on our laptops and computers. And so I don't want to go
• 19:22
  and research a whole bunch of cyber security companies. And so things like that, I think passive
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  investing is really, really good for. But you do pay slightly higher fees for those,
• 19:32
  those kind of themed ETFs than you do for just a pure index ETF. But I again, I think if you're
• 19:39
  weighing up, for example, you know the hack ETF, which is the cyber security one we've spoken
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  about, that obviously has got some of the real top performing companies in the cyber security
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  space. It might also have some that don't do particularly well. But that idea of diversifying
• 19:57
  across the entire sector, if you believe that sector is something that's growing, for example,
• 20:01
  cyber security, we're all on the internet, we're all there's so many companies we've done it
• 20:06
  is like the most important thing within a company. So everyone's trying to protect it whether it be
• 20:11
  met or like any company that's digital would be investing in cyber security. So it makes sense to
• 20:19
  be like, I want to get access to that industry. If you're not confident on which is going to be
• 20:24
  the leading one, then to meet that feels way safer. And we did, we had the podcast about the
• 20:31
  short term trends and long term trends. And it's so good to, if you do spot a trend or you do see
• 20:38
  some, you know, all your friends doing something really strange and you're like, oh, I wonder if I
• 20:43
  can get exposure to that through an ETF. You can literally just Google pet ETF and then it will
• 20:49
  pop up with a whole lot of ETFs around like might be like pet food or anything to do with animals
• 20:57
  or. Okay, so here's a good question for you, Vic. So say there's, you know, 100 pet ETFs or there's
• 21:03
  17 SMP 500. How do you then go through those index funds or ETFs and figure out the best one or
• 21:11
  the one that's right for you? Because that's overwhelming to me. Like I would way prefer
• 21:15
  just to be one that stresses me out. How would we go about doing that? Well, there's not just one
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  because there's so many companies that create ETFs around anything and index or a sector or theme
• 21:30
  or, you know, so there's always going to be, that's why there's 17 because there's
• 21:35
  17 different companies that have created these ETFs. But the best thing to look at would be, well,
• 21:42
  with it index ETF, the returns are going to be pretty similar. You're tracking the index.
• 21:49
  If the market's down 20%, the ETF's going to be down 20%. So the holdings would be exactly the same.
• 21:55
  And when the index, so when the SMP 500, when the companies in that change, which is four times a
• 22:03
  year, that's reflected in those ETFs, it's reflected straight away. And then so the performance,
• 22:08
  the performance might be like marginally, like I'm talking like 0.01 or 0.1%
• 22:15
  difference. And that's mostly, it would be just due to fees or timing. But why don't they have
• 22:22
  so many then? I don't understand how there's market for that many. Because every company would have
• 22:28
  its own like suite of ETFs. And if you didn't have an index ETF, I don't know, I don't know why there's
• 22:34
  so many. But there's so many different companies. Vanguard is one of the largest ETFs. And it was the
• 22:38
  first, or the first index ETF was a Vanguard ETF. And Vanguard's like this huge investment company
• 22:45
  that has tons and tons and tons and tons of ETFs. You'll probably see if you googled
• 22:54
  SMP 500 index ETF, it'll be one of the first ones that popped up. And having the Vanguard in the name
• 23:00
  is a dead giveaway that Vanguard obviously owns that ETF. And are they are good, not brand, but are they
• 23:08
  I know we're not saying that you shouldn't invest in a Vanguard one, but is that a good sign that
• 23:13
  that would be of the 17 maybe one to look at? Yeah, so the benefit is that because they've got
• 23:20
  because they're so large, they've got the scale and therefore their fees are usually the lowest.
• 23:27
  So and then another one is iShares. So iShares is very, very large as well. So you usually see they'll
• 23:37
  have pretty similar ETF offerings or you know a choice. And but they'll just be one might be an iShares
• 23:46
  SMP 500 ETF. And then you'll see Vanguard, SMP 500 ETF. And then you'll see an iShares small companies
• 23:54
  ETF, Vanguard small, you know it's literally like kind of McDonald's. And can I can I ask you
• 24:01
  love that? So how do you know that say they say the SMP 500 index that they're definitely going to
• 24:08
  have all the same holdings like you don't have to go through and they're like checking them? No,
• 24:14
  because the index is the index and it has those companies. So if it says it's the SMP 500 it has
• 24:20
  to invest in all 500 companies and that index. It gets a bit more murky when it's like okay cool,
• 24:25
  this is a healthcare index. Okay, then there's a bit of leeway of like should we put you know
• 24:31
  doing doing this company doing but they'll disclose all the holdings though. Unlike a managed
• 24:36
  fund where you usually only get the top kind of 10% because that's a bit of a you know they don't
• 24:41
  want to give away all the companies they're investing in. Whereas ETF, you get 100% visibility so
• 24:47
  you get to see absolutely every stock that is in that ETF. Were there any were there any other
• 24:54
  I was going to say human questions were there any other questions that have come through
• 24:58
  our Instagram email etc in particular with index funds that people wanted to know about because
• 25:03
  I feel like I've seen a few like is there anything else that we need to cover? Yeah, so dividends.
• 25:08
  So if you own an ETF you will get paid dividends. So if you're investing in the SMP 500 and there's
• 25:16
  I don't know a bunch of those companies that pay a dividend and much you'll get that dividend.
• 25:21
  So you won't miss out just because you're not owning it directly because you effectively
• 25:29
  you are your only ETF therefore you're owning a little little little slice of all those companies.
• 25:35
  So you get a dividend but surely it would be tiny right like if you're in an ETF and you're
• 25:39
  getting access to three of 500 companies and three of them have a dividend surely you'd be
• 25:44
  getting like 20 cents or something wouldn't you. And the same with the managed fund you get the
• 25:49
  dividends there as well. The fund manager doesn't keep them for themselves or anything.
• 25:54
  But is the difference though that if you're in an ETF or an index fund and within that index fund
• 26:00
  or ETF there are companies that give dividends because you're invested on your small amount
• 26:06
  in each company opposed to say a decent amount in the one dividend company you're getting a lesser
• 26:11
  dividend. I mean depending on how much you've invested in the ETF obviously but you wouldn't
• 26:15
  be seeing a huge dividend from each. I'm not it's you'll be getting paid the proportion that you
• 26:23
  effectively own yes yeah. So but one thing also is really really good to remember is that some
• 26:30
  companies when they get into an index so if you were like on the cusp of the S&P 500 say you were
• 26:37
  number 501 and then a company in the S&P 500 did really shit and because it was no longer big
• 26:45
  enough to stand there and then you your company got to go in that's like that's awesome for that
• 26:51
  company in that share price because you've got all this passive money going in boosting the share
• 26:56
  price oh okay that makes sense it's not like they get in and their stock price shoots up like it's
• 27:02
  not it's not exactly like that but it's just like over time because there's so much money being
• 27:06
  invested particularly in the S&P 500 and all these ETFs they're buying the index you know and we
• 27:12
  saw it towards the end of last year there was just like so all the names like the Amazon's the
• 27:19
  apples you know they're large percentages of the S&P 500 so the more money that we're in the more
• 27:25
  these companies share prices got more and more got higher and higher and it kind of just let
• 27:31
  like to this kind of disconnect between what a share price should be trading at because there's
• 27:36
  all this money going into the US stock market so it's something to be careful of as well
• 27:43
  and yeah just assuming just because they're in the S&P 500 and their share price is going up that
• 27:48
  might purely be big cause they're in the S&P 500 opposed to the fact that the stock's actually
• 27:53
  becoming worth a whole lot more yeah or it could just you just have to look at that price in
• 27:58
  relation to the earnings because sometimes the earnings might not be growing but there's just
• 28:03
  so much money going into it so they have to buy it and it just becomes a bit more of a risky
• 28:09
  risky investment but yeah it is it is something once you get into the index it's really it is
• 28:14
  really good for a company it's kind of like I guess I took of approval it's like the Instagram
• 28:19
  tick yeah exactly you're official you're verified you're one really good example and it's a New
• 28:26
  Zealand example actually it was contact energy and I think it was the end of 20 end of last year
• 28:34
  and the its contact energy share price went absolutely bananas and it was all because it was in
• 28:41
  this clean energy ETF which was and and there was just more and more money going into this clean
• 28:46
  energy ETF and it was just that this the share price of this one stock because it was such a small
• 28:53
  stock in New Zealand was going absolutely crazy and so that's just a really good thing to call out
• 29:00
  is that you know that was a pure an example of a great example of how the earnings weren't going
• 29:06
  bananas but it was just the price was going bananas because of all this money going into this
• 29:11
  this clean energy ETF but what does that mean for an investor like as in does that mean that you
• 29:17
  shouldn't invest in it because or is it just nothing to be aware of that passive investing a lot
• 29:22
  of money when a lot of money goes into passive investing it can lead to some really crazy
• 29:27
  crazy share price movements as well there's lots of craziness the girls on in the stock market
• 29:32
  stock markets as wild and wacky plays yeah it can be pretty confusing when you've got
• 29:40
  exchange traded funds index funds manage funds mutual funds hedge funds like there's so many
• 29:44
  different types but essentially yeah you've got one camp of passive investing which is ETFs and
• 29:52
  index funds and you got one camp of active investing which is mutual funds manage funds hedge funds
• 29:57
  and they're all kind of working the same way to give you that instant well that to give you that
• 30:02
  diversification one's just a real simplified approach with pretty lazy way of investing and
• 30:10
  the other one is is more getting in the nitty gritties and trying to find those cool and exciting
• 30:16
  ideas yeah I love how much you're trying to be like not biased but blatantly bad biased towards
• 30:23
  active investing be an expert not advice don't advise don't do that oh no that's not too
• 30:33
  actually don't do anything hey sleep well and I will chat to you again soon cool hey thank you so
• 30:42
  much for joining us for today's episode of raising the curve please subscribe and leave a review
• 30:47
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• 30:56
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