Latest / The Money Puzzle / Too good to be true? A closer look at the 10% return on the ASX

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Too good to be true? A closer look at the 10% return on the ASX · The Money Puzzle

• 0:09
  Speaker 1: Hello and welcome to the Australians Money Puzzle podcast. I'm
• 0:13
  Speaker 1: James Kirby. Welcome aboard everybody, and I've had a.
• 0:15
  Speaker 2: Really interesting few weeks.
• 0:17
  Speaker 1: Unusually I think in some ways that the shows have
• 0:20
  Speaker 1: been dominated by themes. I think it's probably because there's
• 0:24
  Speaker 1: a couple of really big issues out there at the moment.
• 0:26
  Speaker 1: I mean, obviously, the returns for the year have been
• 0:29
  Speaker 1: quite astonishing. As one analyst put it, that that is
• 0:32
  Speaker 1: the financial year that's we've just come in with. We've
• 0:36
  Speaker 1: also had a very interesting shows on crypto, on bad
• 0:41
  Speaker 1: property returns. Who would have thought, but as you know,
• 0:44
  Speaker 1: the apartment market is very weak, and we've covered that
• 0:46
  Speaker 1: and the new super tax. Now on that issue of
• 0:50
  Speaker 1: how good the markets are, if you had index funds
• 0:54
  Speaker 1: or exchange traded funds now increasingly dominant for investors, you'd
• 0:58
  Speaker 1: have had a terrific return because you would have just
• 1:02
  Speaker 1: captured the market. And the market was very good. It's
• 1:04
  Speaker 1: one of those years when it's well above average in
• 1:06
  Speaker 1: terms of returns, double digit returns, so it looks like easy.
• 1:12
  Speaker 2: It looks easy. It looks easy.
• 1:14
  Speaker 1: You buy these edfs and they roll home with high returns.
• 1:17
  Speaker 2: You don't have.
• 1:18
  Speaker 1: To think, you don't have to do a damn thing.
• 1:20
  Speaker 1: You just sort of look and see how high it
• 1:22
  Speaker 1: is each day. It's not that easy.
• 1:24
  Speaker 2: There is no perfect investment. I want to look at that.
• 1:27
  Speaker 1: My guest today is Jack Toussall of the Partner's Wealth Group.
• 1:31
  Speaker 1: That's a financial advisory group which is in the Baron's
• 1:34
  Speaker 1: Top fifteen. We've had Matthew has today on the show
• 1:37
  Speaker 1: from Partners before. Jack's got some really interesting views on
• 1:42
  Speaker 1: these subjects and I wanted to have him on the
• 1:45
  Speaker 1: show for some time.
• 1:46
  Speaker 2: All right, Jack, I'm doing great.
• 1:48
  Speaker 3: Thanks for having me.
• 1:49
  Speaker 1: James, great to have you on the show. I know
• 1:52
  Speaker 1: that I suppose it was the time, really it was
• 1:54
  Speaker 1: difficult for financial advisors to express views, larger views beyond
• 2:00
  Speaker 1: the sort of the details of financial advice itself, and
• 2:04
  Speaker 1: maybe they spoke at conferences or whatever. That's all changed
• 2:07
  Speaker 1: now and people are able to sort of get their
• 2:09
  Speaker 1: views out there, and you're one of the advisors of
• 2:12
  Speaker 1: that new crop of advisors who've come to prominence with
• 2:15
  Speaker 1: clear views just about that issue of the markets. So
• 2:20
  Speaker 1: the ASX two hundred has given me what eleven percent
• 2:24
  Speaker 1: for the year. The s and P five hundred. I'm
• 2:26
  Speaker 1: talking about the financial year, very strong year as well.
• 2:30
  Speaker 2: But you have.
• 2:33
  Speaker 1: You have been arguing that people have to be very
• 2:35
  Speaker 1: careful about thinking about just the index, the ASX two
• 2:40
  Speaker 1: hundred or the S and P five hundred or whatever
• 2:42
  Speaker 1: you've got.
• 2:43
  Speaker 2: What is the issue for you?
• 2:44
  Speaker 3: Well, I think it's been quite distorted. So you said
• 2:47
  Speaker 3: there the IX has gone up by about eleven percent,
• 2:50
  Speaker 3: but come up bank. You know one individual out top
• 2:53
  Speaker 3: two hundred company US has gone up about fifty percent
• 2:56
  Speaker 3: of the time. If you took that senior investment out,
• 3:00
  Speaker 3: your returns only really around six percent. So it's not
• 3:04
  Speaker 3: really reflective of how the grand market has performed.
• 3:08
  Speaker 1: One so in the ASX two hundreds, which did over
• 3:11
  Speaker 1: ten percent, yah of those two hundred stocks, one stock, Yeah,
• 3:18
  Speaker 1: is it if you didn't have it would have taken Well,
• 3:20
  Speaker 1: it isn't that an argument for ETFs in some fashion
• 3:23
  Speaker 1: that you capture.
• 3:25
  Speaker 3: It's an argument when it's going one. But if you
• 3:27
  Speaker 3: can go up in going you on the dance slide
• 3:30
  Speaker 3: as well.
• 3:31
  Speaker 1: Okay, So what you're saying is that if I had
• 3:33
  Speaker 1: the ASX two hundred in an ETF, for instance, in
• 3:37
  Speaker 1: the last year and they were down fifty percent.
• 3:40
  Speaker 3: Yeah, then that would.
• 3:41
  Speaker 1: Have really dragged me down as well. Because so the
• 3:44
  Speaker 1: point I think behind this what you're saying is concentration, right,
• 3:49
  Speaker 1: is that the problem that one bank is too important
• 3:52
  Speaker 1: for this index, it doesn't really reflect the market.
• 3:55
  Speaker 3: Yes, spot on. What I'd say is they typically sprouted
• 3:59
  Speaker 3: as being well diversified. You've got save the ASEX two hundred,
• 4:02
  Speaker 3: you've got access to two hundred companies, and your risk
• 4:05
  Speaker 3: is quite well spread out. The reality is the top
• 4:08
  Speaker 3: ten companies of that whole index are about fifty percent
• 4:11
  Speaker 3: of it. So if you add two hundred companies, ten
• 4:14
  Speaker 3: of them are half of it, and then the other
• 4:15
  Speaker 3: night one hundred and ninety spread across the other fifty percent.
• 4:20
  Speaker 3: And that's not even before we delve into diversification of
• 4:23
  Speaker 3: sectors of the economy as well. So Australia is really
• 4:26
  Speaker 3: good and the bigg at two key things. The first
• 4:28
  Speaker 3: one is banking and financials and then the second is
• 4:31
  Speaker 3: digging sup out of the dirt. So mine those two
• 4:34
  Speaker 3: industries as a whole represent half of the whole index.
• 4:37
  Speaker 3: So really what you're doing is having a punt on
• 4:39
  Speaker 3: whether banking, financials and mining are going to do well.
• 4:42
  Speaker 3: And so you go on a situation where we have
• 4:45
  Speaker 3: another financial services review and that sector tanks or China
• 4:49
  Speaker 3: cracks it at us again like they did in twenty
• 4:51
  Speaker 3: twenty one, stops buying our coal and iron ore. Well,
• 4:55
  Speaker 3: then you complete portfolios, Cactus. It's not actually as diversified
• 4:59
  Speaker 3: as what people think it is.
• 5:02
  Speaker 1: So it's not as easy as it seems to capture
• 5:05
  Speaker 1: an economy or a market, because you're saying that if
• 5:09
  Speaker 1: we look at the share market, we think we're buying
• 5:13
  Speaker 1: the market and a good wide diversified hundreds of companies.
• 5:19
  Speaker 1: In fact, banks, we're really buying banks and miners. And
• 5:23
  Speaker 1: if the banks and miners don't go well, you're in trouble.
• 5:26
  Speaker 1: But can you avoid that.
• 5:28
  Speaker 3: You can have an actively managed portfolio, and really, if
• 5:30
  Speaker 3: you look at building out a portfolio, really what you
• 5:33
  Speaker 3: want to do is have allocations towards all the key
• 5:37
  Speaker 3: sectors of the economy. So if one individual sector isn't
• 5:41
  Speaker 3: doing that well, it's not going to tank your whole portfolio.
• 5:44
  Speaker 1: You know.
• 5:44
  Speaker 3: Part of crafting that is say I'm trying to build
• 5:47
  Speaker 3: out my personal portfolio and I go, look, I need
• 5:50
  Speaker 3: some banking financial sector allocation. There's a four big banks.
• 5:54
  Speaker 3: I think you know cbas are value. Not going to
• 5:57
  Speaker 3: invest in that, I might invest in NAB instead, might
• 6:00
  Speaker 3: leg the two hours out. If you're just going to
• 6:02
  Speaker 3: invest in index fund like Fast for example, you're buying
• 6:06
  Speaker 3: all four of those investments in the exact sound white
• 6:09
  Speaker 3: and you actually buy the ones which you might think
• 6:11
  Speaker 3: are more overvalued higher and the lower ones less.
• 6:14
  Speaker 1: Okay, it's interesting, and what we're going to do. What
• 6:18
  Speaker 1: are we're just doing here? Focus is and we're just
• 6:20
  Speaker 1: going to have a look at the indices on which
• 6:23
  Speaker 1: the index investing are passive investing rules. And then in
• 6:27
  Speaker 1: the second hope we're going to do is we're going
• 6:28
  Speaker 1: to look at the problems. Obviously, then that loom if
• 6:32
  Speaker 1: you like. For ETF, they seem just now to be
• 6:35
  Speaker 1: I suppose in a way it's like they're too good
• 6:37
  Speaker 1: to be true, because because an advisor can say, hey,
• 6:40
  Speaker 1: i'll put you into this ETF, you won't do any
• 6:43
  Speaker 1: better or worse than anybody else.
• 6:44
  Speaker 2: It just so happens for the last three years you
• 6:46
  Speaker 2: do really well.
• 6:47
  Speaker 1: Right, so everyone sort of nobody asks hard questions when
• 6:50
  Speaker 1: things are arising. We look at that at the moment,
• 6:52
  Speaker 1: So just look at that wider issue. So in Australia,
• 6:56
  Speaker 1: the failing if you like, of an indicy's being the
• 6:59
  Speaker 1: asex too, is that it's literally half banks and miners.
• 7:02
  Speaker 1: And if you have a period where banks and miners
• 7:04
  Speaker 1: are not going well, and let's see other parts of
• 7:07
  Speaker 1: the economy are going really well, you're going to pay
• 7:10
  Speaker 1: for that. And it isn't Oddly Wall Street, which we
• 7:15
  Speaker 1: were always told as the world was a magnificent apros
• 7:18
  Speaker 1: fate market. Those in the sense really aren't really reflect that,
• 7:23
  Speaker 1: do they.
• 7:23
  Speaker 3: It's inn where if you look at the S and
• 7:25
  Speaker 3: P five hundreds of the top five hundred bise counties
• 7:27
  Speaker 3: in the US, they the top seven, which they call
• 7:29
  Speaker 3: the magnificent seven examples of metal also known as Facebook apples,
• 7:35
  Speaker 3: your amazons, et cetera. Those seven out of five hundred
• 7:38
  Speaker 3: represent a third, about thirty three percent of that whole index.
• 7:42
  Speaker 3: So again, what you're doing personally if you invest in
• 7:44
  Speaker 3: that index fund is you're taking a punt on the
• 7:47
  Speaker 3: tech he's going to do well, and look if it doesn't,
• 7:50
  Speaker 3: you're going to get burnt.
• 7:51
  Speaker 1: Right, So you're not really buying the US market, I'll say,
• 7:54
  Speaker 1: you're not really buying it, but you think you're buying
• 7:56
  Speaker 1: the US market, but you're actually taking a substantial bet
• 8:00
  Speaker 1: on tech. And more than that, you were taking a
• 8:03
  Speaker 1: substantial bet on just seven companies in tech.
• 8:06
  Speaker 3: Exactly seven companies, all within the same industry.
• 8:10
  Speaker 1: You said something pretty entertaining about the Dow one time,
• 8:13
  Speaker 1: so the that was even worse, I believe. Is it
• 8:16
  Speaker 1: Dow Jones index.
• 8:17
  Speaker 3: That is my objectively the least beneficial index in the world.
• 8:24
  Speaker 2: Sucks.
• 8:26
  Speaker 3: Why, Well, it's a product of when it was made,
• 8:29
  Speaker 3: which was in the late eighteen hundreds, and effectively I
• 8:33
  Speaker 3: think it was Charles doubt someone plays.
• 8:35
  Speaker 1: Correct, dal Jones, Wall Street Jungle, Yeah, I think cooperation
• 8:39
  Speaker 1: which John's the Australian just for disclosure.
• 8:44
  Speaker 3: Looks out the time he made this index, it was
• 8:46
  Speaker 3: purely based on stocks which he thought were relevant to
• 8:50
  Speaker 3: the everyday man. There was no sort of objectivity of
• 8:52
  Speaker 3: it representing the great market. I think there were nine
• 8:55
  Speaker 3: or ten, but at the moment there's thirty. The biggest
• 8:59
  Speaker 3: issue is that it's price weighted, not market cap weighted.
• 9:03
  Speaker 1: So what so Jack tell the everyday listener that's really
• 9:08
  Speaker 1: important and we're going to talk about that.
• 9:09
  Speaker 2: But explain what.
• 9:11
  Speaker 1: That is and the difference between the two categories.
• 9:14
  Speaker 3: Yeah, well, I've got a good example of that. So
• 9:16
  Speaker 3: the index will increase if phenomenal value of a stock
• 9:20
  Speaker 3: goes up. So save for stocks worth ten dollars and
• 9:23
  Speaker 3: increases by ten percent, goes to eleven, you know, then
• 9:25
  Speaker 3: the index would go up by that much. There are
• 9:27
  Speaker 3: multiples in there. It's weighted by, say, if you had
• 9:31
  Speaker 3: a larger company in there, if it goes up by
• 9:33
  Speaker 3: one percent, and the index is going to go up
• 9:34
  Speaker 3: a greater around than say a company which is half
• 9:37
  Speaker 3: the value went up by one percent. I've got an example.
• 9:40
  Speaker 3: So two companies which are both in the Dow Jones
• 9:44
  Speaker 3: are Bowing and Amazon. Prices are pretty much the same.
• 9:48
  Speaker 3: I think Bowing's about two hundred and twelve dollars and
• 9:50
  Speaker 3: Amazon's two hundred and twenty dollars. For share buying market
• 9:54
  Speaker 3: capitalization of one hundred and sixty billion, Amazon two point
• 9:58
  Speaker 3: three trillions, about fifty teen sixteen times larger. Its Boeing
• 10:03
  Speaker 3: share price increases by one percent and Amazon's goes up
• 10:06
  Speaker 3: by one percent, then the index goes up the exact
• 10:10
  Speaker 3: same amount. It doesn't take any factors such as that
• 10:14
  Speaker 3: Amazon's fifteen times the size of Boeing. There's another example
• 10:19
  Speaker 3: as well which just shows how much of a data
• 10:21
  Speaker 3: in the index it is. In my opinion, Apple used
• 10:24
  Speaker 3: to have share prices of seven hundred dollars and at
• 10:27
  Speaker 3: the time they will consue putting the doubt, but they
• 10:30
  Speaker 3: really didn't do it because it would have just pushed
• 10:33
  Speaker 3: up the price significantly. So what did Apple do? They said, look,
• 10:35
  Speaker 3: we're going to do stock split. One share becomes seven,
• 10:38
  Speaker 3: it's worth one hundred and it goes in the index.
• 10:41
  Speaker 3: It's the exact same company, it's got the same financial metrics,
• 10:44
  Speaker 3: it's worth the same amount. But what it can go
• 10:47
  Speaker 3: in now because it's got seven times as many shares,
• 10:50
  Speaker 3: which you know, one seventh of value, that just doesn't
• 10:52
  Speaker 3: make sense to me.
• 10:53
  Speaker 2: We'll take a short breath back in the moment.
• 11:05
  Speaker 1: Hello, Welcome back to The Australian's Money Puzzle podcast. James
• 11:08
  Speaker 1: Kirkby with Jack Tussel of the Partner's Wealth Group. We've
• 11:11
  Speaker 1: just been talking now about stock market indices and the
• 11:17
  Speaker 1: distortions around them, and it's really important to grab this
• 11:21
  Speaker 1: point that the ASX two hundred is heavily dependent on
• 11:25
  Speaker 1: banks and minors if they go south and have a
• 11:28
  Speaker 1: bad year.
• 11:29
  Speaker 2: It's not that you're going to have a bad year.
• 11:30
  Speaker 1: You're going to have a much worse year than you
• 11:33
  Speaker 1: would have had if you had a more properly diversified
• 11:36
  Speaker 1: share portfolio. Similarly, the US, funnily enough, though, for all
• 11:40
  Speaker 1: its reputation, as Jack was explaining in the first part,
• 11:43
  Speaker 1: indices like S and P and the Dow in particular,
• 11:46
  Speaker 1: they're really narrow and they had the really strange distortions,
• 11:49
  Speaker 1: so they could have a good year, but it wasn't
• 11:51
  Speaker 1: really that good for most investors or vice versa. So
• 11:55
  Speaker 1: this is an issue, but it's it was never very important, Jack,
• 11:59
  Speaker 1: but suddenly it is. Because exchange traded funds are now
• 12:03
  Speaker 1: so common, they become very popular, and I think it's
• 12:07
  Speaker 1: probably a time that people really need to know more
• 12:11
  Speaker 1: about them and their limitations. I mean, the obvious thing
• 12:14
  Speaker 1: I have always thought about them is it's like it's
• 12:16
  Speaker 1: dull money. No one's thinking as such. They set their sales.
• 12:20
  Speaker 1: This is an a conventionality. If they set their sales,
• 12:23
  Speaker 1: they say we buy the top two hundred, close our eyes,
• 12:28
  Speaker 1: and you can get all sorts of issues. Then you're
• 12:32
  Speaker 1: consciously buying the worst rubbish on the market because if
• 12:36
  Speaker 1: it's there, you're going to buy it. And there's this
• 12:39
  Speaker 1: argument that ethically you're oblivious. I mean, there could be
• 12:42
  Speaker 1: a company where you know, the most atrocious things are
• 12:44
  Speaker 1: going on. Again you're buying it because your ETF just
• 12:47
  Speaker 1: buys it. I mean, are they fair criticisms?
• 12:51
  Speaker 3: No, I'd say absolutely fair, and you know, I'd say
• 12:54
  Speaker 3: it's going to get worse and worse. At the moment.
• 12:56
  Speaker 3: In Australia they say about eighty five percent of new
• 12:59
  Speaker 3: investment can rule is going towards just passive index funds.
• 13:04
  Speaker 3: And I'm at the argument right Look at Commonwealth Bank.
• 13:06
  Speaker 3: It is the most expensive bank in the world. It
• 13:10
  Speaker 3: resides strictly in Australia, a country twenty seven million people,
• 13:13
  Speaker 3: doesn't do any international business. Can anyone honestly tell me
• 13:17
  Speaker 3: that it is the best bank in the world. And
• 13:20
  Speaker 3: I've asked myself where is the money coming from that
• 13:23
  Speaker 3: pushes it up? If individuals already own it, I can
• 13:26
  Speaker 3: understand why you continue to hold it and ride the momentum.
• 13:30
  Speaker 3: But if you're looking to invest in chairs, who's actually
• 13:33
  Speaker 3: buying dedicating the money to go there? You know, in
• 13:36
  Speaker 3: my opinion, what it is index funds further pushing it up,
• 13:39
  Speaker 3: and then super funds as well, who at the moment,
• 13:42
  Speaker 3: as a result of regulation, effectively market huggling index funds
• 13:47
  Speaker 3: in practice, not in name, but in practice.
• 13:50
  Speaker 1: Right, So there is that notion of the closet index
• 13:53
  Speaker 1: fund right, yeah, yeah, yeah, explain what that means to
• 13:57
  Speaker 1: our listeners, because it's very interesting.
• 14:00
  Speaker 3: So about four years ago they had your Future your
• 14:03
  Speaker 3: supernw rulins which came in and look, you know, it
• 14:05
  Speaker 3: sounds very good in principle, which is to name and
• 14:10
  Speaker 3: chain poor at performing super funds. But the consequence of
• 14:14
  Speaker 3: that is that no one's chasing better returns now because
• 14:19
  Speaker 3: the consequences of doing so is you can also deviate
• 14:21
  Speaker 3: from what the market's doing. So rather than actually trying
• 14:24
  Speaker 3: me better, it's like it's a how of a lot
• 14:26
  Speaker 3: easier just to track the indexes and you know, if
• 14:29
  Speaker 3: they go up, we go up. If they go down,
• 14:32
  Speaker 3: we go down as well, and can say, oh, that's
• 14:33
  Speaker 3: just the markets.
• 14:35
  Speaker 1: Yes, right, so it's sort of self perpetuating failure feelings.
• 14:40
  Speaker 3: Yeah, exactly, spot on.
• 14:42
  Speaker 1: So the way the mechanics are it is come WO Bank,
• 14:45
  Speaker 1: which has I can't recall, but it's like single digit growth, Yeah,
• 14:49
  Speaker 1: a couple of percent. It's only in Australia. Australia is
• 14:54
  Speaker 1: only three percent of the world and it's top fifty percent.
• 14:57
  Speaker 2: Go figure.
• 14:58
  Speaker 1: And you're saying this is perhaps one of the first
• 15:01
  Speaker 1: sort of iterations of the issues of the ETF and
• 15:05
  Speaker 1: what they're distorted, how they're distorted in the market.
• 15:08
  Speaker 3: Yeah, exactly. And I put in one of my LinkedIn
• 15:10
  Speaker 3: person was Michael Burry, who is made famous by the
• 15:13
  Speaker 3: Great with the Big Short and you know, one of
• 15:16
  Speaker 3: his catch phrases was that index funds may be worse
• 15:19
  Speaker 3: than Marxism because they effectively just destroy efficiencies, you know
• 15:23
  Speaker 3: overall markets that you know, price discovery mechanism of you know,
• 15:27
  Speaker 3: say individual investors or funds going well, hey, you know,
• 15:30
  Speaker 3: do the metrics stack up? Should I invest in or not?
• 15:32
  Speaker 3: Whereas as you touched on the dumb money, index funds
• 15:35
  Speaker 3: just throw it out regardless of any outwards considerations.
• 15:41
  Speaker 1: So let's just and I'm not saying this is going
• 15:42
  Speaker 1: to happen, but I think it's something everybody should be
• 15:45
  Speaker 1: aware of. What is the risk here for all investors
• 15:52
  Speaker 1: if they if it keeps going like this where the
• 15:54
  Speaker 1: question where it's all mechanical algorithm based buying. And then
• 15:58
  Speaker 1: if the everything amplified, So if Coverwealth Bank is going well,
• 16:04
  Speaker 1: it goes even better because the amplification of index funds
• 16:09
  Speaker 1: for the money chases the money.
• 16:11
  Speaker 2: It's it's gone up.
• 16:12
  Speaker 1: Five percent, so we have to buy five percent more
• 16:14
  Speaker 1: of it because that's.
• 16:15
  Speaker 2: Our game as an index fund.
• 16:17
  Speaker 1: And if things turn down, I presume it's the same
• 16:19
  Speaker 1: that if they're falling ten percent, so then we have
• 16:22
  Speaker 1: to sell because we've got too much because they've shunk,
• 16:24
  Speaker 1: so we must shrink our holdings. So ultimately, is there
• 16:27
  Speaker 1: actually like systemic risk to the actual nature of markets here?
• 16:32
  Speaker 3: That's absolutely just with the concentration of those specific indusues
• 16:36
  Speaker 3: and holding teeth in the market. Absolutely there is.
• 16:39
  Speaker 1: So what should the active investor do. I'm going to
• 16:42
  Speaker 1: take it that. I'm still going to say that I
• 16:45
  Speaker 1: think ETFs are useful. They're useful from two ways. One
• 16:49
  Speaker 1: for the new investor who has never bought anything for it.
• 16:52
  Speaker 1: Once upon a time they said what chairs do I
• 16:54
  Speaker 1: buy it?
• 16:54
  Speaker 2: To start?
• 16:54
  Speaker 1: And you said, oh, oh by BHP bye app by couse,
• 16:58
  Speaker 1: this sort of thing that was actually quite risky. I
• 17:01
  Speaker 1: always say the first two shares I bought and they
• 17:03
  Speaker 1: be in Pacific done, loop one, doubled.
• 17:05
  Speaker 2: One disappeared.
• 17:06
  Speaker 1: This was in the period of whatever ten years, but
• 17:09
  Speaker 1: it captured the issue. So I think they're good for
• 17:11
  Speaker 1: introductory investors getting to know how to invest, and I
• 17:14
  Speaker 1: think they can't be useful as a core approach core
• 17:17
  Speaker 1: on satellite with some sophisticated thinking around it maybe market
• 17:21
  Speaker 1: way that we won't go into that just now. But
• 17:23
  Speaker 1: what I'm saying is, what do you think the active
• 17:26
  Speaker 1: investor should do? Knowing what you've just been telling us, Well.
• 17:30
  Speaker 3: You know, as a touch on before, you want to
• 17:31
  Speaker 3: have a well curated portfolio which you know, diversify as
• 17:35
  Speaker 3: you reached you know, you always touch on the adage
• 17:37
  Speaker 3: don't have all your eggs in one basket. That is
• 17:40
  Speaker 3: literally what people are doing.
• 17:42
  Speaker 1: That's that's the Yeah, that's what I need to have,
• 17:45
  Speaker 1: isn't it.
• 17:45
  Speaker 2: It's a basket. They actually call it a basket.
• 17:47
  Speaker 3: And then the consequence is, yes, you know, these funds
• 17:50
  Speaker 3: might have had an absolutely cracking you know the last
• 17:52
  Speaker 3: twelve months, but if it's so hedge on one sector
• 17:55
  Speaker 3: or one stock align, how would you feel if your
• 17:58
  Speaker 3: portfolio underperform relative to all the other investments for the
• 18:02
  Speaker 3: next five plus years, I don't imagine people will be
• 18:05
  Speaker 3: too happy.
• 18:05
  Speaker 2: With that, right, So do you.
• 18:09
  Speaker 3: Do?
• 18:10
  Speaker 1: Is your approach that core and satellite idea where an
• 18:13
  Speaker 1: ETF ETF are in the mix or are you actually
• 18:18
  Speaker 1: don't like them at all?
• 18:20
  Speaker 3: Well, it depends on the individual client. Yes, both would
• 18:23
  Speaker 3: work well in the expands you touch on. Can serve
• 18:26
  Speaker 3: a great purpose, especially getting into the markets and giving
• 18:30
  Speaker 3: you an allocation towards other sort of markets, for example,
• 18:34
  Speaker 3: especially within the international side, because it can be extremely
• 18:38
  Speaker 3: expensive to say, invest directly, and there's a heap of
• 18:42
  Speaker 3: tax consequences which I don't need to go into. Cheering.
• 18:45
  Speaker 1: Yes, yeah, something like if you want to buy American
• 18:47
  Speaker 1: small CAFs or something. Yeah, I mean that would be
• 18:50
  Speaker 1: quite difficult to sitting here. You'd have to buy twenty
• 18:53
  Speaker 1: of them. How on earth would you pick them? How
• 18:55
  Speaker 1: would you get to know them? You buy an ETF,
• 18:57
  Speaker 1: but you won't get the big winners, but you know,
• 19:00
  Speaker 1: get a big winner or a big loser, but you'll
• 19:02
  Speaker 1: you will reflect the general tempo of small caps, so
• 19:05
  Speaker 1: they have their uses there. Okay, very interesting, Just one
• 19:08
  Speaker 1: last thing, and I mean, I must say, if you
• 19:10
  Speaker 1: are as skeptical as you are about conventional mainstream ETFs
• 19:15
  Speaker 1: as we know them, you must be terribly skeptical about
• 19:18
  Speaker 1: the new wave of uts where they unfortunately are starting
• 19:22
  Speaker 1: to innovator. And I use the word in sneak quotes,
• 19:25
  Speaker 1: where they're coming up with all sorts of smart ideas,
• 19:28
  Speaker 1: thematic ETFs leverage dtfs, and in a way they're kind
• 19:33
  Speaker 1: of to me at least, they're kind of polluting the
• 19:35
  Speaker 1: original notion, the Jack Bogel notion of a straight mirror index.
• 19:40
  Speaker 3: Yeah. I think that the issue with those is they're
• 19:43
  Speaker 3: easy to sell, right, and you get all of these
• 19:45
  Speaker 3: cowboys social media influences out there. You just tell every
• 19:48
  Speaker 3: random person I dedicate Twain CENTI bi checking in missing
• 19:51
  Speaker 3: these index funds and now right up about oh this
• 19:55
  Speaker 3: industry is going wow. So they'll just put it all
• 19:58
  Speaker 3: in there. And then again, you can't and training your
• 20:01
  Speaker 3: risk in one sector, which just completely flies in the
• 20:04
  Speaker 3: face of sound financial management diversification.
• 20:10
  Speaker 1: Which brings us back to that thing that you're buying.
• 20:12
  Speaker 1: You're buying everything, Yeah, good stuff, the good stuff under rubbish.
• 20:16
  Speaker 1: Yeah yeah, Okay, just one nice thing. You didn't pick
• 20:20
  Speaker 1: up on my contention, which for some reason people don't
• 20:25
  Speaker 1: seem to be.
• 20:25
  Speaker 2: I was ranged about it all.
• 20:27
  Speaker 1: But it's like, to me, the ethical side of things,
• 20:30
  Speaker 1: they're ethically oblivious.
• 20:33
  Speaker 2: For you at all. Yeah.
• 20:34
  Speaker 3: So for example, right, if you buying the S and
• 20:36
  Speaker 3: P five hundred, you know you're getting the American to pacco,
• 20:39
  Speaker 3: you're getting Lockheed Martin, most notably known for making bombs
• 20:43
  Speaker 3: which get dropped on families and mulance. It's helping to
• 20:46
  Speaker 3: that too much. You know, you've got gambling, you've got alcohol,
• 20:49
  Speaker 3: You've got everything in there. You know, especially as an
• 20:51
  Speaker 3: advisor ethical investors, you know, it's becoming more and more
• 20:54
  Speaker 3: of a talking point. And look, everyone's got their own
• 20:57
  Speaker 3: view on it. Everyone's moral is different. But for a
• 21:01
  Speaker 3: lot of individuals out there who are quite moral paper
• 21:04
  Speaker 3: and they're just investing in these in the expands, not
• 21:06
  Speaker 3: actually realizing that they're getting exposure to these companies, which
• 21:10
  Speaker 3: is flying the face of everything they stand for as a.
• 21:12
  Speaker 1: Person understand for Yeah, Look, I think if anything, just
• 21:16
  Speaker 1: from what we've talked about today, Jack, I think it's
• 21:18
  Speaker 1: been a really good illustration to all investors and our
• 21:23
  Speaker 1: listeners that do you actually know what an ETF is.
• 21:27
  Speaker 1: It's easy to give you a top line explanation. It's
• 21:29
  Speaker 1: a mirror of an indices, but behind that there is
• 21:33
  Speaker 1: all sorts of distortions and games being played and issues
• 21:37
  Speaker 1: that perhaps really it's time to get some air. And
• 21:40
  Speaker 1: luckily perhaps the Commonwealth Bank. The extraordinary, astonishing and really
• 21:46
  Speaker 1: unconvincing fifty percent increase in comebank in the last year
• 21:51
  Speaker 1: in our market has brought the issue of the other side,
• 21:56
  Speaker 1: the ETFs, the issues, the problems that they have, the
• 22:00
  Speaker 1: problems that may loom for them, really interesting. Jack, we'll
• 22:03
  Speaker 1: take a short breakase. I also want to talk to
• 22:05
  Speaker 1: you about sophisticated investors, a different issue, but another issue
• 22:09
  Speaker 1: that I think our listeners will be really keen to
• 22:11
  Speaker 1: hear your views on.
• 22:13
  Speaker 2: Back in a moment.
• 22:27
  Speaker 1: Hello, Welcome back to The Australian's Money Puzzle podcast. I'm
• 22:30
  Speaker 1: James Kirby from The Australian and I'm talking to Jack
• 22:34
  Speaker 1: Tossl of the Partner's Wealth Group. Now, Jack, I don't
• 22:37
  Speaker 1: know your client list. I haven't seen them, but I
• 22:39
  Speaker 1: imagine that they are. We could classify them all as
• 22:43
  Speaker 1: wealthy one way or another. And it is a big
• 22:48
  Speaker 1: trend now in financial advice, particularly at the top end,
• 22:53
  Speaker 1: to make things simple for everybody, they simply classify their
• 22:57
  Speaker 1: investors as sophisticated investors. In doing so, it opens up
• 23:02
  Speaker 1: future of canvas of investments that they can access that
• 23:05
  Speaker 1: they couldn't as a retail investor. And they also the
• 23:09
  Speaker 1: price of that is that they give up, if you like,
• 23:11
  Speaker 1: some of the regulatory protections that are in there, such
• 23:15
  Speaker 1: as the Australian Financial Complaints Authority or the Conversation Scheme
• 23:19
  Speaker 1: of Last Resorts.
• 23:20
  Speaker 2: So that's the deal.
• 23:20
  Speaker 1: But advisors love it right because it makes it really
• 23:24
  Speaker 1: simple and they don't have to sign as many documents
• 23:26
  Speaker 1: or go through as much red tape. The criteria for
• 23:30
  Speaker 1: becoming a sophisticated investor, if you don't already know, is
• 23:34
  Speaker 1: two point five million in assets and that can include
• 23:37
  Speaker 1: the family home. It shouldn't, but it does. Or two
• 23:40
  Speaker 1: hundred and fifty grand a year for two years in
• 23:43
  Speaker 1: a rowan income. There was a time that was a
• 23:46
  Speaker 1: really lot of money when they created this system. So Jack,
• 23:51
  Speaker 1: there's also the problems with it, isn't there. I mean,
• 23:53
  Speaker 1: it's been abused as people who are not sophisticated or
• 23:57
  Speaker 1: classified as sophisticated. So there's all sorts of issues and
• 24:01
  Speaker 1: it's under review at the moment. The push is to
• 24:05
  Speaker 1: make it even harder to qualify, like ACID is talking about.
• 24:09
  Speaker 1: I said, four millions you're supposed to have, perhaps in
• 24:12
  Speaker 1: the future, to be to qualify a sophisticated investor. What
• 24:16
  Speaker 1: do you think about this? What do you think our
• 24:19
  Speaker 1: listeners should know about this area?
• 24:21
  Speaker 3: In my opinion, I believe that the current tests it
• 24:24
  Speaker 3: is so completely arbitrary. Now the two point five million
• 24:26
  Speaker 3: dollars in net assets or you've two hundred and fifty
• 24:29
  Speaker 3: thousand dollars a year for the last two years, you know,
• 24:32
  Speaker 3: and you instantly tick a box and you're sophisticate investor.
• 24:34
  Speaker 3: You can have someone that's never invested, is sharing their life,
• 24:37
  Speaker 3: has no financial literacy, and gets a three million dollar
• 24:40
  Speaker 3: inheritance because one of their realities pass away, and then
• 24:43
  Speaker 3: they can access all these away unlistened investments.
• 24:48
  Speaker 1: It's actually it's made me think it's dumb money again.
• 24:50
  Speaker 1: There is actually a segue here between part between the
• 24:53
  Speaker 1: first two segments and the third segment, folks, and the
• 24:55
  Speaker 1: segue is it's the dumb money issue because I if
• 25:00
  Speaker 1: I'm wrong, But okay, so I know nothing. I'm hopeless.
• 25:03
  Speaker 1: I am the worst investor you ever came across. But
• 25:06
  Speaker 1: I inherit three million tick. I'm classified as a sophisticated inventor.
• 25:12
  Speaker 2: Isn't it that easy? Yes? And no, it's that easy
• 25:17
  Speaker 2: to be classified.
• 25:18
  Speaker 3: If advisor is doing a duty dilidence, then they need
• 25:21
  Speaker 3: to actually note know that you are actually scare investor
• 25:24
  Speaker 3: and capable of making financial decisions. But in practice, whether
• 25:29
  Speaker 3: that actually happens across the country, I'll a bit dubious.
• 25:33
  Speaker 1: I'd be bore than jubious. I doubt it happens at all,
• 25:37
  Speaker 1: to be honest, because the person says, well, that's my
• 25:40
  Speaker 1: legal classification. Now I want to buy hedge fund number four.
• 25:43
  Speaker 1: It's only for sophisticated investors. I qualify as once, so
• 25:47
  Speaker 1: I want it. What can you say to me? What
• 25:49
  Speaker 1: could you possibly say to me to stop me?
• 25:51
  Speaker 3: Exactly? And that's the thing. I can just go straight
• 25:53
  Speaker 3: to a fund man injury or get off. And they're
• 25:56
  Speaker 3: not making financially sound decisions. And you know, leaning under
• 25:59
  Speaker 3: what I said before, you, an individual is extremely financially
• 26:02
  Speaker 3: A student who's invested for ten or twenty years, but
• 26:05
  Speaker 3: doesn't have the privilege of having a lot of family
• 26:07
  Speaker 3: wealth which has passed on to them, and then they
• 26:09
  Speaker 3: can't access these investments. It's interesting the US is actually
• 26:13
  Speaker 3: looking at going down a different route. Hasn't been brought
• 26:16
  Speaker 3: in yet, but they're considering bringing in an effectively financial
• 26:20
  Speaker 3: literacy test. And the key reason they're doing that is
• 26:23
  Speaker 3: because they're saying that this divide between you know, ticking
• 26:27
  Speaker 3: a box man sophisticated investor not just based on assets,
• 26:30
  Speaker 3: is further exacerbating the wealth divide, the inequality between the
• 26:35
  Speaker 3: haves and have not.
• 26:36
  Speaker 1: Yeah, yeah, I see the upset of meritocracy. The professor
• 26:39
  Speaker 1: of finance. Yes, no, inheritance is excluded from the person
• 26:47
  Speaker 1: who picked up the four million from Anti lou And
• 26:50
  Speaker 1: there was nothing.
• 26:52
  Speaker 3: Exactly and it's ridiculous. Do you like a fantastic statistic
• 26:55
  Speaker 3: which is actually from Tony Robbins's recent book where you
• 26:59
  Speaker 3: know he actually solid what are these issues? And you said, look,
• 27:02
  Speaker 3: the last thirty five years in the US, the private
• 27:04
  Speaker 3: equity asset class returned fourteen point two percent compared to
• 27:09
  Speaker 3: the list of markets in the US, which shares a
• 27:11
  Speaker 3: bible to your everyday retail investor which did nine point
• 27:14
  Speaker 3: two percent. That's a fifty percent difference in annual returnments.
• 27:18
  Speaker 3: And you think about the multiplier effect of that. So
• 27:20
  Speaker 3: you had one hundred thousand dollars one individual put it
• 27:23
  Speaker 3: in private equity left it there for twenty years, to
• 27:25
  Speaker 3: the other individual put it into public equity and left
• 27:27
  Speaker 3: it there for twenty years. The difference is one point
• 27:30
  Speaker 3: four million dollars versus five hundred and eighty thousand dollars.
• 27:34
  Speaker 3: You know, it's a bit more than a round drinks.
• 27:37
  Speaker 1: As a round the drinks, and you were saying the
• 27:40
  Speaker 1: investor was excluded. The investors were excluded from that party
• 27:43
  Speaker 1: basically because they weren't classified the sophicity exactly. Yeah, so
• 27:48
  Speaker 1: what should they do? Should they raise the bar, which
• 27:51
  Speaker 1: is what Assek wants, or.
• 27:52
  Speaker 2: Should they scrap it?
• 27:54
  Speaker 1: Should they have scrap the whole thing.
• 27:55
  Speaker 3: I'd scrap it all together and I'd replace it with
• 27:57
  Speaker 3: the financial literacy.
• 27:58
  Speaker 1: Test, but that's still that they're still a test.
• 28:01
  Speaker 3: Then, Yeah, it should show that you actually have you know,
• 28:03
  Speaker 3: the financial competence and the knowage of it, and you
• 28:06
  Speaker 3: actually understand, you know, what the benefits are of proceeding
• 28:09
  Speaker 3: with these types of investments and also what the consequences
• 28:12
  Speaker 3: are if that goes wrong.
• 28:14
  Speaker 1: Okay, that's very interesting. I mean I must say if
• 28:18
  Speaker 1: you had to choose between the two, I mean, logically
• 28:20
  Speaker 1: it does make a lot of sense. Why continue the
• 28:23
  Speaker 1: separation at all?
• 28:24
  Speaker 2: Jack?
• 28:24
  Speaker 1: Why have sophisticated and unsophisticated anyway? I mean I can buy,
• 28:29
  Speaker 1: I can go on a crypto size, and I can
• 28:31
  Speaker 1: put my life savings on it.
• 28:34
  Speaker 3: Yeah, we can talk about hours talked about crypto. But
• 28:36
  Speaker 3: I think it's about if you look at why they
• 28:39
  Speaker 3: have the asset tests, you know those tests. The reality
• 28:42
  Speaker 3: is because you know, the government goes look if you've
• 28:44
  Speaker 3: got two three million investment goes bale up and you
• 28:47
  Speaker 3: are these two hundred three hundred thousand not that consequence
• 28:50
  Speaker 3: you all whereis what they're worried about is if you
• 28:53
  Speaker 3: get saying everyday retail investors only got one hundred grand
• 28:56
  Speaker 3: in super and one hundred percentage of that is invested
• 28:59
  Speaker 3: in you know, just a typical mom and dad and
• 29:01
  Speaker 3: that goes belly up. That's going to be you know,
• 29:04
  Speaker 3: not good at all. The every every day I.
• 29:07
  Speaker 2: We just try Okay, So that's there.
• 29:10
  Speaker 1: Yeah, the separation between sophisticated and unsophisticated has to remain
• 29:15
  Speaker 1: a retailer, as they say, it has to refeel it.
• 29:17
  Speaker 2: It's there as a safety net.
• 29:19
  Speaker 3: There's yeah, there's less guard rails as well.
• 29:21
  Speaker 1: But you think it should be based on basically, it
• 29:23
  Speaker 1: should be based on competence, not money exactly. Okay, I
• 29:27
  Speaker 1: like that. Well, who could argue against meritocracy? All right,
• 29:31
  Speaker 1: very good, it's been really interesting. We have just do
• 29:33
  Speaker 1: a couple of quick questions that I have here. You
• 29:37
  Speaker 1: may chip in if you like, Jack, I just want
• 29:39
  Speaker 1: to try and catch up we have. We have had
• 29:41
  Speaker 1: a lot of questions of course, on the super tax,
• 29:43
  Speaker 1: on crypto, on apartments, a couple of other questions that
• 29:47
  Speaker 1: haven't getting issues that have not been getting the sort.
• 29:50
  Speaker 3: Of light that they have.
• 29:53
  Speaker 1: One is from Anna who says, I don't think there's
• 29:55
  Speaker 1: any point knocking the home buyer incentives. It's free money
• 29:58
  Speaker 1: and a competitive mark. When I get a chance, I'm
• 30:01
  Speaker 1: going to use every grant or assistance I can find. Yes, okay,
• 30:06
  Speaker 1: and a point taking yes, I suppose the issue with
• 30:09
  Speaker 1: these boys we're making with these on the grants in
• 30:13
  Speaker 1: the context of an apartment market that is very weak
• 30:16
  Speaker 1: just now is that at its worst, people are being
• 30:20
  Speaker 1: incentivized to buy into weak spots in the market. And
• 30:25
  Speaker 1: we mentioned the course in Queensland state budget you could
• 30:28
  Speaker 1: buy a million dollar house with a two percent mortgage
• 30:31
  Speaker 1: back if you don't mind buy the government.
• 30:33
  Speaker 2: I don't know if.
• 30:34
  Speaker 1: That's really great from a macro perspective, it certainly isn't.
• 30:37
  Speaker 1: But I take your point all right, and charm Me asks,
• 30:42
  Speaker 1: our superannuation is meant to replace the government pension. But
• 30:46
  Speaker 1: everyone calculates assuming you claim the pension when your fund's
• 30:51
  Speaker 1: run out. Now, But that's about is the retirement calculator.
• 30:53
  Speaker 1: So you go in and you say how much should
• 30:54
  Speaker 1: I have? You say how much you have, etc. And
• 30:58
  Speaker 1: they make an assumption. Careful with that. The general retirement
• 31:02
  Speaker 1: calculator assumes not that you live forever, that you're going
• 31:06
  Speaker 1: to live forever. It doesn't assume you live to one hundred.
• 31:10
  Speaker 1: It assumes you live to an average life expectancy. And
• 31:13
  Speaker 1: then it assumes you go on the pension. You may
• 31:18
  Speaker 1: not want to do that. That might not be exactly
• 31:21
  Speaker 1: what you aspired to. So I think that's just be
• 31:23
  Speaker 1: careful with those calculators. I think you want to chip
• 31:26
  Speaker 1: in on those two.
• 31:27
  Speaker 3: Jack touching the last one. You know, if you bank
• 31:31
  Speaker 3: relying on the government pension later on, the issue is
• 31:34
  Speaker 3: that you completely lose your control. The government changes the
• 31:38
  Speaker 3: rules every single year every time your government gets elected.
• 31:42
  Speaker 3: What happens when they pull the carpet out from benetti faith.
• 31:46
  Speaker 1: Yes and yeah, well exactly, or what happens when they
• 31:48
  Speaker 1: can't afford in real terms the pensions perhaps that we
• 31:52
  Speaker 1: have today. It's a rich country, remains a rich country,
• 31:55
  Speaker 1: but will we always have the ability to pay as
• 31:59
  Speaker 1: we do now? Very interesting, Great to have you on, Jack.
• 32:02
  Speaker 1: We will have you on again. That was very interesting.
• 32:05
  Speaker 1: I think there was a couple of issues that are
• 32:07
  Speaker 1: very timely. I think the ETFs this is the time
• 32:09
  Speaker 1: to reconsider them really and understand what they are, because
• 32:14
  Speaker 1: it's not always going to be this easy, is it.
• 32:16
  Speaker 1: It's not every year your shares are going to roll in.
• 32:20
  Speaker 3: You're working on the laws of averages, and as we
• 32:22
  Speaker 3: just showcase, you don't have much diversification over on your
• 32:27
  Speaker 3: portfolios if you're just chasing those behind in next ONNSE.
• 32:31
  Speaker 2: Very interesting.
• 32:32
  Speaker 1: It's very interesting because that's the whole proposal.
• 32:35
  Speaker 2: Thanks Jack, Love you to have you on the show.
• 32:37
  Speaker 4: Thanks having me, Jame, It's been absolute pleasure. That was
• 32:39
  Speaker 4: Jack Tossl of the Partner's Wealth Group. Let's have some
• 32:42
  Speaker 4: more correspondents the Money Puzzle at the Australian dot com
• 32:47
  Speaker 4: dot au. Love to hear what you thought of those
• 32:50
  Speaker 4: observations on ETFs, which I must say are rarely made,
• 32:54
  Speaker 4: but I think you'll find they're going to be made
• 32:55
  Speaker 4: much more often in the near future.
• 32:57
  Speaker 1: Talk to you soon.
• 33:00
  Speaker 3: The wood, the collect the