The Rentvesting Podcast is the ultimate property podcast that unpacks the facts and explains what’s really going on in property.
It’s not timing but time in the market that matters. This week, Jayden’s been reading (shock, horror!). He came across a book by Tony Robbins – Unshakeable. In Tony’s previous book, he wrote about how after the GFC a lot of people had issues, so he has written another book helping people get around that and get over the fears of what stops from investing and making money.
In this episode we cover:
- How to be wealthy
- Getting over your fears
- The power of compound interest
- Trying to time the market, diversification.
We’re talking about some of the most common mistakes investors make—and how to avoid them.
Changing your mind frame
If you want to be wealthy, act like ‘the wealthy’. Get into a positive mind frame and don’t just spend all your money like you’ve just won the lotto. Generally, studies have found that wealthier people use simple techniques like paying yourself first – instead of ‘saving’. Figure out what you need to save first, then work around that.
Try to remove your fear, everyone’s always predicting the next crash. Just like when everyone was worried about Trump getting into power in the USA, but what has been seen is that the US market has had some of the best run up in history.
Get into the market as soon as you can, because basically, the longer you invest, the more you can take advantage of compounding interest and the greater asset base you’ll have in the future.
Shares vs cash
If you put $10k away today in cash, or you put $10k into the share market here’s what will happen.
Cash will get about 4% income return while shares get about 10% of total return. In 10 years that $10k of cash has grown by $4k while the shares have grown by $16k. In 20 years the cash will have grown by $12k, while shares will have grown by $36k.
While in 30 years cash will have grown by $22k and shares $164k.
So if you do the maths, you’ll find that in 30 years it will make a big difference. Right now cash is almost giving a negative return after inflation. However due to the fear, as cash is more defensive often people stick with cash over compounding.
Time is your greatest asset when it comes to investing.
Trying not to ‘time’ the market
It’s all about time IN the market and not about the timing of the market. Tony Robbins found in the last two decades there’s been about an 8.2% annual return for the S&P500. In Australia for the 20-year review, we’re almost the same at this point. However, for a long time, Australia was the best at 12% but the US market has had a run-up.
Over that 20 year period you’ll have had 8.2%, but if you weren’t in the market over that time and missed the best 10 trading days your return would drop to 4%. No one knows which days they will be, but by being in the market and using time you’ll win.
For investing, there’s index/passive investment or there’s dynamic investment. Over time, it’s been found that index investing beats about 80% of dynamic, this is due to fees but also because even professionals can’t actively time the market. You can’t forecast that out beyond general assumption.
This comes back to emotions.
People buy into dynamic management because they think the other person knows what they’re doing, but you’ve got to look at it long term and over a longer period due to fees, those dynamic managements can’t outperform consistently.
Another thing is diversification.
If you just invest in one share, then you’re holding onto just that. It would be like investing in Black and White cabs, where it seemed so secure, but now Uber has come along and changed everything. This also includes domestic stock, overseas, bonds etc. The overall point is, don’t peg yourself into one industry.
With a lot of investments, there are underlying costs. They’re usually either indirect cost ratio or management expense ratio. Fees types are index or exchange traded funds (0.18 or 0.2%) which are really cheap, active managers (1%) which are more expensive along with dynamic managers (2%) extremely expensive, or if money is preserved it can cost up to 2-2.5%. The latter being very expensive for what you get.
Is there a net return?
In every single product disclosure statement, fees will be embedded but not normally visible to the eye up front. If you’ve done some research on it, you’ll be able to find it. Try typing in the fund with MER after it, and it’ll come up through Google.
The other major fee is the running management of the fund – performance fees. So when management gets a good performance, they’ll take a clip. It’s usually between 10 – 20%. These fees can drastically change the end value of the investment, which is another thing to consider.
Keep it simple. Set up direct debits into an exchange traded fund or managed portfolio on a monthly regular basis so you don’t have to do anything to manage it. You can set up with your employer to get your salary divided into two accounts too. This makes life really easy for you so you don’t have to manage it yourself.
- Keep it simple.
- Get into the market quickly and take into account compounding interest with the rule of money doubling every 7 years.
- Don’t try and time the market. Just get in and use time.
- Not diversifying – Make sure you do!
- Exchange Traded Funds have lower fees (ETF) than active funds – these fees can erode away your long term returns.
- Automate – Make it easy for yourself so you don’t have to think about the investment process. This helps to make sure you don’t get involved emotionally with the process of the money coming out.
The Rentvesting Podcast, available on iTunes, was created by Red & Co’s Jayden Vecchio and expert financial planner Louis Strange. Together, Jayden and Louis unpack the facts behind the property market, explain what’s really going on & where the market is heading. They believe in challenging the status quo and want to get out there to educate absolutely anyone looking to enter the property market.