A strong core to support your future | Summer Series

Bryce: [00:00:40] Welcome to the Get Started Investing summer series where over six episodes we're going through six steps to help you set your finances up for 2023. From budgeting and savings habits, emergency funds, superannuation through to common mistakes and how to set up the ultimate core portfolio, this series will have something for everyone. While we are licenced, we are not aware of your own personal circumstances. All information on this show is for education and entertainment purposes, and any advice is general advice only. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you? 

Alec: [00:01:11] I'm very good, Bryce. Great to be here. Five episodes in? Yeah. Excited for this one. Because we have got our foundations of money, right? We've set up our bank accounts. We've got the emergency fund taken away. We've thought about our superannuation and we're happy with our choice. We've made sure we don't make some of the common mistakes. Now we get to the fun part. Now we get to build wealth. Now we get to the stock market. 

Bryce: [00:01:39] Now we get to investing. And in today's episode, we are talking about all things core portfolio, how to actually build a portfolio. If you've just started your investing journey, in fact, it doesn't have to be. If you've just started your investing journey, if you don't have a core portfolio. This is the episode for you. 

Alec: [00:01:55] Now prices said core portfolio about six times in the 2 minutes that we've been recording this episode and people might be a little bit unfamiliar with that term. So in the world of financial advice or in just investing in general, they will often speak about a core and a satellite portfolio, and the core is the less risky longer term holdings. I was about to say core holdings, but you can never use the term in defining the term. It's the bedrock of your portfolio. It's the things that you're going to sit and forget, put in a bottom drawer, and that's going to be where the majority of your money goes. That's the core. And then satellite are the things floating around the core, which are the maybe a little bit more risky, a little bit more fun and interesting potentially. Maybe some spec is that's where you're going to play a little bit more. You're still going to try and make a return, but you'll be willing to take more risk there. We're not going to talk about satellite investments. If you want to invest in individual stocks or invest in certain themes like electric vehicles and stuff like that, we have a whole other podcast where we talk about that Equity Mates Investing podcast. This episode is all about that core. Some may say boring, but just like price is core, off to go into the locker room holds up a stronger and bigger frame. This core will hold up. You're stronger and have bigger wealth. 

Bryce: [00:03:25] Yes. It might not feel sexy and appealing then, but having consistent, solid returns over 40 years is going to look pretty sexy and appealing when you turn around and look at your portfolio in 40 years time. 

Alec: [00:03:37] Yeah, yeah. When you've got $100,000 invested and you get $4,000 a year in dividends, that's pretty sexy. 

Bryce: [00:03:47] CHEERING So we've established that it is the bedrock for the, for, for our investment portfolio. 

Alec: [00:03:54] And you want a strong core, you want this level core. 

Bryce: [00:03:59] You want to see this level of cool you want you want you want what do they call it, the cheese grater core. So we've established what the core is before all that though. And the number one question we often get asked is what broker should I be using? You can't create a core portfolio. You can't make any investments unless you actually have a broker. Now I do realise we've answered this question a lot, but what are, what should we think about when getting a broker? If you've just started your investing journey. [00:04:26][27.5]

Alec: [00:04:27] For people who are new, you can't go and buy shares directly from the share market. You need a broker to do that on your behalf. And these days it's literally an online platform. And these days, much like when you're online shopping, when you buy shares, you go to the website, you put your order in and you hit submit. Now, there are, I think, a lost count, over 30 online brokers in Australia and there are so many good ones that it's hard for us to choose one. The important thing to say is there's no switching costs. So if you select a broker and you're not happy with it or a better offer comes along, there's no cost for you to move to another one. And I think that's the important thing to stress, because so many people get stuck at this step because they want to choose the right broker. Whichever broker you choose, you're buying the same shares and you can always change. Now there are heaps of good options and we actually both use multiple brokers for different reasons. I think if you're just getting started, a really good one is shares. They've built their platform for beginners and the reason that it's good for beginners is you can invest with literally what a cent. Yeah. Yeah. And the costs are low. Yeah. And they give you access to Australia, America and New Zealand. Yeah, for me the main thing is you can start investing with. 

Bryce: [00:05:46] No investment minimum. Yeah. 

Alec: [00:05:47] Yeah, that that's a really common thing that stops people. They're like, I don't have enough money to invest. Yeah. Shares these are kicking that door in and blowing that wide open. 

Bryce: [00:05:54] Absolutely. And for reasons that we'll get to in next episode when we talk about automation as well, shares these in a number of other brokers, including superhero also worthy of starting we should say that superhero and stakes sort of play in this area as well. Cheap access, global access. Yeah. So there are other options out there. Shares is stakes superhero. 

Alec: [00:06:17] Yeah. If you start with an S.

Bryce: [00:06:18] If you start with an S, yes. All right. So you've chosen your broker, you've jumped in. There's no switching costs. You're not locked in from the get go. So it's okay to just start with one and then figure it out as you go. That's important thing to understand where to from here when it comes to the core. 

Alec: [00:06:33] So when we talk about core portfolio, what we really mean a broad based market indexes. Now, what do we mean by that? For most people, thinking about the share market, you think about buying a company, Woolworths, Commonwealth Bank, Afterpay, you buy shares in one company, but you can buy index funds through this acronym called ETF Exchange Traded Funds, where you buy a little bit of everything. The classic analogy that's given in finance books we probably write it in ours is rather than buying a piece of fruit at a supermarket, you buy a fruit salad, which has a little bit of banana, a little bit of apple. You guys know how fruit solids work. And that's the same as an index fund. You get a little bit of Commonwealth Bank, a little bit of BHP, a little bit of NAB, all in one easy to buy package, love it. And in Australia it's the ASX 200 that's the main index, 200 biggest listed companies in America, it's the S&P 500, the 500 biggest companies in the UK it's the Footsie 100, the 100 biggest companies over in the UK. So each market has its own index. They all have the different number of companies in them, but at its core they all do very similar things which just give you access to the overall market return rather than any specific company. Yeah. 

Bryce: [00:07:55] Okay. So I've got my broker. I understand that my core is made up of these ETFs exchange traded funds, each of which tracks large companies in markets generally from different countries or regions of the world. There's large companies in Australia, large companies in Europe, large companies in the United States, easy single trades that can allow us to do that. You've mentioned the market return. What does that mean and why is this core enough for me as a beginner investor? 

Alec: [00:08:25] Yes. So in any individual year, the stock market might be up, it might be down. It's pretty volatile, which means the range of outcomes is pretty wide. Some years it's up 30%, some years it's down 20% in the worst stock market sell offs, it could be down as far as 50%. But over the long term, it averages out pretty consistently and it consistently averages out to between eight and 10% a year. So the question is, why is that? And well, the first answer is getting between eight and 10% a year over a long period of time builds wealth. If you invest $100 a fortnight and you get 8% a year, well, in 30 years you'll have 300 grand. In 50 years, you'll have one and a half million.

Bryce: [00:09:13] Just not bad. 

Alec: [00:09:14] If you up that to 200 bucks a fortnight and you get 8% a year in 30 years, you'll have about 600 grand. In 50 years you'll have 3 million small dollar amounts with consistent compounding over a long period of time to add up. So you ask, why is it enough? Because it is in Florida. If you have $1,000,000 in your retirement account, you're right. You're good. The second reason why it's enough is it's because it's really hard to do anything else. And it's interesting to say the amount of professional fund managers, those that have studied finance, have worked in finance and that have all the tools at their disposal. So many of them, the majority of them don't do better than the overall stock market. S&P Global, which is like a data provider, they actually look at these professional fund managers and compare them to the market. And what they find is that not many of them can outperform the index. They look at US fund managers over a ten year period, only 10% have outperformed the index consistently. In Canada. That's 8% over the past ten years. In Europe, that's 12%. In Australia it's 23% over the past ten years. So Australia fund managers are pretty good I guess. But the takeaway there is that the majority of professionals don't do it. So who way to think that way you can do better. So because it isn't off and because it's really hard to do anything else. This strategy is a strategy that makes sense. 

Bryce: [00:10:46] Absolutely right. And before we turn to some of the specific stocks that can help you to build the portfolio, let's just take it a few numbers to kind of illustrate your point there. If we were invested in the United States, I guess CORE, which is the S&P 500, you mentioned the average return is 8%, but over five years the return for the US was 6%, over ten years, 10% and over 15 years 11% per Year. Yeah, yeah, per year. Which is phenomenal. Returns. Canada five years was 4% and ten years was 18%. Great returns there. Europe 12% over five years and ten and 12% over ten years. And Australia resource mining loving Australia 26% return over five years 23% return over ten years and 17% over 15 years. Now that probably takes into consideration dividends and all sorts of things, but there is nothing wrong with getting those returns at all. That is amazing. 

Alec: [00:11:43] Now, Bryce one take away and then one question out of that. My takeaway out of that is all of those numbers are above inflation. Even with inflation really high this year, though, all of those numbers were higher. So I think that's the first thing. This is beating inflation. Your money is working for you and it's building wealth. The question, though, is just because that's what's happened historically, does that mean it's going to keep happening? We always hear past performance isn't an indicator of future performance. 

Bryce: [00:12:12] Now, we can't predict the future then. But the reason that I'm fairly confident in saying the outlook and probability of is in our favour for this occurring over the next ten, 20, 30 years, is that when you're investing, you're investing in companies that are hiring the smartest people, innovating, actually trying to create product and create shareholder return. And so by just nature of that and everyone improving over time, if you look at what has happened over the stock market over the last hundred years, you'll find that it is constantly grinding up. Yes, we're going to have our down periods. Yes, we're going to suffer losses. But the long term outlook is one of positivity. 

Alec: [00:12:52] Yeah. And I think in many ways the stock market is simply a reflection of human ingenuity and innovation. And we think about all of the big changes in our lives over the past hundred, 150 years, there's been a way to invest in them on the stock market household appliances. Westinghouse pioneer of that was listed Ford and the car was listed electricity in the light bulbs General Electric was Thomas Edison's company listed the invention of the phone was the company that is now known as AT&T. All of these foundational inventions you could invest in through the stock market more recently, flood plains, Boeing, electric vehicles, Tesla, all of those innovations we say, on the stock market. And that's why we can be relatively confident that the stock market will keep grinding upwards, because these new companies come into the stock market and drive the economy forward and create value. And, you know, they might not quite be the General Electric or Ford, but recently in Australia we've seen examples of that. Probably the clearest example is Afterpay, a company that was only founded six years ago, took Australia by storm, took the world by storm, created billions of dollars of value out of nothing. And that value was seen in the stock market and that pushed the market upwards. You know, now we're seeing it in lithium players, companies like Pilbara Minerals and coal, lithium companies that are creating value and that values in the stock market. And if you just own a little bit of everything in the stock market, you participate in that value creation. That's how you build wealth. 

Bryce: [00:14:29] Well, speaking of owning, owning a little bit of everything, we're now going to look at the specifics of what goes into a core portfolio and discuss what's in hours straight after this break. All right, Ren Well, it's time to actually talk about when the rubber hits the road. What do we what can go into a portfolio? And I think it's important that we are speaking about this from and from Australia, but the concept remains the same sort of wherever you are in the world, because there are ETFs everywhere that track the same indexes at the end of the day. So let's start with the one ETF core portfolio. 

Alec: [00:15:02] Yeah, if you just wanted to buy one thing and then get on with your life, this is that thing.

Bryce: [00:15:08] And that thing is the Vanguard Diversified High Growth ETF. The ticker in Australia is Veda H.J. And. 

Alec: [00:15:15] When we talk about TIC is what we mean, let's say you sign up with Sharesies. These you can search VDHG. And it will come up yeah click buy say how much you want to buy click confirm that you're on your way. 

Bryce: [00:15:26] Away you go. The reason we say this is a11 ETF core portfolio. Is it because this ETF is made up of many sub ETFs that give you access to local market here in Australia, gives you access to American markets, gives you access to different asset classes as well. It's very diversified. There would be nothing wrong with sitting in that for the rest of your life. 

Alec: [00:15:46] Yeah, yeah. So that's one way to do it. Look, there's many ways to do this. We're just giving some examples. The next example we have is a two ETF portfolio, Vanguard, which is a ETF provider. They have an index that tracks all of the world outside of the US. The ticker there is V, a U, so you could buy that one and then you could buy Vanguard's American ETF. And in it, which is ticker Vitesse. And between those two ETFs, you get America and all of the world outside of America, which really covers the world. 

Bryce: [00:16:24] So you get all well above that. So as you can say, you get access to thousands of companies around the world with two easy trades. How do you do yours? 

Alec: [00:16:33] Ren So what I do is every paycheque, I automatically transfer money into my brokerage account. That's, that's set up as an automatic transfer. And then that money I split across five index funds, five ETFs and they are Vanguard's Australian shares ETF The U.S. Vanguard's U.S. Total Market ETF ft yes. Betashares Footsie 100, which is the United Kingdom. F 100 is the ticker betashares Europe, which doesn't include the UK, which is h, a, u, r and then finally Vanguard Asia, ex-Japan, which is v a and so you can see there Australia, the US, the UK, Europe and Asia. 

Bryce: [00:17:19] Nice. That's pretty straightforward. Yeah, I'm pretty similar in terms of geographies. I've got Australia, US, Europe, Asia and the UK as well.

Alec: [00:17:30] That's exactly the same.

Bryce: [00:17:31] Yes, slightly different ETFs though. My my Australian one is a geared ETF gear and my US one is a geared US called J just they both Australian and US markets.

Alec: [00:17:43] I think if people are unfamiliar with that term. 

Bryce: [00:17:46] I wouldn't worry about it right now. The second is the Vanguard Footsie, Asia, ex-Japan. Then I've got the Vanguard Footsie Europe and then the FTSE 100. That's the Betashares as well. So very similar vibe. Yeah. So that's the core. Those five ETFs can sustain us around and give us the market returns over 40 years and we can be happy. Yeah, we don't have to do more than that. 

Alec: [00:18:12] Let's just go back because I'm mindful that for some people this is the episode where there was a lot of jargon and with the personal finance stuff which most people are familiar with, crossed over into the world of investing, which for a lot of people is new. The key takeaway here is all you need to do is buy one thing that owns a little bit of everything. So if you buy one ETF that owns the 200 biggest Australian companies and you consistently put money into that, you're okay, that's enough.

Bryce: [00:18:45] Yeah. And just repeat that around the world. 

Alec: [00:18:47] Well, yeah. Then, you know, when you feel more comfortable you can split it into two and you can also get the US and stuff like that. And you will learn this world, you will understand it more, and I promise you you'll get excited by it as you say it develop and you start to understand it more. But it it is an overwhelming world. We've been there. Everyone has been there. It's never been easier to take baby steps. And so we'd really encourage you to take that baby step. Yeah. Sign up with shares is put $0.05 into one of those ETFs that we just spoke about and do nothing more. Yes, I just understand how it works. 

Bryce: [00:19:22] That is part of the three key actions for the end of this episode when we spoke about finding a broker. So choose a broker, sign up to it. Even if you're not convinced it is the perfect one, you can change at a later date, but make sure you just sign up and get started. Fund a small amount of money. You can start small. These days, which is awesome. And then choose your first index ETF and buy that in a way you are invested, you are in the. 

Alec: [00:19:46] Market, you are now an investor.

Bryce: [00:19:47] You are now an investor. You will find out what it means and more about who you are as an investor and everything that goes into it as time comes. But just get started. 

Alec: [00:19:56] All right. Well, Bryce, we have made it to the final episode. Next week, we will be talking about automating at all. We will be using ourselves as case studies and will really be putting everything that we've spoken about over the past five episodes together. 

Bryce: [00:20:13] Yes.