Ask an Advisor: Patrick Malcolm – Pay off mortgage or invest in shares & Two funds he’d invest in for life

Bryce: [00:00:15] Welcome to another episode of Equity Mates. Or should I say, Hey, howdy, folks. Welcome back to another fun filled episode of Equity Mates, the show where we, you know, invest in stuff, whether you're a total noob or you're just basically the Warren Buffett of your block, we're here to help you from zero to doughnuts. I mean, dividends if you're tuning in for the first time. Welcome to the party, pal. Just a heads up. We've got licenses and stuff, but we don't know your money situation. So what we say we take with a grain of salt or a doughnut hole. That's always. I'm joined by my equity buddy, Ren. Who am I? 

Alec: [00:00:51] Uh, I am going to guess you're Homer.

Bryce: [00:00:55] Is correct. He's absolutely nailed it. 

Alec: [00:00:57] Really? Just because of the doughnuts. Doughnuts? Nothing else? Yeah, yeah, yeah, yeah.

Bryce: [00:01:02] Now, my name is Bryce, not Homer Simpson. And if you have just joined us, welcome chat. JP is writing my interest for me. If you have a persona that you would like paid to to do for me, send it through contact at equity mates. But when we have a massive episode today, one that we've thoroughly enjoyed doing every month and one that is enjoyed by the equity mates community, purely just based off the number of questions we get for these episodes. And it is an ask an advisor. 

Alec: [00:01:32] That's right. Every month we get one of Australia's best financial advisors in the hot seat and we put your questions to them. We know that advice is expensive and so hopefully this is a way to get some of your questions answered. This month in the studio we had Patrick Malcolm from GFM Wealth Advisory and we spoke, we covered a lot of ground, we covered investing, we covered, I guess wealth strategies more generally. We had a number of rapid fire questions. Investing for kids is something that keeps coming up. 

Bryce: [00:02:05] Tools that he uses.

Alec: [00:02:06] Yeah, tools that he uses. Yeah, a couple that, um, one that I've got a tab open and I might do some exploration. Yeah. To this. Yeah. But we'll let him explain it and then we finish by talking about, I guess, the work of financial planners. Patrick Patrick's quite passionate about getting more people in the field, so we cover a lot of ground in this interview. So, Bryce, without any further ado, you got any further ado? 

Bryce: [00:02:32] So I don't have any dos. 

Alec: [00:02:34] Okay, great. 

Bryce: [00:02:35] Well, let's get into this one. Oh.

Alec: [00:02:37] Here is our conversation with Patrick Malcolm, senior partner and certified financial planner at GFM Wealth Advisory.

Bryce: [00:02:45] To Patrick, welcome to Equity Mates. 

Patrick: [00:02:47] Thank you, Bryce. Thanks for having me. 

Bryce: [00:02:49] Now to kick things off, would you rather travel the world for free for a year or have $150,000 to spend as you please? 

Patrick: [00:03:01] Am I answering this question or is my wife answering this question? I think I'll take the 150,000 to spend as I please, because I think I could do that. Travel around the world for less than 150,000 and then not invest the rest, Bryce, of course. I got to play the numbers game. 

Bryce: [00:03:21] What about if it was 50,000 to spend? 

Patrick: [00:03:23] I'd probably take the overseas trip. 

Bryce: [00:03:26] I was thinking what the number would be. But free implies that you could just go. You could have a multi-million dollar around the world.

Patrick: [00:03:35] Yep. Best pass. Best hotel.

Bryce: [00:03:38] Best Hotels. Best food everywhere. Yes. It's a tough one. 

Patrick: [00:03:42] That's a very tough start. 

Bryce: [00:03:44] They get easier from here. That's a good thing. What would you do, Ren? 

Alec: [00:03:48] Well, I would have said 150,000 as well, because I was like I could get a really good tripleaway for 50 grand. But you've really enticed me with the unlimited spend. 

Bryce: [00:03:57] Yeah, there was no qualifier. 

Alec: [00:03:58] And it would be like every city you go to, it would be like, you know, I'd be like, private tours of the Colosseum. Yeah. Lock it down. And I want to be the only one in that. Yeah, yeah, yeah.

Patrick: [00:04:08] Front row, Yankee Stadium.

Alec: [00:04:09] Exactly. Yes. Super Bowl. Like all the best chefs. 

Bryce: [00:04:12] Masterstroke, Like. Yeah, All the sports, all the schools. [00:04:16][3.2]

Patrick: [00:04:17] You saw the cross on the other side? Yeah. Yeah. [00:04:21][3.7]

Alec: [00:04:22] All right, well, I mean Patrick Patrick's a big Carlton fan, and when this episodes out, we'll know if they won. You'd be able to get grand final tickets as well. [00:04:28][6.6]

Patrick: [00:04:29] Let's not talk about it. He's got the whole league. It's been a good run. Anything really is a bonus now. That's a good like a true, because at least the cards that we put up with 20 years of grief. [00:04:41][11.8]

Alec: [00:04:43] Anyway, we'll save that for the AFL podcast. We will. As we are here for an ask and advise episode, we've gone out to our audience and got their questions and as always they flood in. If you do have a question for an advisor, hit us up ask at equity mates dot com and we'll ask it on the next episode. But before we get into it, an important disclaimer whilst we are licensed and whilst Patrick is a licensed financial advisor, none of us are aware of your personal financial circumstances. This episode is for education purposes only. Any advice is general. With that said, let's crack in. 

Bryce: [00:05:15] Let's do it now in prep for this part. Pat, can I call you Pat? 

Patrick: [00:05:18] Of course you call me Pat. 

Bryce: [00:05:20] In prep for this. You actually mentioned a couple of specific tools that you use that we hadn't heard of before. So before jumping into the listener questions, I thought it'd be great to start there because there's some general tools that I reckon a lot of people are going to get a lot of value from. So let's start with budgeting. What do you use in your daily life from a budgeting point? 

Patrick: [00:05:41] Yeah, so I use a tool called Pocket Smith. It was a little bit disappointing. There was an Australian app called Pocket Book that disappeared from the market.It's jus vanished, which is really disappointing. So I'd say it's more of a tool for a desktop computer than an app. The apps, okay, it's not amazing, but what it applies, it employs a business-like process to your personal budgeting. Okay, so you can generate profit and loss balance sheets and those sorts of things. And I think the starting point with budgeting is I think it's really hard to budget without looking at the past as a reference for the future. I know that sounds very vague, but if you don't know what you've spent on certain things, I don't know how you then make an assessment of how you move forward. 

Alec: [00:06:28] I mean, the classic example of that is everyone says like, Oh, I could do 100 bucks a week for groceries because it just feels like a good round number. I've never looked at. I've actually been spending 150 bucks. 

Patrick: [00:06:38] So I call that bottom up budgeting, the budgeting that I'm talking about I refer to as being top down. So looking back at what you're spent, what you've spent and then making adjustments from there. Okay, So, you know, we're not going to go about it, you shouldn't be drinking a la Tiger Day or smashed avocado or that sort of stuff. It's just complete rubbish. Okay, that's not financial planning, but I don't know how you go about setting a budget without looking at what you've spent in the past. And the really good thing about Pocket Smith and these other apps like this is you can feed in all your past data. It uses tools to classify those into certain categories like groceries, petrol. Sometimes you need to take it, you know, that's Woolworths, the petrol station rather than Woolworths, the supermarket, Woolworths, the supermarket. Once you get that right, you've got to get a really good sense of, okay, well this is what I can set myself. And from a budgeting perspective, if you then looking to save and you've realised, well actually I don't have a savings capacity, I think gives you a reference point to say, well what are the categories can I pull back on to get to my spending goal? Okay, so maybe that's why I'm eating over three times a week. I'm going to eat over two times a week and that saves me $50 a week that can work towards a goal. So I think it's a great tool. 

Bryce: [00:07:49] Is it free?

Patrick: [00:07:50] It's not free. There are free versions of a price. It is paid, but I think it's worth it since I've got the paid version. I think it's about 180 AUD a year. Okay. I honestly think it's worth its weight in gold.

Bryce: [00:08:02] Here is a question. Would it be tax deductible? 

Patrick: [00:08:04] I'm not going to get into it. I don't suspect it would be because it's not produced. It's actually saving you expenses. Yes. I don't think it would be tax deductible. 

Alec: [00:08:17] But I've just had a look, not sponsored, but there is a free version of it. But I just don't think it gives you. 

Patrick: [00:08:25] It's gonna scale up. 

Bryce: [00:08:27] It's roughly 18 bucks a month, call it. Or thereabouts. 15 bucks a month. Yep. If that's going to save you more than that, obviously. Net positive. 

Patrick: [00:08:36] Absolutely. Yeah. And I'm not sure how it's a really interesting time because I think it's. I think it's so easy to budget, but it's also so hard. It's so easy because there are these wonderful tools. Bryce, but at the same time, the tapping go with the things that kill people. It is a death by a thousand cuts. So, you know, our parents probably worked off the envelope system where you get your pay in cash and you divide it up amongst a whole heap of envelopes and you know, once that all envelopes finished where you can't spend any more money on that thing. Yeah. And you sort of can't do that now. It's really, really hard. But at the same time, there are these tools that can keep you disciplined and really help with your budgeting and your saving and therefore investing.

Alec: [00:09:18] Yeah, nice. 

Bryce: [00:09:19] The second one was around getting good deals. There is an environment at the moment where any deal is helpful for the bottom line, and yet we have a show and get started investing podcast where we're trying to find deals to save us upwards of 100 bucks a month. Yeah. So what are you using to find good deals?

Patrick: [00:09:38] Yeah, as you can probably see through my use of Pocket Smith and being a financial planner, I'm quintessentially stingy. Yeah, it's in my DNA. Okay, So I love a good deal. I think, you know, there's all these websites out there you can get good deals from, but in terms of things where you get really good bang for your buck with, I think a choice subscription is absolutely fantastic. So you know where you want to get when you want to compare fridges or laptops or those sorts of things. Choice is really good for that. But where often choice really is valuable is with things like insurance. If you went through your budget and you classified insurance as an out and out item, rather than saying, well, that's health insurance or car insurance, it's really up there in terms of expenditure, it's probably top three. Yeah. So if you can save $500- $1,000 here or there on those sorts of things for a choice of membership, which you can do, it's really good at comparing private health insurance. There's some really bad ones out there. I'm not going to name any of them, but choice is really, really good at that rate with car insurance, home insurance, those sorts of things.

Bryce: [00:10:42] How is it different, though, from an insurance point of view or financial services to what is freely available on Finder or compare the market or. Yeah, those sort of comparisons. 

Patrick: [00:10:54] Yes. So with those, my understanding is and I could be wrong here, often they take a commission or they get. 

Alec: [00:11:00] That's how they make their money. Like, well I'm not sure about Finder but compare the market or I select. 

Bryce: [00:11:05] So it's not fully authentic.

Patrick: [00:11:07] No. And you're not getting a true picture of the whole marketplace. And they might steer in a certain way because that gets them the highest commission. But choice isn't like that. Yes.

Bryce: [00:11:17] So did it used to be free? Because I remember going there quite often. It's years ago. 

Patrick: [00:11:22] The choice website? 

Bryce: [00:11:22] Choice. Yes. 

Patrick: [00:11:24] Look, I suspect the same thing as with Pocket Smith. There's a lot of stuff that you can get on the website for free. 

Bryce: [00:11:29] All the good stuff hidden behind a paywall, though. I'm trying to find a mattress at the moment, and everyone recommends go to choice and they'll tell you which of the good mattresses they pay for. 

Patrick: [00:11:37] I did. I did. I did use it for the mattress the way that I can. 

Alec: [00:11:45] I mean, how much is a good night's sleep worth? 

Bryce: [00:11:47] Thousands. 

Patrick: [00:11:47] Thousands? Yeah, definitely. 

Alec: [00:11:49] So stop being so stingy. Yeah.

Bryce: [00:11:51] Yeah, yeah. Anyway, it takes me a long time to do those things, so I'll get there one day. 

Patrick: [00:11:55] So those are two tools where I think there's, there's an investment there. And certainly if you're struggling to make ends meet, you know, I may sort of saying, well, go out and spend $100 on these and $180 on that. And if you can afford it and you're looking to save money, I think they're really good tools just to get the basics right and build from there. 

Alec: [00:12:16] I love that. Well let's turn to investing and to kick us off today we have a recorded question from Michael. 

EM Community: [00:12:23] Hey Bryce and Ren, I've read your book on investing and to others as well as follow you guys on socials and your investing podcast. The main message I get is investing can be for anyone and it's important to just get started. I've recently spoken with my accountant who's also a financial advisor, and she said to forget about investing into a tech home mortgage. While I do agree the mortgage is important, it was kind of a big blow and left me a little confused as to why not at least put aside small amounts for investing. She also made a comment that insinuated that investing in shares is for people with more money and essentially forced to not pursue, which was an even bigger hit. As I've been getting really excited to get into the world of investing, I just wondered if you guys would agree with her or what your thoughts are on the matter. She cheers Michael from Sunshine Coast. 

Alec: [00:13:05] Oh, hi, Patrick. 

Patrick: [00:13:05] There's a lot in that. There's a lot in that. The first thing is I must disagree with the sort of assertion that investing is just for rich people. That's just complete garbage. Yeah, I think anyone can invest in one of the benefits that we've had with technology and all sorts of things over the last little while or over a prolonged period of time is investing is far more accessible than what it used to be. Know you're not calling up some guy at the stock exchange to buy shares. You can do it online and you can do it online pretty quickly. So anyone with any sort of money that's got the cash flow can invest. And it's a really, really tough question because at the environment. With interest rates being so high, that hurdle rate that you need to achieve to make that investment worthwhile is a lot higher. Okay. So if your mortgage had a 1% at the start of it, which was the case a little while ago, the hurdle rate that you need to target on your investment wasn't very high to go over that mortgage rate. Okay, Now we're sort of up in the sixes. Okay. So your investment needs to generate an after tax return to exceed the benefit of paying down your mortgage. Okay. I guess the hardest thing in financial planning is it can be a very precise science. There's an answer that's going to be right or wrong here, depending on what that investment produces in the future. But to think that that investment would need to produce a rate of return of, say, 10% to beat your mortgage, which is six on an after tax tax basis, give or take, it is really hard. But at the same time, you know, I think we focus very much on diversification from an asset class perspective. I think diversification of strategy is important as well. You know, not having all your eggs in one basket, i.e. not paying everything off the mortgage, maybe carving a little bit of what you're repaying additionally to that mortgage to invest isn't such a bad idea. So I know I've sort of straddled the camps there, but the reference point is it's a harder environment to beat that after tax return because interest rates are a lot higher. But at the same time, I think I have a little bit. Why isn't such a bad thing? 

Alec: [00:15:12] So one other thought that I have when this comes up, and I'd be interested to get your thoughts on this, it's I guess, a liquidity question, like for people that spend all their time really focussed on paying up their mortgage. I understand that impulse. Like it's the biggest piece of debt you're ever going to have in your life and you want to get it off the books. But what you don't want to be is 50 mortgage free heaps of capital gains in the house that you own outright, but no liquidity yet when you might need to draw on some money. And then you have two super illiquid assets, super that you can't draw on and a property debt yet you can get another mortgage on but don't want to do that. Yeah. Does that factor in as well? 

Patrick: [00:15:50] Absolutely it does. Yeah. And I think the other risk that you're alluding there to is leaving your run to like dollar cost averaging is a very, very powerful strategy. Okay. So what does that mean? It means that you can sort of smooth out returns if you invest over a period of time of, say, 20 years consistently rather than ten years. So the framework with that, I guess, is around maybe working out how long it's going to take to repay your mortgage at the current rate and then what you could push that out to and then using that surplus cash flow that you've got to either invest outside super. Or inside soap or a combination thereof. Yeah. So it could be you've, you know, this is you meaning a mortgage repayment. You going to have your mortgage repaid in ten years? Let's make it 20. What's that gap. How should I be directing that towards investments maybe outside super versus investments in such a bit. But I get your point. If you want to retire at 50 and sounds like you're pretty keen to do that.

Alec: [00:16:52] I mean, who wouldn't like that idea of that yeah. 

Patrick: [00:16:54] Absolutely. You can't have it all in super, super in your house. So that's the diversification of strategy that's really important as well.

Bryce: [00:17:01] So, Pat, you know, the question of paying off a mortgage or investing or investing in super and paying off a mortgage is one that we get literally every week. 

Alec: [00:17:11] Yeah, I think it's probably the biggest question that people our age. Earning more than they're spending for the first time in their life Totally. 

Bryce: [00:17:17] Followed by which broker should I use. Yeah and when we collated all the questions no surprise this was right up there yet. And you mentioned that you had a decision making framework to help people with this. So can you talk us through. 

Patrick: [00:17:31] Yeah. So the decision making framework is around that. The mathematics that I was talking about with that mortgage. So if you're repaying your mortgage at such a rate that it's going to be gone in ten years. Okay, maybe you want to have it paid off in 20 years. What would you reduce your repayments to to have a pay it off in 20? How much cash do you have? And then using that cash to either invest inside super or invest outside super. And why this is really important price is because how long have we got with super? Because I can probably talk about it for about 50 years. But that's like. I get really excited about superannuation that well. And the reason why this is really important and it's really the really good question is from your listeners is the system isn't set up in a way that is conducive to you catching up later in life with superannuation. So what do I mean by that? There are limits in terms of how much you can put into superannuation on a pre-tax basis. Okay. Used to be 25,000. It recently got indexed to 27 and a half thousand. So combined with what your employer puts in for you and then with salary sacrifice, contributions on top of money that you're putting that you claim a tax deduction for. There's a limit of 27 and a half thousand dollars a year. Many, many years ago it was $100,000. You could put $100,000 of your pre-tax salary into super. So what does that mean? You could actually leave your run quite late in life and catch up. You can't do that. Yeah, you really can't do that. So leaving super until you're 50, you may actually run out of time because that 27 and a half thousand max will. You may cap that out based on what you're earning and you might be able to contribute more than that, but you can't contribute more to it. So, you know, my situation, I've got a mortgage, unfortunately. Okay. But my wife and I put the maximum amount that we can into superannuation each year and we're fortunate to be able to afford to do that. But we do that because we know we can't catch up later in life. So if you can afford it and you're not massively trading off how long it might take you to pay off a mortgage, you should be putting extra money into super. Now what's that age? I think it's really hard to tell a 30 year old the salary they are sacrificing this year, but I'm being quite binary here in terms of numbers. But it's 30 years until you can access it potentially longer. Okay. I think 40 you've got to stop thinking about it. 50. You've got rocks in your brain. If you're not putting extra money into super and can't afford it.

Bryce: [00:20:00] I've been thinking about this in terms of salary sacrifice. Well, not salary sacrifice, but just getting money in as early as possible. Yes, super. So you can then get to a meaningful amount where you can then to SMSF. And start then buying assets that we would probably want to buy outside but you'd have a chunk of cash. Yeah. In super to actually do it. And then whilst you don't get access to the benefits of that asset, it's still all within the framework. 

Patrick: [00:20:25] I would argue that you do get access to the benefits of the asset because it's growing in value.

Bryce: [00:20:29] Yeah, sorry. What I mean is like I can't realise that until I retire, but if you're getting to 250 K as quick as possible in your self-managed. Yep. You can play with it I guess. 

Patrick: [00:20:43] Yeah. Yeah. Yeah you can. Yep. 

Alec: [00:20:45] Do you contribute extra. 

Bryce: [00:20:46] No I don't. But I'm and I'm not like trying to buy a house outside of super at the moment. It doesn't make sense for me, but I think once you kind of I'm just thinking through like once you get to that point, like I met and met someone recently who was young and they were doing a lot of like start up and small cap investing through this self-managed, super smart. And they're like, we've got the liquidity in there to be able to take some of those risk. Yes, because I've got to 30-40 years in front of me. 

Patrick: [00:21:12] Absolutely. And they're the sorts of really with you super. And these sort of we're sort of maybe steering to investment strategy a little bit here. That's really interesting. You speak to three year olds and they say, I've got my super conservative strategy and you're like, we do. It's going to be 30 years. Yeah. Like, have it invested in the high growth option. Yeah. And that's sort of what you're talking about, having an exposure to asset classes that will produce an attractive long term return. And you're not really worried about the volatility price because it's not something that you're selling in your personal name. 

Bryce: [00:21:41] Yeah. Well, just a follow on for that. And we have a question here from the community. The question is, what are the signs to start making extra contributions as you're building wealth outside of super? In other words, I guess at what point in terms of maybe cash flow or free cash flow, whatever, is it a good idea to start thinking? 

Patrick: [00:22:01] Yeah. So I think the first point is, is what we're talking about here, putting extra money into super is either what we call salary sacrifice, which many listeners may have heard I've heard of. It's distinct from salary packaging. Okay. Salary sacrifice is trading off some of your wage. Okay. Which then goes into super. Okay. And just to be clear, the benefits of doing that, when that contribution goes into super, that's taxed at 15%, I call you a marginal tax rate, maybe 34 and a half, it may be 39. Okay, So you're instantly saving by having that money go into super. Okay. So the first thing is you need to have a savings capacity. You can't sacrifice something you don't have. I think having your mortgage under control, those numbers that we were talking about before, whereby if you're repaying your mortgage at such a rate that it's going to be paid off in ten years, if you're say you're 40 and you're going to leave your self in a position where you're 50, where your mortgage is paid off, but you can't catch up with your super contributions because of these caps, that's the time. So excess savings capacity, mortgage under control. I think the other thing you have to position in as well, these you need to understand that you can't lay your hands on that money until you're at least 60. Okay. So there's lots of financial decisions that you can make where you can sort of backtrack and say, look, I bought these shares, but I really need them to, you know, do some renovations to the house or buy a new car or go on holiday. Once the money goes into super, it's there until you meet a condition of release, which is at least age 60. Okay. So you need to be comfortable that you're not going to want to access those funds in the immediate term. 

Alec: [00:23:34] Yeah, Yeah. You mentioned the you know, some of these things you might not need to do until you're like 40..

Patrick: [00:23:41] I'm being, I'm being quite binary. But yeah, it's sort of, as I said, I think thirties very early to be putting extra money into super. 

Alec: [00:23:48] I just something that I've been pondering about recently just in my own personal finances is that I might be in the best position I'll ever be in just because my partner and I are both working. We make okay money, don't have kids, don't have a mortgage, like the capacity to invest and contribute. Now, I might never enjoy this again. And then it's like, am I making the most of it or am I still doing too much? 

Patrick: [00:24:14] Maybe that's investing outside super then rather than investing in. So I'd say, but I think it's a really big call, even in spite of all of that, to put the money away and say, I'm not going to touch it until I'm 60. But look, you know, I think we talk a lot about the benefits of time, the benefits of compounding. Think about the benefits in super, where you're starting with $0.85 on the dollar rather than $0.65 on the dollar or less than your personal life. And that compounded impact over time is massive. It's really, really big. The other thing that people might be missed the piece with super too, is the actual environment in which it's invested is consistently taxed as well. So when you make a concessional contribution, it's taxed at 15%, but then the income's also taxed at 50%, so you're getting the compounding on the compounding, if that makes sense. And there's also discount for capital gains. Where it stands at the moment is once you get to 60, this is a long way off for the three of us, but nonetheless it's a tax free environment up to a pretty generous limit, $1.9 million. So there's no better place to have your wealth in retirement. And there's probably a whole heap of 40 year olds that are probably snoozing at the moment. But yeah, you sort of got to think. You've got to you've got to think ahead of the curve of that. 

Alec: [00:25:27] Well, let's bring it back to, I guess, a really common question for people more our age and thirties, late twenties, the dream of buying a house. Yet Bryce and I both on this journey at the moment we're saving for a home deposit, speaking to mortgage brokers, going to inspections and realised not for it. 

Patrick: [00:25:43] You know, smashed avocado, buying coffees every day or something like that. 

Alec: [00:25:48] Yeah. And so it's a common thought about how you set yourself up. And a question that we got through it was, I guess, around investing time horizons. Yeah. And let's say they've got some cashflow, they're putting some money away. They want to buy a house maybe, you know, call it three, five, seven years. Yeah. How should they start thinking about what they do with that money? 

Patrick: [00:26:09] Yeah. Yeah. It's a really. Really tricky question because time horizons, when it comes to investing, there's nothing more important. Okay, So with superannuation, if you're investing for 30 years, you can take on some risk and sort of say, I'm prepared to ride that volatility. But if you're saving for that house deposit. Okay. And the. Before you want to sell those investments, the market falls 10%, then you've suddenly got 10% less purchasing power. Okay, probably not a great thing. Yeah. So as well as being a quintessentially stingy financial planner, I'm pretty conservative as well. I think if you're investing for three years, if you can sort of see the time horizon at least it is very, very boring. But if you can see your time horizon for buying a house in the next three years, I would not be taking any risk with that money. I wouldn't. That's a very short space of time, and markets can do a lot in three years. Five years I find a really awkward one. It's that sort of in-between where it's not quite Long term, but it's probably a little bit longer. I'd probably be drawn to being conservatively invested. I think if you're sort of saying I view my investment time horizon for owning a house as beyond seven years, maybe a portion of what you're saving, you could direct towards some market linked investments. But my view is that when you're saving for a specific purpose where you need a lump sum of capital, I probably wouldn't be taking a risk with it. And look, the one thing now is at least investing defensively, you're getting an okay rate of return. It's certainly not higher than inflation on an after tax basis. But you know, we had term deposits with zero at the front of them. Okay, You're now getting where you can get sort of high interest debt, coal accounts sort of in the mid fours. Then if you play the game with the $250 a month or whatever it is, you can probably get five. 

Alec: [00:28:00] Sorry, I was just about to say that we are both in a high interest savings account. Yeah, it's just like that is the one silver lining at this point.

Patrick: [00:28:07] At this point in time, with the other side of that being that when you get the mortgage, the interest rate is lower than what it was before. So we sort of can't have our cake and eat it too. That makes sense. So it's quite interesting. You know, in our firm we deal with lots of retirees and self-funded retirees and you talk about their defensive investments and they are happy that their defensive investments are producing a higher rate of return to say, Yeah, but your kids have got the high mortgage rates have to go, Oh yeah, that's. Right. So yeah, it's a double edged sword. 

Bryce: [00:28:34] Now to close out the investing convo before we take a break and then move on. Small caps. Very large caps, Yeah. What are your thoughts? 

Patrick: [00:28:42] I think this has been a little bit missed. It's really interesting when you look at where the market is positioned at the moment and where certain personality types in the finance industry, we love putting things in buckets and groups and cohorts and these sorts of things and we talk about the ASX 200, but to sort of divide out the small caps from the large caps in Australia, we generally consider the top 100 stocks to be the large cap stocks, small caps we generally consider or the index is 100 through 300. And then I think the microcap index or the emerging market indexes thereafter. It's really interesting when you look at the top 100 stocks as a cohort, as a collective on average at the moment are only 5% below their all time highs. Okay, so that's a price index. Small cap index is 25% below. It's not, its all time high. The all time high was set quite a while ago, but I'm sort of talking about the last 2 to 3 years now. There are some reasons for that. There are sector biases that exist between both of those indices. Okay, The banks have had a really good run. They've got four really big banks in the top 100. That's helped the top 100 index. But small caps have been a little bit beaten up. So pound for pound, you're getting a collection of investments at 25% lower than their recent high, which is in the last two years or so, versus the ASX 100, which is only 5%. So I think it's a really attractive time to be investing in small caps and micro caps with a long term view. 

Alec: [00:30:13] So when it comes to the small and the micro caps and you're talking to clients, are you picking stocks or are you picking managers? 

Patrick: [00:30:20] Yeah, we like to pick managers. We won't get into a debate about active versus passive. There are certainly some asset classes that are very suited to passive and index strategies. Our very firm view is active managers in the small cap space to add value over time, and the research suggests these.

Alec: [00:30:39] Emerging markets and small caps on active plays. 

Patrick: [00:30:42] Yeah, so and there are lots of ways to do this. Again, it's a lot easier to gain access to these parts of the market. So many, many years ago you could probably only use a managed fund that had a prohibitive minimum. Okay, There are vehicles that you can buy on the ASX. There's a couple of really good listed investment companies that have done really well over a long period of time. It's one called Mirrabooka. I always get them. I always get the name Nairobi called Mirrabooka always seemed to get it wrong, but that's okay. It's run by the same team that runs ethic. Okay. It's not precisely a small cap listed investment company because it invests outside the top 50, but that's mid-caps and small caps. Again, we love putting things in buckets. It's my 12% a year over the last ten years. You could buy it in a little bit of a discount to its net asset value. I think that's you know, and it's got you know, for the stocks I just look this morning on car sales.com and realestate.com or REA group race and Breville pretty good businesses yet they're just not the biggest stocks on the ASX and the beauty with small cap stocks is small cap stocks do become large cap stocks yeah CSL was a small cap stock once upon a time. 

Alec: [00:31:56] Is REA really not a largecap. 

Bryce: [00:31:57] Surely. Yeah. Yeah.

Patrick: [00:31:58] I think it's I think it's a mid-cap. It might be going x 50. They do allow them to drift but they've got it in their portfolio. It probably is just with Mirrabooka. 

Alec: [00:32:08] I mean. I don't, I don't criticise at all. Just the classification. 

Patrick: [00:32:11] Mirrabooka is X 50, whereas we typically define small caps as being such, probably in that 50 to 100 they do let things drift which make sense. You don't want to sell something just because it's gone out of the index or bought just because it's gone into it. So yeah, there's another one in the market cap space, which is really interesting. I think many would have heard of. Geoff Wilson runs a large stable of listed investment companies. They've got something called WAM MicroCap, some really, really well names in there aren't quite as familiar as those in, say, a Mirrabooka. But again, you're getting exposure to companies that generally speaking, will grow much faster than the largest 100 stocks over a period of time. And with a long term view, pretty good way to get an exposure by really nice, fully franked dividends listed investment companies are good because they do generally try and control the taxation outcomes, which can be better when you're doing your tax return at the end of the year rather than an ETF. 

Alec: [00:33:06] Especially Geoff Wilson. He loves it, right? Yeah. 

Patrick: [00:33:08] Yeah. Does he?

Alec: [00:33:10] Yeah. He was leading the charge against the franking credit changes. He was doing it again beating his. 

Bryce: [00:33:17] My thing with small cap funds is the more names I know in it the less interested I am. 

Patrick: [00:33:21] Yeah. Interesting. Yeah. 

Alec: [00:33:22] I mean that's like that is why active management plays a role. Yeah. I don't recognise. 

Patrick: [00:33:26] I think it makes I think a mix of the two is nice having some names that give you a familiarity, but then also accepting that there's a lot you missing and that's. Yeah, so it's a combination there, I feel Bryce, where you get a comfort from knowing some of the names i.e. car sales, real estate, race, gravel and then maybe a few there. Well, hang on. What does that do? Yeah, a good mixture of the two. 

Bryce: [00:33:51] Well, we've covered a lot of ground. We're going to take a quick break. And then on the other side, we've got some quickfire questions from the community and then we'll close out with a bit on the industry itself. 

Patrick: [00:34:02] Exciting. 

Bryce: [00:34:06] Welcome back to Equity mates. We're here with Patrick Malcolm, Ask an Advisor series. We've covered off investing, we've covered off super, we've covered off tools and resources, and now we've got a few quick fire questions to get through. So first one, what is the best method to begin learning financial literacy or lingo whilst working full time? 

Patrick: [00:34:28] There's so many resources out there now. I think I'm not pumping up equity mates, but podcasts are just amazing. And the best thing about a podcast is you can do it on what is dead time. Yeah, so you couldn't write a book in a car. It doesn't work. You shouldn't be reading a book in a car. But it's just such a good way. You know, I listen to podcasts when I'm walking at all, get a payment plan. I'm at 1.25 speed, which is good to get through it a little bit quicker. So I think podcasts are a really good way. Comparing how accessible information is around investing now compared to 20 or 25 years ago, Like I was a little bit of a dork when I was a teenager, I used to line up at the newsagent waiting to buy Shares magazine and that's how I learned about investing. Yeah, well, going to the library, all these sorts of things, the internet, podcasts, sensible things on YouTube. I know you guys have your Friday segment, which I always find very easy to say. Some of the things that are floating around, it always gives me a good giggle at the end of the week, but I think using what would otherwise be dead time to listen to things is a really good way. 

Alec: [00:35:34] Yeah, I completely agree. 

Patrick: [00:35:36] Equity mates first, though, of course. 

Alec: [00:35:38] Yeah, well, I mean, the reason that we started Equity Mates was because we loved podcasts, but they were really all American, and a lot of them were like the industry speaking to the industry. And we were like, There should be one for people like us. Yes. Want to learn? 

Patrick: [00:35:49] Yeah, if our podcast is really good as well, those sorts of things are there's numerous ones out there and pretty easy to find as well. 

Alec: [00:35:58] So here's a big question and it's becoming more and more, which I guess is a reflection of where equity mates, listeners are in their lives. What is the most tax effective way to invest for kids? 

Patrick: [00:36:10] Well, this is a really tricky one because it depends on a range of different variables. The problem with investing in something like an ETF is it can pay out really nasty capital gains. Yeah, you probably want something. It's pretty set and forget where you can reinvest dividends. I think some of the least investment companies are really good with so many children I know that have inherited. Shafiq shares that their parents bought for them once upon a time. You can reinvest the dividends. They've also got a bonus share plan, which is really interesting from a taxation perspective, again, depending on your individual circumstances. But what happens there is rather than being given the dividend, you get given extra share and it's not actually a tax event. Okay. So that can be a really tax effective way. I think the other thing too is, is we can get really bogged down with with the tax effectiveness of the investment. There's some horrendous products out there investing for kids that are really expensive on a fee basis. Yes. So you might have a product that suggests it's tax effective and it may very well be. But if you're paying an exorbitant fee on the investment, the sort of fees, wash out the tax effects or the benefits of the tax effect. So I think sort of looking at the fee structure of certain investments and then thinking about the tax as well is a good way to look at it. I think the MLR and ethics like 0.2% or something, it's just a such a cheap way to get a diversified portfolio of Australian shares. A Again, it's just the Australian share market. But yeah, look, ETFs can work. Listed investment companies can work, listed investment trusts, all these sorts of things. But it is a lot easier now than what it was ten or 15 years ago. 

Alec: [00:37:48] Yeah, there's been like a flurry of platforms that have opened like kids accounts, like a lot of the online brokers have done it. Some of the micro investing apps have done it in terms of for new parents who want to like actually set up the account, like what's and you know, I've heard people talk about trusts and stuff. Yeah, like what? Like I'm a new parent. Like what? What website am I going to? What am I actually doing? 

Patrick: [00:38:08] Yeah. So, look, trusts can be that the problem with a trust is there's a fixed cost element to setting up a trust which may not necessarily justify the sum that you're investing. And then also the ongoing cost of the compliance and tax return for the trust. 

Alec: [00:38:23] You know, like so you mentioned some products there that are good products to think about, but how am I actually doing it? Like, am I just buying it through my brokerage account? And yeah, good question. Claiming it as a kid's asset. Yes. 

Patrick: [00:38:35] So you can invest directly for a child. It can be very tax ineffective, though. So there's an amount that a minor can have tax free. It was $416 a little while ago. That number stuck in my head. But there's quite a penalty of tax rates above and beyond that. 

Alec: [00:38:52] Recently it's pretty. 

Patrick: [00:38:53] 66 or 67%. Look, and there's legitimate reasons for that. You know, people putting ridiculous sums of money in their children's name and then when it should be theirs, you could always hold an investment in trust. All, which means that the person earning the investment in trust four is responsible for the taxation. Yeah. Yeah. Mhm. 

Bryce: [00:39:14] Well, speaking of kids, we've got one here. Excluding ETFs, what are some great companies to buy for kids that can just drop a dividend, reinvest for 20 plus years? 

Patrick: [00:39:24] Yeah. Ethics. Great. I reckon mirror book is great exposure to small caps. You're investing for children and you've got a long term investment horizon playing the small cap bias. Yeah. Generally speaking, smaller companies will perform better. You know a mixture of Africa, a mixture of near Buka, maybe a little bit of market cap in there as well. You'd want some international exposure there as well. It's really, really hard because she's starting with $500 you're not going to get by for. Right. But I think as it grows and you add, you might think about diversifying a little bit. So yeah, ethics, great. Arabic is great. When they all offer dividend reinvestment, they're all really, really good ways to invest for children for the long term.

Alec: [00:40:05] Nice And that was the explicitly in the question was exclude ETFs as well. Yeah you can always those indexes and ETFs as well. 

Patrick: [00:40:15] Yeah the thing with look as I said ETFs a great they can pump out nasty taxation outcomes if the trust has had a good year and it's triggered a whole heap of capital gains which can happen in an index fund is they chop things in and out. Whereas something like, you know, the listed investment companies I was talking about, they they can be much better from a taxation perspective. They pay tax as a company often distribute you a fully franked dividend, which may be better than a whole heap of realised capital gains from an from an ETF.

Alec: [00:40:43] This question is going to be an interesting one to get your answer from because I feel like it might be a piece of string, but let's ask it. 

Patrick: [00:40:51] Yep. 

Alec: [00:40:51] How much percentage should I save each pay and then how should I split that percentage across saving and investing? Yeah. 

Patrick: [00:40:58] Look, that's such a hard one. That's really, really hard. Because there are people out there that because of their financial situation, cost of living is extraordinary, particularly in the big cities in Australia. You may not be able to save. Okay, so me sitting here and saying, well, you should be saving 15% of your salary is a little bit self-righteous. Okay, But you're earning a good wage living at home with mom and dad, not paying many bills. You probably should be saving a really good chunk of your salary. And sort of to reference it back to those tools that I spoke about at the start, particularly Pocket Smith, You should be using that as a reference point for what you're saving. While I find that's really good too, is the other thing that we can do as we progress in our careers is we naturally spend more. Okay, I'm sure you guys are the same. Okay? You don't live like you were university students now, okay? You spend money on different things, but I don't have the data around this. But generally, when we get a pay rise, we generally consume most of it. Okay, so using Pocket Smith as a reference point to sort of say, well, this is what I'm spending and maybe this is how I, how I'll reward myself. But yes, some people can't save any of this salary. Some people should be saving 80% of their salary. Yeah. And then dividing that with between saving and investing. But it really it really depends on your time horizon. Yeah. If you're saving for a house in the next three years, 100% of it should be saving. Okay. If you've got a savings capacity, you've paid off your mortgage, you should be investing all of it. Now whether that's inside super or outside super is a different thing. Okay. But it really depends on where you're on. It depends on family circumstances as well. You know, I've got two young children. When my wife took some time off work when they were younger, we couldn't save anything. And for me to come up with a binary percentage around what I'm what we should be saving probably would have resulted in me losing my life. But yeah, there's times in your life where you can't you can't save. So I yeah, I just can't, you know, I see 3010, I see all these sorts of percentages. I think the garbage it's really depend on your circumstances. You know, if your two singles and you move in together, you should have a bit better savings capacity as a couple because your bills are going to be lower again, if you're living at home and your expenses lie, you should be able to save a lot. If you're a young family and someone's taken some time out of the workforce, you may not be able to save. You may actually be tuning into your savings. So it really depends. And then that split between savings and investing, it depends on what the goal is. So it was a bit of string I did get. 

Alec: [00:43:32] That is alright. As I thought.

Patrick: [00:43:33] I did a Very good job of not answering that one. 

Alec: [00:43:36] But I think it's a good thing to think about and it's a good reminder that like people who are, you know, feeling the cost of living crunch more than much like it's okay if you're not if you. 

Patrick: [00:43:48] Can't, you can't we can't guilt or shame people into thinking that you can get out of a story like it's tough out there. Okay we see this data around inflation. You need to understand with inflation, that's an average of a whole heap of different things. Right. You know. Food costs are up 20 or 25% at their peak. And groceries are a really big expense. Now, if your grocery bill has gone up 20 or 25%, maybe you can't save anymore. So I think having these sort of silly rules around how much you should be saving, it's just lots of people out there are really struggling with cost of living pressures and mortgage interest rates have gone up as well. So yeah, it's not an easy environment. 

Alec: [00:44:30] Yeah, well we are almost out of time, but we want to talk about the career of financial planning and investing because we've had a lot of advisors on the show and we haven't really spoken about it yet, but we know it's something that you're quite passionate about. So give us the pitch. There's a lot of uni students listening, a lot of good starting Year. Give us the pitch. 

Patrick: [00:44:51] I think it's a fantastic industry. Despite my youthful appearance, I've been in the industry for almost 20 years and I've been an advisor for a little bit more than ten years and I never regret the day that I entered into this industry. I don't it it's a fantastic profession. What do I like about it as a profession? It gives you lots of diversity on a day to day basis. So we've spoken about investing and what we would call strategy. Today they are two different things. Okay, there's the investing piece. Then there's a strategy around should it be inside super, should it be outside super, should it be mortgage? So you get that diversity of roles. The other thing that you get to do is you get to deal with people on a day to day basis, which is really, really good as well. Okay. So I couldn't bear to think of myself crunching numbers into an Excel spreadsheet all day. I do do it for good portions of the day, but not all the time. But the thing that I enjoy most about financial planning is that face to face interaction with people. Having listened to your podcast and watched things on social media from you guys, there's always this desire to find stocks that have really attractive thematics and tailwinds. This industry has really attractive thematics and tailwinds. Okay? There's been an exodus of advisors from the industry for a range of different reasons that we don't need to go through. So there's actually a shortage of financial planners. We've gone through a lot of upheaval in the industry. People generally seek advice as they approach retirement. The ageing baby boomers are huge. So you've got this industry thematic where you've got a low supply of financial planners but high demand for financial planning advice. It's a great industry, it's a really good industry, if you like dealing with people, if you like solving problems. I think it's something that you should look at. It's really, really hard because, you know, I did a broad commerce degree. There's one financial planning subject. I did my masters in Applied Finance. There's one financial planning subject. Now, I was lucky. I was in the industry and there are some universities that do it really well, but there are some universities that sort of touch on it at a very, you know, they all want you to do accounting and these sorts of things, which is great. But I think it's a great industry. And if there are university students listening, I would encourage them to have a look at the industry closely. 

Alec: [00:47:08] Well, I think the fact that this episode exists is testament to the fact that there's demand for more advisors. And, you know, Price and I both experience it personally. We don't have advisors and a lot of our audience is also feeling it. You know, we all love to get advice. So, you know, supply and demand, okay, the prices can come down if supply goes up. That's right. Let's get some more planners out there. 

Patrick: [00:47:33] Absolutely. Sounds good. 

Bryce: [00:47:35] Love it. Will. Patrick, thank you so much. Thoroughly enjoyed that. And keep the questions coming from the equity rights community. Thank you to everyone who put questions forward. If we haven't got through all of them today, we do have a weekly email that comes out on a Thursday as part of the Equity Mates newsletter, and it is where we get our advisors to answer one of the community questions as well. So if you're not signed up to that, make sure you head to EquityMates.com/emails to sign up. To hear more from our advisors. Again, ask at equitymates.com to submit questions for next month but thank you so much. Thank you for covering a lot of great things.

Patrick: [00:48:11] Appreciate the invite. 

Alec: [00:48:13] I know we're releasing this after the weekend. 

Patrick: [00:48:15] I can say God bless. 

Bryce: [00:48:18] Love it thank you man.