Automated Investing: Why it works

Bryce: [00:00:26] Welcome to Get Started Investing a podcast where we attempt to answer the most common money and investing questions from the community. If you're joining us for the very first time, welcome, we strongly recommend that you scroll up and start at episode one. But with that said, my name is Bryce, and as always, I'm joined by my equity by Ren. How are you?

Alec: [00:00:44] I'm very good, Bryce. Very excited for this episode. We have got a listener question that really sparked a conversation in the office about automated investing and why it works. So excited to get to that. But before then, one piece of housekeeping, you may have seen it on social media or heard it on the podcast, but we have written a second book. 

Bryce: [00:01:05] We have. 

Alec: [00:01:06] Yes. We didn't think we were producing enough content and we thought, why don't we produce a little more? 

Bryce: [00:01:10] That's it. 

Alec: [00:01:11] But I think for so many people, ourselves included, money is really stressful. And I think a big stressor is knowing when you've done enough because we're projecting 10, 20, 50 years in the future and trying to figure out if what we're doing today will be enough, then overlay the uncertainty of what's going to happen with the economy and our jobs and interest rates and all of that stuff. There is just so much uncertainty when it comes to money and it's really stressful. And so we wanted to write a book and do the work, I guess, to allay some of our own concerns and understand what doing enough looks like when it comes to money. So the book is called Don't Stress, Just Invest. It is available for pre-order now. The link is in the show notes to this episode plastered across our social media as well, and it will be available wherever good books are sold on the 22nd of August. And we're of a bad book. 

Bryce: [00:02:05] I love how people always say that they are available in all your good books or wherever good books are sold. It's like who's actively selling shit? 

Alec: [00:02:13] But no, I think I take it as a challenge to a bookseller. Like, if, if you're, if you want your bookshop to be considered a good way to sell good books, you have to sell a book. 

Bryce: [00:02:24] I guess So. 

Alec: [00:02:27] Anyway, it will be available on the 22nd of August. But if this sounds like a book that is interesting to you, it's available for pre-order now. If you've got friends, family, colleagues, acquaintances that you think should start investing, this is the book for them as well. 

Bryce: [00:02:43] Yeah, that's it. Family, friends, anyone grab a copy? All right, Ren. Well, as we said in the intro, get started. Investing is all about answering questions that come in from the community investing and money related. So to kick off, we've got a question that's come in from James. So let's have a listen. 

James: [00:02:59] Hi Bryce and Ren, it is James here and I'm a 17 year old student from England. If you couldn't tell from my accent, I first became interested in investment when I thought, my dad is making money and I thought about doing any of your work. So that led to me making my first investment about a year ago in an American growth fund without doing any real research. Since then, I've been learning a lot more about investing, and I feel like I'm ready to invest more regularly. So the other day I was messing around on a compound interest calculator and it made me wonder why somebody young wouldn't just invest some money into an S&P index fund every month. I'd love to hear what you guys think about this. I just like to say thank you to you and the rest of the equity team and all that you're doing and helping the community. 

Bryce: [00:03:40] Well, thank you. Firstly, thank you to James. Love the fact that he's dialling in all the way from the UK. We should say that he's in the middle of exams at the moment, which is why we couldn't get him on the phone. So good luck for those. James. But a great question. Really, really good question. So we've got two reasons, James, why you would invest in just the S&P 500 index and then one reason why you wouldn't. Yes. So let's get stuck in. But just a reminder that while we are licensed, we are not aware of your personal circumstances. So any information is for education and entertainment purposes only. And any advice is general advice. 

Alec: [00:04:15] To be explicit about that. Like James has asked us a question, but we're not aware of any of his other surrounding financial circumstances. So we're going to talk through three reasons here in general that we think apply to everyone is how we think about it. But we don't James, we don't know if you've got other costs that are coming in. We don't know how much money you're making. So it's just when we say we're not aware of your personal financial circumstances, it's just that there might be small factors or small reasons that we're not aware of. And so that's why we say it. But I think this is a good example of the practicality of it. 

Bryce: [00:04:50] Yes. So Ren, let's start with, I guess, the first half of James's question, which was just the you know, the idea of putting something regularly in on a monthly basis, the sort of the automated side of things. So we'll start with why automated investing works or what it is and why it works. 

Alec: [00:05:07] So that idea of putting money away every month, it's known as dollar cost averaging. And the great thing today is that you can automate that process. So there are brokers, the platforms where you buy and sell shares and ETFs that will allow you to basically give it an instruction that it will repeat forevermore if you want it. And so, James, using his example here, you could tell your broker, I want to buy the S&P 500 ETF every month and set up an automatic transfer from my bank to my broker. And then my broker will take that money and automatically invest it. And I can get on with my life and not worry about it. And you can do that for anything. You could do it for an individual share. You can say every month, I want to buy Woolworths. You could do for the S&P 500 index fund or you could do it for a truly global fund. Vanguard's VDHG is a popular one. Betashares DHHF is one that we've spoken about. There's so many out there. So I think that's sort of what we're talking about today conceptually. 

Bryce: [00:06:11] Yeah. Yeah. So I guess the first reason why buying into an S&P 500 index only automatically month on month works is because of the power of dollar cost averaging that you spoke about written by automating your dollar cost averaging. And for those that have just joined the show, dollar cost averaging is a strategy that allows you to buy more when the stock market is cheap and buy less when the stock market is more expensive. Yeah, by nature of constantly buying at a consistent right, you're averaging the price at which you're entering it at that market. 

Alec: [00:06:48] Yeah. Just to be really clear, when you say this, you're buying at a consistent right. It's like you're buying you're putting the same amount of money in every time. Yeah, yeah, yeah. And I think the important thing, the reason that dollar cost averaging works is that no one can time the market. Well, and there's been some really surprising studies done on the importance of not missing out when it comes to the stock market that there are a few just really great days every decade where the stock market jumps up and the name of the game is you just don't want to miss out. Which is a bit surprising. But Bank of America have done the work for us and they've looked at decades going back to 1930. And we'll include there's a graphic here that we'll include in the Facebook discussion group, if you want to say it all. So we don't have to try and describe every part of this table. But basically they've looked at each decade and said, what was the price return for that decade for the S&P 500 index fund? And from 1930 to 2020, so almost a hundred year period, you would have made 17,715% if in each of those decades, the twenties, the thirties, the thirties, the forties, the fifties and so on. If in each of those decades you'd missed just the best ten days of the stock market. So the ten days when the stock market went up the most in a decade, that's 17,715% return is just a 28% return miserable, which like it conceptually, is hard to get your head around how much you miss out on. 

Bryce: [00:08:28] Thousands of percent. 

Alec: [00:08:29] Yeah. Like you almost make no money in almost 100 years because you missed out on ten days. In, what, nine decades? So how many. 

Bryce: [00:08:40] Of those ten best days came in the January of 1930. And you got it in fair. True. Black. 

Alec: [00:08:47] But you still get the best days in every other. 

Bryce: [00:08:50] Yeah, yeah, yeah, yeah, yeah, yeah. 

Alec: [00:08:51] And you might be wondering why that is. And it's because if you miss out on the few best days, you still get all the falls, you get the Great Depression, you get the global financial crisis, you get the tech wreck, but you don't get the recovery. And if you miss out on the recovery, then that's a shame. 

Bryce: [00:09:11] So, I mean, that all makes sense. But I'm sitting here going, okay, so does that mean I need to time that so that I try and get these get the best days? Or is it just a matter of starting now? And and that's going to be the best result knowing that from this point, this this I guess research tells me that the more time I'm in the market, the better chance I have of capturing those ten days. 

Alec: [00:09:35] Yeah. So Nick McCauley over in the US wrote a book called Just Keep Buying. And in that book he looked at the U.S. stock market back to 1926. And what he found was if you just picked a random month whenever and just kept buying every month from that point for the next ten years, there was a 98% chance you would have been up, you would have made money. So just a 2% chance he would have lost money. Random Month could have been any month. The median outcome. So the middle outcome would have been a 10.5% a year return. Great. Yeah. So the historical data tells us that there's power in dollar cost averaging and that whether it's the worst time or the best time, you just want to get in so you don't miss out on those great days. 

Bryce: [00:10:26] I mean, we talk about this so often on the show, but every time we speak about it, it's just the stats are there. It's so powerful. Yeah, it's just. 

Alec: [00:10:33] Like the dot is on.

Bryce: [00:10:34] The dot is that Just do it. Get in.

Alec: [00:10:37] So that's the first reason why just regularly investing in an S&P 500 index fund would make sense. There is another reason as well, and this is why index funds make sense, and that's because companies die. But indexes are forever. Yes. 

Bryce: [00:10:53] A saying which I still don't have tattooed on me off the back of the curve $500 challenge. 

Alec: [00:11:00] I can we say that we've coined this?

Bryce: [00:11:02] I guess so. 

Alec: [00:11:03] I like I don't think anyone else has done it.

Bryce: [00:11:05] Well, you can say whatever we want. True.

Alec: [00:11:07] So what we mean by this, Geoffrey West in his book Scale, looked at the 28,853 companies that have been listed on the US stock market since 1950, almost 30,000 companies in that time. Of that, 78% of the companies have gone bankrupt. So you're telling. 

Bryce: [00:11:30] Me he's pretty crazy? 

Alec: [00:11:31] More than three quarters of the companies that are listed on the US stock market have gone bankrupt. That doesn't feel like a good thing to invest in. No. If more than three quarters of something fails, you probably don't want to put your money into it. 

Bryce: [00:11:43] No. How do I avoid that? 

Alec: [00:11:45] Well, no, but here's the thing. Even though 78% of the companies listed on the US stock market went bankrupt between in that time that he looked at between 1950 and 2009, the US stock market has grown 23,249%. Well, put another way Each $100 invested with dividends invest reinvested over that time has turned into more than $200,000. 

Bryce: [00:12:12] Each $100. 

Alec: [00:12:14] Despite three quarters of the constituents failing. 

Bryce: [00:12:17] So then what's the relationship here then? Then why are we calling it? Companies die, indexes lost forever.

Alec: [00:12:22] Because the beauty of the index is that you get the performance of these new and great companies coming through and they drive the index forward while the companies that are falling and failing and ultimately going bankrupt fall out of the index. And so while they may go bankrupt, your performance is pushed by the generation of companies coming through. And the classic example of that is looking at IBM, General Electric and Apple, three companies that most people have probably heard of before. IBM was the biggest American company in 1980. General Electric was the biggest American company in 2000. Apple was the biggest American company in 2020. They all had their moment in the sun. In the 1980s, there was this saying that no one gets fired. Investing in IBM. General Electric was a once in a generation company. Jack Welch, Management strategies, all that stuff, an Apple. We all know Apple today. They're all giants of their time. But IBM and General Electric have fallen away and been left behind. If you would invest in a. Thousand dollars in General Electric at the start of 2000 when it was at its peak. Today, you'd have about 200 bucks left because it's fallen about 80%. But if you would take that thousand dollars and rather than investing it in General Electric at that time, you just invested in the index in the S&P 500 today, you would have almost tripled your money. That $1,000 would have gone to $2,700. And the reason is, while J fell away, other companies took their place. Apple, Microsoft, Tesla, NVIDIA. 

Bryce: [00:13:57] Which is indexes last forever. Yeah investing in it these companies churn through. You don't have to you don't have to pick which companies to invest in the companies as they you know we'll probably look back in 40 years and say that Apple was the biggest company in 2020 and now it is equity, equity finance. 

Alec: [00:14:17] And that's not to say index's don't fall. Yeah, it's just that they keep getting topped up and rebalanced with the biggest and best and fastest growing companies. Yeah. 

Bryce: [00:14:30] So those are the two reasons why taking the approach of investing in the S&P 500, you know, every month, those are two reasons why that is a good strategy. The power of dollar cost averaging and the fact that while companies die, if you're invested in the index, it's going to keep getting refreshed with the new companies that are coming through and you're going to be able to reap the benefits over the long term, you know, growth of the index. We're going to take a quick break. And on the other side, we're going to discuss the one reason why investing in the S&P every month isn't a greater. All right. We're back answering the question that has come through from James from all the way from the U.K.. Thank you, James. He's asked why you wouldn't just invest in the S&P 500 index. And we've spoken about it. Yes, the reason why you should dollar cost average the power of dollar cost averaging. And secondly, the company's dollar index is last forever. But again. 

Alec: [00:15:22] To be clear, the reason why you would not the reason why you should we would never we would never feign to tell you what's right or wrong. Just information.

Bryce: [00:15:31] Well, Will, then what's one reason why we wouldn't do that strategy? 

Alec: [00:15:36] Countries rarely go back to back. And what I mean by that is the U.S. has had an unbelievable 20 tens driven by the biggest tech names that we're all so familiar with. The US stock market outperformed everywhere else in the world. It was phenomenal to watch and phenomenal to invest in. But if you look back over the stock market history, what you find is that it's rare that a one particular country will outperform decade after decade. Instead, what you say is that different countries in different stock markets have their moments. Japan in the seventies, I don't know my stock market history well enough to give you a head. More examples. Quite frustratingly, I've seen a chart that illustrates this, and I spent about half an hour trying to find it before we recorded today and I couldn't find it. But you go back over history and Australia has had decades where it's outperformed. Japan has the UK has some markets in mainland Europe have, the US obviously have, but it changes decade after decade. As technology changes, different countries go through different challenges. We say different markets outperform. And so to go back to the question, the reason why you wouldn't just go, but one reason why you would consider not just investing in the S&P 500 each month is because there's a whole world of stock market opportunity that isn't in the U.S. and the U.S. has had a great decade, but the 2020s could belong to anyone. 

Bryce: [00:17:06] They could. Well, they certainly both feel like they belong to the states at the moment, that Japan's having a pretty. 

Alec: [00:17:12] Strong I mean, to rewind 18 months, everyone was like, China is coming. 

Bryce: [00:17:16] Yeah, yeah. 

Alec: [00:17:17] Yeah, Australia is pretty good. 

Bryce: [00:17:19] So I think the point here is that diversifying the indexes that you're investing in is still taking on the idea that companies are indexes lost forever and the idea of automating and dollar cost averaging. I think the final piece is thinking outside just that one concentrated country index. And you said in the intro round there are a number of ETFs available that all in one trade give you global exposure, which takes away that I guess concentration and and the risk of just being allocated into one country and missing out what other countries might do decade after decade. Who knows which country are going to be leading the way when we're 60 or 70 years old? Maybe Australia, maybe so. 

Alec: [00:18:03] Two names. And these are just two examples to illustrate, because the point we want to make is that you don't have to buy heaps of different things to get global exposure. There are ETFs that give you access to the world stock market in one trade, two examples that are quite popular. One is the Betashares Diversified Oil Growth ETF, DHHS, and another is the Vanguard Diversified High Growth ETF, which is VDHG. They're just two examples to illustrate the point. But do your own research because every ETF provider and whatever country you're listening in will have versions of this. But I think the point is that you can invest globally, and history tells us that it makes sense to invest globally. 

Bryce: [00:18:50] Yes. And automate it as automatically as possible. 

Alec: [00:18:54] Yeah. So automate dollar cost average, index, and diversify globally.

Bryce: [00:18:59] The automation that some of the brokers offer is just awesome. I think it's yeah, just takes away any need to think about it and just getting that text message once a month or whatever the frequency is that you've just had your stocks this round of stocks purchased. It's just epic and really takes away the emotional, I guess, bias that a lot of investors face if they have to make an investment decision month on month. 

Alec: [00:19:22] So I think let's leave it there, Bryce let's if you've got questions about what we've spoken about or if you want to share how you invest with the equity markets community, jump on to the Facebook discussion group. We're all continuing the conversation there. James, thank you for your question. Hopefully we helped and good luck for your exam as well. And then one final request from us. We are continuing with a $100 challenge where every month we try and earn or save an extra hundred bucks so we can invest it in the stock market because we know that little changes today add up over time. Our producer Sascha, is collecting your ideas for our next episode. We want to know what you're doing to save or earn that extra little bit of. So you can keep investing. So it's usher up contact at equity rates dot com or jump in the Facebook discussion group and share what you're doing. 

Bryce: [00:20:13] Love it. We'll leave it there and pick it up next. 

Alec: [00:20:15] Week and pre-order our book as well. 

Bryce: [00:20:17] Now we'll leave it there.