I’ve set up my DCA’s. What’s next?

Bryce: [00:00:26] Welcome to Get Started Investing, a podcast where we try and answer the most common money and investing questions coming from our community. Now, if you've joined us for the first time, a huge welcome, we do strongly recommend that you scroll up and start episode one. Now, while we are licensed, we're not aware of your personal circumstances, so any information on this show is for entertainment and education purposes. Any advice is general, but with that said, my name is Bryce and I am joined, as always, by my equity buddy, Ren. How are you? 

Alec: [00:00:55] I'm very good, Bryce. Good to be here. Excited for this episode. We are here trying to answer all of the common investing and money questions. It's tough because we only do one episode a week and there's a lot of questions. 

Bryce: [00:01:09] Yeah, we do get them all. We read them all. We can't answer them all.

Alec: [00:01:12] Well, we'll do our best. Yeah. I've pitched today in our content meeting that we should do it. Clear out the mailbag episode to end the year where Bryce and I like ourselves in the studio and answer every question that we haven't got to, and we can't leave until we finish. Bryce, shut it down. But I reckon if there was a groundswell of listener support for the Clear the Mailbag episode, we might get it over the line. 

Bryce: [00:01:34] I don't think that would be the case. 

Alec: [00:01:36] Let's see. But today we have a listener question from Maddy. Let's get into that.

Maddy: [00:01:46] Equity mates Team Maddy, who is from very rural New South Wales. I just have a quick question about that car and satellite investing and auto investing. So I currently have an auto invest system set up for my core portfolio into a few different ETFs. And yeah, just curious, do I just keep doing this forever and save up little bits to then invest into different parts of my satellite, shares and ETFs? Or is there a point where I eventually say, I've got enough of my core on hold and now I start looking more into the satellite side of things? Any advice would be great. Thanks. 

Bryce: [00:02:29] Any advice is general, but thank you for that question, Maddy. 

Alec: [00:02:33] Do I do this forever? Had such a forlorn inflection to it. 

Bryce: [00:02:37] Yeah, it should be more exciting. 

Alec: [00:02:38] Yeah. 

Bryce: [00:02:39] Is this all I have to do forever? Yes. Short answer is yes for me. 

Alec: [00:02:45] Yeah. I think the starting point is that core and satellite can sometimes be a little bit confusing because it's more than enough to just have core and do nothing else.

Bryce: [00:02:55] Yeah. Yeah. I think we spoke about this last week. I want to say I can't remember. 

Alec: [00:02:59] Wrote a book about this at the start of the year. 

Bryce: [00:03:01] Yeah, yes, you're right. But maybe it was on in the conversation with Cate Campbell, and we made it very clear that you don't need a satellite. A satellite is, if you're interested, more than just having the automated process. If you want to take that next little step and invest in some of the more flavourful options that are available, but you don't need it to have a fulfilling investment philosophy. 

Alec: [00:03:26] So let's split. This ends up into two. Let's start by explaining that a little bit more why just the core can be enough and where it can get you. And then let's talk about introducing satellite and and so the part of Maddy's question around do I start putting more and more in satellite over time or how does that work? Um, because there's a couple of different ways that you can tackle this. And I think, you know, you made the point you gave our disclaimer in the introduction, you made the point that this is general advice. And I think to reinforce that there's no one right answer to this. It just depends on your time horizon, your investment goals, your risk appetite. And that can sometimes be frustrating for people because they want just the one simple answer. But it's money, it's personal. So this is this is general and that's why it's general.

Bryce: [00:04:19] So point number one, why is one why is a core enough as we've said in the book, as we've said on this show plenty of times before, the average return of the stock market, a very long period of time, is roughly 8 to 10%. 

Alec: [00:04:32] Everyone says 8%.

Bryce: [00:04:33] But we rounded Up ten.

Alec: [00:04:36] Since 1900. The Australian, all odds with dividends reinvested has returned 13.1%. So I kind of think and like we did this, we put 8% in the book. Part of me thinks that the investment industry should stand by what it's done. Well, the companies that make up the stock market should stand by what they've done 13%.

Bryce: [00:04:57] Anyway, that compounded over 40 years is more than enough for an incredible return on your money over a long period of time. You don't need to do anything more than that. Some of the best investors in the world struggle to do that themselves. Professional fund managers struggle to do that. There is no reason that you need anything more than that return over 40 years. So I think that to close that point, you don't need a satellite portfolio to generate that return. 

Alec: [00:05:26] Yeah, well, here's some quick maths for you. 50 bucks a week for 40 years, an 8% return gets you $756,000. 100 bucks a week if you can afford it for 40 years, that 8% gets you 1.5 million. 

Bryce: [00:05:39] And that's 8%. 

Alec: [00:05:42] Well, then I'm just pulling all these numbers from our book, Don't stress, Just invest. How many plugs for that book can we get in one episode? We had a look at because so many investment books speak in hypotheticals. What would you get if you did this for this long and got this return? But we actually flipped it and did the opposite. What would you have needed to get $1,000,000 based on historic stock market returns? So and this is to the end of 2021, if you had started investing 50 years before that. So the start of 1972, $8 a week in and we looked at both the ASX and the S&P 500. 

Bryce: [00:06:23] So $8 a week for 50 years from 1972 would net you $1,000,000 today.

Alec: [00:06:28] You'd have a million bucks. Yeah. Maybe you don't want to work for 50 years. Maybe you want to retire early. Maybe 40 years is your time horizon. So you start in 1982 in America, the S&P 500, you would have had to invest $27 a week to be a millionaire, in Australia if you'd invested in the ASX, All Ords 36 dollars a week. So like these numbers aren't insurmountable, I think is the start. It's pretty. 

Bryce: [00:06:55] Amazing. $8 a week for 52 weeks. For 50 years That's a you actually only investing $20,000. 

Alec: [00:07:05] Is your maths, right? 

Bryce: [00:07:06] If I got that. 

Alec: [00:07:07] Right, eight times. 52 times 50? Yeah, 20 grand. 

Bryce: [00:07:11] 20 grand. And it compounds to a million. 

Alec: [00:07:18] And it's lucky it works because we put it in our book. Tough to edit editable, but put it this way. So if you back calc that and you say $8 a week invested for 50 years, got you $1,000,000. What's the like the effective annual rate of return you're getting there. It's about 11 and a quarter percent. 

Bryce: [00:07:38] Which is well and truly within what the.

Alec: [00:07:42] Yeah. It's amazing what compounding can do. That's amazing. I think that's really the starting point is that if all you want to do is have a core portfolio dollar cost averaging to your core portfolio, that's enough. Morgan Housel who has is a really great finance author over in the States. He made this point that's always stuck with me, which is the number one thing you can do to improve your financial situation is increase your savings rate, like increasing the amount that you invest. Getting your cash flow right and getting more into the market, especially when you're young, will just have exponentially more benefit than finding the next spec. And that's counterintuitive to a lot of people because it's like finding the next Becky could turn 100 bucks into 10,000. But like, that's why because over 50 years, your investment of 20 grand can be a million bucks. And so imagine if you had. 

Bryce: [00:08:36] 22 grand. 

Alec: [00:08:37] Yeah. Imagine if you did ten bucks a week rather. 

Bryce: [00:08:40] Then 30 grand of 40 grand. 

Alec: [00:08:42] Well, actually, let me do that. What if you did ten bucks a week. 

Bryce: [00:08:45] Or two and a half million bucks? 

Alec: [00:08:46] It's an extra $250,000.

Bryce: [00:08:48] Yeah.

Alec: [00:08:49] The crazy after 50 years. Yeah. So it's just like that is the power of compounding. We bang on about it all the time. People are probably sick of us talking about it, but it's like it is mind blowing when you think about it.

Bryce: [00:09:00] So I think to relate this back to Maddy one, I guess my build on, on knowing that and the situation of I've set my automation up, is this all I do for the rest of my life? One thing you could do where possible is actually put more in. As fast as you can, as early as possible, because we've just done the maths and shown that what that does is, is rather luck changing. 

Alec: [00:09:26] Yeah. So I think that's the first part. We said we're going to break the answer up into two parts. The second part of the answer is what if you do want a satellite portfolio? How do you think about that? Let's take a quick break and then get into that. Welcome back to Get started Investing. Today we are answering a question from Maddy, which if we sum it up, it's basically I've set up my core dollar cost averaging. What next? And the first part of the answer is that doesn't have to be a what next? It can just be double down on what you're doing. You're doing well. If you've got more that you can invest, do it. But what next is live your life. But I think, you know, for us, for a lot of people who are taking the time to listen to this podcast, there's a general interest in finance and saying if there's better returns out there, learning more about the market. And so this is where the satellite part of your portfolio comes in. 

Bryce: [00:10:29] Satellite can mean two, it can be two different things. If you don't want to go outside of ETFs, it can be the ETFs that don't make up your core, which are generally more thematic ETFs that aren't necessarily tracking a broad based index. They could be actively managed ETFs, just the ETFs that aren't your classic big, broad, cheap global index funds. Or it can be individual stocks. It's where you start having a play with the spec keys or even just building up positions in Google or whatever it may be that you're interested in.

Alec: [00:11:04] Yeah, I mean, not to nitpick, but there's heaps of other options as well.

Bryce: [00:11:08] Oh, of course. Yeah. 

Alec: [00:11:10] Crypto, Unlisted fund manager, property, private equity and paintings. Infrastructure. Yeah. Sneakers. 

Bryce: [00:11:19] Yeah, That's paintings. Yes. Yeah, you're right. If cash. Next question. Pretty good right now but I think I think the sense that I get from the equity mates communities that it is mainly what I kind of alluded to, which is. 

Alec: [00:11:35] Thematic ETF 

Bryce: [00:11:36] Thematic ETF or individual stocks. And I think the call out is that to your point, that's where the interest comes into it. And there's nothing wrong with having a core a portfolio is made up of those things. You just for me, it's just the you got to be prepared to pay a bit more attention to it. 

Alec: [00:11:51] Yeah, Yeah. I think the key thing when it comes to satellite positions is time horizon. Like the core concept with your core is your time horizon in theory should be infinite. Like the way that an index ETF is set up is that it should just keep on tracking the top performers in the market forever more. And as those companies change, they get in and out of the index. And the time horizon on an index in theory is infinite. Now, it's obviously not infinite because, you know, empires crawl, because empires fall and civilisations crumble and, you know, all of that stuff. But like in theory, the index fund is set up to just keep ticking along. When you're talking about thematic investments or individual stocks, your time horizon isn't infinite because thematic investments only make sense until they don't. And individual stocks, you know, are constantly rising and falling. And I think the studies since 1950 in the US, 78% of companies have gone bankrupt. So that's a key sort of differentiator. You've got to pay a bit more attention because of that. But I guess that none of this has actually answered my question, which is how do you think about the satellite portfolio? And do you start putting more money into your satellite over time as you can afford more, as you're earning more of your work and you saving more? My gut is no. It's a personal choice. But for me, the starting point is the expected returns on your satellite is probably not higher than your core. And again, it's counterintuitive because people will think about this satellite as where they're taking more risky positions. They're investing in things. The hot thing of the moment, lithium, AI, miracle weight loss, drugs, whatever the hot thing is going to be next year, investing podcasts from Australia, whatever everyone is getting excited about, that's in your satellite. But, I think you have to go back to the fact that it's really hard to beat the overall stock market. And we've got some stats from the book that illustrate it. So S&P Global, the financial data company, they track the SPIVA a scorecard Spiva scorecard. Not sure if you cited a word or an acronym. The scorecard looks at the percentage of professional fund managers who beat their index. Over ten years in the United States, it's 9% of fund managers beat the index. In Canada, it's 15% over ten years. In Australia, it's 22% over ten years. In Japan, at 18%. We've got more data in the book. So if you want to look more at it, you can. But it's just that like less than half of professional fund managers are beating the index. When you look over a long time horizon. So for me, that's the starting point. And with that information, when I have more to invest, I'm not putting more in my satellite necessarily because it's like the core is what I expect to be my real like the engine of wealth generation. 

Bryce: [00:14:58] It's never my satellite investments. And never at the expense of my core. That's the way I look at it. It's like I'll never turn off my call for a month because I want to go invest something in the satellite. I've got to have additional surplus funds outside of what I'm doing in my core, because to your point, the maths around beating what's going on in the core over the long term is not not yet. So that's how I look at it. 

Alec: [00:15:22] Make it really practical. Like you've just bought a house. I'm looking at buying a house and I'm trying to do the math. So unlike where I'm going to pull money from to afford a crazy high mortgage and it's like all my satellite investment is going to go and I'm going to try and cling on to maintaining some core investments. I might have to reduce the amount I'm auto investing, but I just want some in there to keep it ticking over. You know, keep reminding yourself it was just eight bucks a box, eight bucks away. And so, yeah, I think a lot of people will try and keep a percentage. You know, they might say, I want 70% of my investments in my core and then 30% in my satellite. And as they're earning more and they can invest more, they focus on keeping that percentage the same. So that's probably how I'd approach it with the caveat that if I do buy a house, a lot of my money in the short term will be going towards that goal. 

Bryce: [00:16:16] Like I said, clinging on. That's that's what it feels like anyway. Maddy, I hope we've answered your question. If, if you'd like more information, but it's firstly, it's sound what you're doing is an awesome way to do things, but there is more info in our book, Don't Stress, Just Invest. 

Alec: [00:16:32] Yeah, and I think my closing thought is it's really hard when it comes to finance to know when you're doing enough because like, there's this constant need to like you see people who have more, who are doing more, who are earning more, who are spending more on Instagram, and you're like, How do I keep up. What you're doing if you've automated a dollar cost averaging into your core portfolio, like be confident that you're doing enough. Be confident that you're setting yourself up. 

Bryce: [00:16:58] Love it. Well, if you want to understand more about investing $8 a week for 50 years and turning into a million, as I said, it's all in the book Four Simple Steps to get you started on the process or to get you started into a core automated portfolio. 

Alec: [00:17:11] I wonder if we've told anyone that we wrote a book. 

Bryce: [00:17:14] I know. Right far out. Anyway, thanks for the question, Maddy. Keep them coming in ask@equitymates.com. You can drop us a message and we'll get in touch. Ren, we'll leave it there. We'll pick it up next week. 

Alec: [00:17:25] Sounds good.