Why companies die but indexes are forever, Pimp my portfolio & ETF overlap

Bryce: [00:00:31] Welcome back to Equity Mates Investing, a podcast that explores what's possible in the world of investing. If you've just joined us for the first time, a huge welcome. My name is Bryce and today we're looking at our latest tattoo slogan. Companies die, indexes last forever. We have a community question on ETF overlap, and we have Adam Dawes back with another Pimp My Portfolio to chat through. It, as always, is my equity buddy, Ren, how are you? 

Alec: [00:00:56] I'm very good, bryce. Excited for this episode. 

Bryce: [00:00:59] Yes. You're still laughing about the fact we're going to get tattoos of companies die, indexes last forever? 

Alec: [00:01:09] Are we going to get tattoos? 

Bryce: [00:01:10] No, no.

Alec: [00:01:12] If we sold equity mates.

Bryce: [00:01:13] If we sold equity mates, if we list, I'll get Companies dies indexes last forever Tattoo. 

Alec: [00:01:19] Which is ironic, because that's not what you want to be telling your investors once you list. But speaking of listing, I wanted to just quickly jump in at the top of the show to get your thoughts on this news item that the Financial Times has been reporting. The New York Stock Exchange have been pulling market participants on a big change they're considering making. 

Bryce: [00:01:39] Oh, I think I've seen this. 

Alec: [00:01:41] Okay.

Bryce: [00:01:41] 24/7 trading.

Alec: [00:01:43] 24/7 trading. What did you think?

Bryce: [00:01:45] Awful idea. Yeah. Awful idea. 

Alec: [00:01:47] Good for the exchange. They'll make a heap more money. 

Bryce: [00:01:49] Great for the exchange. But can you just imagine they A, change in mental stress that it'll cause a lot of people? B, just the general working environment industry. You'll have people literally working around the clock. Like the banks, the high frequency traders. You already have people working around the clock trying to play the market in Australia and then play the market in the states. It would be awful. Just keep it as is. There's no need.

Alec: [00:02:20] I reckon, make it less, one day a week. 

Bryce: [00:02:22] Sure.

Alec: [00:02:23] Like, seriously, just the market can digest the news and then every Wednesday, open the market. Everyone can buy a special price discovery. And then everyone has to own their shares for at least a week. 

Bryce: [00:02:37] You can shoot. I think it's an awful idea. I don't think it'll get off. I don't know why I say that, but

Alec: [00:02:44] I mean. 

Bryce: [00:02:45] Look, this is such an industry change. 

Alec: [00:02:47] The financial

Bryce: [00:02:48] The bankers will have to. The bankers won't be able to go on their long lunches when the market closes.

Alec: [00:02:51] Oh, I mean, imagine being even, like, working for a company, like being a company CEO and every morning having to wake up and say, well, your stock price has done overnight and then respond to it. Worst start to the day. 

Bryce: [00:03:05] Worst start. Well, I mean, it happens with aftermarket trading for some. 

Alec: [00:03:09] Yeah. And futures and all that stuff. 

Bryce: [00:03:11] But but yeah just awful awful awful idea. And I think it's being driven by the fact that crypto markets are open 24/7. 

Alec: [00:03:18] Yeah. Crypto treasuries futures and also apparently Steve Cohen, who's a big investor has some Start-Up trying to drive it. So 

Bryce: [00:03:27] Property markets open 24/7 as well. Sorry about that. 

Alec: [00:03:32] Yeah. Maybe that should be the exchange. You can open the stock market 24/7. But there has to be massive settlement costs for each trade. 

Bryce: [00:03:40] Yeah. And no prices. So you just have to knock on the door. 

Alec: [00:03:44] You have to have real estate agents taking you around. Anyway, that's the pace of news. We hate it. And if the New York Stock Exchange listens to us, don't do it. If the ASX listens to us, don't even think about doing it. 

Bryce: [00:03:57] I guess so far from that.

Alec: [00:03:58] But there's a lot of money that would be made if they do it. So it wouldn't surprise me if they do it. But look, Bryce, we wanted to also use this side of the show to talk about this slogan that we included in our latest book. Don't stress, Just Invest. But that's not the slogan. The slogan is companies die, indexes are forever. 

Bryce: [00:04:17] Yeah, I think I said indexes last forever, but it's essentially the same thing. So what do we mean by this Ren and why do we have it at the top of the show? I think it's important that we remind ourselves of the value of long term investing. But also importantly, a lot of new people have come to the show this year and, tossing up around, should I be buying individual companies? Should I be buying indexes? And this is just a great reminder. Companies die, indexes are forever. And what do we mean by this? When you're investing in individual companies, you can lose everything. Companies die. Companies die. Jeffrey West, in his book scale, calculated that since 1950, 28,853 companies have traded on the US stock market, and that 22,469 of those companies had gone bankrupt by 2009. That is, 78% of companies that have listed on the stock market have gone bankrupt. 

Alec: [00:05:16] Not great odds. 

Bryce: [00:05:17] Not great odds at all. 

Alec: [00:05:18] Why would we be investing? 

Bryce: [00:05:20] Exactly. Yeah, that scares me of someone coming to the market. I read that 78%. How am I supposed to get this right? 

Alec: [00:05:26] Yeah, well, the thing is that 78% of those companies that listed on the US stock market between 1950 and 2009 went bankrupt at that time. The US stock market has grown 23,249%. Or put another way, each $100 invested with dividends reinvested has turned into more than $200,000. Yeah. So then how do you square that? The idea that three quarters of companies have gone bankrupt, but you've turned $100 into 200 grand in that time. And that is the power of indexes.

Bryce: [00:06:05] That is the power of the index. The top whatever percent remaining 20% driving huge market returns. 

Alec: [00:06:12] Well, it's not even simple. It's. Yeah, it's not even as simple as that. It's like a lot of the companies that have gone bankrupt have driven the index for some time. And as they drove the index, they became bigger parts of the index because the stock market index, the ASX 200, or the S&P 500, whatever it is, gets rebalanced every quarter. And as companies grow, they take up a bigger part of the index. And when companies have grown, generally they keep growing. And so then that bigger part of the index then grows more. You benefit from that growth. And then when they start to decline, they get smaller and smaller every quarter. It's like it's a pretty elegant product. And obviously like, you miss some of the growth because, as they grow in the quarter they're not rebalancing all the time like. But you get I mean you certainly get enough growth based on incredible amounts. And you know, these companies that grow will grow for years and you benefit from that. You know, as we have from the tech giants of today. But those tech giants are going to fall off. They're going to be disrupted. Are they going to be replaced? And as that happens, the new companies that come through and overtake them will become bigger parts of the indexes as they become smaller parts of the indexes. And those companies may die, but the index will keep grinding up.

Bryce: [00:07:31] I can't wait for the day that Google, Microsoft, Amazon, are not the top companies in the S&P 500, because it'll mean I just can't wait to see what the top companies are, you know what I mean. 

Alec: [00:07:44] There will be a big period of stagnation there though. That's what you've got to know, because there's so much bigger now for the other companies to catch up. There'll be a few years off. 

Bryce: [00:07:53] Yeah, yeah. So there's no better example than what Ren has just explained, by looking at IBM, General Electric, GE and Apple. So IBM was the biggest American company in 1980. GE was then the biggest American company in 2000, and Apple was the biggest American company in 2020. So over a period of about 40 years, we've seen three companies rotate through driving the index, as Ren was saying. But, you know, at periods then falling away. 

Alec: [00:08:23] Yeah. And if you had tried to stock pick and invested in those big companies, you would have lost money, like I think from GE was number 1 in 2000 to now it's down about 80%. But in that time the indexes just kept getting stronger and stronger. The biggest company has fallen away, but that hasn't slowed the index down because other companies have come through and taken it over. Same way in the 80s. Like the saying in the 80s, no one gets fired buying IBM. IBM went back to back in the Nobel Prizes. They won like Nobel Prize for physics two years in a row. Like they couldn't be touched. They were incredible. If you were an individual stock picker in the 1980s, you had IBM in your portfolio, but just as it happens time and time again, individual companies die. Even the biggest of powerhouses, the most financially stable and cutting edge technology. They die. That's just the nature of it. And IBM fell away. Not as dramatically as GE., but by 2000 it was number 11 in the index. By 2020, it was number 53 in the index by the index powered on by new companies, Apple being the biggest symbol of that. And that, I think, is just an important reminder when you're building your portfolio, when you're thinking about core exposure, like that is why indexes are so powerful. That's why they are so hard for active managers to beat and for retail investors like us to be. It's just a reminder the companies die, indexes are forever. Build your portfolio accordingly. Indexes you can put in a bottom drawer companies you've got to keep checking on. 

Bryce: [00:09:55] Absolutely. And here's to IPOing so we can get the tag companies die, indexes are forever. So this week we have a question from Eric Alvarez. He says hey guys, quick question. I have DHHF in my portfolio, which is the Betashares diversified old growth ETF. Is it too much of an overlap if I also buy A200, which is the Betashares ASX 200? Are there benefits to owning both. So we thought this was a good opportunity to address ETF overlap and understand if it is a good or bad thing in your portfolio because guaranteed. Most of us will have some form of it. If you're at least doing ETF investing. So let's unpack ETF overlap first. Very simply, ETF overlap is when you have different ETFs in your portfolio that have the same underlying securities or stock positions. Multiple ETFs can track similar indexes sectors, asset classes. So in Eric's example he's looking at two ETFs that will have similar exposures. DHHF will have exposure to the Aussie market. So it will have Commbank, BHP you name it the A200 ETF is Australia only but will also have commbank BHP and some Australia positions. So the question is, is owning both with that overlap, is there any benefit to that?So I think to start with, in some instances you can't avoid it. And I don't think it is a bad thing. You just need to be aware of why you're doing it. If you do have ETF overlap. Yeah, that's my takeaway. I have some level of overlap in my portfolio. You even look at S&P 500 and the Nasdaq. They're going to have ETF overlap. 

Alec: [00:11:46] Do you own both? 

Bryce: [00:11:48] I don't know. I'm sorry. Sorry I do I have Faang and then I've got the

Alec: [00:11:53] That's a good example of overlap. So you have an S&P 500 ETF. And then which are the biggest holdings in the big tech stocks. So it's I'm trying to think it's like something like 40% of that ETF is now the big tech stocks, maybe not that much maybe 30% or something. And then you've got Faang which is the big tech stocks again. 

Bryce: [00:12:14] Ten high concentration. So that is a clear case of overlap. 

Alec: [00:12:20] So talk us through your thoughts there. 

Bryce: [00:12:22] So the S&P 500 is geared so that that's why I've gone with them. and like I want that. And then I just did one very concentrated exposure which inevitably you get through the S&P 500 because it makes up something like 40 or 50% of. 

Alec: [00:12:41] No, I think it's like 30. But yeah, yeah.

Bryce: [00:12:43] But there are companies in Faang that that I wanted direct exposure to and essentially on, I wanted to double down on, on those ten companies. I didn't want to worry about the remaining 450. I just wanted to go hard on those ten. 

Alec: [00:12:57] Yeah. So I think that's that's the thing. If you have an investment thesis, that, I guess, means the overlap would be a good thing, right? So, you know, in this case, let's actually use the examples of these two ETFs. So DHHF is a global diversified ETF. It has stocks. It has thousands of stocks from all around the world. the Aussie proportion is about 35% of the ETF. So 35% of DHHF is Aussie stocks. And then obviously 100% of the Australian ETF is Aussie stocks. So if you were going to if you had 100 bucks to invest, and if you put it in DHHF then $35 of it would go into the ASX 200. If you then said actually I want to split that 100 bucks across two ETFs. So $50 in ASX200, $50 in DHHF and then 1750 of that $50 would go into the Aussie market and then the whole 50 would go, as well. So $67.50 of your money would go into the Aussie market. So that's all to say. There's no right or wrong answer here. It's how you want to construct your portfolio. But you've got to be mindful that, if you do split your money equally and go into the ASX, you're pretty heavily weighted to the ASX. Given that the ASX is 2% of the global stock market. 

Bryce: [00:14:29] And I think that's where a lot of people get caught up with this. It's because they think by putting their money across more ETFs, you're getting more diversification. If you actually look at those numbers there, if 67.50 total is going into the A200 via two ETFs, that's almost 70% of your money now. Yeah. Now exposed to the ASX 200. 

Alec: [00:14:50] You're less diversified. 

Bryce: [00:14:52] Exactly. You're less diversified than if you just put $100 all into DHHF, which again is the beauty of some of these ETFs that are constructed. So the portfolio weighting is varied globally. 

Alec: [00:15:04] So now look I don't know Eric, but if I look at this problem and think about how I would do it I wouldn't add A200. 

Bryce: [00:15:11] No no. Yeah. No, I think you're getting a nice mix of Australian. You're getting the total stock market. You're getting developed and emerging markets all through the day. 

Alec: [00:15:22] You're paying one set of brokerage. Yeah. It's just less complex. You can build a bigger position in one. Yeah. It's already overweight. Like 35% of it being Aussie is quite high given Australia's 2% a global stock market. But yeah look I think that's an overlap. And in this instance we wouldn't do it. But I think there's so many examples where overlap makes sense, especially where you've got maybe like an S&P 500 it's 500 stocks. I wouldn't be scared about buying individual stocks that are sort of in the middle of the index. You know, like stock number 100 in the S&P 500 isn't going to really materially move the index. So if you want to have exposure to that particular stock because you think it's going to do well, you kind of have to lean into the overlap and buy yourself. So there's plenty of examples where overlap makes sense. The challenge is just understanding it and being aware of it. And then yeah.

Bryce: [00:16:21] So I think if you want to do a bit of DD on your own portfolio, help you through making the decision, like, Eric, between two different ETFs, should you go both just stick with one. There's a good online tool called ETFtracker.com.au and there's a Holdings section on there where they have almost all ASX listed, ETFs. And you can see the weightings of all of the holdings within that ETF. And it'll actually show you the overlap. So definitely worth checking out.

Alec: [00:16:49] Nice one. Well if you want to ask a question you can go to Equitymates.com/contact. You can also record a voice note. We love getting your voice notes and playing them on the show. But after the break we're going to be joined by Adam Dawes for another edition of pimp my portfolio. 

Bryce: [00:17:16] Alright, Ren. That's it, Pimp my portfolio, where we bring in an expert and a community member and get their portfolio pimped. And we have with us today Adam Dawes. Adam, welcome. 

Adam: [00:17:26] Well, great to be here, guys. Thanks so much. 

Bryce: [00:17:28] And on the other side, we have community member James. James, welcome. 

James: [00:17:32] Hi everyone. Thanks for having me. 

Bryce: [00:17:34] No worries. Thank you for submitting your portfolio today. I cannot wait to get into this one. So Ren, take us through it. What is James's portfolio?

Alec: [00:17:40] Yeah. So, James's portfolio, I guess, is anchored by the Vanguard Australian Shares High Yield ETF. About 38% of his portfolio is in that. Then there's a few other thematic ETFs. We've got the Betashares Asia Tech ETF, Global X uranium and VanEck Video Gaming and Esports. And then after that we've got five individual stocks, Archer materials, Luan materials, Min Res, Mineral Resources, Panoramic resources, and vital metals. So a bit of a tilt towards the resources sector in the individual stocks. But Dawesy, over to you. How are you thinking about this? 

Adam: [00:18:19] Well, I'm calling this the tech resource portfolio. And look, it it does look like there's been a little bit of thought, been put into it, but, James, what's this sort of, sort of outline for your investments in these stocks. 

James: [00:18:33] There's been a thought that it's a bit of a mess. So thank you to Bryce and Ren, for starting me on the journey. But also, I don't take my top five as a reflection on the education yield 

Bryce: [00:18:51] Good. I am glad you put that disclaimer in. 

James: [00:18:54] Yeah. As far as I started my investing journey sometime around 2020 when I was trying to buy a house, Covid hit. And I thought, great house prices will go down, but I didn't. And so, I shelved that idea and started diving into individual, stock investing. Because there were some companies out there that looked undervalued. So that went well. This portfolio looked completely different at that point in time. And I probably got overconfident and started investing in small cap miners and other odd investments, eventually bought a house, sold out of a bunch of other shares, and, left holding onto some assets that didn't perform that I'm holding out hope on. 

Adam: [00:19:47] Yeah, that makes sense. You can see that by some of the stocks in there that you've sort of held on. I mean, that Archer Materials was a fantastic stock back in the day. Are you sort of still hanging on to the loss on that one? 

James: [00:20:01] Yeah. That one but Vital Metals is another one that was going really well from when I first invested and rates and takes and I didn't sell at the time and I'm sort of holding on still. I'm feeling as though there's value in the companies that, God knows how long it will take to ever recognise that. 

Adam: [00:20:22] So having a trading plan or having an investment plan is really, really important when you're looking at these things and certainly when you've, you know, you've got some downside protection. So if something is going to fall, you know, whether that's a 10%, 20% stop loss or 50% stop loss, you've got to have some rules that go around that from there. Also, on the upside, you should potentially also take, you know, profits, you know, 10%, 50%, 100%, when, when you do have those and a lot of time with a smaller portfolio as what I do for clients is, is that if we've made 100%. So in other words, a stock goes from $5 to $10. You take out your original investment. You let the profit run. So if the if that profit goes to 20 bucks, you've doubled, you know, tripled your money, fantastic. But if it goes to zero, you haven't actually lost anything because you've taken out your original investment. You take out that original investment, put it into something else and let that grow again as well. And this is why you can build out a portfolio going forward. But I do like some of the, international side of things. You've got the, the betashares tech giants, you've got the VanEck Video Gaming, the esports one. Now that's like, I mean, we all know that, esports, especially after Covid, e-sports, the betting on esports was fantastic. And it it gets more than an NFL game gets to people watching, you know, fortnite or some of these other games. So I think that's a really good thematic ETF that you've got there. I do like Mineral Resources because it's got the, the new and the old. It's got the Iron ore, plus it's got the lithium side of things. So I think you're doing well there. But to, to bring this out, I think what you need to do is have a little bit of a structure around the portfolio and really, you know, you've got your core versus. Satellite. You've got your Vanguard Australian shares. I think that's great. So that's could be potentially your core. But I would build that out more. I would have bigger stocks, maybe looking in the top 200 and looking to sort of build that out. We don't have any financials here. We don't have any property stocks here. And we don't have any sort of income generating. But most of the stocks, what I would do for you is that you would look for dividend reinvestment as well. So in other words, if they do pay a dividend, you would get that reinvested back into the company for your portfolio to continue to grow. I think that's the key, is trying to get this portfolio up again after you've sold down probably all the good stocks, and you sort of kept some of those, ones that are nursing some losses.]

Bryce: [00:22:53] So Dawesy, could that be achieved though through the vhi the Australian shares high you because a lot of those top 200 companies are paying great dividends. And so James could just build a bigger position because that's what I'm hearing you're saying. You've got these thematic ETFs in a few speccies, but you're wanting to see more of that core position. 

Adam: [00:23:14] Absolutely. The core position is going to make money day in, day out. Ryan hell, shine. It's going to be there. And then we can muck around with some of the speculative around the outside to that's the fun part. But the boring part is, it's going to continue to grow and generate revenue as well as, income. But then you're diversified by the, the Australian shares high yield side of things. That's the diversification that you need. And then from there we can have some specialties. But I want to see that core portfolio to become a lot larger, because that's where you're going to make the money over five, ten, 20 years. That's where you're going to get the benefit from it. And then the speculative stuff, some will go to zero, some will go 2000 times higher. But at least we've got that core sitting there. 

Alec: [00:24:00] So, James, I've got a question for you. First of all, congratulations on buying the house. Like, it's no mean feat. So well done. 

James: [00:24:07] 

Alec: [00:24:07] When you freed up your money to put the deposit down, why did you sell all the stuff you'd made money on rather than sell? Sold the stuff that had fallen off? 

James: [00:24:17] Yeah, I'm not sure my psychology in that was right, but I think, hanging on to the value that falls in shares and expecting that at some point in time they'll come back without delving into some of the individual regions around of those shares is why they've gone down, I felt like it was impossible for them to recover. 

Alec: [00:24:39] So, Dawesy, I am sure you've come across clients that have a similar mindset. 

Adam: [00:24:45] Absolutely, yeah. 

Alec: [00:24:46] How do you counsel them? 

Adam: [00:24:47] Yeah. So I think what you've got and in the portfolio, let's talk about Archer mineral, Materials like that used to be a graphite business. Okay. And then they've, they've changed into being sort of quantum computing. Now that has a great ring to it, and it has a great story to it. But really, does that mean that it should be invested? A lot of the time we look at portfolios and you want to and I'll use a garden analogy. You want to get rid of the weeds, but let the flowers grow, right? So the ones, the weeds are the ones that aren't doing so well. And you should really be getting out of those, pulling that money into something that's gonna continue to do better, and then let that let the flowers grow. So I think a lot of these kinds of portfolios are, is that it's very tough to take a loss. It's tough because you get emotionally attached. But what you should be doing is looking from a clean lens. This isn't this hasn't worked. And some people say, well, it's only worth $1,000, so I might as well just let it sit there. Right. But that thousand dollars can be used somewhere else to then grow to $2000 to $3000. And so while that other stock is just sitting there doing nothing, it's time, a value of money, and that's where you should be looking to get that portfolio, get rid of the weeds and get it to grow a lot higher. 

Bryce: [00:26:05] Its opportunity cost, correct. That's what it is. With limited funds. You own a house we don't have, we don't have the ability to just keep pouring money in. Seems like you need to be optimising the capital that you've got. If it's sitting there at a loss where it could be in a Nasdaq 100 pumping out 30% in the last three months. That is an opportunity cost. Yeah. James, that brings us to the end. Do you have any final questions for Adam otherwise? Thank you so much. 

James: [00:26:34] No, I think you've answered all my questions, and I'm probably going to bite the bullet, and you can stop being so emotional. 

Alec: [00:26:42] It's a challenge. It's a challenge we all face. And I don't think it ever gets any easier. So. Yeah, hopefully, this helped. And, good luck with it all. 

James: [00:26:51] It's been great. Thank you, Bryce. Thank you, Ren. And thank you, Adam.

Bryce: [00:27:00] If you'd like to submit your portfolio to Pimp my portfolio, head to equitymates.com/contact. Similarly, if you would like to sit down with Adam. We can connect you, head to equitymates.com/advice and will connect you with Adam. But Adam, as always, thank you so much.

Adam: [00:27:15] Yeah, great to be here.