Tortoises and Dolphins
A lot of my university friends have landed jobs in the health professions. Doctors, physios, paramedics, osteopaths. Not sure why, it’s just dropped that way. Useful for a 25-year old that’s been thrown off their parent’s private health policy. Muscle injuries, sore backs, medical advice, Hepatitis A, B, C. no problem. They are never short of a bit of not quite qualified medical advice.
The drawback is the barbecue conversation. It’s gone from “Big night last night, did you see who XYZ left with…” to “you should’ve seen his ECG”, “this guy came in with a burnt C4 dermatome” and “one job was GCS5.”
Might as well be speaking another language. At our “pop in and tell us about your new life” Christmas barbecue this year the medical dolphins (you know they are intelligent but you can’t communicate with them) outnumbered the humans. Liam and I found ourselves nodding and nodding as they blithered on with acronym after acronym. You’d think for such a presumably intelligent group of mates they’d realise the rest of us haven’t actually done three to six years learning medical jargon as we stand there with our heads tilted to one side like an Alsatian puppy, trying desperately to understand and please but really not having the slightest idea, or in the end, interest, in what’s going on.
Didn’t Einstein say something about, smart people being able to explain complex theories to their grandparents? They’re obviously not that smart then if they can’t make it interesting for the dumb, but if you pull them up the rest of the conversation is peppered with a subtle yet evident veneer of superiority.
In the finance world, we have a few acronyms of our own, and for those of you still trading shares (so 1980s) there is one acronym you had better wake up to because it’s a hot topic with the dolphins (my future clients) and its ETFs.
I know most of you probably think the Millennials are all short term spivs looking for a quick buck but that couldn’t be further from the truth. We are hyper-cautious. We have no buffer, we have no equity in our houses and short of inheriting off you lot we know that unless we start employing the eighth wonder of the world (compounding returns) as soon as we can we simply aren’t going to build assets.
The good news is that we have a much longer runway than most of you and a structure, Super, that was built to achieve it. The money goes in and it doesn’t come out and if you do the numbers we will be OK.
Here are the numbers if you put in a $1 contribution every year for 35 years:
- At 1% pa you will end up with $42 (having contributed $35).
- At a 5% return pa you will end up with $90 (having contributed $35).
- At 5.5% pa (average stock market return) you will end up with $100.
- At 9.7% pa (average stock market return plus dividends) you will end up with $253.
- At 10% pa you end up with $271 (remember it cost you $35).
- At 15% pa you end up with $881.
- At 20% pa you end up with $2928.
You get the idea. So if a Millennial with a 35-year runway, puts $10,000 a year into Super and conservatively earns 5.7% pa they will end up with a million dollars at the age of 60 ($1,045,657).
So $10,000 a year gets you $1m. Now imagine putting away more than that or getting a higher return. For instance, $20,000 pa at the average long term return of 9.7% turns into $5,059,928.
That’s what we see Super as. An asset-building structure for the long term. We see it as it was designed to be. Many Marcus Today Members don’t have that vision. They see it as a good structure to trade shares tax efficiently.
It’s not like that for us. Millennials see Super as long term, because we have a long runway, we need to build assets and to achieve it we don’t need to ‘trade’ shares and make a buck here and a buck there. We just need an average annual return. We are focused on that, and ETFs is the place. Conservative, not volatile, cheap running costs (not paying for fund managers to drive BMWs)…sensible.
Whilst we all like a bet, Millennials are not interested in a lot of activity, we are not interested in trading, we are not interested in the short term. We are, because of the length of our runway and our lack of (property) assets, surprisingly perhaps, a generation of genuine long-term investors. Didn’t imagine that did you?
Millennials don’t have too many options to grow our savings. Most of us don’t have hours of free time to go out and research individual stocks, construct a well-diversified portfolio and then manage it. Or have the savings to buy into the property market. What realistic investment options are left?
And it’s not just us. It is also the place for anyone disillusioned or simply fed up with the (increasing) volatility of individual stocks. And they are for people disappointed by low-interest savings accounts (Bank deposits are almost going backwards) and the conservative nature of most ETFs also suits those in search of an entry point into the world of investing. Plus the other features, like offering diversification and exposure to global markets, commodities, sectors, something that is still surprisingly hard and otherwise expensive for individuals.
The ETP market in Australia has grown exponentially (ETP stands for Exchange-Traded Products – that description includes ETFs – Exchange Traded Funds). At the moment the ETP market sits on a market capitalisation of $61bn. In January last year, it was half that size. $61bn is still a tiny part of the total equity market – but will inevitably become a much much bigger part of our market as it has in the US. Trading individual shares is becoming less popular – holding ETPs is becoming more popular.
As Henry wrote last week, they are great products. They offer cost-effective, simple ways to get exposure to other markets and assets. That could be an index or a group of stocks or even a commodity or currency. Want to invest in Asia? Buy an ETF that gives you exposure to a bunch of Asian stocks. Want to invest in big US tech companies like Microsoft and Apple? Buy an EFT with exposure to those businesses. You can even buy an Australian property ETF.
I’m a pretty risk-averse individual when it comes to money. I don’t like the idea of being kept up at night worrying about how individual stocks are performing. Or the idea of owning a company that might tank after a market announcement as we are seeing this results season, yet again.
I’d rather buy something that ticks along slowly day by day, with low volatility, that focuses on a theme that I like and can choose. So much easier. So much less fuss. So much more time to focus on things that I want to do.
I can’t afford to chase the next hot stock with its lack of earnings, high PE, and exponential risk, and I’m sure I’m not the only one out there. I just want to build an asset that is not only going to pay for my nursing home, but for 35 years it’s going to give me a glow of satisfaction knowing that I didn’t balls up this “Super” opportunity.
Gushy articles are all very well and good but at some point, the rubber has to hit the road. It has. I have started putting 15% of my monthly wage, into an ETF holding. In my case, it is an iShares Global 100 ETF that tracks the performance of the world’s biggest companies. The biggest holdings are Microsoft, Apple, Amazon and Alphabet (Google). But there are 100s of ETFs you could choose from.
Hopefully, I can slowly build an asset that allows me to turn around in 5-10 years and go, “Nice, happy I decided to do that”. Ahead of the pack. It’s the tortoise that wins the race, but only if it sets out nice and early. Be the tortoise. Overtake the dolphins.
For those who want to do some more investigating the best place to start is with the list of ETPs on the ASX website. This has fabulous links to each of the individual websites.
ASK list of ETPs
ASX Course on ETPs – CLICK HERE
MARCUS TODAY ARTICLES ON ETFs
And here are links to major ETF providers.
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*This article is not intended to represent financial advice. Please remember to always contact your financial advisor before making an investment decision*