How will Australia's younger generation get ahead?

[Value Collector]

With the fees being paid and the billions and trillions they're responsible for, it's pretty reckless and stupid to just mechanically follow these indexing style of managing other people's money. But apparently it's the best performing type of fund management.

Imagine what all those billions and trillions could do if they're properly invested.

On average, the actively managed funds failed to beat the index.



At the 2 minute mark he talks about index funds.

 

[Value Collector]

Imagine what all those billions and trillions could do if they're properly invested.

There is a key point in market fundamentals you are missing.

The Market as a whole will earn a certain amount each year via the underlying companies conducting their businesses and producing profits, over time the market returns will match the performance of the underlying businesses.

eg, Boeing Building Planes, Apple making iPhones, Heinz Making ketchup, Disney running theme parks, google selling ads, Fortescue mining iron ore, etc etc etc x 1649 companies.

the performance of all these companies combined is what produces the market average return index funds will achieve.

To say that it would be possible to invest trillions in a way that could beat the averaged performance of all these companies is statistically impossible,

Of course some people will achieve better than average returns, but this comes at the expense of some else who will now get lower than average returns.

This is made worse by the trading costs those attempting to beat the average will incur, and the fee's they pay their Guru's who are going to attempt to run the trillions of dollars in a way to beat the market average.

Even Buffett admits that the larger they get the smaller their margin will get between their performance and that of the index, eventually you just become the index if you grow big enough.

The Billions and trillions of funds you say you want invested "properly" are the index, how could they ever out perform the index?

 

[luutzu]

There is a key point in market fundamentals you are missing.

The Market as a whole will earn a certain amount each year via the underlying companies conducting their businesses and producing profits, over time the market returns will match the performance of the underlying businesses.

eg, Boeing Building Planes, Apple making iPhones, Heinz Making ketchup, Disney running theme parks, google selling ads, Fortescue mining iron ore, etc etc etc x 1649 companies.

the performance of all these companies combined is what produces the market average return index funds will achieve.

To say that it would be possible to invest trillions in a way that could beat the averaged performance of all these companies is statistically impossible,

Of course some people will achieve better than average returns, but this comes at the expense of some else who will now get lower than average returns.

This is made worse by the trading costs those attempting to beat the average will incur, and the fee's they pay their Guru's who are going to attempt to run the trillions of dollars in a way to beat the market average.

Even Buffett admits that the larger they get the smaller their margin will get between their performance and that of the index, eventually you just become the index if you grow big enough.

The Billions and trillions of funds you say you want invested "properly" are the index, how could they ever out perform the index?

Properly invested doesn't mean invest only in listed companies.

Can go private; can fund research and development; fund new projects, new industry etc.

If Buffett could go the double-barrel approach, why can't these fund managers? I mean, they might not be as brilliant, but they're not total idiots either.

To have managed funds with those massive amount of cash chasing limited number of stocks with large market cap... A bit like a ponzi.

Yes I know, over the long term the market value of those on the indices will reflect the fundamental value of its business, as you say.

But Basillo raised a good point in that since indices goes by market cap, those quality businesses currently suffering some minor set back, or just negative market sentiment, mean the index fund will have to sell, further pushing prices... Then buy into the new kid on the block... Isn't that just chasing trends in a way? Always selling cheap and buying high?

And for these to be the best performing funds out there, that's a bit absurd.

 

[Smurf1976]

House prices are a big factor in all of this.

It's pretty hard for someone to own a diversified portfolio of assets when an average house in Sydney costs $1 million, Melbourne isn't too far behind, many occupations now require living in one of those two cities and renting is beset with problems in many cases.

If house prices weren't so stupidly high, and if there wasn't this national obsession with two cities, then I think that would help greatly.

I've nothing against Sydney or Melbourne by the way, quite like Sydney actually, but I do think that a lot of problems would be solved if governments made an effort to achieve a better balance. In this era of technology, I can see no rational reason why there shouldn't be corporate head offices in places like Adelaide or for that matter even Darwin.

 

[SirRumpole]

I can see no rational reason why there shouldn't be corporate head offices in places like Adelaide or for that matter even Darwin.

Hobart ?

 

[Junior]

I prefer a mix of Index and Active funds, with some active behaviour around asset allocation, with active funds for areas like alternative assets and small caps.

As has been pointed out, with regular contributions you are still buying after prices have fallen, thereby building your position at lower prices, ready to take advantage when prices inevitably recover.

As you approach a time when you might stop/reduce work hours and require income from your portfolio, this is the time to change your weightings....less in shares/property, more in cash/bonds. Timing can come into play here, if we have a great bull run and you know you're going to commence draw-down in say, 8 years, you might choose to go more conservative ahead of time

 

[Smurf1976]

Hobart ?

Yes certainly but I didn't want to come across as biased given I live in Tas so mentioned other places as examples.

So yes Hobart, Adelaide, Perth, Darwin etc all make some sense to me. I just don't see a need to centralise so much in just two cities and then have people spending $1 million for an average house there. That's not an economically efficient or sensible outcome and makes it incredibly hard for people to get ahead financially with such a huge cost.

 

[SirRumpole]

Yes certainly but I didn't want to come across as biased given I live in Tas so mentioned other places as examples.

So yes Hobart, Adelaide, Perth, Darwin etc all make some sense to me. I just don't see a need to centralise so much in just two cities and then have people spending $1 million for an average house there. That's not an economically efficient or sensible outcome and makes it incredibly hard for people to get ahead financially with such a huge cost.

I don't think anyone would have minded you mentioning Tassie, they obviously need the jobs too.

But remember how difficult it seems to be to get public service departments to move from the big cities.

That's where the critical mass of labour is and the perceived lack of services and remoteness may be a turnoff for some. But I agree that Sydney and Melbourne are growing far too fast and other areas need to be given a boost.

 

[Value Collector]

Properly invested doesn't mean invest only in listed companies.

Can go private; can fund research and development; fund new projects, new industry etc.

.

That stuff is already happening inside listed companies.

but you have to compare oranges with oranges, if your argument is that other asset classes will out perform listed companies, then invest in those other assets class, but if you think that as group listed companies will deliver sound returns then invest in them, and for most people the best way to do that with be index funds.

If Buffett could go the double-barrel approach, why can't these fund managers? I mean, they might not be as brilliant, but they're not total idiots either.

To have managed funds with those massive amount of cash chasing limited number of stocks with large market cap... A bit like a ponzi.

Investment dollars do get spread across all asset classes, no one here is saying all investments dollars should go to the Stockmarket and all other asset classes should be ignored.

What I am saying is that low-cost index funds are a sensible way for people to access the stock market, they can still invest other dollars where ever they like, but its a good idea for a certain portion of that to go into the stock market, and index funds are a sensible way to do it.

But Basillo raised a good point in that since indices goes by market cap, those quality businesses currently suffering some minor set back, or just negative market sentiment, mean the index fund will have to sell, further pushing prices... Then buy into the new kid on the block... Isn't that just chasing trends in a way? Always selling cheap and buying high?

thats only happening on the fringes, its not like BHP will be in the index this week, and next week its back out and then its in again.

And for these to be the best performing funds out there, that's a bit absurd

Absurd? it seems like common sense to me.

If you had several trillion dollars to invest, do you really think you could beat the market?

At a certain point you will be spread across the market to such an extent that you just become an index fund, however all your trading as group would make sure your investors underperform due to your fees and running costs.

 

[Value Collector]

And for these to be the best performing funds out there, that's a bit absurd.

Think of it like this, the entire USA stock market is about $20 Trillion dollars, now imagine we dividend it between rumpole and I (inactive) and you and, Basillo (active)

Rumpole and I took 50% of every company and just held, and you and Basillo divided the other 50% equally between yourselves and attempt to trade between you to secure above average returns.

If we all just sat on our holdings and didn't trade, we would all get the market average return of 7%.

So Rumpole and I sit on our $10 Trillion and earn 7% - so at the end of the year we earn $700 Billion ($350 Billion each, while I am at Disneyland and rumpole worked on his stamp collection)

However you and Basillo want more than $350 Billion each, so you attempt to trade with each other regularly hoping to secure an edge.

but between you, you will only have the same $700 Billion profit rumpole and I split, all the trading you are doing is simply trying to reshuffle the deck so you get more of the $700 Billion and Basillo gets less.

Also, because of all the activity, there isn't really $700 Billion available to earn on your side anymore, because fees and transaction costs ate into it, so you really only have $600 Billion to share.

Sure Basillo might come out on top with $450 Billion, giving him a 9% return, so he beat the average, but that only leaves $150 Billion for you, so you only earned 3%, grossly under performing.

So as a group you're underperforming our inactive group simply because of all the transaction fees, its actually impossible for you two as a group to beat us, even if transaction and running costs were zero you could never beat us, the best you can ever do is equal us, but every transaction cost you face reduces your return as a group further below rumpole and I's idiot proof earnings.

 

[SirRumpole]

but every transaction cost you face reduces your return as a group further below rumpole and I's idiot proof earnings.

Actually, I probably beat you all.

https://www.telegraph.co.uk/busines...ter-investment-than-shares-property-and-gold/

 

[sptrawler]

I don't think so.

Tax free superannuation supplies the needs and wants of retirees and by then they should have also paid off the mortgage so their expenses are reduced.

Once the majority of people have a reasonable amount in super, their access to the age pension will be reduced proportionately. IMO
Do you really think super, is for your benefit?
Maybe it is designed to reduce the cost of the age pension, and transfer a large portion of the costs from Government, to the private sector.

 

[SirRumpole]

Do you really think super, is for your benefit?

People get the benefit of super so yes it is. The fact that it may also reduce government spending is another benefit, so what's the problem ?

 

[Value Collector]

Actually, I probably beat you all.

https://www.telegraph.co.uk/busines...ter-investment-than-shares-property-and-gold/

Hahaha, your stamps might be valuable, but walking in Walt Disney’s footsteps is priceless

 

[sptrawler]

People get the benefit of super so yes it is. The fact that it may also reduce government spending is another benefit, so what's the problem ?

No problem at all, I just think people are being sold a pup, always being advised to invest in super to better their retirement.
I think their retirement would be much better served, investing outside super, at least there the Government has limited say in how you use it and how it will be treated.
You say people get the benefits of super, but those benefits are being eroded very quickly, why is that?
Simply because the Government has all the say, in how it is used and the individual has no come back, because it has been given a tax advantage.
So why would anybody place any of their money into it? When any money value, or access to it, can be stripped from it at the stroke of a pen.

 

[SirRumpole]

So why would anybody place any of their money into it?

Because the contributions are only taxed at 15% and the pensions are tax free after 60 ?

 

[sptrawler]

Because the contributions are only taxed at 15% and the pensions are tax free after 60 ?

At the moment, that is the case, however last election Labor was going to tax pension earnings above a certain amount.
This election they have dropped that idea, and are now going to dis allow tax credits on franked income, like I said the stroke of a pen. LOL
It all sounds good, but super is becoming a real dud investment, put your money in now and the Government will let you take it out later, Maybe. LOL
The old age pension is becoming much more attractive than super, it is indexed, it is guaranteed, it doesn't take any sacrifice to obtain and you can enjoy spending your money rather than save it.

 

[PZ99]

Interesting article on the topic > http://www.abc.net.au/news/2018-05-...-superannuation-to-care-for-grandkids/9692742

 

[Value Collector]

I think both Rumpole and Sprawler have valid points.

My opinion is that Super is a good thing, and it makes sense to use it as a low tax shelter to build up some investments in.

But yes, it will probably be a target of government in the future, but then again so will all investments.

There will always be a section of government that sees targeting investors as the path of least resistance.

The Australian public has a soft spot for "workers", but as soon as those workers have accumulated an investment portfolio, they become evil rich people that need to be penalised as far as the average Joe is concerned.

 

[Junior]

No problem at all, I just think people are being sold a pup, always being advised to invest in super to better their retirement.
I think their retirement would be much better served, investing outside super, at least there the Government has limited say in how you use it and how it will be treated.
You say people get the benefits of super, but those benefits are being eroded very quickly, why is that?
Simply because the Government has all the say, in how it is used and the individual has no come back, because it has been given a tax advantage.
So why would anybody place any of their money into it? When any money value, or access to it, can be stripped from it at the stroke of a pen.

If you're earning a salary of say $100,000 per annum, your marginal tax rate is 39%. Invest through super and your tax rate is 15%, and then 0% when you retire.

Yes, super has become more restrictive, you are now limited to an account balance of $1.6mill and the amount you can contribute is capped.

Still a very long way to go until it makes more sense to only build wealth outside of super. Governments may continue to restrict super, but I strongly doubt it will get to the point where super is taxed more heavily than non-super investments. A government which takes it that far will not be voted into power.

The best strategy in my view is to build wealth both inside and outside of super. When retirement age is less than 10 years away, then really load up super and take advantage of the caps & low tax rates available.