In this episode of PodMD, the Managing Director and Principal Adviser at Oxlade Financial, Mark O’Flynn, will be discussing investing in an uncertain world.
- Transcript
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Today I’d like to welcome to the PodMd studio, from Oxlade Financial, Managing Director Mark O’Flynn, talking with Peter Chaplin, finance from Rooms with Style (RWS).
Today, we’ll be discussing the topic of Investing in an uncertain world.
We do hope you enjoy this podcast but please remember that the information discussed here is of a general nature and is not intended to serve as advice. The views and opinions expressed in this podcast are those of Oxlade Financial, not PodMD. Oxlade Financial reminds you that any information or opinion in this podcast is general in nature, and does not consider your personal objectives, situation or needs. Nothing in this podcast is a recommendation, and you should seek personal advice from a registered financial adviser before making any decisions.
Mark, thanks for talking with us on Pod MD today.
Mark: Thank you for having me.
Question 1
We are here today to talk about investing in uncertain or volatile times and they certainly are that at the moment. But before we get into that, can we just talk about investing at a top line? What are some of the key things to know?Mark: Sure. Well, firstly, what you should know is there’s literally heaps of options out there and we’re all familiar with some of them. So most people buy their own home first. So residential property and perhaps they go on to buy some additional investment properties. There are shares and that could be listed in Australia, overseas, they can be unlisted. There’s. You know, doctors often have the ability to buy into their own practises, so that’s an investment, cash which everyone knows. Other types of investments like fixed income, bonds, alternatives and a lot of doctors we find also wanna consider owning their own practise premises as well. What we find most common in Australia is, you know, a lot of people invest in residential property, so that’s been particularly attractive in Australia’s property prices have gone up, particularly with some of the other tax aspects, which are quite attractive for doctors. A lot of people are familiar with investing in direct shares as well and and I guess what we find and what I encourage people to do, particularly doctors is, you know, look outside and look at other options of what’s available before you make decisions. So lots of people and doctors buy A home And then they’ll go on and they’re familiar with that bricks and mortar and buy another one and then another one. But it does pay to be diversified and and just look at other options as well because, you know, there can be other opportunities that provide very attractive returns.
Question 2
Yeah, sure. I mean, there’s certainly lots of options, as you say, if we can just sort of focus on sort of shares for the moment, you know, can we just talk a little bit about more about shares and the role that they play in the investment portfolio?Mark: Sure. So it’s important to step back a bit and say, well, what is a share and that is basically ownership in a company and you have the ability to participate in profits going forward. Those shares can be unlisted like if you own your own medical business, that’s effectively an unlisted share or as most people are familiar with, you know, can be publicly listed shares like on the ASX or overseas in America. In terms of shares So like I said, you know in Australia we have quite a concentrated index, lots of banks and mining companies. So if you expand your time or geographic horizon outside of Australia, so to the US and overseas markets, you know there are much more diversification and you know other sectors such as technology that you don’t necessarily get a lot of exposure to. And really the benefits of the share market are really the returns and the ease and the cheapness in which you can get exposure to them. And I’ll give you one Example like the US share market has returned 10% per annum between 1970 And 2020, so you know, we’ll talk about later about what that you know what getting a 10% return per annum means. I guess importantly for doctors, you know now with technology and the costs coming down, it is really quite easy to invest in share markets. It’s extremely cheap as well as there’s obviously. No stamp duty. No, you know, very minimal transaction cost. So you know when doctors have limited time, it is very easy to set up and get going.
Question 3
Yeah, sure. You do mention it’s cheap and yeah, certainly anybody that’s bought a house and having to save up for a deposit on a house you sort of go there’s a lot of money tied up as. As a guide like what would sort of be the minimum that people should sort of be looking at when if they were looking to invest in shares, to make it worth their while.Mark: Yeah. And that’s the great thing like the minimum, you can literally start now with pluck a number $50.00 a month or $50 a week. So there are platforms you know for, you know for junior doctors, you can literally open a vanguard account and start a direct debit, which we encourage people to do. I do for my kids. I have their own share accounts so you can start with very minimal amounts of money and get going and and obviously you know those sort of accounts are more basic. And then as people progress with bigger amounts of money, you know you can look at other accounts that tend to have higher fixed cost. But obviously you know as the balances go up. You know those costs come down as a proportion. So yeah, that’s the great thing you can start with minimal amounts of money.
Question 4
So, Mark, you make mentioned about, you know, getting the kids investing in shares. And obviously earlier the better and you know we hear people talk about compounding and the benefits of I suppose the investment over time. Can you talk a little bit more about that compounding effect.Mark: Yeah. So compounding is often referred to as the eighth wonder of the world. And really, it’s investment returns on investment returns. So and over time, while it starts all very slowly, over long periods of time, it just keeps growing on itself. So the best example I can go back to the 10% a year from the US share market over the last 50 years, so that actually works out to be an 11,600 percent return and so that is effectively turning $100,000 in 1970 into $11.7 million. And so whilst 10% doesn’t sound a lot you know over a lot getting that over a long period of time really does add up. And that the other example I can talk about is most people have heard about Warren Buffett. Probably the most successful investor in the world, one of the richest people in the world. What’s over, often overlooked with him is he didn’t do really anything fancy. He just did it for a long period of time. So he started at 12 investing and he’s now 90. And so more than 90, I think it Would be about 97% of his wealth has accumulated after age 60. And so you can imagine if he started at 30 instead of 12, you know you wouldn’t even know who he is because he wouldn’t. You know, he wouldn’t have 97% of his wealth. And so most of us can’t turn back the clock to a 12, but we can get started on it Now, if you haven’t already.
Question 5
For sure. So if we just talk perhaps generally a little bit. You know what are the foundations for investing success generally?Mark: Yeah. So we think the key foundations are just setting clear goals. And those goals are like why you’re doing things in the first place when you need money. What’s the timing of that? So investing should be a matter of marrying up when you actually need the money to the investment. So if you need money in the short term, don’t put it in long term investments. And if you can go without for a long period of time or you can afford to invest that long term. Setting the foundations in terms of like what’s your cash flow position, do you need money from the portfolio or can you add to it. Getting you know the the Plan B in place, having cash reserves, you know, personal insurances. So if some something goes wrong, you don’t have to disrupt your investments to get money from them. Reviewing your tax position so everyone wants to jump to who owns you know what to invest in. We think it’s better to first decide well what name Are you actually gonna invest in? Is that your super fund or your partner’s name on a lower tax bracket in a trust or a company? Your risk profile as well, so you know how much risk can you endure because the worst thing you want to do is find out you’ve taken too much risk and then a downturn occurs and you sell out. About also, what investment decisions do you actually wanna control and what’s meaningful? So do you wanna control selling CBA and buying ANZ or do you wanna control what sort of risk profile you take and what the asset allocation is with it. Look It can be hard for doctors to make all the decisions, particularly if you’re in direct share portfolios, that there is a lot of decisions and most people don’t have the time for that. And then what I personally love and what you know has the I think the most influence is actually managing Your own behaviours as well, which is often an underappreciated part of investing, because behavioural mistakes have a massive impact on things, so humans are naturally crazy. So if I use the analogy between shopping versus investing so shopping. When something goes on sale, Peter, whatever you like, buying your Richmond jersey, you’ll probably rush out and buy more of it. And when it goes up in price,l you’ll probably sit back and go I’m not buying that. That’s a RIP off. Investing is totally the reverse of that and. And so when things go down in price, everyone gets spooked and no one wants to buy, right. They’re like, why? Why would I buy more when what I already own has gone down? And conversely, when things go up in price, people feel like they’re missing out. And they want to rush in and buy more and more. And that actually, you know, over time we should be actually doing the reverse as well. So. I think for investors, some of the the best traits have been patient controlling your temperaments. They’re not, you know, in the good times not getting carried away and in in the bad times, not getting too spooked cause I guess we a lot of people have the habit of, you know, taking the recent experience and then extrapolating that, like it’s gonna continue forever. So if property prices go up 20% a year for the last three years, people assume that’s just gonna continue indefinitely. It Doesn’t, and if they go down or whatever, the share markets go down, they then extrapolate well, they’re gonna go down forever. But that you know, that changes as well.
Question 6
There’s certainly a lot of decisions to make, you know, when just listening to you there. And obviously iT sounds like the best advice is to really just go and speak to somebody that that knows a lot about it sort of thing. So look, you know, getting back to the topic for today, which is talking about navigating you know, volatile markets, what’s probably the ones key thing that sort of investors should be thinking about?Mark: Yeah. Look, I think that if anyone’s waiting for a time when things are certain, it it just never happens. There’s always gonna be periods of uncertainty. If there wasn’t uncertainty, there wouldn’t be any risk. And then there probably wouldn’t be any investment return as well. There’s an old old saying. So the worst investments get made at the best times. And So what I mean by that is when everyone’s making money and everyone’s happy and things are going up, a lot of things get overlooked. And so things that perhaps. Aren’t perfect with that property. Maybe it floods in Brisbane once in every. Well, it’s said once every 100 years, but maybe that’s once every 10 years. Well, when everything’s going up, those issues get overlooked. And unfortunately, when the tide goes out, you know those investments when the when the boom times stop, they don’t look as great. And then when times are uncertain actually that’s when they there are the most opportunities because you know if prices are down because something’s going wrong. There’s more bad news priced into things, and it just actually means you could be buying at a better price. As well, an example would be like in 2009, like at the worst period during the GFC. That’s when the people are scared the most and spooked the most and it it probably didn’t matter what you bought then if you got in then you made a lot of money just because things felt the worse. And were the most uncertain, but it actually meant prices were completely down.
Question 7
Yeah, like you say, I think that people do the exact opposite to what they should be doing. Yeah and I’ll probably be guilty of that as well. OK, s otalking through some perhaps specific strategies for investing in an uncertain world, what would those strategies be?Mark: Sure. So number one, just going back to having defined goals. So you know there’s only a couple of things that really can go wrong and that is if you haven’t planned out when you need money and how much it will cost then you know that can be an issue because if you have to go and get money from long term investments or it could be a bad time. So having those defined goals, you know if you wanna buy a house or give the kids money, put that in short term investments. Number 2 is just having that plan and and sticking the course so so any sort of plan should account for the volatile periods as well, so you know if I talk about back to the US share market, the 10% per annum return, it’s actually almost never the case that on a one year basis that return will be 10%. It’s actually far more likely that it will be a lot more or a lot less than that, and that’s just par for the course. In fact, over those 50 years out of those 51 year observations, there was only three times that the investment return was between 8 and 12%. So, you know, ±2% of the average. So it was like13 out of 50 years the return was more than 20% of the average, so it returned better than 30% or a return that was worse than 20% of the average. So a return worse than -10, so 13 times. So it was it was actually about four times more likely That you’d get a return that was completely different to the average compared to close to the average. So you know when you have a long term plan, stick to it and and you know often it’s the case that people will wanna abandon their plans right at the worst possible moment. Another key thing is don’t chase last year’s winners so often We’ll pick up the financial review and read about last year’s best performing Super Fund or fund. And often people then want to take their underperforming funds and get out of that one and move into last year’s winner. And they you, perhaps they should be actually doing the reverse in in some cases, because you know, often if something shoots the lights out one year, it actually reverts to the average The following year, and vice versa. Obviously, maintain diversification would be the 4th point as well. So not having all your eggs in one basket, diversifying, it’s not just across properties or shares. It’s like you know geographic locations you know overseas shares, international Shares Australian shares. There’s an asset classes, so cash, property, all the investments perform well at different periods of time. And so you want exposure to many different things to smooth out the returns. And I, I guess there’s also a view that you know concentration and risk is how you You know accumulate well, so if you’re a medical practitioner, you have to concentrate all your risk and efforts into studying and then training and then you know your specialty. And then diversification is how you hold on to your wealth. So you know, spread it around. The fifth thing fifth thing is understanding your risk profile. You know you want to try and get the best possible return, but over the longest period of time. So you really need to set yourself up for the long term. So having an appropriate level of risk and debt levels, etcetera. Because unfortunately life does change along the way. You know there’s life volatility external like economic and pandemics and Wars and financial disruptions, and then your own personal volatility. So you change jobs, people get divorced, someone gets sick in the family, and so you you want to have an appropriate level of risk to account for all those factors and the chances of one or more of those events turning up in your life Is 100%, so you just gotta keep that in mind. And and the other thing is, you know, in terms of investing, you know there’s something wrong If it’s exciting, if you’re talking about all the time. So investing should be and that compounding should be like watching grass grow. And if it’s not then you know, I don’t think you know, something else is going wrong. And so, you know, I think The more you look at investments. The more you look at share prices, it really, you know looking at things on a day by day basis and the price really holds no value. It just makes things appear more volatile than what they are. So you don’t have to dedicate hours a day to this it, you know maybe look at it. You. Know twice a year. I think it’s and it’s it’s enough as long you have Set the foundations and the strategy.
Question 8
Yeah, it certainly sounds when you describe the US share market, obviously it’s a long term view is how you see it because I think like most people, you know, I would think about the share market as being somewhat volatile. You know, even in calm conditions and yet actually you know if you said to me Ohh look I’ll give you 10% return over a long period of time, but you know that seems like a quite sort of steady sort of approach. So just out of interest risk profiles, do you find that the risk profile for people changes over time as they get nearer to retirement?Mark: It does, but it doesn’t necessarily mean you know if you retire at 60, you can hang up the boots and put all your money in cash. Like hopefully you’re gonna live for couple, you know, 3-4 decades now from from that point. So again You know you need to be investing still long term, but yeah, people you know, we find that overtime as peoples working careers decline well perhaps their ability to take risks declines as as well. So everyone’s different as well I also find. You know, we have to do risk profiles. We try and avoid doing it too much because if you give someone a risk profile when things A negative they’ll actually profile lower risk because they’re getting influenced by what’s happening in the world and when times are great. Actually people want to take more and more risk, which is comes back to that behavioural impact as well. And you know, often, you know, when people want to take more and more risk is Often when times are good and precisely when actually the opportunities are limited.
Concluding Question
Yeah, sure, sure. Well, look, Mark, thank you for your time here today in the PodMD studio. To sum up for us, could you please identify the three key take home messages from today’s podcast on investing in an uncertain world?Mark: Sure. Number one would be having those defined goals and writing them down, understanding what they cost and when they’re gonna happen. Number 2 is having a plan and more importantly, sticking to it and it’s just going to be totally normal that things go off course from time to time. And number 3 is diversification and compounding, which are really the two critical tools to build and hold on to wealth.
Terrific. Well, Mark, look, thanks again for your time and the insights you’ve provided.
Mark: Not a problem. Thankyou.
