Why our CEO is investing $1m at the top of the market

The following is a transcript of the podcast above.

Ron Hodge, welcome to this special and particularly the fact that we’re talking about personal anecdotes at the moment. Why we wanted you to come and talk to us about your own personal investing is that for someone like yourself who’s had a lot of experience in and out, living and breathing investing for so many years, it’s interesting to talk to you about what’s come from a personal perspective for you over the last couple of weeks, so let’s talk about that. What in your personal investment world has changed and caused you to actually have a real good look at your own personal finances?

Thanks, Evan. Interestingly, we were talking the other day and I was telling some guys at work that I’ve recently been investing some money at market highs. For my wife and us, six months ago we got an investment property and our tenants, long-term tenants, have been there for like five years, she told us that she’d bought another place to move up closer to her kids’ school and so, I called up the real estate agent and asked him to find us a new tenant and he asked us the question about whether we’d be willing to sell because the market was really hot and it was something that we really hadn’t thought about before, but we always say at InvestSMART, as you know, all about diversification and you shouldn’t have all your money in one basket.

We always tell people that and I tell my mates and my friends and family that all of the time, we’ve been doing the exact opposite with pretty much all of our investment money in just one investment property. That was a big moment, the decision that I faced was, why should we have all of our money in just one asset class, property? And I guess that’s the big thing that’s changed over the last few months. We talked to our real estate agent, “If you can sell our property, well then go for it.” He did it off-market and we talked to our tenant and he kindly said we could show the home while she was still living in it, so we didn’t lose any rent because we’d sold it and then we had all this money.

Just on that point, I just want to pick you up on something, you talked about the fact that obviously yourself and your wife were very, very familiar with investment property, which tends to be a very, very familiar theme across the Australian market, we tend to love property. Is that something that you both realised. What we refer to in behavioural finance is familiarity bias. Is that because you’d always had tangible assets, because you’d loved investment property, that’s the only way you thought? What changed you to start not only going down the diversification but realising that you were just so heavily weighted towards one asset?

Interesting enough, this property is in our SMSF and we had to do one of those loans that you do within the SMSF to buy the property. We did all that stuff many, many years ago. Interesting enough, two years ago we actually got an email from the ATO that basically said we weren’t diversified in our SMSF. We had to write a massive investment strategy, one specifically on why we didn’t have any diversification in our SMSF. I’ve sort of always known that we weren’t diversified. I guess, yes, it is familiarity, the property is quite close to where we live, property hasn’t done that bad. But the market’s at all-time highs, it keeps on going higher, but for us it’s not liquid, that’s one problem, it’s not a liquid thing. If anything was to go badly with property then we don’t have anything to do, we can’t sell half of the property, it’s very hard diversifying when the majority of your money is in a single property, investment property. I guess that’s where the decision came for [Robbie] and I to sell the property. I guess the final decision came down to, that if we had a pool of money [Audio cuts out], would we be buying a singular asset, like a single investment property? The answer to that, when I sat down with my wife, was no. We wouldn’t actually put all of our money in one property.

What was the next step for your wife and yourself to sort of look at not just the here and now, look at what the money needed to do for you going forward and what were some of the things that drove you to make the decision that you have about where you’ve actually allocated that in the end?

I think that’s a really good question and it’s the hardest one and I think that’s probably why a lot of people don’t make a decision to sell a property, because it is really just easier to hold on to it forever. And you might do well, you know, who knows? For us, the hardest decisions always as an investor [Audio cuts out], we made the decision to sell the property – now, the problem is, if you think about it we’re now completely in another asset class which is cash. So, what really got everyone talking at the pub, the fact that I sold my house and that I was investing in the share market and whatever else, was everyone was going, “Oh my god, the share market’s at all-time highs.” And I’m like, “Yeah, but the property market is at all-time highs…”

And the fact is, I’m in cash now and I’d much rather not be cash and I’d much rather be diversified over all asset classes, so I’d much rather have some money in Australian equities – I don’t care that it’s all-time highs. It’ll be all-time highs again at some future time, even if it actually was to come off a little in the next day or next week, it doesn’t really matter. We’re investing our money for 20 years. We really aren’t looking at the stock market and going, “Oh my god, the All Ords is at all-time highs, we better not invest today…” because for us, it doesn’t matter. We really didn’t want our money in cash, we put money into Australian shares, international shares, we even put some money back into property and infrastructure, we put money into fixed interest and bonds and stuff and we left some money in cash.

For us, it was really not a question about when to do it, but for us, you asked the question, where did we invest it? The ‘where’ was pretty easy for us. The ‘where’ was, we wanted to be diversified across all asset classes. I’d say our asset allocation is more like a fund…

Just jumping in there because I want to pick you up on some of the words you just used before, is that you don’t really care about the market being at all-time highs, it’s not really your concern because obviously you’ve got that time. Is that because what you’re looking at with regards to being in the market is the other parts of it that we don’t always talk about? Things like compounding, looking at a total return salary… Is that why you just don’t care about today’s price being a record all-time high?

Yeah. In one of the emails that we’ve sent out, we put an article in there that was written by Paul Clitheroe. Now, he wrote that article in August, 2019, and at that stage that was when the market was hitting highs – well, if you didn’t invest in 2019, you might have been looking pretty good in 2020, feeling vindicated in march, then the market roared ahead and right now, you’d be looking like an idiot. I think market timing is a real fool’s game. You might get it right once, you might even get it right a couple of times. It’s very difficult to try and time the market. And you’re totally right, for me it’s about asset allocation, making sure I have a little bit of money in all the different pies. Some of those pies will go up and some will go down. Overall though, I’ll probably make my 5 or 6 per cent Y on Y for the next 20 years.

Which is obviously the design of what you and Robbie are doing, which is exactly what we’re trying to talk to here, because the next part of that whole discussion that also comes, you’ve got your compounding…

By the way, Evan, if you just go back to that for 20 years and let’s say you’re making 6 per cent, the rule of [71], which really says to [Audio cuts out] numbers together and that’s when you double your income, so if I’m going to [Audio cuts out] per cent, times that by about 12, that’s about 71-72, that means I will double my money at 6 per cent every 12 years. That’s amazing [Audio cuts out] and that’s just compounding interest, I don’t have to do anything.

And that doesn’t talk about dollar cost averaging, which we’ll do for another day and all those other things on top of it. The next part of it also I wanted to talk to you about which is costs involved with what you’ve discussed and doing that. Costs is something I know you’re very passionate about, but costs was another thing you and Robbie were looking at and trying to make this as low-fee and low-touch, I think is probably the word, low hassle. Can you explain why that also was part of your thinking?

These are [Audio cuts out] percentage [Audio cuts out]. We just talked about compounding returns at 6 per cent, compounded year on year on year and after 12 years it might just double my money. The problem is, percentage-based fees do the exact same thing, they also compound. The problem is, is when I looked around, I couldn’t just get my wife to put all of our money into the InvestSMART Professionally Managed Account, we had to do our own. The fact is, I still had to make sure that she had the comfort knowing that this was the best way for us to invest our money. That fee was a really important part of that because the PMA charges 55 basis points per $82,000 dollars, which equals $451 dollars.

Then, no matter how much money you invest in after $82,000 dollars or where your money grows to, as I said, if I put in $82,000 dollars today I’d be paying $451. At 6 per cent in 12 years’ time it’s doubled, I’m still paying $451 dollars. If I was paying a percentage-based fee all the way along, well then by the time my money doubles from $82,000 or $100,000, I’m paying double the amount in fees now, that’s the problem with percentage-based fees. The more and more people get on board with the problem of percentage-based fees, I think the better investment outcomes will become. You don’t have to go too far, you don’t have to believe me.

The Royal Commission talked about percentage-based fees, abolished conflicting remuneration which was the percentage fund managers were paying advisers. The Superannuation Commissioner talked about percentage-based fees. The Productivity Commission, they found that, in fact, there was no correlation between the higher the fee and performance. In fact, there was an inverse relationship. The higher the fee literally meant you got worse performance. The average fees are still like 1.7 per cent, 1.6 per cent…

The old adage of the 2 and 20, so obviously 2 per cent management fee and then the 20 per cent performance fee – when you look at that and think about that, that is daylight robbery, there is no other word.

Oh, it is, yeah. And so, fees are really, really important.

Let’s go back then to the most exciting part, I think, about the whole thing is your actual investment. You talked about your choice that you and your wife have chosen which is the balanced portfolio. First, is that because of your risk tolerance or is that the way that it’s spread across assets? What ended up pointing into that? Now, before I go any further as well, none of this obviously is advice, but this obviously is what you’ve decided to do for your personal scenario, take us through why you’ve done that over staying a bit more aggressive and going up the space to a growth or to the high growth, what about the balanced portfolio fits your scenario?

There’s a few reasons for that. For us, we’re in our 50s, early 50s, I’m 51, my wife’s a similar age. We could theoretically go for a growth or a high growth because we are investing [Audio cuts out] super for our retirement. For us though, what we’ve decided is, we’ve also got other investments. Luckily for me, we as a business, we’re a listed company, InvestSMART is a listed company. We put our money in the balance because, personally, we’ve got an investment in our listed [Audio cuts out]. If I put those two together in our health [Audio cuts out] because that’s Aussie equities, and a chunk in Aussie equities directly through InvestSMART, so I’m looking at it as an overall risk across me as one entity, my [Audio cuts out] the other entity and cash that Robbie and I have in our bank account.

That’s actually a really good theme. What you’re saying there, is you’re no longer what we refer to as ‘ring-fencing’ your individual investments. Your ownership in InvestSMART, your SMSF, your property, your other assets, they’re all now seen in your view as one thing. What you’ve just described is that basically you’re now using the balanced portfolio to “level-out” your overall portfolios to make sure that you are now diversified in a way that actually suits yours and Robbie’s future expectations about your…?

Yeah, if I was sitting down and doing our family’s overall asset allocation, I would leave out my house. I’m not looking to sell our residential property and I don’t actually include this as property in my portfolio because I’ve got to live somewhere and Robbie and I have to live somewhere, that’s not part of it. I don’t consider that property exposure as such, I just need a roof over my head. But what I do consider in my portfolio is my SMSF and my personal investments and cash in the bank. If I looked at that holistically, I would be probably in a growth portfolio, if that makes sense. I’ve probably got more weighting towards Australian equities and international equities…

What you’re describing there for those listening is what we would call a core and satellite scenario…

Correct, absolutely.

You’ve got your assets that are – particularly, obviously your investment in InvestSMART Listed is probably what we’d declare as the satellite, because it is a bit more of a “risk” asset rather than your balanced portfolio which is diversified across all of the asset classes. It’s just a strategy that you’re clearly using. You’re clearly now looking at your overall investment pool as one thing with that setup going on forwards.

[Audio cuts out] after this many years, I’m starting to listen to what we’ve been telling everybody else to sign up. The actual other thing I’ve got an investment in is also the Intelligent Investor. Remember, we listed the Ethical Fund and IIG, the Growth Fund, and their portfolios of like 20-25 stocks, so they’re more diversified, those portfolios, but they’re still Australian equities. If I add that, own InvestSMART shares which are Australian equities again, and add that to the Balanced Fund, well now you can see how I’ve gone up the risk curve a little bit because now I’ve got way more in Australian equities so I’m moving closer to that growth, maybe even high growth asset allocation.

And that is probably where, for now, I’m going to finish it. Ron, good luck on your investment journey, it’s been a fascinating story and thank you so much for sharing.

Thanks very much, Evan, cheers.

[Music]

Here are the links to the rest of the series:

https://www.investsmart.com.au/investment-news/a-personal-anecdote-part-1-why-our-ceo-invested-1m-at-market-highs/149961

https://www.investsmart.com.au/investment-news/a-personal-anecdote-part-2-how-did-i-invest-keeping-it-simple/149966

https://www.investsmart.com.au/investment-news/a-personal-anecdote-part-3-where-my-wife-and-i-invest-1m-and-why/149973

https://www.investsmart.com.au/investment-news/qanda-from-ceo-invests-1m-series/150003