IAN IRVINE | Listed Investment Companies & Trusts Association

· Podcast Episodes
Lego, lion tamers, balloons & lego blocks. Just another day in the share market. Ian Irvine - Listed Investment Companies & Trusts Association
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Simplifying the complex world of investment with Ian Irvine from the Listed Investment Companies and Trusts Association (LICAT). We attempt to use similes, comparisons and analogies to explain the nitty-gritty of investing. For example, imagine the ASX200 as a Lego castle. The bigger company, the more blocks they contribute to the index.

Inflows and outflows can drastically alter the size of an ETF like a balloon expanding and contracting. LICs are more like a Lego castle with a fixed number of blocks.

The balloon concept works well for exchange-traded funds or ETFs or any open-ended managed fund. They tend to be driven by inflows of capital or investment funds from investors as they choose to invest in those funds. Therefore, the balloon would expand. If there's more investors seeking to take money out than wishing to put money in, the balloon will contract. So the balloon moves up and down Probably could get to a point where it gets very large and just have to be careful about it going pop.

We know, the Australian tax system can seem like a labyrinth. But perhaps you can offset your tax liabilities with franking credits.

Investing in the stock market can be intimidating - it's like taming a wild beast. But with some edcation and planning you can stick to your investment strategy for the longer term. And do you know what makes for a good investment portfolio? It's as varied and balanced as a well-topped pizza!

Lastly, we discuss the intricacies of Capital Gains Tax. Imagine holding an asset for over 12 months and getting a 50% tax discount! But remember, when dealing with Capital Gains Tax, it's crucial to seek advice from a licensed tax advisor.


0:01:22 - Explaining ETFs With the Balloon Analogy (80 Seconds)

0:09:14 - Closed-End Funds for Steady Growth (62 Seconds)

0:11:21 - Tax Benefits and Stock Market Investing (103 Seconds)

0:21:52 - Capital Gains Tax and Financial Advice (56 Seconds)

0:29:53 - Importance of Getting Appropriate Financial Advice (71 Seconds)

0:37:03 - Company Announcements and Stock Market Strategies (72 Seconds)


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0:00:01 - Chloe

Shares for Beginners. Phil Muscatello and Finpods are authorized reps of MoneySherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

0:00:12 - Ian

Investing is different from trading. Yes, we see the index outcomes every night on television or every morning in the morning news.

0:00:20 - Chloe

If you're an investor.

0:00:21 - Ian

That's almost background noise. Don't be distracted by it. So understand what you're investing in, why you're doing it, how you want to do it and the structures you wish to use to make that happen for you.

0:00:31 - Phil

G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. What's the best way to explain difficult investing concepts? Why is the jargon so opaque and how can we best learn to understand? Joining me today to try and untangle some torture analogies, strained comparison, laboured similes I like to look on your face and as I go through this list Contrived parallels and awkward allegories, is Ian Irvine from the Listed Investment Companies and Trusts Association. G'day, Ian.

0:01:01 - Ian

Phil, great to be with you again. Yes, I've got a wry smile on my face. See how we go. Happy to help where I can.

0:01:06 - Phil

Well, that's right. I mean, we're just trying to work out, because analogies work up and to a point, don't they?

0:01:12 - Ian

Yes, if you keep it simple, if it's straightforward, easy to understand, that's just great. But if you start to drift off down a rabbit hole, you can, a rabbit hole, you can yeah, that's right which we've found in our discussions.

0:01:22 - Phil

This chat came about because of the glossary that I'm compiling at sharesforbeginnerscom forward slash glossary. I rang Ian to ask him about what he thought about my balloon analogy, which is a way of describing an open-ended fund like an ETF, and we ended up on a logo block analogy, which seems to work as well. So let's have a look at an ETF, what is an ETF, and let's talk about the balloon idea to start with.

0:01:47 - Ian

Well, the balloon concept works well for exchange-traded funds or ETFs or any open-ended managed fund. They tend to be driven by inflows of capital or investment funds from investors as they choose to invest in those funds. Therefore, the balloon would expand. If there's more investors seeking to take money out than wishing to put money in, the balloon will contract. So the balloon moves up and down Probably could get to a point where it gets very large and just have to be careful about it going pop.

0:02:17 - Phil

Because it will go pop along with the rest of the market. There is a market.

0:02:21 - Ian

If again the analogy is and I don't want to cast aspersions it works very much on the lines of if there's more redemption requests, I would like my money back. Please sell my units and give me cash. Then there are new investors saying, or existing investors saying, I want more new units and applying for more here's my money. So if there's more coming out than going in, yes, the balloon will contract.

0:02:44 - Phil

In the case of an LIC, the industry that you represent. What's the difference? Why is it not like a balloon?

0:02:50 - Ian

Yes, it listed investment companies and listed investment trusts, lics and LITs as they're known. That's where we started to talk about the alternative to the balloon the Lego example, because you build your little Lego stack and that remains constant.

So, rather than increasing or growing as investors decide, I want more or I want to move out but actually sell on market through an exchange such as the ASX, to another investor who wants to take over your ownership piece of your block. Now you don't have to sell the whole Lego piece. You can sell a block to another investor and keep some, or you can sell it all or you can buy some more yourself. So the blocks that the company owns remain constant. It's just your proportion of that company capital Lego piece remains constant. As you move your block around, it goes to somebody else, but it still remains within the company.

0:03:41 - Phil

So in the case of an ETF, then, rather than a balloon, it's more like there's many, many more ETF blocks, or many, many more Lego blocks that are being constructed in the castle. The Lego castle gets bigger and smaller.

0:03:53 - Ian

Yeah, if you want to continue the Lego discussion, you've got fund managers for one or a better description, workers on that Lego castle pulling blocks out as more people want to take their money back, taking those back to the factory, getting cash and giving it to them as people want more. Those managers are running up and down that Lego stack, going back to the factory, which is the funds management, the fund manager, and actually getting more blocks and sticking them on the castle.

0:04:18 - Phil

But in an LIC the castle is a fixed size, correct, yeah, unless there's, of course, capital.

0:04:23 - Ian

And that's so. When you decide you want to put another rampart on your castle, you go back to the market or to your existing investors or to new investors and you say can I have some more capital please? Here's what I want to do with it. Here's the reason why you should consider buying more of our capital to help us build this castle, and this is what we're going to do with that capital in the future.

0:04:41 - Phil

I really enjoyed when we started talking about the Lego block analogy, talking about the ASX200 and looking at what the ASX200 Lego castle looks like. Give us a bit of a view on that.

0:04:54 - Ian

Yes, if we said, for instance, there was 200 blocks in the ASX200, that would all be different sizes. The biggest block, as it stands today, would probably be BHP, around about 9 to 10% of the market. So, or a collection of blocks would make up BHP to account for that 9 or 10% About 10 Lego blocks.

0:05:11 - Phil

If there was 100 blocks in the ASX200, they would be about 10, wouldn't they? Yeah?

0:05:15 - Ian

Next would come the Commonwealth Bank and then toss up between Westpac, nab and ANZ, Telstra, Wesfarmers and a few others. But when you get through that top 10, however many blocks they account for combined, they represent about, I think, 60% of the value of the 200 index. So there's a concentration in the Australian 200 index and it's pretty much mining, resources and banks.

0:05:38 - Phil

And it's. I found it when I started looking into this analogy and looking for the relative sizes that Coles and Woolies combined is only around three blocks.

0:05:48 - Ian

Yeah, it's surprising. They're big and important companies. They are yeah, in the back of the day, when Coles were part of Wesfarmers, it might have been a little bit more. But, yeah, that's it. There's a big step down. I think you can put Telstra in there as well up towards the top 10. But once you step out of those 10, let alone the 20, there's a very long tail to make 200 or even the 300 index, which goes a lot further, obviously further 100 stocks. Yeah.

0:06:10 - Phil

Why do you think it's important for new investors to understand the difference between a closed-ended and an open-ended fund? This is where the Lego Castle gets bigger and smaller, or it's a fixed size.

0:06:21 - Ian

Yeah, I think I'll talk to my area of better understanding around the closed-end structure of a listed investment company or a listed investment trust. That means you've got a closed pool of capital. You're not a forced buyer into hot markets. So if markets are running hot, you as an active manager may take a view. If you're managing the LIC or the LIT, that's overvalued, we'd be paying too much to actually be forced to buy whatever's running hot. Buy Now Pay Later is probably a good example of some time ago, whereas if you're in the open-ended structure, they've actually got to follow that index. So as those buy now, pay later.

For example, products grow, they need to buy more and more and more On the other side and the winds do turn, as we all know. As those things fall away, they could be forced sellers Again. If there's more people wanting to sell than there is to buy, they might be selling all of the individual stocks in that 200 index in proportion, whereas the closed-end LIC says no, I'll stay with my chosen strategy that market's too hot. When it's turned there's good value, I'll buy in. I'll use my captive pool of capital to maybe sell some of the stuff on the way up that was overheated and then buy again on the way down, which is good value. So make a capital gain as well, as I'm buying into investments that are going to deliver income as well, so I can get the best of both worlds.

0:07:42 - Phil

And the other side about it, and I don't want to besmirch the reputations of ETFs here at the moment. But if you're looking at an index fund, which is the most common form of ETF, you're going to end up, like you say, concentrated in the top end of the market, there with all the miners and all of the banks, and another kind of manager may say well, we don't want to have all the miners and we don't have to have all of the banks. We want to make an informed decision on which of those we feel is going to give us the best return. If you can speak to that for a moment, yeah, that's correct and I would never talk down exchange-traded funds.

0:08:19 - Ian

I think they have a role to play and I'm certainly the view and we as an association of the view that these things fit together and the best thing is to educate investors about why. Would I go closed in with an LIC or LIT as opposed to open-ended free ETFs? To give the ETFs a little bit of a plug, I think they track a commodity price such as gold or a currency such as the US dollar very well, but, as you point out, I wouldn't necessarily use them for my equity Aussie equity investing or my global equity investing, because you are forced buyers or the fund managers are forced buyers into markets, as I've stated, where things could rapidly be changing in what appears to be growth, which is good, but overheated growth, which is not good. On the other side, as we keep mentioning on the way down, closed-end fund, with its closed-end pool of capital, makes it able to make considered decisions strategically for the long term so that they match long-term investment thinking with long-term investment outcomes. And for investors that are looking for steady growth not necessarily that rapid rush up and income to flow from that fund the closed-end fund, lic or Trust I think they are the ideal mechanism to do that and you will see there are a number of LIC companies.

As opposed to the Trust, they're able to retain their profits and actually stream that payment back to their investors or owners over a future period. So it's not this up and down, back and forward lumpy distribution. It's a considerably consistent payment of a dividend and it can be franked and there's a number of LICs that have done this consistently over a long time. Bring it back into percentage terms. If you've got 100 blocks, let's say BHP somewhere between 9 and 10, let's say 10 for ease they've got five of those blocks.

0:09:58 - Phil

Yeah, oh, we say 200 blocks in there, 200 in my conclusion, in the ASX200 castle.

0:10:03 - Chloe

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0:10:21 - Phil

I just quickly wanted to run through franking credits. What do franking credits mean to investors and if you could explain basically what a franking credit is.

0:10:30 - Ian

That's a much vexed question, phil. Thanks for asking it. It takes a little bit of explanation, but a frank credit probably could better be described as a tax credit, and it gives credit for the amount of money that the company so these particularly relate to companies, not just listed investment companies, but companies such as BHP, woolworths, westpac and others that we've mentioned when they operate in Australia, make a profit in Australia, pay tax in Australia. They pay that to the government, and those companies I've just mentioned pay company tax at the rate of 30%. So if you invested in one of those companies, they've paid 30% of your tax obligation In the full fulfilment of time at the end of the financial year you work out as you would with your own personal income.

Did I pay too much tax and I've got deductions that actually get me to have where I see a refund? So the 30% is actually offset against your tax liability. So if you're a high income earner and you're paying the top marginal rate, which I think is around 45%, and you receive this dividend where the tax has been paid at the rate of 30%, you pay the extra 15% On the other side of that 30% company tax rate, where your personal tax is below that or in fact zero, as some super funds are not just self managed super funds, super funds generally you actually may be entitled to receive the full taxes paid by the company on your behalf as a refund, because your true rate is zero.

0:11:51 - Phil

It's a tax deduction, isn't it? Yeah, if you're set against.

0:11:54 - Ian

The company's done this for you. The government's got actually received that tax. It's probably had it for the better part of 12 months until you complete your own tax returns again for your super fund or for yourself. Yes, so it's balancing out over time.

0:12:09 - Phil

And this is quite unusual on the world stage, isn't it?

0:12:11 - Ian

It is. Australia has this almost unique characteristic of franking credits. It was introduced by the government going back many years, recognising that they don't want to pay double tax.

0:12:21 - Phil

Yeah, it's a double taxation.

0:12:22 - Ian

Isn't it the tax of the? Company rate tax of your personal rate. So if you're on that top marginal rate paying 45 cents before Medicare and tax had already been paid at 30%.

Add those two numbers together just paid 75%. So that would dissuade people, in particular some of those people with income that they can afford to invest. And when you invest in the stock market, you're supporting companies that are listed and a lot of people look at the trading side of the stock market and that's called, referred to as the secondary market, was really companies come to the exchange for the primary market to raise capital, so the ability of them to raise capital supports the Australian economy Across all those types of companies we've talked about. They're banks or miners or retailers.

0:13:05 - Phil

Okay, so let's get to some tortured analogies, and I put these into chat GPT. Ah so let's ask for a bunch of our tortured investing analogies. Investing in the stock market is like taming a wild beast you have to study its behavior, anticipate its moves and carefully approach it, just like a seasoned animal trainer. An investor needs patience, skill and a keen understanding of the market to ensure they ride the waves and avoid getting trampled. I don't know how they got waves in there, and that's mixing the metaphors isn't it?

0:13:35 - Ian

There's tigers, there's waves, there's a whole bunch of things in there, phil, that's cheap.

0:13:39 - Phil

That's chat to GPT, hallucinating apparently, it's just pulling things out of all over the place.

0:13:43 - Ian

Let me see if I can simplify that Education understanding what you're doing. Investing is different from trading. Yes, we see the index outcomes every night on television or every morning in the morning news. If you're an investor, that's almost background noise. Don't be distracted by it. So understand what you're investing in. As I said about the characteristics of an LIC is or an LIT is, because of their closed-end structure. They're investing for the long-term and they're backing that up with long-term investment thinking, not focusing on the day-to-day noise. So, distilling that down, understand what you're doing, why you're doing it, how you want to do it and the structures you wish to use to make that happen for you, and consider investing for the longer term rather than for the very short term.

0:14:25 - Phil

I think the only thing that I'd take away from that particular torture analogy is that it can be dangerous and you can lose money, and unless you take those steps that you suggest, the chances that you will lose money rapidly increase. I'd never suggest there's no risk there is risk, because risk is where reward comes from, isn't it? They're totally related, exactly.

0:14:45 - Ian

And the old adage often proves to be true the higher the reward, the greater the risk. Understand that and that's where investing for the long term. Over the long term, you may see your style of investing change from being higher risk typically, but not always, for younger people that have time Time to recover should the market change against them. As you get closer to retirement and looking for a steady income, the nature of some of the products you may use would change as well. But you're also dialing down the risk because you want some certainty around the income and you can't take the shock of a significant market correction.

0:15:20 - Phil

Ah my favourite Pizza analogies. Understanding diversification is like building a delicious pizza. Each investment is like a different topping Some provide flavour, others add texture and a few deliver the perfect balance. Just like a pizza with too much cheese can be overwhelming, an investment portfolio lacking diversification can leave you vulnerable to market volatility. I think we were just talking about that really well, we touched on market volatility.

0:15:45 - Ian

So the first place I'd start with this torture analogy is we think of a pizza, we think of it sliced up and each of those slices is roughly equal. Asset allocation, which leads to diversification, is not equal slices. So back to what we talked about a moment ago if you're younger or more willing to take on risk for greater return, slices in that area of higher risk will be greater, whereas on the other side of it you may have smaller slices that are dedicated to things like fixed income or even cash alternative deposits in the bank, which have got a much more secure nature about them. So determining which slices are which size is referred to as asset allocation, and that then gives you a diversified pizza. Probably going to torture this a little, but the next piece is portfolio construction.

So how much of those slices do you want made with pepperoni or with cheese, all those sorts of things? So that's coming back to what's the product I want to use to get that slice. So if the largest slice I wanted was a mining stock, do I do that through buying the stock directly? Do I buy an LIC that transacts and trades heavily into mining stocks, or do I use an exchange rate at fund, for example, that has a focus on mining stocks. That's the topping, that goes on that piece of slice, and that's the same all the way around, adding up to 100%.

0:17:03 - Phil

And if we're talking about, say, mining stocks as being pepperoni, if you've got an ASX200 ETF, a large proportion of your pizza is going to have that pepperoni. Why could I not? Then to go out and buy pepperoni separately, or to buy BHP or Fortescue or Rio, means that your diversification overall is reduced. Yes, you're doubling up, or more.

0:17:25 - Ian

And that's often referred to as look through. So in your portfolio you should be actually looking at that slice and how many products you have, irrespective of structure, in that slice. Then you count your BHP once, twice, thrice or whatever. It is same with the others. All your banks and a lot of investors will probably have a number of products that have exposure to banks and it's always useful to actually look through and find out what the holding is. And listed investment companies and trusts declare their top 10. Typically they don't go into a lot of detail because they're active managers. They're choosing to invest for the long term. That's their intellectual property, whereas an index fund over the 200, it's blatantly obvious. So there's no IP to protect.

0:18:09 - Phil

The other pizza analogy as well, as just talking about one particular company and the shares in that company are like pizza slices as well.

0:18:17 - Ian

Yes, but again it's back to that. This is not going to sound very appetizing. It's a bit more like the Lego block thing, because within that company slice is only that big always, because they are like listed investment companies closed in funds.

0:18:31 - Phil

Just an individual company, itself listed on the exchange Exactly. Yeah.

0:18:36 - Ian

So they have a limited number of shares on issue at any point in time and they do raise capital or give it back in much the same way as an LIC would.

0:18:43 - Phil

Okay, let's move on to another one. Understanding compound interest is like watching a snowball grow. Initially it starts small, but as it rolls downhill it accumulates more snow, gaining momentum and size. So when you invest your money and earn interest or dividends or capital growth I'm assuming in this on your initial investment the power of compounding helps you grow your wealth over time, turning a small snowball into a massive boulder Wow.

0:19:09 - Ian

I think the answer is yes.

0:19:11 - Phil

It is really, isn't it? It's self-explanatory.

0:19:13 - Ian

Yeah, well, it is. But it comes back to this long-term investment thinking. So if you start early with smaller amounts, they may grow over time, but if you start with smaller amounts and you receive income that you don't need be that through shared dividends or trust distributions and you reinvest it, that snowball starts to grow and as the snowball grows, possibly more income is generated, reinvested, more income reinvested, and rolls on.

It's often been described as the eighth wonder of the world, I think inappropriately attributed to Albert Einstein, but that's another discussion. But once you gather how it works, it's really mind-boggling, and I think we've discussed this before. I did a little Excel exercise that just said if I started investing when I finished university, when I was 20, let's say, and invested for 20 years until I was 40, and someone said, no, I'm going to live the life I'm going to start 20 years later and invest from 22. Retirement age at 60 and you'd stopped at 40 and you're investing the same amount of money. Who's gonna have the most retirement if you do the Calculation?

0:20:18 - Phil

yeah, two or three percent you've tried to test me on this before I did I did.

0:20:21 - Ian

It's an interesting outcome, but I encourage anyone listening to do a little bit of it for themselves.

0:20:26 - Phil

And it can be hard. Reinvesting dividends in terms of Sometimes you get to a stage where you're paying tax on this as well, and to hold on to them Means that you've actually got to be increasing your. I'm just. I know this example of a friend of mine who's now looking at retiring at 58 years old, and that's because he kept on reinvesting his dividends. But it was a strain at the time, especially when he was raising a young family to pay that extra tax on the reinvested dividends.

0:20:55 - Ian

Well, and you're not paying tax on the reinvested dividends, you're paying tax on the dividends, on the dividend, yeah whereas he could have just taken the dividend and paid the tax. And yet some, you still have, you've still got to pay Tax what are the yes?

So if you receive a dividend in a financial year, you pay tax now. You may get a refund through the Franking Credits and all those things we discussed earlier, but you still have to pay that tax. Irrespective of whether you take it as cash now, mm-hmm. Or reinvest it, you still have to pay tax now. So what goes into your investment is just the dividend itself. On a completely separate exercise, that incomes been reached. It's like, put it this way, it's like the dividend was actually paid to you into your bank. I can see that they I need to pay tax on that, but I've taken it out and I put it back into the company. What the dividend reinvestment plans enable you to do is not take the money into your bank and back into the company. So it'll be reinvested without brokerage or further cost, but you still need to pay your tax.

0:21:52 - Phil

Okay, just leaving the analogies aside for a moment, the other kind of tax that's involved in share market investment is capital gains tax. Tell us about that.

0:22:00 - Ian

Well, first up, not a tax expert, so I'm not giving any tax advice whatsoever, although it's funny accountants can't even give you tax advice anymore, have you noticed?

0:22:08 - Phil

Well, I can't say to me I'm not allowed to give you tax advice and I'm going what?

0:22:14 - Ian

It can't yeah.

0:22:15 - Phil

Some accountants I think, I think I need.

0:22:17 - Ian

I think everyone needs to have an appropriate license to give out their investment advice or tax advice. Hmm and these days you don't often find the same together. Yes, you have an investment specialist who can give you an investment advice. Accountants can give you tax advice, maybe not to tell you what you should do, but tell you the consequences of what happened if you did do it.

0:22:35 - Phil

I think they kind of have to approach it Tangentially rather than telling you directly do this because you'll save this amount of money. Yes, yeah, I can't give you investment advice. No, that's their qualified as a financial advisor? Yeah, exactly.

0:22:47 - Ian

So where were we? Capital gains tax often describes. The tax is not a bad one to have because you've actually grown your wealth. So you've, over time, you've been reinvesting dividends and your portfolio has grown, but you decided to take some money out. So the difference between what you actually Bought for and what you're actually going to receive the gain Is what you pay capital gains tax on. Now there's a whole range of formulas which have changed over the years, but you may be entitled to some discounts the longer you've held the asset. So typically again, disclaimer, I'm not a tax advisor If you have held the asset for longer than 12 months, you may get a discount on sale. The other important thing to consider is this is very Australian as well. Along with franking credits, they tend to be linked Self-managed super funds. As you move into pension phase, when you hit that magic age, whatever that is, which is a good thing you may be drawing a pension from your super fund tax-free. That may give that structure some benefits in terms of how capital gains tax is treated.

0:23:45 - Phil

Emphasize please get the appropriate advice from a licensed professional and there's a discount, isn't it like if you hold on over a year, 12 months, 12 months? Yeah, there's a 50% discount.

0:23:55 - Ian

Yes, something like that. It is 50%. But yeah, it's strange it used to be linked to CPI.

0:24:01 - Phil

Hmm, which other? That doesn't happen now.

0:24:02 - Ian

That's not over the last decade it would be great, because you had no capital gain. Yeah no CPI increases on your capital gain, but for I think, was the Wallace report, I think we probably don't. The Wallace report introduced this. Let's make it simple. Hmm if you hold it for over 12 months, there's a 50% discount on the capital gain. Yeah which is again, I think, at your marginal tax rate.

0:24:22 - Phil

Hmm and of course this is something to do with the cost side of things. So the longer you can hang on to your investments for 50% doesn't matter. Oh, but no, more importantly is you don't. If you don't sell, you don't pay tax.

0:24:33 - Ian

Oh yes, so yeah it's a, as I say, it's a good thing to have see capital appreciation. It's a bit like a house. So, yeah, it's a feel-good thing and most people in Australia but present would be saying that their property is worth more Not everyone, but most and that that's a feel-good thing and that that helps consumer confidence, even though you can't sell the kitchen and keep the rest of the house.

It's a good feeling to say my house is appreciated and valued there. For a more confident and the the long term downside of that is, if anything we're to get a custard, I could always sell the house, which now never really wants to do and very few people do, and I regret it. Sometimes there are those that are forced to do that, but that's unusual. Mm-hmm.

0:25:12 - Phil

I was reading an article last night and it's about divorce lawyers are going through a bumper period Because since post-COVID there've been a lot of relationships falling apart. But the other side of it is that property values have gone up so much that it's not a financial strain to break up, which is a bit sad, you know.

0:25:30 - Ian

Look, I think the, a major global investment bank, has done some wealth studies around the world and and Australia is one of the wealthiest countries per capita in the world. Mm-hmm. So that's on an average basis, but on a median basis we're top five mm-hmm in terms of wealth. A lot of that's to do with property, that property and our superannuation.

0:25:54 - Phil

Just getting back to franking credits, just for a moment. You have to hold on to them for 45 days to qualify, don't you? We didn't?

0:26:00 - Ian

mention that 47 days. I've actually felt. Strange, as it may seem, you need to hold an investment and receive the franking and dividend payments within a 45-day period, plus the day you buy it plus the day you sell it. So in other words, I could buy it four o'clock on one day, hold for 45 days, then sell it nine o'clock the next morning, on 47 days.

But, I have to have it at risk and in a space of one and a half months, as we know and I do talk long term but in the space of 45 days the markets can gyrate a bit and what you'll typically find is leading up to that X dividend date. If the expectation in the market is that the result is going to be good, the share price will appreciate. So you've got to get in, maybe even before that 40-day run-up, hold it over that announcement date and then, when it goes ex and that's the date where, if you're holding the stock, it goes ex-dividend you're entitled to the dividend and the person you sell it to does not receive that dividend. A very important date. But you need to hold it through that ex-dividend date for the 45-47 days.

0:27:08 - Phil

Yeah, and that's the other term, isn't it cum dividend.

0:27:10 - Ian

Come and X. So come dividend means you get it X, obviously X, you're buying ex-dividend. Now, if you're using a broker full service broker they should tell you that. If you're trading online, you will see it as this is X or come dividend.

0:27:26 - Phil

Hedging your investments is like constructing a safety net. It's like being a trapeze artist who relies on a safety harness to mitigate the risks of a fall. Tell us about hedging. How can you hedge?

0:27:37 - Ian

There's a lot of circus analogies coming through from GP chat.

0:27:40 - Phil

Well, we're all clowns After all.

0:27:43 - Ian

Interesting. Hedging is yes, hedging abets. That's obviously where it comes from. So try to think of a regional analogy, and the one I would not normally go to is bookmakers or insurance companies, probably a better one. Insurance companies, for example, if they've got a lot of exposure to a certain group of clients geographically, or industry we all know about floods and bushfires they will actually lay off some of their exposure to that to other insurers who take a little bit, a little bit, a little bit, so they reduce their exposure and spread it out.

Hedging, typically in investing terms, refers to currency, and it's particularly important if you are investing overseas, from Australia, for example. So if you're investing in a fund that's in the US and there are both listed investment companies and ETFs that do do this, you're exposed to the US currency. Now you can buy a hedged version, or the manager of an actively managed LIC can take hedging to cover their exposure. So what they're saying is, whichever side of the equation you want to be on, if the Aussie is rallying, it can work in your favor domestically, but it can be costing you overseas.

Whichever side you want to be on, now I'll leave the experts to explain this, but you can actually protect your downside or your upside of the currency in which you're investing running away, or the currency in which you're investing from the Australian dollar falling away. Hedging helps manage those sort of outcomes.

0:29:10 - Phil

Yeah, but then some people want to have that currency exposure as well. I was speaking to an investor recently who bought Berkshire Hathaway during the global financial crisis when the Aussie dollar was way, way down and then, of course, when the dollar appreciated, they made capital appreciation. Is that the requirement? Other way around, other way around? This is where I don't understand currency risk very well.

0:29:36 - Ian

When the Aussie was equal to the US. Happy days so you bought. Us stocks in US dollars. It cost you a dollar. It cost you a dollar Aussie but, as the US market appreciated, you got the benefit because it was rising against the Aussie dollar, so it was favourable. If it went the other way, it would be the other way around. It's difficult to understand and it's always important to get appropriate advice around those sorts of considerations.

0:29:59 - Phil

I'm glad you're here to correct me and my misconceptions.

0:30:02 - Ian

I'm not the person to do this, it's not my role, but yeah.

0:30:06 - Phil

We'll get back to the show right after this brief message. Why am I buying, holding or selling a share? If you can't answer that basic question, then you don't have a plan. The best investors are ruthless in executing their plans. I've been fortunate to meet many great investors on the podcast. Tony Kynaston is one of the best. He has a clear and systematic approach to investing that is honest, sensible and methodical. It's called QAV Quality at Value. Qav now offer an excellent light plan. For only $29 per month, you can follow their buy and sell recommendations and learn the ropes, and the first month is free using the promo code SFBLIGHT. Go to qavpodcastcomau to sign up. That's qavpodcastcomau using the promo code SFBLIGHT. Pass performance is not a guarantee of future returns. Please read the QAV FSG and consult a financial professional before investing. I receive a small commission for services I recommend and I only recommend services I use myself.

So this is your soapbox, ian. Is there anything else that you wanted to cover and tell listeners about while you were?

0:31:08 - Ian

here I think we're talking to a group of congratulations to you, Phil, and to your audience, because these people are interested in learning more about their financial literacy, more learning more about managing their money, their retirement superannuation and those sorts of things and investments.

0:31:24 -

I think the important things to understand is that the markets are a long-term consideration.

0:31:28 - Ian

But if we roll this right back, why would you buy a share or an LIC or an ETF to invest in the Australian market? Let's keep it straightforward. The realisation to many is it's an aha moment. When you buy a share in a company listed on the ASX, for example, you've become an owner, so and we often refer to that as equity ownership so you have a slice of the company. Now, depending on how many shares you have, your ownership and your entitlements to vote and all those sorts of things rises or falls in proportion to your share ownership.

It's not like some investments. We're actually following an investment manager. You have an ownership where you've actually given capital to the company and you're expecting them to work for you, to give you the outcomes that you're expecting by way of income or growth and to do the sorts of things that they say. You have entitlements to attend the AGMs, question management, talk to the directors and the chairperson of the business. So I'd encourage anybody getting started investing to look at it from exactly that perspective. It's like I've bought something and I'm an owner, but I'm one of many. So together we have a voice and I encourage people not necessarily to become activists, but to go along to AGMs, as I just mentioned, because there's a large proportion of people there who have a chance to ask questions why did this work? Why did this not work? What's the future hold? And you can ask the difficult questions, the ones we can't talk about here what's your dividend policy? What's the future look like for payment of future dividends?

0:32:55 - Phil

And remuneration policy, which is the big one as well in the AGMs, isn't it how? Much they're paying their executives.

0:33:00 - Ian

Yeah, and I think there's a balance there, I mean these things do get overwrought.

And taken out of proportion. Because you want the best, you have to pay for the best. You don't have to overpay for the best, and it is a global market, but I think you need to pay an appropriate remuneration for the right outcomes. That's the good news is, if the AGMs aren't right, as a shallower you have a right to vote and you can vote down the REM report. And if that happens by a certain number of votes, two consecutive years, there's a spill on the board.

0:33:34 - Phil

It's also interesting to have a look at an annual report or a half yearly report, because sometimes it's easy to assume when a company makes its money from, but actually when you read the report you can see that sometimes there's Unexpected areas where companies are making money that you wouldn't even think about unless you did a little bit of a dive into it.

0:33:55 - Ian

Yeah, and again we're coming up to reporting seasons, so half a year. A lot of companies balance. At the half year it's at the 30th of June a lot of announcements will be made and shortly thereafter annual reports provided and then followed by AGM's. But If you get the annual report and go through it, that's a nice document to take to the AGM. Unfortunately, and I think it's unfortunate I think it's always good to have a lot of information but you can have too much. Some of the annual reports are 64 96 page documents. They've got nice photos of the board of directors and the chair people and all that sort of stuff.

0:34:27 - Phil

Beautiful PowerPoint presentations as well. I do?

0:34:30 - Ian

they do all that so there's a lot and I'm all for communication, but I back to that point. I think the, the PowerPoints and the summaries that the precede the, the annual reports, are often useful as well, and If there's something there that you've got a question about, or on the other side there's something that you is not there, so put it that way and Delve into the annual report to find out a little bit more about it. So the first part of annual reports tend to be not the right words, but they tend to be a bit more puffy words that they've got the financials attached to it.

They're the, the annexures at the back. If you've got a Accounting mind, if you understand a balance sheet or a very basic profit and loss, very handy information to have a look at.

0:35:11 - Phil

I don't know if we'll keep this in, but I thought was interesting Credit Corp. They released their report yesterday and they said that the state of the Australian economy and the state of debt amongst consumers was not at worrying levels at all. In fact, their business has been affected to the point where consumer debt, which is what they deal in, is Not available for them to make good money out of right. Which is an interesting overview of the economy, isn't it?

0:35:38 - Ian

Yeah, I think again back to the point we're saying. So this is, this is about doing your research, looking, learning, listening. That sort of comment is something if you put in some space in your mind and you look for reconfirming other Companies saying something similar. Hmm. The media probably wouldn't be looking for the alternative headline and the bad news headline.

Yeah, if it bleeds it leads, sort of thing. But so yes, so what's going to get people to pick up my newspaper I'm thinking old-fashioned here or click through? It's going to be that headline. That doesn't sound good. But if you're listening to what one company says about the state of consumer debt, that's interesting. Another company says something else. It's similar. That's more interesting. And if you get two or three views at expressing the same sorts of Outcomes, that's a useful way to build up your knowledge and form your own view.

0:36:27 - Phil

Hmm, I. And especially to protect yourself against the bad news headlines that we constantly bombarded with.

0:36:33 - Ian

And a knee jerk response to I've got to do this because I saw it in the headline there. I've got to buy yourself which I boy it is. It was lithium. Everyone's talking lithium. So I mean, if I Many ways to get lithium, but do I have?

0:36:46 - Phil

to go and buy myself. Don't go to the pub, you know. I feel you know about shares. What do you think about this?

0:36:50 - Ian


0:36:51 - Phil

I said why do they do? I've got the perfect response. Now, have you heard of vanadium? Apparently, vanadium's the thing. Now Forget lithium.

0:36:59 - Ian

Well, there's two sides to lithium isn't there, so anyway.

0:37:02 - Phil


0:37:03 - Ian

Look. The other thing to look out for with company announcements is something coming out at four o'clock on a Friday before a long weekend.

Oh yeah, they're the ones to watch out for aren't they and you may miss it, because that's exactly what it's designed to do. Also, just what we talked through. There's a company that announced yesterday it also happened to be a reserve bank interest rate announcement, which tend to be fairly benign. But I'm not drawing the same comparison to the Friday before the long weekend outcome. Companies tend to set their announcement dates for the results, the AGMs, etc. Etc. Etc, on a regular basis, also the payment of dividends.

So if you're an avid investor and you keep a record of as divs come in, you find it's almost the same day twice each year, twice a year around about the same point in time, except if it moves from being a weekday to a weekend and it jumps to the next weekend or comes back or something like that. So you have plenty of forward. Notice is probably the point I'm trying to make of when a company is going to make an announcement and when you're going to be able to find out more information.

0:38:02 - Phil

So it looks like the stock market is a juggling pizza making trapeze artist line taming beast that builds its business in Lego blocks and then puffs up balloons.

0:38:16 - Ian

Wow, you've mixed them all in there together. That's an interesting recipe you've put down. Look, I'm going to simplify it and just come back to it. It is all of those things. If you look at it from one perspective. If you come from another view, backed by research, education, knowing what you want to do with a clear strategy for yourself and, if need be, seek appropriate advice, it can be a great place. Everyone likes going to the circus and if you know what you're looking at and if you know what the outcome is, you'll have a great time.

0:38:45 - Phil

Ian Irvine. Thank you very much. Cheers, pleased to be here.

0:38:49 - Chloe

Thanks for listening to Shares for Beginners. You can find more at SharesforBeginnerscom. If you enjoy listening, please take a moment to rate or review in your podcast player, or tell a friend who might want to learn more about investing for their future.

TONY KYNASTON is a multi-millionaire professional investor thanks to the QAV checklist he developed . Tony's knowledge and calm analysis takes the guesswork out of share market investing.

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