Nothing written below is financial advice. The below questions and answers are for general information only and should not be taken as constituting professional advice. You should always do your own research when making any financial decisions.
Hi Mr Bug, I’ve been listening to your podcast for the last month or two and am really enjoying it so far. I’m trying to find an answer to something and can’t find it online, sorry in advance if you’ve already addressed this, I haven’t listened to them all yet.
Do you know how an ETF that tracks the top 200 or 300 companies in the market decides what percentages they invest in each company? I looked into Betashares A200 and was expecting half a per cent invested in each company, instead, the top two companies get over 7% and then each company after that gets less and less all the way down to less than .1 of a per cent
Thank you 🙂
There are companies that provide Index data that ETF providers use. Betashares offers the A200 ETF as a financial product the public can buy on the ASX, but behind the scenes, they pay another company to provide the index data that determines which companies are in the ETF and their appropriate weightings.
A200 for example follows an index called ‘Solactive Australia 200 Index’ from the company Solactive AG.
You can go to Betashares website and look at the indexing methodology that explains exactly how it’s constructed.
Below is an extract from the index methodology PDF document.
On Selection Days, Solactive defines the Index Universe as outlined in Section 4.
Solactive Australia 200 Index
- All companies in the Index Universe outlined in chapter 4 are ranked according to Free Float Market Capitalization. The 200 largest companies are added to the Solactive Australia 200 Index, subject to the buffer rules below: – a company that is currently included in the Index is only excluded if the Float Market Capitalization of the company is lower than the Float Market Capitalization of the company ranked 225 at any Selection Day
- A company that is currently not included in the Index is only included if the Float Market Capitalization of the company is higher than the Float Market Capitalization of the company ranked 175 at any Selection Day.
If the application of the buffer rule results in less than 200 companies entering the Index, additional companies will be added from the Index Universe according to the highest Free Float Market Capitalization. If more than 200 companies end up in the Index, companies with the lowest Free Float Market Capitalization will be removed until a total of 200 Index constituents is reached.
Or to put the above in plain English, companies within the index are weighted by market capitalisation (market cap)
Market cap = The value of all outstanding shares.
Here are the top 20 companies on the ASX by market cap.
As you can see, the ASX is top-heavy which results in the top 20 companies making up over 50 per cent of the ASX in terms of market cap.
The companies that land in the 150-200 range are so small by comparison that their weightings are very small as you discovered.
And in the nutshell, that’s how it works 🙂
Have you thought about when you get to your FI number if you would have any anxiety over leaving you’re paid job?
I feel it will be the hardest part for me, I will struggle with the “what if something goes wrong” “what if I haven’t done my numbers right” kind of anxiety.
This is a great question.
In some regards, I sort of left normal employment back in 2018. I’ve been contracting in London and travelling the globe for the last two years and have recently started my own consulting company here in Oz (update coming up on this). So I’m in a unique position of not having to “quit” my main job per se. We haven’t reached full financial independence yet but it’s amazing what sort of freedom can be achieved towards the middle/tail end of the journey. We’re already reaping a lot of benefits from the seeds we planted all those years ago.
But I understand that not everyone is in this position. In fact, most will probably need to pull the plug at some point and leave their secure 9-5 type of job to make the leap of faith into early retirement.
Here’s the deal.
Anything you do in life is a risk!
But realistically speaking, what’s the worst thing that could happen when you quit your job and enter early retirement? Financially, a major crash in the markets is probably the number 1 most likely risk that can and might occur for most Firebugs. This will means some adjustments will need to be made but it’s really not as bad as a lot of people make it out to be. I mean… anyone who reaches FIRE usually possesses such attributes as:
- Delayed gratification
- An analytical approach
- Obsession with optimisation
These are the qualities of someone who is more than capable of adapting to adversity and making adjustments.
And let’s bring up another point that’s almost always disregarded when FIRE is brought up by mainstream financial commentators and advisors.
FIRE does not mean you can’t make money in retirement!
In fact, I’ve yet to meet someone who has reached financial independence that hasn’t gone onto a passion project that doesn’t flip a buck.
Even our lord and saviour, Mr Money Mustache pursued a love of his in retirement which was carpentry. This made him money. Was he still retired in a FIRE context? Yes!
What about our very own early retired badass Dave from Strong Money Australia? Retired at 28 but still earns a bit of money from the blog and I believe his partner works part-time for the social aspect (please correct me if I’m wrong mate).
Most people in our community know that the word “retire” probably doesn’t describe what most of us are trying to achieve here but the FIRE acronym is here to stay.
My point is that it’s not an all or nothing approach. Once you build up a big enough portfolio to generate enough passive income using the 4% rule that covers your lifestyles, IMO, in most circumstances, you’re good to go. It’s taking that leap of faith that’s the hard part. But every single person I’ve ever spoken to that’s reached FIRE has always told me that they wished they did it earlier. So take that as you will.
Hi Aussie Firebug,
I was wondering if you could shed some light on what new investors should know about tax.
I’m recently out of uni and have always had very straightforward tax returns, however over the last few months I’ve invested a couple of thousand dollars into shares and ETFs. I’m thinking about what that might mean for my tax return next year, and would love to hear your advice on what I should look out for.
Could you please provide a bit of information on how you got your head around tax as a newbie investor, eg. did you use an accountant or go by general information available online, and if so, what do you think are some of the most important things to be aware of?
Any advice would be much appreciated!
Firstly, congrats on finishing Uni 👏, and it makes me smile that you’re already thinking about your financial future by investing your hard-earned dollars into the market at such a young age.
The easiest way that I know of to complete a tax return in Australia is to get some help from a company called Sharesight (affiliate link). I’ve been using them for over 5 years and their services are free if you have under 10 holdings.
You can generate an income report and there is a section below it that shows you exactly where to plug your numbers into an Australian tax return form.
Here is mine for example:
Just be sure that the numbers in Sharesight are correct, always double-check with your ETF provider.
You don’t need Sharesight to do this but they make it very easier. You can always just use your ETF providers data and calculate the numbers yourself but I haven’t done it that way before.
Another thing to note is that if you sell shares, you’ll need to generate another report called “Capital Gains Report” which does a similar thing but for capital gains and not dividends.
I personally use an accountant atm because our situation is a bit more complicated (we invest through a trust) but the older I get, the more I value simplicity which is one of the reasons that investing in shares is so appealing to me. Once you know how to do your tax returns as a passive index investor, that’s about the only admin you’ll ever need to know for the rest of your life.
The same cannot be said about most other asset classes (looking at you real estate 👀).