Nothing written below is financial advice. The questions and answers below 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 Aussie Firebug
I have 3 kids aging from 21 to 14 who are great savers and want to invest in ETFs and LiCs.
I’m educating them financially by teaching them everything from Rich Dad Poor Dad but don’t know much about share investing. Do you have any guides for investing in shares?
I’m going to suggest three books.
- The Bogleheads’ Guide to Investing by Taylor Larimore
An excellent book that provides a practical real-life understanding of how to become a passive investor through low-cost index funds and ETFs. It explains how the stock market works and why tracking the index makes sense for most people when it comes to investing. Skip the US chapters
- Money School by Lacey Filipich
A great practical book written for Aussies but also has timeless wisdom that is applicable anywhere in the world. Lacey is someone who has walked the walk and reached financial independence in her 30’s so she knows what she’s talking about. My favourite thing about this book is that it’s very direct. You’ll learn practical skills on how to actually execute a plan. Sometimes financial books can either be too anecdotal, or way too dry and boring. Lacey strikes a fine balance of good-humoured relatable stories that emphasise the importance of peer-reviewed investing strategies.
- The Psychology of Money by Morgan Housel
The older I get, the more I realise it’s mostly our behaviours that determine if we’ll succeed with money/investing. I always thought that it’s how much you know, that the really smart guys and gals would be the ones with superior returns but Morgan shatters this myth in ‘The Psychology of Money’ with fantastic examples of why even some of the most brilliant minds suck at managing their money and investing. I really liked this book because it focuses on the most neglected part of investing… mindset! Life happens outside of spreadsheets and we’re often our own worst enemy when it comes to building wealth.
Blogs and podcasts are a bit like junk food really. Nothing beats a well-written book!
I’d also like to give a shoutout to Passive Investing Australia. It’s a blog that you’ll probably be able to read in one or two nights but it answers a lot of the most commonly asked questions in a really clear and succinct manner.
I hope that helps 🙂
Hi Aussie Firebug,
Thank you for all the sensational and user-friendly content to date!
I’m a newly inspired millennial seeking FIRE (thanks to your podcast) and was curious to get your views on investing in high dividend-yielding ETFs (Australian and global) vs your current strategy of Aus ETFs/LICS, VTS and VEU. I get that the former typically produces lower capital growth and has higher MER, but wondering if you have ever considered the strategy given the potential for higher dividend income?
Keep up the awesome work!
Thanks for your kind words about the content mate 🙂
There’s a misconception when it comes to chasing high yielding shares called the dividend yield trap.
I’m a fan of receiving dividends because they’re tied more to the fundamentals of the business than the share price which can largely be influenced by the behaviour of the market even if the cash flow of the business hasn’t changed one bit.
Let’s take Commonwealth bank for example. On the 14th of Feb 2020, CBA closed at ~$91 bucks.
Just over a month later it closed at ~$58 bucks during the COVID crash. That’s a drop of 36%. Did anyone actually think Commonwealth bank lost 36% of its value in a month? Probably not. Were people running for the hills and acting irrationally? More likely.
But the interesting thing is that the CBA August dividend didn’t drop that much compared to the previous year (as a percentage).
For the majority of businesses, dividends go down less (as a percentage) than the share price in a crash and can be more reliable in retirement. But whilst I do like dividends, the total return on investment is ultimately the most important number when judging how well an asset performs.
Let’s imagine two scenarios when evaluating how two investments have performed.
- Company AAA is currently trading for $100 per share and pays $3.5 per share once a year. Dividend yield = 3.5%
- Company BBB is currently trading for $100 per share and pays $3 per share once a year. Dividend yield = 3%
Let’s pretend that we buy 1 share in both companies and after 1 year these are the results:
- Company AAA is now trading at $90 per share and pays $4. per share once a year. Dividend yield = 4.4%
- Company BBB is now trading at $110 per share and pays $2.5 per share once a year. Dividend yield = 2.3%
The dividend yield for company AAA has gone up! But the total return is actually a net loss of $6.5 whereas company BBB’s dividend yield has gone down but the total return is $13!
Growth is really important which is why focusing on the dividend yield can be a bit of a trap sometimes.
Diversification and low management fees are within our controls (to an extent) as investors which is ultimately why we invest how we do. I hope that answers your question Reg 🙂
I just wondered whether an episode of the podcast addressing patience might be coming up in the future. It’s a massive part of FIRE I think. Waiting each month for net worth’s to rise, checking markets too often, waiting for dividends, waiting to get paid, waiting even though goals can seem so far away.
Keen to hear your thoughts.
This is an interesting topic and one that I struggled with at the start of my FIRE journey.
If I could go back in time, I would explain to my younger self that financial independence doesn’t make you happy. It’s what you can do with the extra time you’ve bought back that really makes you happy. I’d also explain the concept of coast/flamingo FIRE where you can really start to control your time years before you reach your FIRE number. You’ll be surprised what an extra 10 or so thousand dollars a year of passive income can do to your psyche.
And I know it sounds corny but you’ve really got to enjoy the journey and make sure you’re living a fantastic life along the way. FIRE is more of a life philosophy for me as opposed to a destination I need to reach in order to be happy.
Breaking things up helps a lot too. The first $100K is often the hardest. Once you pass that, compound interest really starts to kick in.
I hope that helps mate 🙂