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The Experts

Tom Hickey
+ About Tom Hickey

Tom Hickey is commercial manager of Switzer Group. He holds a Bachelor of Journalism from Charles Sturt University and has worked in various roles at Switzer since 2012.

The questions you're too embarrassed to ask about investing in shares

Friday, May 18, 2018

By Tom Hickey 

Each week I speak with dozens of people about their investments, and it’s always interesting to see who knows what about the share market. But what’s even more interesting is seeing what some people don’t know about investing in stocks.

With that in mind, here are some of the top questions most people are too embarrassed to ask about investing in shares.

What are shares?

Shares represent part ownership of a company. Owning shares means you own part of a business. Simple.

If your business does well, the company will become more valuable and price the price of your shares should go up. If you business is doing badly, the share price should go down.

What’s a dividend? 

As a part owner in a company, you’re entitled to your share of the company’s profits. These are paid to you as dividends.

Instead of taking your dividends as cash, some companies will let you to take your dividends as additional shares. This is a great way of increasing your return over the long term, because your investment will start to compound, meaning you’ll start earning dividends on dividends.

Not all companies pay dividends, and dividends aren’t guaranteed. Some companies might make a profit, but instead of paying it out as a dividend they will reinvest the money back into the business to grow the company. Australian companies have a tendency to pay higher dividends than companies in other countries.

How much riskier is it than investing in property?

Shares are higher up the risk spectrum than most other asset classes, meaning they have more risk, but should also see higher returns over the long term. 

Source: Vanguard Investments, Plain Talk Guide.

Risk in this sense really means volatility, or the amount the value of an asset may change over a period of time. If you invest in fixed interest, like a term deposit, you’ll get a very low return with essentially no volatility - you know exactly what you’ll have at the end of the year. 

Investing in property is more risky - meaning the value of your property can go up or down, but over the long term the right properties should increase in value. 

Shares are ‘riskier’ again, meaning you would expect to see bigger price swings in the short term, but over the long term this asset class should outperform.

But not all companies are created equal and some shares are less volatile than others. A small mining company, for example, might experience big rallys and deep troughs depending on things outside of their control, like the price of the stuff they dig up, whereas a large toll road operator, with a very predictable source of revenue, should have a more stable share price.

How do you start investing in shares?

To buy shares, you need to go through a stockbroker. When most people think of stockbrokers they think of Leonardo DiCaprio from Wolf of Wall Street, but in real life, it’s far more boring.

There are two different types of stock brokers: full service brokers (who will give you advice about what to buy and sell) and execution only brokers (these are basically online bank accounts where you can buy and sell yourself). The ASX has a list of all of the brokers on their website.

Most of the main banks have their own discount broking services and they all offer a similar service, so setting up an account is generally as easy as setting up a bank account.

How much does it cost and how much do I need?

A stock broker will typically charge you for every trade you make. Creating a broking account should be free, then depending on who you go with it’ll be between $10 on the cheaper end of the scale, and 1.5% up the expensive end.  

Most online brokers have a limit of around $500 per trade. It’s important to realise though that if you’re buying or selling $500 worth of stocks and getting charged $30 from your broker, which is a typical fee, that represents a decent part of your investment and you’ll be down 4% from the get go.

How do I know what shares to buy?

That’s the million dollar question, and the reason some brokers charge way more than others. For someone with only a small amount to invest or just starting out, the best thing to do is use a managed fund, which essentially spreads your investment over many different companies. This is much less risky than buying shares in just one or two companies, because you’re spreading your risk across a number of companies. This is the basic principle of diversification.

The next question would be: how do I know which managed fund to buy? There are two main types of managed funds: active funds (where there is a portfolio manager actually picking stocks for the fund) and passive (where the investments are chosen based on a rule).

Warren Buffet, one of the most successful fund managers of all time.

A passive fund (also know as an exchange traded fund, or ETF) might invest in the top 200 companies in Australia, or companies in the healthcare sector, or track an international index. These are a great, cheap way to get exposure to a large number of shares in one trade. Once you have a broker, you can invest in these just like any other shares. Most ETFs charge an annual fee of between 0.1% and 0.8%, which automatically comes out of the money you’ve invested.

The other option is actively managed funds, where there is a fund manager picking stocks with the goal of beating an index. Again, there are lots of different types of these, some invest in international companies, some in Aussie companies, some in high-dividend paying companies etc.

How much should I invest?

How long is a piece of string? How much you invest depends on your situation. How much money do you have, what stage of life are you in, are you comfortable with risk, are all questions you should ask yourself. Shares are a long-term investment, so a basic rule of thumb is: don’t invest any money you’re going to need over the next 3-5 years.

Is it worth doing?

Yes. If you reckon you’ve got more than 3 or 4 years left to live and you want to build wealth, having some exposure to shares is a great place to start.

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Is our love for dividends hurting our stock market?

Monday, April 30, 2018

What I’m about to say won’t be popular, but bear with me. Bill Shorten may be onto something with his proposed franking changes.

OK, calm down. Hear me out.

Aussies love their income stocks. Franked dividends have become the financial equivalent of the vegemite sandwich. Not everyone likes it, in fact many people are strongly against it, but for those that like it there is no compromising.

I was at a presentation recently with Charlie Aitken where he talked about his global investment strategy (you can watch his presentation here). He spelled out his argument for investing globally for growth, and domestically for income. It was a pretty convincing argument for looking offshore for capital growth, and he gave some examples of how his fund is structured to achieve this.

I was standing with Charlie after the presentation and an investor came up to him. His only question: What kind of income does the fund pay?

Aussie investors, particularly those in low tax brackets, are obsessed with franked income. But this obsession could be having a negative effect on our stock market.

The Franking System

Australia is one of the highest income markets in the world. There are a number of reasons for this, but one of the main factors is our franking system.

Franking was introduced as a way to prevent the double taxation of company profits. If a company pays tax on its profits, then pays some of those after-tax profits out to investors as dividends, and those investors pay income tax, that’s a big double dip from the government. The franking system was introduced to prevent this, which it did.

John Howard took this one step further and introduced refunds for people in lower tax brackets, as the original franking system failed to address this segment of the market and the government was still double dipping in some cases. This (the refund of surplus franking credits) is what Shorten is proposing to unwind.

If this goes ahead, the government will go back to double dipping on company profits that are paid as dividends to people in low tax brackets. I don’t think that is fair, so I don't agree with the proposed change. But I do think something should be done to encourage Aussie companies to reinvest their profits rather than pay them out as dividends.

Australia for income

The ASX 200 has an average dividend yield almost double that of the rest of the world.

Due to our obsession with income, and a franking system that encourages the payment of dividends, Aussie companies often commit to irrational payout ratios to please shareholders. A case in point is our resources sector. Until 2016, BHP and Rio Tinto both had a policy to pay an increasing dividend each year, regardless of how the company performed. Even if the companies recorded a loss, they would maintain or increase their dividend.

You don’t need to be Warren Buffet to figure out this is an unsustainable commitment.

The other obvious example of an imprudent dividend policy was Telstra which, until last year, was committed to paying almost all of their profits out to shareholders as dividends.

When a company pays all of their profits out as dividends (in the case of BHP they were often paying more than their profits), they leave nothing in the tin to reinvest back into the business. And if a company isn’t reinvesting back into their business, how can they expect to grow?

The ASX 200 index (which doesn’t include dividends) has lagged the rest of the world over the past few years.

Source: Bloomberg, SMH 

While our market has an impressive average yield, this has arguably come at the cost of growth. And as longs as our tax system continues to encourage the payment of dividends, it’s hard to see this changing.

The franking system exists for a reason, and it was successful in stopping the double taxation of company profits. But the side effect was that it encouraged firms to pay higher dividends than they otherwise may. I don't think Bill Shorten’s changes would be fair, but I do think the franking system could do with a look in to address this.

Income is great, and there’s nothing wrong with being primarily an income market. But we can’t have our cake and eat it too. If we want to see more capital growth on the ASX, it’ll likely have to come at the cost of yield.

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Is super the only thing keeping our market afloat?

Monday, February 05, 2018

A common argument from equity naysayers is that our stock market is being artificially propped up by the constant stream of money pouring in via superannuation.

The logic goes that because there is so much money entering the stock market via super contributions (let’s call this the superflow), stock prices are kept high despite not much real growth in company profits.

But can this argument hold water?

The first thing to do to answer that question is to look at the superflow, and the first thing you notice here is: the superflow is bloody big.

Each month, Aussie workers put billions of dollars into super accounts. According to the Association of Superannuation Funds Australia (ASFA), superannuation assets grew by $25 billion over the last quarter of 2017. That’s growth of about $278 million dollars every single day.

There’s now over $2.5 trillion in aggregate super assets in Australia. $2.5 trillion. That’s $2,500,000,000,000. There are a lot of zeros in that number.

All of this money has to go somewhere, and it turns out that about half of it ends up in equities, with just under a quarter ending up in ASX listed companies.

Source: ASFA. Chart displays average asset allocation of APRA regulated funds.

So what are these huge inflows doing to company valuations? All else being equal, if there is more and more money investing in the same amount of stock, simple supply and demand logic would suggest that valuations should go up.

Has this happened?

According to the average PE ratio (what’s a PE ratio?) since 1980 is 15 times earnings. At the depth of the GFC, PE ratios were as low as 8.2 times, and they blew out in the dot com boom in the late 1990s to around 23 times earnings.

So where are we now? At October last year the average market-cap weighted PE ratio for companies on the ASX was 15.8 - only marginally higher than the 27-year average.

Over the past 12 months PEs have actually been coming back, as share prices track sideways despite modest growth in corporate earnings. So based on PEs alone, the superflow doesn’t seem to be having much of an impact.

Source: Chart shows Market-cap weighted PE Ratio for the Australian stock market.

But why not? Surely with all of this extra cash flooding the market, valuations should be pushed up?

While on first view the superflow appears huge, if you take a closer look it actually doesn't seem quite as significant. Of the $25 billion superflow last quarter (the number would actually be a bit smaller given this includes investment growth, not just inflows), around 23%, or $5.7 billion, will end up invested in ASX-listed companies.

In the grand scheme of things, this actually isn’t that much. In fact, it represents just over a quarter of 1% of the market cap of all ASX-listed securities. Not really enough to make a material impact on share prices.

So next time somebody suggest the Aussie market is being held afloat by our super system, you can explain to them why that isn’t the case.

Or another approach would be to play devil’s advocate. Say, for argument's sake, superflows are propping up our market. What’s the big deal? With super balances growing at the rate they are and compulsory super contributions set to increase to 12% over the next few years, it’s not going to change anytime soon. So you may as well go along for the ride.

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Spaceship and Grow Super: Challenger disaster or Apollo 11?

Thursday, August 17, 2017

By Tom Hickey

Over the past year or so, I’ve noticed something strange happening on my Facebook feed. It didn’t happen straight away: just the odd post here and there. But after I started noticing it, it became impossible to ignore.

This may sound stupid but bear with me. I think superannuation is becoming … cool.

I couldn’t believe it either. But every time I open social media – and it’s not just Facebook - there it is again. Another friend has started following Australian Ethical Super on Facebook. Spaceship’s latest post has over 100 likes. Grow Super’s latest video has gone viral.

OK - admittedly it’s a great ad.

The fact that young people are starting to take an interest in superannuation is undeniably a good thing. Almost all Aussies will rely on their super balance in their golden years, but it’s a topic that has traditionally been pretty dry, so anything to get people engaged is a positive.

But the tipping point for me was when I saw the first ‘love’ reaction on a Facebook post from a super fund. That’s when I realised things were getting serious and it was time to take a closer look.

Gen Ys don’t like super. They love it.

When people start saying they love superannuation, it’s time to have a good hard look at the situation. Here is a review of some of the main super funds targeting the super balances of millennials.

The funds

The main funds on offer (or at least the ones that seem to target me) are:

• Spaceship

• Grow

• Australian Ethical

While Spaceship and Grow are both very new, Australian Ethical has been around for almost 30 years. I’ve included them here because they seem to be after the same target market.

The basics

I’m a sucker for a good marketing campaign, so when I started getting targeted by these funds I almost got caught up in the excitement. That is, until I read their PDSs (Product Disclosure Statements).

Here’s how the funds set themselves apart:

Spaceship: “Investing in the future” by building a diversified portfolio with technology at its core.

Grow: Nice app, ‘roundup’ investments (ie. investing your spare change), and having the flexibility to invest 15% of your balance in industries you care about.

Australian Ethical: Investing “in a cleaner, better tomorrow”.

There are three main principles to consider when choosing any investment. These principles are the same whether you’re choosing a super fund for the next 40 years, or if you’re picking a term deposit to park some spare cash for six months. These three basic principles are risk, return, and fees.


Let’s start with the fees. Baby Boomers and Gen X can naturally afford more luxuries than Gen Y, simply because they’ve been around longer to save up more money. They typically drive nicer cars, live in bigger houses and can afford to treat themselves with the odd European cruise.

However, there are two areas where Gen Y spend better than all the other generations put together. These are:

1. smashed avocados, and;

2. superannuation fees.

Let’s take a look at how the millennial super funds stack up in terms of fees. I’ve included Australian Super in this article purely for the benefit of comparison. This is not an endorsement of Australian Super.

Not all funds are created equal, so it is natural to expect higher fees for a more specialised product. But it’s important to note that these fees are high. Very high. And unfortunately, many people don’t understand just how high they are.

At a lecture in front of a university class of final-year commerce students recently, Felicity Cooper from Cooper Wealth put the following question to the class. If you have a mortgage with an interest rate of 2%, and interest rates rise to 4%, by how much have your interest payments increased? Most of the class responded that the repayments had increased by just 2%. And these were final-year commerce students!

For those playing along at home, the interest repayments doubled, or increased by 100%. 

It seems to be a similar story of understanding with superannuation fees. The difference between the grow super account (1.83%) and the Australian Super account (0.64%) isn’t just 1.19%. It’s actually closer to 300% more expensive! 

And over time, these differences in fees have a huge effect on your super balance.

Consider two super accounts over a 20-year period, both with a starting balance of $20,000 and both earning 8% per year. At the end of the 20 years, you would have $82,771 in the fund with the lower fee, and $66,232 in the higher fee fund. That’s a difference of $16,539!

$20,000 earning 8% over 20 years

But as I mentioned, not all funds are created equal and in some cases, it would make sense to pay a higher fee. Some people are willing to pay a premium to know their money (or a portion of their money) is invested in things they care about – or not invested in companies or industries they object to.


One obvious justification for a higher fee is the prospect of a higher return. But when looking at the returns of these funds compared to others, it’s obvious they’re not basing their premium on lofty expected returns.

Spaceship and Grow haven’t been around long enough to have any performance data to report on. But despite having the highest fees of the four funds researched, these funds had the lowest return listed as their investment objective.

On the other side of the scale is Australian Super, which had the lowest fee and the highest investment objective. (Again, this isn’t a plug of Australian Super. There are other funds out there with much lower fees than these guys.) 


One of the other main considerations is risk, or volatility. If two funds can achieve the same return, but one fund does it with less risk, the less-risky fund is the more optimal portfolio to invest in. If a fund can achieve a higher return with a lower risk – even better.

This is how each of the funds categorise themselves in terms of risk:

It’s not what you would expect to see based on the fees and expected returns.

The other point to make on the subject of risk is diversification. This point is more specifically directed at Spaceship, who boast about investing over 34% of their portfolio in tech stocks. Technology stocks in Australia make up just 1.4% of the ASX200. In the US, technology is the biggest sector by market capitalisation, and even there it’s just 22.3% of their market. So by any standards, 34% is a huge overweight position, particularly at a time where tech stock valuations are so high and leading stock pickers, such as Charlie Aitken, are taking profits.

In Charlie’s words, “it needs to be made clear that the gains in large cap technology shares globally HAVEN’T been driven by earnings growth. The majority of the share price gains have been driven by P/E expansion with investors paying higher and higher multiples for earnings streams. This is a dangerous situation and one that can easily reverse if investor sentiment changes.

“Put simply, technology earnings multiples have generally increased at a faster rate than earnings momentum.”

But technology is Spaceship’s key selling point, so it makes sense that they’re heavily overweight the sector. That being said, I still think more of ‘Challenger disaster’ than ‘Apollo 11’ here.

The verdict

So despite having higher fees and a more conservative investment objective, Spaceship and Grow carry higher risk than Australian Ethical and Australian Super. Looking at these three points, it’s hard to make much of a case for these funds. Sure, the marketing guys are doing a great job getting millennials excited, but as an investment product they don’t tick my boxes.

But will these funds raise a lot of money and convince thousands of young people to move their super?


All three funds seem to have great marketing departments and when you’re targeting the smashed avocado generation, this seems to be what’s important. If I wasn’t interested in finance, I would likely have put my super with them months ago.

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Is modern-day journalism out of touch with reality?

Thursday, November 10, 2016

By Tom Hickey

“Nobody can believe it. Nobody thought this was possible.”

I heard this from someone during a cross on the ABC’s coverage of the US election, and it follows an all-too-familiar theme in modern-day journalism.

Nobody can believe it. Well, that’s not entirely true. Actually, over 60 million people can believe it. Over 60 million people thought it was possible. Over 60 million people voted for this.

The same thing happened recently with One Nation being elected to the Australian senate, and with Britain voting to leave the EU. None of these things seemed possible at the time, but they sure seem possible now.

What this shows isn’t just that communities across the world are demanding change, but something that, from my background as a journalism graduate, is far more sinister: it shows how truly out of touch the mainstream media are with what’s going on in the world.

Now, I’m not a hippy or a leftie, and I’m not a hard-core conservative either. I’m normally the last person to blame ‘the media’ for anything. Not that it’s relevant, but I’d have voted for Britain to remain part of the EU, and for Hillary to become president if I had the opportunity, and I understand that both of these issues have put us into uncharted waters and no one really knows what will happen next.

But the thing I find the most striking about this situation is the unashamedly biased media coverage these events have received, and the extent to which the ‘mainstream media’ have been so far off the mark.

Each of these examples saw an army of working-class folk gather to vote for something that ‘educated’ people couldn’t comprehend. These ideas were ridiculed and dismissed by many, but all the while a not-so-silent majority was ready for change.

It’s oddly reminiscent of The French Revolution, with the unwashed and underestimated masses rising up against the oppressing bourgeois to regain control. I don’t think anyone’s going to get the guillotine this time around, but you get what I mean.

So much discussion around these issues came from the perspective of a moral high horse, with the majority view being made to look like that of a few outlying hillbillies.

I completely understand that Trump has some crazy ideas which deserve to be scrutinised, but the mere statement that ‘nobody saw this coming’ highlights just how disconnected from reality today’s journalism really is.

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