Mailbag: incl. Are we paying too much for volatility protection? May 4, 2025

26:57Yep. Agreed. All right. So rare though, right? So rare. yes and yes one day one day I'm going to write a long article which is kind of going to be the CEO handbook from an investor here's what I want you to do that kind and I won't I'll get it on there but yeah let's do it maybe do that as a pre-recorded there you go for a whole day there you go bit of planning on the fly George says greetings Scotty and Drewie P Drewie P that's not bad that's a new one I'm thinking if it'd be MC Drewie P it's kind of got some Yeah, I like it. Yeah, yeah, yeah. Drop a beat and I'll just start freestyling. Waka, waka, waka, fun.

27:39I would like to think the next time we experience significant market crash, says George, I have the nerves to invest as much as I can, but I know this is much easier said than done. However, I think to give me the best possible chance of doing it, I want to have a step-by-step plan for when it does occur. How should I approach it? Should I buy an ETF? Should I invest more into the companies I already have and like? Should I invest in a bulletproof companies that I think couldn't be wiped out? I'm quite busy and would not have the time or the brainpower to think through the first, second, and third, and fourth order impacts of the next Black Swan event.

28:12So I'd love to hear your thoughts and if it's possible to make a plan now. Love your work. Cheers, George. Thanks, George. Very kind. Oh, yeah. That's a great question. What's the step-by-step crash plan, Mark? Yeah, I'm going to go blank now on the name. I'm Scott. It was the fucking guy. Oh, that's good, mate. He's the former boss of Goldman Sachs. I think I mentioned it on the pod recently. Yeah, you did. Yeah. But I'll just repeat it again for those that didn't miss that episode. But he really, he was being interviewed on some show. And the journalist was saying, how do you guys, how come your forecasts are always so accurate?

28:51Because we don't forecast. We scenario plan. And I just, God, that struck a chord with me. And it's just like, and the brow of the question is really far enough. I was like, what? No, you are making forecasting. No, we don't. It's really hard to do. We spend half our time just figuring out what's happening now, let alone what's happening next year. Like what's happening right now? I don't know. Like there's a lot of data to sort of ingest and interpret. So what I think you do is it's, because you don't know what the next crisis is going to, you don't know when it's going to be. You don't know what's going to precipitate it.

29:26Even if you're generally directionally right on what maybe some of the big themes are, like the specifics are going to be very unexpected. They kind of have to be because things that are very easy to wrap your head around don't precipitate big market falls because people can deal with it. It's really when things are uncertain, you know, in a very fundamental way that you get very, very, very steep discounts. So just ask yourself, you know, really basic questions like what does this company look like under a severe recession? Now, it's not that you're not forecasting a severe recession, right? But if a severe recession happened, what would that kind of look like?

30:06You know, if trade entirely broke down between us and China and the US, what would that look like? And you can go through various things and not because that's going to be the plan, but it means that when the world unfolds in a particular direction, you can be super agile. It looks as though you're acting on future information because everyone there is in real time going, oh my gosh, this thing just happened. What? Pandemic. What? Borders closed. How do we, you know, and it's like, okay, we've got to figure this out on the fly. Whereas the person who's thought about it before, and again, they never would have anticipated the exact set of circumstances, but it's just like, well, yeah, this is clearly bad, but you know, this company makes food that's, you know, represents a very substantial part of most household budgets.

30:53and, you know, they'll take a hit, but their balance sheet is really strong and da-da-da-da-da. And you can work through all of that kind of stuff. And even outside of big black swan type of events, I mean, I really liked, I've been doing this recently on the straw man because I've been a bit slack. I'm refreshing some of the investment cases I've got for the major stocks that I've been holding. It's just like this is the company, this is what it does, you know, really basic kind of stuff. This is why I like it. These are the things I need to watch out for. this is what I think it's worthwhile and very often because I'm tight you know it's like I think it's worth less than the market is offering and I don't know that it'll ever get there but I know if it does get there and I know that the circumstances that got it there don't undermine any of the structural advantages or you know positioning of the business then I should buy so I'm reacting in a way which which leverages the I'm a precog to like think of the minority report.

31:54I've cognitively, you know, gone through this already. So I can, I can act very fast. So it means you build up this sort of investment diary full of all kinds of stocks, as much as you've got the time to sort of dedicate to it. It's like, and then, and then things will unfold and you go, gosh, I always thought that no matter how bad things get, Woolies is probably going to have a tough time of it, but they'll be much better than most companies on the market. And gosh, if it ever got to$19, like that is just like, how bad, like, unless the world is ending, that is a screaming bargain and I should buy.

32:24And then something will happen and you'll find it that it's there. And then you'll convince yourself that you'll just wait until things get better and you'll do all the behavioral stuff that we all do. But at least that's the theory, I think. I like it. So I'm going to, George, I'll do the politics now. I'm going to disagree with the premise of your question in one sense, which is to say that I don't try to pick the bottoms of markets or time these things or wait for the dips. I'm always fully invested that are almost always fully invested. And when I'm not, it's because I haven't got around to buying something or besides I haven't bought anything yet or whatever.

32:56So my approach to being prepared for the dips is just to be owning shares. And yes, that means I can't buy more when they fall. But as I've said lots of times, the market goes up more than it goes down. It goes up further than it goes down. Waiting for the crash, if you like, is betting against the market in the meantime. Now, if the market goes up 20 % while you wait for a 10 % fall, then you've still lost 10 % in the process. Now, everyone's different. Some people like to have cash for optionality, all that kind of stuff. I like to have the wind in my sails all the time because I think over time, you're going to do much, much better.

33:31You're going to have higher share prices over time. You're going to make more money over time being fully invested. So that's my first step. It also means you don't have to make yourself invest when the market's down. If you're going to do that, by the way, the other thing is to use dollar cost averaging. If you're buying every time you've got a certain amount of money or buying every time you save some money or get paid or whatever it is, that also helps you do it because you're kind of in that space and you're already doing it, it becomes the habit. So you just kind of get on with it. In terms of what to buy, it depends entirely.

33:58So you're given three, I love the three options you gave us. Buy an ETF is a great way to get market exposure. When the market's down, if you think it's down too far and you think it's going to come back, then yeah. And I've said many, many times, the ASX has never yet failed to regain and then surpass a previous high. In other words, unless that changes, whenever it's below the last high, there's upside already baked in, plus it'll go higher again than that. So even going back to that, during COVID, when the market felt 38%, it was like, well, it's probably going to go back to at least that level.

34:24In which case, the upside is not 38 % is more because you're doing it on a lower base, but you get the idea. Was it 60%, 70 % upside? Whatever it is. So, you know, buying the ETF is a great strategy. That's what you want to do. In terms of which ones to invest in, I like the more in the companies you already have and like better than the bulletproof companies for a particular reason. And that is, by the way, the ones you own and like should, if not be bulletproof let's be pretty pretty damn bulletproof um because if you own them and you like them and they've got better futures than most then that's probably a good you'll have more conviction you'll do it more comfortably because you already know them um buying a new company you don't know yet it's just it's always it's always easy to buy something you already know because you just feel better about it that that's got some um by the way endowment effect a bias in it so be careful that but generally speaking if you if you objectively like them and they're down well unless anything's changed about the long-term future as ram says the future should be pretty good in terms of bulletproof companies that couldn't be wiped out yes um i for the for the last hit that couldn't be wiped out but yes um why do i say that well we saw the market crater a couple of weeks ago when the u.s going to be talking about we say crater it fell meaningfully but not down yeah uh but and what happened well everyone bought will lose coals and endeavor group they were three of the top five stocks right now and they did because they were they're buying bulletproof companies the thing is you're paying high price of the bulletproof companies because they're already everyone's doing exactly the same thing and so when you're doing the same thing everyone else is doing you're going to get whatever else is getting you might as well buy an ETF at that kind of level I get why you want to buy them I really get it and as I said if your second category you already have and like can be wiped out I'd be really thinking about that now we're not even waiting for the next crisis right so because if you own something that could be wiped out and you know it could be wiped out you're kind of playing the Russian roulette a little bit and I don't I can't have any circumstances I would do that I might if and this is probability i might have a if i've got 20 companies in my portfolio i might have a couple that i think can be 100 baggers but also might go broke i mean that that's still a probably good trade as long as you as long as you get the probabilities right so i don't think you should avoid always companies that couldn't possibly in any circumstance get wiped out um but generally speaking you should have companies you think are going to be bigger and better at five and ten years time so i kind of would go with that option personally um it's also true by the way the biggest opportunities in hindsight will always be ones that almost could have got wiped out and didn't because they're the ones that the market has left for dead and then when they don't die that the re-rating as they call it basically the market goes oh it's okay now they're gonna be the biggest winners but you are absolutely playing a very dangerous game because they might get wiped out so um looking back it always looks like the best opportunities were the ones that didn't get wiped out because it's kind of survivorship bias right you gotta be careful of that i just want to double down on that point that everyone buys the consumer staple stocks in the depths of a bear market it's it's too late they were the stocks to hold beforehand because they're going to hold up much better i mean you you actually want the more cyclical ones at the bottom right like they've got far far far more upside i'm not saying like i'm some speculative flyer but you know it's sort of the sentiment is right the timing is is wrong on that not not trying to time things in advance but it's just sort of like to go uber defensive after everything has crashed is kind of like i mean you should have done it beforehand.

37:42Or more to your point, is it's like you just expect that these things are going to happen from time to time and try and have reasonably resilient businesses. And I've got to clarify that as well because what do you mean by resilient? I don't mean a business that doesn't suffer an earnings downturn during a recession or some kind of calamity. Like, fine. Most businesses are going to suffer. I just want the business that isn't facing an existential threat because sales drop 10%. because they're highly leveraged. They've got no, the balance sheet is super weak. They're selling a product that, you know, really only moves when there's extreme levels of exuberance in the market.

38:19And this is so playing with fire. No matter how cheap it might look on a PE multiple or something, you want balance sheets are the things that no one pay attention to until it's too late. I often think. And yeah, so I just make that point and just always have an eye as to, at any day you wake up. And it doesn't have to be something, it's like, it almost certainly will be something out of left field, right? God forbid the bombs start dropping over in the Northern atmosphere. I was like, yeah, it'll happen tomorrow, right? And it's like, oh, okay, now I'm going to like move into Woolsey. Like, it's just, it's silly, right?

38:56You just, it's always around the corner. And sometimes it's right in front of you. And that's fine. When, I've said this before too, The true test, everyone says they've got conviction. The true test of conviction is that when it happens, you go, I wish I had more money to buy more of this. If, oh my God, what's happening? Oh, should I sell? This is really scary. You never had conviction in the first place. Know what you own, know why you own it, right? And if you deeply, deeply know that, I'm not saying you should be happy because the share price is going down. I'm not saying you should be happy because profits are going to take a backward step for maybe a few years.

39:32But you should be happy in knowing that it is temporary. There is genuine value behind this ticker and this wiggly line on a chart that you're looking at. There's a real thing here. And if you really understand the value of that thing and the price appropriately reflects that, you can sleep like a baby. Yeah, exactly. Right? Exactly. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

40:04Let's get one from Drew who just says, Hi guys, you know I love you both, so I'll skip straight to the point. Yes. I'm not sure. Is that okay? Maybe you're right. Maybe we need a bit more. I wouldn't have thought so. Lately, says Drew, I've been spending a lot of time yelling at investment managers on the pod machine. They all bang up. Does he mean you've been? He'd been. We haven't had them all. Maybe other pod machines. They all bang on about strategies for managing risk. You need defensive assets. You have to have gold, risk on, risk off, cyclical strategies. It seems to me that an enormous amount of time, effort, and clients' money is spent managing risk, which really over the long term is just volatility.

40:42I don't believe risk and volatility are the same thing. You've been listening well and or, come back to yourself, well done, Drew. Couldn't investors be better served being educated about volatility and learning to roll with the punches than to have complicated, fee-hungry strategies to mitigate the so-called risk? I'm sure a lot of investors' money is being torched, avoiding the normal ups and downs of the market that mean very little over the long term. Thanks, Drew. No notes on that one, Drew. You absolutely nailed it. I mean, yeah, volatility is not risk. Volatility is the natural state of the world, I would very strongly argue, because poo happens to use the friendly way.

41:19Yeah, it just does, right? Like, to think that everything just progresses in a straight line or should, I mean, it's just the height of fancy. It's just that volatility is perfectly normal. And more than that, it's actually great for those that do have conviction and long-term vision and emotional fortitude. Again, I'm saying this as if I've got it. I mean, there's some zen state of investing. No, I panic and do dumb things constantly. But I am very, very firm in my assertion that that is what you should at least aspire to. Yeah, should people be better educated? Yeah, I'm not hopeful. I mean, we've been doing this as a species for a long time and people just not learning the lesson, right?

42:05So when the ducks quack, feed them. Wall Street knows exactly what it needs. The reason things are the way they are is because that was what the market demands. You would imagine that, well, no, people just want good quality investment advice and decent risk-adjusted returns. Like, no, they don't. They say they do. No, they don't. They want a comforting story. They want to believe that there can be someone who's smart enough and clever enough and well-connected enough to make sure that you only enjoy all the upside and you don't have any of the downside. Leave it to me for a very small fee. I will do all of this for you.

42:41And to help build up your faith in my abilities, I'm going to use lots of big words and lots of fancy models. And I'm going to want to perform the market just like pretty much everyone in my space kind of does. And it's super frustrating. I get you. But I long ago stopped being angry about it because human nature is human nature. And, you know, I actually, as I often say to you, mate, it's like long may it last for my purely selfish reasons. You know, a flighty, ill-informed, you know, a short-term focused market is the best friend for the person who can keep their head and think a longer term, et cetera, et cetera.

43:19So it's kind of annoying, but it's kind of really good at the same time. 100 % I'm going to actually defend fund managers the first two answers then I'm going to stick it to them in the third Drew I may have more than three but I'm going with three for now first thing is I think investors fund managers are largely there to do what their investors want them to do we have this conversation about CEOs all the time it's like a really good objective CEO would say hey Shell as you said I'm going to tell you how I'm going to do it then I want you to come for the ride the other view is the CEO works for the directors or for the shareholders via the directors of their agents.

43:57And if the shareholders say, I want you to go and pump the share price, please, the CEO is kind of obliged to do exactly that. And so it's like, well, which is right? Now, objectively, I think I know what I would prefer, but if 65 % of the shareholders say, dude, get out there and start shelling for me, what do you do, right? You do what you're told, as long as you don't do anything illegal or unethical. So I guess for the fund manager perspective, if that's what your shareholders want or your investors want, and you do what you tell or you you offer them that if they choose to invest with you they're buying into that strategy in theory and if that's what they want now and and by the way again i you're right which i'll get to but we know with things like balanced and conservative um strategies superannuation for example people people actually want that they they don't want as much volatility even if long term they got a better return they just can't stomach it they don't want it they don't like it they they want it to be less volatile less scary and if that means more cash and they're happy with that, that's what they can choose.

44:53Now, so those are two reasons why I think it's reasonable. The third one is not really defense of them at all, but there are families who believe they can actually generate better returns by doing some of this stuff, and I'm sure there are some who have. Some of them can. So I think it's something like 10 % to 20 % do outperform the market, and there's a smaller subset who have done it consistently. They are genuinely capable people, right? They do exist, to be fair. And so are they wasting money? Well, yes, if they get average returns and have done their stuff, they're wasting money. Absolutely.

45:26But to your point at the end, shouldn't we – well, I hope this is what we're trying to do with this podcast – shouldn't we educate investors so they don't worry about it? Yes, absolutely. And why don't fund managers do it in part because of their own egos, in part because of, frankly, their pocketbooks, as Warren Buffett would say? Why? Because if you say, it's easy, just buy an ETF, then the fund manager goes, oh, I've just got rid of all my funds under management and my fees, and I guess I'm looking for another job. And so there is absolutely, we've said this a lot about financial types. There is a subset of them who either for their own ego, because they think they're better than they are, or for completely selfish and self-serving reasons, think they can and tell you they can and they're going to try, maybe because you'll give them their money.

46:08So yes, you're absolutely right. And that's why it's different to volatility. If they're managing volatility, that's a waste. Again, with the exception of people who actually want that managed for them, because some people do, and that's completely okay. If they're trying to time these things, then, as Ram says, a few people can, most can't. So, yes, it's absolutely a waste of time, effort, money, effort, energy, all that kind of stuff. And we know the market, the average fund manager loses to the market. So it's not even managing the risk stuff. It's just their own stock picking is bad enough, let alone adding the other stuff on top of that.

46:36Why say bad enough? I don't mean they're bad stock picks. I mean, if they get the average market return and then you have fees on that, you're going to be behind. So, yep, I completely agree. I think there are reasons why investors might want it, and that is reasonable. Just a quick one. I have a lot of people who say to me, the answer is financial literacy. And I've said a lot of times, that is absolutely true as a first order thought. I'm going to throw a but here because the but is, no one thinks taking drugs is a good idea, right? Addictive drugs, right? I'm going to take heroin. I didn't know it was addictive.

47:10That's a surprise to me. Now I'm hooked. You know it and you do it anyway. No one gambles expecting to win. No one, you know, So we know Big Macs are bad for us. And yet, how many Big Macs sold in Australia, right? So literacy in that sense of if you only knew you would do better is half the exercise. But the ability to actually put that into practice or be protected from yourself, I don't mean in an anti-state kind of way. I mean having a fund manager, have a conservative mix so you don't freak out and sell. Even though you know you shouldn't, you do it anyway because I just got overwhelmed. So again, you're not wrong, Drew.

47:44I think we should do more to educate investors. That's what we're trying to do with this podcast. That's what we've got. Ram's been doing for years, what I've been doing for years now, respective businesses and careers. Some people can't listen. Some people don't listen. We want to reach those who can and will, but there's always going to be those who can't and won. I am convinced that's the majority. And I'm going to use my own family and friends circle here. I don't know how many Christmas dinners I need to be ranting and raving about some things. I'm never going to convince Uncle X of certain.

48:16And it doesn't matter how, like, it really is something I've got to get over because I have this naive view that if only I can put the words in the right order and present the evidence, it becomes irrefutable. Just through an exercise in pure reason, logic, and fact, you must end up on this conclusion because there is no other conclusion based on this set of circumstances. Either that or I've got it wrong and then you can present some facts to me which make me change my mind. But there is beyond our monkey brains, there is a base layer of reality, which is truth, right? And there is only one truth.

48:52And so, but no, no, it doesn't. And it's not like the weird outlier for most of us. And I'm sure I'm guilty because I'm human as much as anyone else. They're just things I passionately, firmly, dare I say, pig-headedly believe that no one will talk me out of, right? and and it's to err is to human i suppose so i i i don't certainly don't want to make this a little rant here from my uh you know a position of look how good i am if only others could be like no no i on a daily basis do dumb things that i know i shouldn't be doing and yet do do anyway but again at least like it is it is worth sort of harping on about the ideal at least at least we know the direction in which we go.

49:41Probably I'm not going to try any heroin anytime soon. But, you know, there's a long gap between that and maybe I will buy that little specky biotech company. Oh, totally. And then, yeah, people are people. And, you know, this is where it's... We financialized our world a bit much. Ram and I are massive fans of investing in stocks in terms of wealth, but it's a great thing to do, a great way to do it. people I'll use my mother I've said before years and years and years and years ago she said the old man had passed away she went to the financial advisor or she got something for the financial advisor and the super fund had fallen and my question genuinely was isn't super supposed to go up and it wasn't it was just pure naivety absolutely and not I don't mean that in a disparaging way she just didn't she was a nurse right and she hadn't lived in the financial markets all of a sudden dad's gone she's running up right never thought about it before What am I supposed to do here?

50:35You know, without help and assistance, someone in that situation is going to have that issue probably shouldn't have to think about superannuation. Probably should have just industry fund, you know, choose an option, knock yourself out. Again, I think I'm also a million percent agreeing with Drew, though. All of the financial institutions we deal with have much more work to do to genuinely help people with these sorts of questions. It should have been something that was on a website, on a homepage of the super fund saying, hey, here's how to think about investing in the fund. You will lose money sometimes for a bit, but over time the market's gone up, the stuff that we do all the time, there's not enough of that.

51:11So the education piece drew you a million percent right. We probably just have to have gradations of involvement for people. And I don't, again, as Ram said, we don't want to do the, you know, don't worry your pretty little head about it, we'll take care of it. But genuine people with genuine interest in their members or investors' outcomes who are saying, you know, this is, here's what I'm doing, here's why. You don't need to think about it, don't need to worry about it. Now, again, a dodgy person who says that is just trying to pull the wool over your eye. So it's got to be a credible person.

51:35But there is a combination of both, I think, required. And to your point, Drew, either say to people, I'll show you a super in 10 years, don't worry about it. Or if you are going to worry about it, here's what option to choose to minimize the volatility, but we can't make it go away. Yep. Yep. Hey, question from Nick, mate, which goes to a couple of, well, it goes to what we talked about before, which is investing or paying off the mortgage. But Nick's got a couple of parts of the question I do want to read out individually because I think it gives a sense to talk about a couple of things. We don't cover as much.

52:04Hi, Scott and Andrew. He says, thanks for taking my question. It may be a very straightforward answer, but I hear people often speak about how investing in the stock market when an individual has a mortgage is a smart option, as on average the rate of return is better in the market, at least historically. However, this doesn't make sense to me in all situations. As an example, my fiancé and I, congratulations. conversations oh nick say i liked you until you said you were at 28 and 26 and now i don't like you at all bought a house last year with a mortgage a home loan is six percent which is lower than the typical market average of eight to ten percent over the long run however the bit i struggle to understand is why would i be investing the spare cash now into stocks etfs for example when the volume amount of my loan would mean the six percent i pay in interest is costing me more than i would get for investing with only a small portfolio of about fifteen thousand dollars to me it makes sense to pay down the mortgage or offset first with any spare cash until you reach an equilibrium point in which time it's better to start investing in the market i also understand that shares might have 50 years to mature in my age category while a house loan is typically 30 years however it doesn't feel like investing in the stock market makes much sense when someone first gets a home loan i understand you can't give financial advice the above is to provide an example of what i think is a typical situation for someone in my age category and i'm not looking for specific advice.

53:20I'm interested in your thoughts. Have a great day and fool on, Nick. Thanks, Nick. Do you want to go first? You go first, mate. I've just got a couple of thoughts. I've got a point I want to drag out of it, so I will if that's okay. Of course. Nick, I understand the approach you're starting with, and I'm going to get you to reframe it a little bit. So what you're saying is you've got a massive mortgage and a small portfolio, and so I'm going to make numbers even easier than yours. You went with 15 grand. I'm going to go with 10 grand because it's easier. If you get a 10 % return on a 10 grand portfolio, you're going to make$1 ,000.

53:55And you're thinking, well, hang on, I've got a half a million dollar mortgage, for example, and I'm paying 6%, and 6.5 million dollars is$30 ,000. So I'm spending more interest or mortgage interest than I'm receiving from my portfolio. And I get that's the initial thought. What I want you to reframe it is to imagine not the size of your mortgage, but only use the size of your portfolio. Because here's how it would work. I get I'm using 10 grand because it's easy. if you were to pay 10 grand off the mortgage you will save 600 bucks in interest at six percent right which is great that same 10 grand invested at 10 percent i'm taking the top end to make my life easier will actually make you a thousand dollars so even though the total interest bill is still large you can't really compare the two all you can do is say if i had 10 grand if i put it here i'm going to make this if i put it there i'm going to make that which one is better so i And I get that that's not necessarily always obvious, Nick.

54:48It may not be intuitive, but that's how you need to think about it. So the equilibrium point isn't really the way to think about it. It's just a question of where do I make or save the most money? It's interest foregone, investment return achieved. So there's that. The second thing I want to throw at you is just to also think about the tax implications. If you're borrowing to invest, you can offset the borrowing cost. but if you're just using the saved cash, then you're getting 10%, but you're going to have to pay something. Now, it depends on what your income is. Let's say it's 30 % for fun. Your 10 % return isn't being 7 % return after tax.

55:21Now, that's still above the six, but not by much. So just include the tax in the considerations as well. So that's the second thing. Last thing for me is a behavioral one. Nick, and again, we spend a lot of time talking about behavioral finance. Why? Because it's probably the most important thing to get your head around.

55:38in dollar for dollar the most rational choice is to do the thing that gives you the best after tax return just there's no there's no question that rationally that's the best thing to do whichever gives you the most money at the end of the day is the thing you should do why i do think that investing at the same time as having a mortgage is useful is what people will do at the end of the mortgage now in a perfect world if the mortgage was better than investing. Do that until you pay it off. Absolutely. And then what you should do is take all of that repayment money and put that straight into the share market so you're then investing in shares with the same amount of money.

56:14What behaviourally people tend to do is their lifestyle kind of grows and grows. And when you finally paid off the mortgage, you think, oh good, I've paid the mortgage off. Now I'll start investing. But we really should redo the kitchen because we've been living here a while and I'd really like to go on holidays and maybe I'll buy the iFillit rather than the rump steak because I've got some more money now. So what ends up happening is the mortgage gets paid off, which is great. And then you don't quite ever get around to investing as much in the market as you were paying off the mortgage. And that's fine.

56:43I'm not saying it's a bad thing, but what I mean is the end return, you're kind of about costing yourself some money. If you can, this is why super is important. I mean, we all are investing while we're paying off the mortgage, right? Because we've all got super. And the reason that's important is because that will grow independently of your home mortgage being paid off. And behaviorally, for most people, maybe not you Nick for most people that doing both is probably going to give you a better long-term return because you're in the discipline of doing it and you're not tempted to kind of have the house and then just maybe scrape a little off the side for this or that or something else and never quite get around to it Ray?

57:19Excellent answer we've touched on this before too it is something that will be dependent on the person itself you've disclosed before that you've focused more on mortgage repayment than you otherwise would have. You know, mathematically, it's probably leaving a bit of money on the table, but you and your wife really value having a massive margin of safety. Correctly. Who am I or anyone to say that's wrong? It's like, no, for you, it's right. For other people who have a bit more risk tolerance is like, no, I can make more money if I do it this way and still be reasonably prudent. It's like, well, that's right for you.

57:59You know, so it's sort of, it is horses for courses. The only way, I've mentioned this before too, and it's probably a bit more controversial. The only way my thinking has evolved recently is that if you were to expect a lot of inflation in the decades ahead, say you're 28, say you're Nick, say you've got a million dollar mortgage, you know, by the time you pay that, you know let's let's say that you i'm not saying you should do this it's just an exercise let's just say go interest only right and you think i'll just pay it off in 20 years time well the the value of the loan is still a million dollars but a million dollars ain't much in 20 years time i can tell you because i still think in my head a million dollars sounds like a lot of money because when i was growing up you know as a teenager in the 90s oh my god they're a millionaire it's so much it's exactly like the dr evil scene you know when he comes out of cryo and he goes i I want$1 million.

58:57And they're like, oh, it's like, it's nothing. You know, it's 2003. This is like, it's absolutely ridiculous. And so there's something, do you get what I'm saying here? It's like there is something to be said. It's like, I don't want to be too, I don't want to be too fancy here because you can definitely blow yourself up. But it's like, wait a second, I'm borrowing something that is not only likely to go down, is designed to go down in value over very long periods of time. and I'm going to take that capital and I'm going to put it in something that's likely to go up in value over time. Now, where it gets silly is where you push that to the nth degree, where you are so highly leveraged that you cannot afford to ride out any volatility or a little tiny dip and it's effectively a margin call and you're a four-cell.

59:47I mean, that's dumb. Dumb, dumb, dumb, dumb. And I don't want to even advocate for that. but as i as i say as my thinking has evolved i have thought that it's actually and this is just for me right because it's where my risk tolerance lies but for me it's like because we were very much have been actively discussing this around our kitchen table which is let's keep as much money on the mortgage as we can because we're getting a better return over here and we're comfortably meeting the repayments yeah and if we change our mind we can always pay a big chunk down if we need to but this is this thing is it you know what it is it's a speculative attack it's a george george george soros bank of england right him and drunken miller and others just did they basically did this play on a far grander scale but just borrowed bad borrowed uh borrowed in in something that wasn't great and and invested in something that was like it's like it's a genius It's a genius move, I tend to think.

1:00:48And I've said to you before, I made all these mistakes. I won't recant my life story, but in terms of renting, because I thought I'd get a better return in the market than I will in housing. One, there was a once-in-a-millennial housing boom that, gosh, really stuffed that up. And two, there's the leverage aspect of it as well. But prior to actively choosing to be a renter, we owned a house. like we own this two-bedroom fibro shack in Granville and the reason we had that is because I in the bank oh my god I'm an idiot the bank was going to lend me a fortune at the time I thought it was a fortune relative to my income it was an absolute fortune and and I said no I just want a really really really really modest house and I would really pay that off as quickly as I can and I did because we we just we just we didn't have to borrow much because we bought a really rundown crappy house um with the benefit of hindsight it was the dumbest thing like what what was i thinking my mindset was locked into a depression era kind of thinking it's just like no debt is bad pay it off build that you know and it's just sort of like that actually that stuff actually kind of does matter during certain periods of history but over generally speaking not as I'm really struggling to articulate it but do you get where I'm coming from?

1:02:11Yeah I do Can you give it the rhetorical flourish it needs because I'm struggling No I think I think it always relies on the assumptions In hindsight it's 20-20 Exactly that's kind of what I was going to say so it's kind of what worries me a little bit is that same play then you made the point about the Stretch Elastic Bandit At some point, it probably doesn't keep going up. Maybe it goes down. Maybe it goes nowhere. And the returns from that debt end up being not very useful. And there's always that kind of risk. We've talked about this before. As you know, I'm less keen to take that risk personally.

1:02:50But with a – I mean, they're all financial assets. All assets are sold for dollars, dollars, dollars, no matter where it is or one Bitcoin, as we know. but you know my financial assets I separate from my lifestyle assets social assets call it what you want so for me it's kind of like I value the fortress of financial stability around the house is the house is the house is the house and you can't take it off your mortgage is paid off blah blah blah and you know I could sell some shares and pay the mortgage those things those things are still open to me as options I just I feel better personally and this is risk tolerance frankly we've talked about volatility and other things and as a family we feel better about saying this is ours, this is ours, this is ours and when there's no mortgage there's no mortgage so that's kind of that's why that approach was taken I

1:03:47I'm probably too, you put a misdepression in your thinking I'm probably too much of a Buffett acolyte, all I can hear in my head is leverage the only way a smart guy can go broke and and risking what they have and need for the don't have and don't need at some at some point i don't i don't need to what once i once i achieve a certain level of um financial stability and and security security that's the right word thank you i was gonna say wealth security is the right word um then i will from there in a way that can't be taken from me because that's just i just i don't i don't i want to have to think about it if i worry about it is it a chance no but again buffett talks about you wouldn't play russian with a million with a bullet with a million chambers There's only one bullet in one chain because it's still not worth the risk of getting it wrong.

1:04:26So for me, and again, your tolerance is different, which is perfectly appropriate. I'm just like, I will separate those assets from the others. I'm still fully invested in shares. I don't own any gold. I'm not pedging with cash. I'm not, you know, like I'm taking absolute, I was going to absolute risk because I'm being silly. I'm choosing risk assets specifically because I expect the return will be good. I am taking more risk there than if I was in cash, or maybe not with inflation. But with that reason, that rationale. Yep. Yep. I mean, this is why the frustrating answer comes up so much on the pod.

1:04:58It depends. It depends on who you are. It depends on what your expectations are. But the beautiful thing is that there's a spectrum, but we spend too much. This is just true in life in general, but we spend too much time debating the extremes. And there really is that Zen middle path a lot of the time. And so, yeah, maybe I'm more risk tolerant than you, but Lord knows I'm not 90 % LVR all in magic internet beans, right? Like it's not that. But someone who's a 20 % LVR, a very diversified portfolio of quality stocks, then yeah, you know, is that risky? Well, definitionally it's riskier. It's like saying you go to the gym five days a week and only eat fruit and vegetables.

1:05:45And I go to the gym four days a week, only eat fruit and vegetables, but once a month I have Maccas. Yeah. Now, am I more unhealthy than you? Well, yeah. Am I unhealthy? Not really. You know, it's kind of, you got to find your own thing. And we, in a previous question, this episode, you know, we talked about sort of contingency planning or scenario analysis. I think that's a good way to sort of frame this kind of stuff. When you're trying to figure out where you fit on the spectrum, again, don't try and figure out when the next recession is or what it looks like. just like, well, gosh, if my portfolio did fall 50%, what would that mean?

1:06:22Or if my home loan interest rate went up to 15%, what would that mean? It's not going to, by the way. But still, think about it. What would that mean? If my property got, what would that mean? And you can game theory it out a little bit and that will help you and your partner because it's got to be one team, one dream here. teamwork makes the dream work, as they say. And you've got to settle on something that's going to satisfy most of your desires. Again, knowing that there is no, wherever perfection lies, you'll never find it anyway. So all you can do is hope to get close. And by the way, you did say, I just pick up on a very small point here.

1:07:08Was it Nick, wasn't it? Yes, Nick. Nick, yeah. So someone typical of my life stage, I think you said, I don't know how many 28-year-olds got a house. Yeah, true. They got a foot in the door, right? Yeah, true, true, true. Which is such an indictment of our economy and civilization. So I'm just going to say well done to you to make that happen as quickly as you have because I heard the other day, I think the average first home buyer now is 35 or something like that. Yeah. isn't that isn't that just like we have failed we have really failed mate the only thing left to me at this point is to wish you a happy Star Wars Day too because this is going live on May the 4th and also with you I love that May the 4th it is that's all if you're lasting this long you get a bad Yoda impression do you do it Yoda no I was going to try and do a Chewbacca but I can't do that either I can't do it Instant regret Instant regret That is brilliant If you've had it this far in the podcast you're very welcome Thanks for listening Have a wonderful week Enjoy the rest of your weekend first and we'll see you on Friday Fool on Cheers The Motley Fool and people appearing in this program may have positions in the companies mentioned General advice only Please speak to your financial professional to understand how it may pertain to your situation.

1:08:38Subscribe to the free newsletter at fool.com.au forward slash listener. The Motley Fool operates under Financial Services Licence 400691.