Mailbag: incl. We design a sovereign wealth fund!. September 1, 2024

25:18Was it great? Was it perfect? No. If we went back there, would it be terrible? No. So if the new 99 % of volume is just simply passive, we go back to 1980, in which case it was perfectly fine. So I just can't imagine a scenario where it's problematic. I sympathize with that. I do. Where I get tripped up is, as you say, it's the counterfactual because there is a bid, an unthinking bid that is there that otherwise wouldn't be there. Yes, but at the prevailing market price based on the – because the ETF only buys BHP at the current market price of BHP. Yeah. Or sells it if someone cashes out, by the way, on the same basis.

25:53Does it not require more sell volume, more sell pressure to affect the same amount of fall? So people who are active may well, gosh, it's overpriced. I'm going to sell that. But there's much more depth on the bid, on the buy side, that needs to absorb that selling pressure to affect a price. I don't know. I actually don't know. To me, all else being equal, it feels as though it should – it's like you're sailing with the wind at your back. You might still be going that direction anyway. The ship will do what it's going to do, but you're not into the wind so much when you've got that sort of relentless bid that's just there, adding demand that otherwise wouldn't be there.

26:45Except that demand would be there by active pickers anyway. The amount of money going to the market would be any different. They'd just be picking individual stocks rather than ETFs. Well, I don't know. I mean, yeah, maybe, but then there's a lot of people who invest in the market that wouldn't without the advent of the passive ETF. It's too hard. It's too risky. I don't want to do it. ETF investing, easy. I can do that. So I'll do that. Do you reckon in dollar value cents? I mean, those passive people are 25 years old and earning$100 a week to the market. The managed funds, the super funds are already there and they're doing their thing.

27:12I can't see the weight of money that wouldn't otherwise be buying shares be that different. Well, like I said at the start, we don't have a good answer, do we? I mean, it's very hard to quantify and measure and we don't have the counterfactual to go, oh, look over there. Spot on. So I don't – I would say this. It's a fascinating question, but it just doesn't change what you – the so what is just keep doing it either way, right? Exactly, yeah. Very unsatisfying. Yeah, that's right. Maybe it's having an effect. Maybe it's not. If it is having an effect, it's probably not massive, and you still want exposure to the best asset class in the world.

27:50And if you don't like it, you can always take matters into your own hand and be the stock picker. That's it. But if you're perfectly content to be passive, then... And frankly, as we know over time, price follows value, right? So it's kind of... Right. Yeah. Yep. Hey, question from Sam who says, Hi, Scott and Ram. I am Sam and a huge fan of you too. Thank you. I've been investing for two years. Initially, haphazardly, reacting to stop tips from mates and podcasts. More recently, following your guidance, we don't give guidance, but I appreciate what you're saying, I've refined my investment strategy.

28:24currently. Oh, dear. You've really given some money. I know it's coming. Dollar cost average into the following. 65 % in ETFs, mostly US, some ASX and global. 17 % in Bitcoin. 17 % in direct investments. Currently, NewBank. I'd love to get your general thoughts on the above splits and diversification. I'm also considering adding smaller microcap stocks. Can you see any other glaringly obvious missing pieces? I still hold very small positions in various ETFs, cryptos and companies, though these make up a negligible percentage of my portfolio. Would you recommend selling these positions and reinvesting the funds according to my current allocation?

29:06Lastly, I started using one platform for all my investing. I'm using Sharesies. However, I've since switched my ETF investments to a platform with 0 % fees for ASX listed ETFs, this is BetaShares, and a lower cost platform for direct company investments, Webull, due to their significantly lower fees. This has resulted in holding some companies and ETFs across multiple platforms. Would you recommend consolidating all shares and ETFs into a single platform, i.e. the lower cost one, to take advantage of lower costs for dividend reinvesting and simplicity? Thanks for your feedback and rant on, Sam.

29:40All right, mate, first things first. 65 % ETFs, 17 % Bitcoin, 17 % direct. How does that strike you? We can't tell Sam what to do, but how does it strike you? Yeah, I mean, you can't. I mean, that's not terrible. I don't think there's anything wrong with that. But others, I know that you put that exact same question to many well-respected pundits in the market and they would say that's insane. You and I know better than they do though. That's true. And they would also say, well, you don't have any bonds and you don't have any of this. And I think too often there are just exposures to categories because it feels like I should have exposure to that category.

30:18You know, it just, it doesn't, it doesn't make any sense. It's like, I'm, as you know, I'm a passionate advocate for small cap investing, but I don't think you should have small caps because they're small. Yes. Like, I just think it just happens that there are a lot of, well, there are some really good businesses where there's much less competition for, and there's much more growth opportunity. And it's interesting. It's interesting because the business is interesting. It just happens to be small. I hate the idea. I would say as someone who likes small cap investing, most small caps are rubbish.

30:50Like a strong majority are rubbish. And you only like small caps because of certain characteristics which aren't necessarily only available small caps. You just find them more often there. Hey, if I could – look, I was looking at a company the other day, a very small little company, growing its profit to 30 % per year. Strong balance sheet, always had a profit since its flow that's trading on a PE of nine. Right, exactly. If I could get NVIDIA at nine, I would do it. But am I buying it? I'm not buying it. I should be careful here what I'm saying. But would I be interested in it, not interested in it if it was big because I've labeled myself as a small cap investor?

31:27Most labels are pretty unhelpful. I look across the menu of various investment options and I say, what is the best combination of risk versus return relative to my own personal view of the world? And as you know, I have a certain view towards Bitcoin. So for me, it's like 17 % makes perfect sense. They're rookie numbers. Bump those numbers up is what I would say. But that's me, right? And I could be completely wrong on all of that kind of stuff. So it's just, you know, I'm fumbling here because it's hard to give a specific prescribed answer, particularly when I know anything about this person.

32:04Yeah, exactly. And so it's - And if we did, we shouldn't be giving. Yeah, as well. But you've certainly done it in a way where you're pretty robust. I mean, let's say Bitcoin goes to zero. It sucks. 17 % of your portfolio, you've still got 83%, which is fine, right? Let's say that there's some stocks within those ETFs that go, well, when they go to zero, because it'll happen, right? You're okay because it's so broadly diversified. And the rest is just a rounding error. So, yeah, I can't. You're in a situation where, yeah, you're pretty robust, even if some really bad things happen along the way.

32:40What about some platforms, mate? It's got shares, beta shares, Webull, stuff all over the place. Is it worth consolidating? And if you were to consolidate, how do you think about how to do it? Well, once you own it, what's the difference? There's no carrying costs. Well, gosh, I hope there's not a carrying cost. Exactly. So the cost is incurred when you buy it. Is it simpler and easier, though, to have one place to go and see your shares? I think so. I do. But that's because I'm lazy. But yeah, I think so. And I'm not a very active trader. I don't buy and sell very often. And I'll tell you who I use.

33:17I think I've mentioned it before. I use ComSec. Why do I use ComSec? Because when I was a million years ago, it was the first account I opened. I'm too lazy to change. They're pretty good service. I don't want to be critical of them. I mean, but they're the most expensive in the market. I've had the discussion with others in the industry who turn around and go, oh, but we're cheaper. It's like, you don't get it. No one cares. Right? Exactly. No one cares. Yes, you're cheaper. Yes, yes. And I'm not going to look back in 30 years and go, gosh, if I'd paid$5 less per trade, my outcomes would be vastly different.

33:48And this is – I've got to be careful here because I'm kind of advocating for complacency and I don't mean to. If you can get an equivalent deal for a lower price, then yeah, absolutely, absolutely do that. and yeah if you could be bothered consolidate it all because it is just easier to sort of have it all in one place but once once you've once you've got it you've got it and there shouldn't be any any carrying cost one exception i will make here is with um the term that i hate with a passion crypto um don't leave it on exchanges it's still the wild west there there's i don't i don't know how many stories the world has to hear of where people have just been completely rugged because these absolute dodgy operators just are dealing in tokens that don't exist.

34:35Not just don't exist because I don't recognize their existence. They've literally said that they've got a database on their server saying you own this much, whatever altcoin it is, and it's just not there. And they basically run a very aggressive fractional system hoping that not everyone runs on it. Look at FTX. And the whole point is you can hold it yourself. So I would say, hold it yourself or hold it through an ETF. I would say, don't leave it on an exchange. And just, you know, for God's sake, there is no second best. Stop it with the altcoins. It's just rubbish. It's an affinity scam. And I'll hand it back to you and shut up at that point.

35:14Nice. Sam, I have no issue with the allocation. I wouldn't put 70 % in Bitcoin, but I don't share Ram's conviction. He'd do more, I'd do less. Somewhere in between probably he's right, I guess. Most people would probably argue that more than a million less than him is probably about right, but, you know, whatever. What you find is people are like 100 % or zero. Right, exactly. That tends to be where the battle lines are drawn. You either drunk the Kool-Aid or you haven't. Yeah. So, yeah, somewhere in between probably makes sense. Although, like everything, a compromise means that both sides are unhappy.

35:44In terms of platforms, I go one better than you, Ram. I have a Comsec account because the company I used to have an account with was bought by Comsec. That's how long ago I opened that one. So I'm one step removed from that level of complacency.

36:00Well, so I have – I use Comsec, I use Perla, and I use Sharesies. I don't have any relationship with any of those companies. I just do because I do. It's where I've kind of built them. Sharesies because I wanted the fractional shares for my young bloke. I've just mentioned that. Perla because I wanted – that's actually where I'm putting some money in for him. So basically, Comstex Mine, we started a Perler account now, we're adding some money every month for him. And then here's where he gets to choose his own stocks with a small amount of money. So that's how we've used those three platforms.

36:28They're all good. Do you need to consolidate them? Not really. It's a bit easier if you do. Just be careful of making sure they're chess-sponsored holdings. We've talked about chess sponsorship before. It costs you a couple of bucks a trade. It's incorporated into the fee so you don't pay extra. But the brokers have to cover that inside the transaction fee that they charge you. Why? Because if anything goes to the wall, you have at least recourse based on how many shares you own. There have been non-Chess sponsored brokers in the past that have gone broke and people have lost some money. So you just have extra protection being Chess sponsored.

37:04It's the computerized holding electronic subsystem or something like that. Clearinghouse electronic sub-registry system. There you go. So he knows he's done. Very, very, very old system that hilariously the ASX is trying to rebuild and I'll save that rent for another day. Yeah. Just look at their write-downs in the most recent full-year results. They're like, you idiots. Yeah, it was always stupid. Anyway, I'd love to know how much money people wasted on blockchain projects in the last five years. Oh, my God. What was the cool thing to do? So just be careful. And personally, it depends how frequently your dollar cost averaging and how much you're investing per trade.

37:37there are in my opinion i would i would personally trade less frequently pay a little bit more to be chess sponsored is all i would say i don't know whether these ones are i don't know anything about the beta share direct holding i don't know where that i assume it's some sort of trust ownership so you should be okay shares is is i can't remember uh don't think it is so just just just be a little bit careful about where you want to put that money and what recourse you have if things go badly please pay up a little bit extra for an extra level of protection you probably you almost certainly won't need it.

38:06But if you do, you'll be bloody glad you've got it. And that's what insurance is, right? If you never need to claim on insurance, it's the most expensive thing in the world. The second you need to claim on it, it's the cheapest thing in the world. Just kind of bear that in mind. Motley Fool Money. For more, subscribe to the free newsletter at fool.com.au forward slash listener.

38:27Can I ask you, I'm embarrassed to ask this, but it's a mailbag episode. I'm going to send in my own question for you. Andrew Page. We have a question from Andrew Page. Live on the line is the caller there. I should know this. I really should. It's been so long since I've thought about it. But if I'm issuer-sponsored, so the alternative is issuer-sponsored. So I have a set of a HIN, a holder identification number. I have an SRN, a shareholder reference number. It's all over. That's held with the registry. Oh, sorry. Not even held with the registry. Accounted for by the registry. So if my broker goes bust, I've still got that.

39:01As long as I've got that reference number, I can still sell my shares anywhere, right? Square that circle for me. I believe that's true, mate. And I haven't talked about this for a very long time. There are very few issuer sponsored shares left these days. Okay. Most of them have been converted to share sponsored one way or the other. Most people sell them. Some people will still have Telstra ones, for example, probably, that currently exist. I thought you ticked a box. Back when I worked at a broker a million years ago, you tick a box. Do you want to be chess-sponsored or not? Oh, right. The advantage of being chess-sponsored – Well, it was ComSec I used to work, and you could absolutely sell your shareholder – your issuer-sponsored shares through there.

39:45The advantage of being chess-sponsored was it's all there. You don't need to prove that you own it. You don't need to provide a number. You don't have to check it. It settles faster. It's just easier in all of it. But the disadvantage of being chess-sponsored, if I owned a E-Trade account and a Comsec account and Comsec is my chess sponsor, I can't sell the shares I hold through Comsec on E-Trade. Or I can, but it's a big pain in the backside where I've got to do a chess transfer, et cetera, et cetera. With a shareholder reference number, I can just take that anywhere, rock up with my bit of paper or quote the reference number and I'm away.

40:16I believe that's true. They will charge you more to do that because they want to be chess sponsors all online. That doesn't cost them any extra to do. Last time I sold issue of sponsored shares, I was working at Woolworths. So this is more years ago than I should acknowledge. And I think it was$65 a trade. Okay. Because you convert them to chess-sponsored or you can sell them directly through a broker, but you pay effectively a manual trade fee, which at the time was$65 from memory. Okay. So that tends to be the story. Yeah, interesting. Hey, I'm going to go out of order just for a second. Okay.

40:49Not to answer your Mr. Esquire question. We had the question about from an anonymous listener asking about the ETF impact. And I just want to read the PS because I was going to and I skipped over it. I just remembered to go back. So rewind in your heads to that. It's not relevant actually, but it was the same questioner who said, PS, this bit isn't necessarily for the podcast, but I don't mind if you read it out. And I thought I would, Matt, because I think it's important. I just wanted to say thanks to both of you, not because of that, but especially Scott, thank you, for calling out the lack of female representation in your profession and investing in general.

41:22As a female listener and investor, I really appreciate when men acknowledge the gap head on and strongly disagree with the previous female investor who did not want it to be mentioned. As long as the difference is present, it needs to be called out or it will never change. Unfortunately, Scott, I think you'll just have to accept women have as many diverse opinions about investing as men do, but keep up the great work and full on. By the way, it's not just especially Scott. Ram has been absolutely as clear and as strident as I have. So we've both been pretty clear on this one. I appreciate you mentioning it.

41:51And the reason I'm mentioning it or reading this out is not to give myself a rap, but to give you a rap, Ram, because I think the point, and specifically, she says, I really appreciate when men acknowledge the gap head on and strongly disagree with the previous female investor who did not want it to be mentioned. While there are different views, we'll continue to do it, I think, mate, because it's important. There are too many women who don't invest, don't take control of their financial futures in the way that men have traditionally in the past, and that needs to continue to change. And we can't be the example that other women need to see because we're blokes, but we can certainly call it out.

42:24Well, it's just fact. It's just you don't have to like it, but fact. Fact is 90 % of the industry is male, you know, whatever high percentage it is. And you can attach value judgments and interpretations to that. Sure. But that is the fact. Correct. Here's one from Adam, mate. Hi, lads. I hope Scott had a great, well-earned rest. Thank you, mate. I did. It was spectacular. My question is to both of you. You both have your super investments and strategies, but how do you plan to change this when you get to retirement phase and need to withdraw funds? Do you plan on keeping shares and selling when needed?

43:03Or sell them all, capital gains, tax-free and pension phase, and invest in everlasting income, insert plug here, it's a beautiful service, or income-based ETFs? Just curious if you had thought about this yet. Thanks and fool on, Adam. It's a good question, mate. We've got a listener base who are getting in or getting near retirement and thinking about how to take their portfolios and make them into income producing in one version or another, whether it's selling out the shares and taking out the capital, whether it's taking them into dividend-paying shares. I've thought a little bit about this.

43:36We're very, very, very, very young, but hypothetically in 70 or 80 years when we retire, have you thought about how you might take your portfolio and start producing income from it? Yeah, because I'm so hubristic and – yeah, hubristic is the best word – where I think that the capital base will be so vastly gigantic that I'll just sell as I need. And it's so reckless in a lot of ways because maybe it won't be. We'll see. But there is enough of a runway and I've been doing it long enough where you can, again, it's not needing to make a heroic assumption. I just think getting rich slow is in principle pretty easy.

44:27In practice, incredibly hard because you've got to factor in human nature and greed and the old curveball that the universe is going to throw at you. but if you just choose a fairly benign rate of growth that you might want to assume maybe base that on the historical record and maybe knock a percent or two off just for the sake of conservatism and then factor in what you're able to sort of contribute i i get i'm on a glide path i don't i i'm i'm really cringing as i was saying all of this there's is that all of our listeners know there's no filter here so just by the time it comes i'm listening to this for the first time as well right and yeah and i just caught myself and how this sounds but i feel as though i'm on a bit of a glide path where i should be fine in in in the in the sense that the downside with having to sell is that some years like just to fund your lifestyle in retirement is that some years the market will be down 30 it's like it's gonna really suck to sell when it's 30 down yeah but again i just use a stupid example you know if i've got 10 million dollars in a portfolio and I need, I don't know, what kind of life do I want?

45:35I don't know. I've paid the house off. Hopefully at some stage in the future, I need a hundred grand a year, two grand a year, two grand a week to live. I think it's pretty good for me. That'll do me very nicely. Thank you very much. The amount that I do sell is not going to be enough where I've eroded my capital base so significantly that I won't be there to enjoy the recovery. It's not going to make a If I've got$1 million in a portfolio by then, the market falls 50%, I sell$100 ,000, I've now got 20 % less of a capital base for the recovery, and that makes it very different. So where I'm getting at here is that it very much depends on the pot of money that you've got.

46:20Jeff Bezos is not thinking about transitioning into income stocks. He doesn't give a stock. He's fine. He's not buying tells for is he. He's fine, right? Now, if it's – So, what you're saying is the straw man portfolio and the business is worth something close to Amazon? Is that what we're supposed to read from the lines here around? You can read from that, yeah. Is that what you're saying? Yeah. Me and Jeff are palling around. I don't need to worry about your superannuation questions. I mean, the good thing about an income portfolio is that when times get tough, we have recessions, market crashes, all that kind of stuff.

46:51Dividends do not get cut as well, by the way. They just don't get cut as much. and you get all of these other tax benefits. It is a really nice strategy to sort of have. So you're going to have to try and calculate how much you think you'll have, how much you think you'll need to leave and need and all of that kind of stuff. Here's the downside of it though. Let's say you do decide that you know income is superior relative to my needs and wants. But I've had this other strategy for the last 30 years. There's a chance you might be sitting on a mountain of capital gains. So I was like, I'm going to switch into income because this is the more prudent approach.

47:28Yeah. Yeah, but you're just going to lose a lot of money on tax as you do that. Except that, as he mentioned, you can, if you're in pension phase, sell those capital gains tax-free. So as long as you hold them until you get to pension phase, once those assets get converted. So if you can afford to wait, convert them then. The first 1.7 million now, is it, I think, of your superannuation balance, which will be more than most people will have that balance cap is, is capital gains tax free at the point. Sorry. I was, I was thinking outside of. Yeah. No, you're right there. Yep. Yeah. So it's actually come up on strong and the conversation before, and I know what some of our members do is that they're opportunistic as it approaches.

48:08So I've got a share that hasn't performed well. So there's no capital gain. So that's the one I will sell. Yes. Yeah. And that's the one I will reallocate. So as, as I, as I reallocate, I favor more the dividend paying stocks as I approach it. So it's not like three years out or on the day, then I do this big transition. I just, I recognize that it comes. I sell things in the most tax effective manner that I can. Again, I'm talking outside of super. And that can make a lot of sense too. But yeah, it depends how much money you've got ultimately. Correct. And again, nice problems to have.

48:45So I have thought about this a little bit, Adam. and you're right inside inside now well firstly can i say the super anyway system is stupidly complex and ridiculously structured right the whole thing is is just mad um we want to encourage people to save for retirement we want to make that an attractive and concessional way to do so to make sure they have a decent standard living in retirement and to relieve the pressure on the federal budget those things are absolutely appropriate the number of rules and the stupidity of dates and ages and accounts all that kind of stuff is just absolutely mad so let me also say that um my strategy thus far is that i am increasingly inside super sorry start again i'm still investing in super as i would outside super which is an almost before those are almost very similar across the two i'm trying to find the best ideas i can for the long term uh and i suspect that if i do that the ones that are paying income now the salt pats of the world will be paying more and more income at that point so hopefully i won't have to sell at all and i'll just harvest the harvest the income as it comes um assuming the portfolio is big enough by then to cover my living costs but that's the hope um others that aren't that big yet or aren't paying that much dividends now either i'll sell in the meantime because the thesis will be over either it'll be bust or it'll have worked and the value won't be there or I will have achieved whatever return I was hoping for.

50:13Or they become mature companies and start paying dividends. So if you're kind of far enough out, and Randham and I are still not ancient yet, I suspect a decent number of my companies, if they're still worth owning, if they're still in business, if they're still successful, will be paying out other new dividends by then or larger dividends by then. And so I hope that I can live primarily on the dividend income, not as a strategy necessarily, just because of the life cycle of the companies. Now, when I get to 57, am I thinking a little bit differently about what I buy? Yeah, at that point, probably.

50:48I suspect as I get closer to retirement, I will probably start to favor income-producing companies more than... Here's the other thing, by the way, and you're right about the capital gains thing, because you can transfer at that point what you own pre-retirement, and then the day you turn your account to a pension account, you can pretty much redo your entire strategy tax-free. So it kind of doesn't matter that much. But I think I will probably, because I've got fewer years to make it happen, to Ram's point, you don't want to be taking five, seven, 10-year risks when you want the money, the income next year.

51:22And so if I've got business, I think grow nicely over five years, but I'm 62, I'm probably going to say, maybe they will, maybe they won't, but is that really what I'm aiming for at that point? Or am I going to want to start to draw down some capital, in which case I'm going to prioritize the relative, nothing certain, the relative likelihood of higher income flows over the chance of a capital gain in my time horizon? Probably, yeah. So at and towards retirement, I'm probably going to be just pivoting generally towards income. I'm not going to take a substandard return for that income, by the way.

51:55I'm going to buy companies that are going to beat the market, but I'm not going to be taking a flyer on growth only, hoping that they grow quick enough that I can sell them at that point in three, four, five years time and fund my retirement. I don't want to be reliant on a thesis playing out just in time for me to sell. So that's probably how I think I'll change the money I'm adding to the portfolio, whether it's reinvested dividends or new contributions from my employer. I suspect at that point, I'll probably start to pivot that portfolio towards income. The final point I'll make before we move on to the next one is don't go for a company because course it pays dividends.

52:29I mean, if you want more of your return in the form of dividends, fine, but you still want a decent company. And too often I see people fall for the dividend trap, which is, oh, it's a biggish company in the top hundred and they, look, there's a 6.7 % yield. And often they're really bad investments. Yeah, you get a decent yield, but the growth is sometimes not even growth, right? Like you just, you get this nominal yield based on your purchase price, which seems good, except that the dividends slowly erode over the year and you lose 30 % in your share price. Yes, absolutely. You know? Income in the context of quality businesses is not just income for its own sake.

53:15And what is really bizarre, and if you're thinking, so again, you've got to think like an actuary. At retirement, your life expectancy expectancy is longer than what you would is at birth. I'm going to try and explain that. It just is, right? You've made it through your twenties and your teenage years and a lot of sort of early risk factors. It's just different. You tend to, your life expectancy is longer. So you could maybe, people think I'm, you know, the old joke used to be, I don't buy green bananas anymore, right? Like I'm retired, you know, I'm not going to be around that long. No, you can retire and And hopefully we'll be around for another 30 years, maybe longer.

53:52So you absolutely have to think like a long-term investor. So by all means, favor some dividends. That is fantastic. But when you're looking at that income stream, I know I've made this point a lot, but I'll do it again. It is often better. A company that is offering you a 4 % fully frank dividend could be vastly superior as an income investment than one that's offering you a 7 % fully frank dividend. And the reason being is that one is just growing its earnings and therefore its dividends each and every year. So you start off slower, you get less today. But after a few years, the income stream is just massive compared to what you would have got through the higher yielding investment.

54:35Again, yield is based on what they paid last year versus what the current share price is. And we use that to assume going forward that that will always be the case. Dividends get cut all the time. Dividends get pulled all the time. And capital loss is a real risk. So I flog that horse to death. But just by all means go dividends, but still don't lose sight of the quality and the growth angle. All companies need to grow at least to some degree. I think that's right. The only ad for me, mate, is just that obviously if you need the income at 67, rather waiting until 75 for the income to grow, there's a balance of what you need now versus what you can afford to reinvest.

55:10Yes. And that's just the – you've got to manage your own cash flows. But that's not – our listeners can do that for themselves. That's kind of the idea. They can sort that out, I think. Yeah. Which back to the original point, right? Like the capital base matters a lot. Just do what most don't, which is think about it earlier. And again, it sounds so arrogant. God, I'm so hyper aware of this. But I don't get paid a lot. I didn't come from money. But I've just been a good saver and I've invested for a long time. And anyone can do that. Anyone can do that. And if you start early enough, you will put yourself in a position where this dilemma isn't as much of a dilemma as it would otherwise be.

55:46Love it. Here's one from Tim, mate. Hi, Scott and Ram. You recently spoke about the lack of a sovereign wealth fund in Australia, but we do have one. The Future Fund was set up in 2006 with the sale of Telstra and an initial$29 billion-odd in funds. It has since risen to$285 billion in 2024, although the exact figure is debated, but a good sign of compounding in action, I think. I'm going to stop there. I really really annoy the pedants I'm a fellow pedant Tim so I get it yes it's a sovereign wealth fund in name and kind of in function but it's the narrowest sovereign wealth fund in the world not literally but effectively because it only it's designed it has a couple of sub funds which are tiny but it's largely designed to cover Commonwealth public servant pensions so do we have one yeah kind of and that's fine but when we talk about one not having one again i mean yes you're 100 right on the other hand it's kind of one of those you know technically you're right uh functionally we don't have anything like a sovereign wealth fund which is the as generally accepted i.e norway or saudi arabia or something else right which i made a really big well-funded large-scale general purpose sovereign wealth fund so yes you're right um but um yeah anyway tim then adds i listened with interest to your latest if i were They're ex-for-a-day rants.

57:10And I love them all. So if I were in charge for a day, I would give you the responsibility. That's very kind. See, that is humility right there, mate. When Tim says, gee, Scott and Ram are smarter and funnier and more sensible and better looking. No, I'm kidding. Tim, you're probably going to do a better job than we would, but thank you. He says, but if you were responsible for our sovereign wealth fund for a day, what would you do and why? Keep shaking your fist at the sky. Your insights and thoughts help us all think. Thank you. Cheers, Tim. All right, mate, you're now in charge of the Sovereign Wealth Fund.

57:46It might be the future fund or at least the future fund on steroids, but some sort of – well, I won't even assume it's a general purpose fund. I'm going to let you decide. If Albo gives you a call and says, look, Ram, here's the thing. I hear the Sovereign Wealth Fund thing. You've got to set it up, mate. So what are you going to set up? What's it going to do? How's it going to be funded? What are you going to use the money for? Or what are you going to write in the legislation for Australian Sovereign World Fund? Gosh, this is something that's going to require a bit of thought and definitely not shooting from the hip.

58:16Do you want me to go first then? Let's go. No, no, no. I was going to say, it's never stopped me before. But no, please, please, you go first. No, no, you go. Go for it. I was going to say, I think what I wouldn't do is I would try to remain as apolitical as possible. It's a big honeypot, right? And there could be all kinds of requests and demands on the fund to build a highway or build a bridge or do whatever because jobs and growth and stimulus and all of that kind of stuff. and I would say no. Not because I don't want to help Australians, but because I would say that my mandate would be to be an effective steward of this capital to maximise the returns in the most prudent, low-risk manner as possible.

59:04That's what I would do. So if it turns out that building high-speed rail link between Brisbane and Sydney was going to deliver exceptional returns relative to what else I get, I'm all for it. I'm not going to do it to help some politician get elected in 2028 and will be forgotten about a few years later and have this massive white elephant. And just the opportunity cost for the investors, i.e. the people of Australia, would be subpar as a result of that. So I think that arm's length independence is vital. And again, the misinterpretation of that is, Andrew's saying that that fund should never be used for any public projects.

59:40No, not. Any ill-conceived poor returning projects, yes, I am. That's exactly what I'm saying. But that is the first thing I would do. I think I would probably try and minimize costs as well, only because these things tend to balloon. And I know the argument is, oh, yeah, it costs all of this. You look at it and go, oh, my God, it's egregious. It's$10 million in administration costs. It's like, yeah, but relative to the capital, it was very small. I don't think it's very – it'd be very hard to justify big budgets because the strategy I would employ would basically be an ETF strategy, I think. I would have very large exposure to Australia because it's the Australian fund and you've got to have skin in the game.

1:00:22I would have some exposure to some sensible overseas markets with a heavy outweighing on the US. I'd have a bit of Bitcoin for the future. I really would. And I'd probably just do that. It's basically money comes in. We have these target allocations and we just do that. The kind of fund that even though it may be many, many hundreds of billions of dollars, a team of 20 could run it, right? Because we're not analyzing companies. We don't have an in-house economist to tell us what the next CPI figure and what the Reserve Bank's going to do. We're just doing this. We're just doing passive investing in what we regard to be very high-quality asset classes.

1:01:03The other part of your question, which was how and when can you spend it, that is a more difficult one. So I'll palm to you at this point. That's difficult. Scott, you do it. All right. So I love this question, Tim. Thank you. Because it lets me rant and I like to rant, particularly about sovereign wealth funds. I think it is the most glaring policy gap in the finance ministry area, responsibility. There are other policy areas we should fix, climate and equality, poverty, that sort of stuff needs to be fixed. But from two guys who are in the finance space, super is excellent. The lack of a sovereign wealth fund is an absolute disgrace.

1:01:41So, if you put me in charge of a sovereign wealth fund, designing - Why don't we have one, to the question?

1:01:50Because a lack of vision among - No, but we've got the future fund, though. So, why isn't that a sovereign fund? It is, but it's not a general purpose of a sovereign fund. It's for a very specific purpose. So, let's start from the beginning. there is no reason why we should defer spending today for tomorrow we've said many times we talk about discounted cash flows a dollar is worth more dollar in the future right so why would we willingly give up the ability to spend money today and for some future time and place and my starting point of a sovereign wealth fund is that's not an unreasonable question with the exception we said this on friday um with the exception of we are digging up so i would fund to sovereign wealth fund entirely from natural resource rents and royalties.

1:02:37Effectively only, I would also tip into that the proceeds of sales of any government instrumentalities. So Telstra, Commonwealth Bank, whatever comes next, Poles and Wires in New South Wales, I would put all of those proceeds. So if you're selling a national asset, whether that's a resource or an instrumentality or an organization, if we've privatized Australia Post at some point, you're taking a taxpayer assets not a cash flow it's an asset that business or that mineral that should be kept as an asset converted from one type of asset to another from a organization like australia post to a financial asset an investment in the sovereign wealth fund from a mineral in the ground an ounce of gold a ton of iron or a barrel of oil or lpg equivalent into, or natural gas equivalent, I should say, into a financial asset.

1:03:28Why? Because we've inherited it and we should protect and pass on that inheritance. We have no moral right to spend it, leave nothing for the kids. And when we say nothing for the kids, someone will say, well, you can build a bridge. Okay, the bridge might last 30, 40, 60, 80 years. So it can be replaced at some point unless you put aside the next amount of money for the next time. You've created a short-term asset rather than a long-term asset. It's better than spending it on your tax cuts or whatever, champagne and bickies. an eternal asset for an eternal asset is my starting point. So why is there a sovereign wealth fund?

1:03:58For that reason and that reason alone. The other reason, by the way, which is kind of related, I expect at some point we decide as a country and frankly as a globe that we're no longer going to dig up coal or drill for oil and gas in the same numbers. So we also have the reality that our tax base is a significant long-term risk. We're going to have to replace that spending with something else because if and when we stop digging up coal and selling it overseas, when we stop drilling for oil and gas and selling it overseas, we're going to have to do something else. Maybe we find something, maybe we don't.

1:04:29But assuming there'll be something to replace it is ambitious at best. And it's not very risk tolerant. It's very risky. We can be more risk, not averse, but we can be more accepting of that risk and setting up a function or a structure, i.e. the sovereign wealth fund, to offset those. They're the two reasons, future tax flows and the passing on of inherited assets. that's why what would i do with it uh i'd be a little bit different to you rams we might have to have a conversation i would have no bitcoin in it as you probably know actually you know what i probably would have bitcoin if it was big enough but that's a that's a different conversation um because it's an existential thing right i think you know the chance of bitcoin is worth something you've said many times not only at least one percent is probably a mistake i don't think that's a that's a bad outcome on a national level so maybe i would but the u.s is actively talking about it like well trump is actually talking about it yeah like two of the three leading candidate Well, one, RFK's dropped.

1:05:22I just find that - If you're reckoning RFK and Trump are making argument for Bitcoin, I reckon you've got safer - No, I'm no fan there. But I just make the point that it is notable that it is even being talked about. No, that's true. That's true. I do wonder if that's political rather than economic, frankly, though. Sure. The backers of these campaigns tend to be Bitcoin fans rather than vice versa. Sure. Different changes. It's an easy way to get some votes, but yes. But you're right. But you're right. There is definitely a groundswell. I would invest most of the sovereign wealth in overseas, actually, and for two reasons.

1:05:56One is that it differentiates the funding sources from just the Australian economy, so some diversification there. The other thing is, and Norway has done this themselves, they have none of their sovereign wealth fund invested in Norway, and it's largely so they don't disrupt or distort the local capital markets. If you imagine a large sovereign wealth fund that grows over time, I would hope, frankly, that it's possible at some point the Australian sovereign wealth fund is bigger than the Australian share market. That's certainly the case with Norway, I believe. So if Norway was only invested in Norway, Norway's fund was only invested in Norway, you would have stupidly expensive shares all owned by the Norway Silver and Wealth Fund and have to own most of the capital there.

1:06:33So now this, by the way, suggests Australia becomes a bigger financial player than its raw economy would suggest. And that's what happened when you compound. That's the beauty of compounding, right? So at some point, I would suspect the Australia Fund is what I'd call it. And I would suspect the Australia Fund would be larger than the ASX at some point. So I would have most, probably 90 % plus of the assets invested in non-Australian assets. That could be gold, for example, which is not really a national asset or an international asset, but I certainly would have a lot of it invested in overseas markets.

1:07:03Maybe a little bit in Australia, but probably not much for exactly those reasons. It gets too big and I don't want to store local asset prices unnecessarily. So I take the opportunity to diversify internationally. I did not think of that. That's a really good point. I've thought a lot about this. i gotta get out clearly um i would also like ram though for all of when i say internationally i'd invest in all etfs i'd have three people running the office you got someone doing the mailers you got someone answering the phones and someone making the investment decisions and frankly that investment decision is largely um which etfs are they still the same yep okay good go to lunch that's what uh nevada's uh pension state pension fund does there's one bloke investment committee invests in etfs and goes to lunch um that's all you know it won't be There should be three people, but it might be 15 people.

1:07:47It's not a lot of people. It's certainly not the future fund trying to pick winners in managed funds and layers of fees and all that kind of rubbish. This is too big for that. You don't need to do it. You do the basic things well. I pick stocks for a living. I'm saying buy ETFs. Why is that? Because I don't want a sovereign wealth fund picking stocks. I can take stock picking risk. The country shouldn't be taking the stock picking risk. Particularly if we don't know who's running it. It's not a responsible thing to do at a national level in my mind. in terms of what you do with it i would do two things i would ensure that some proportion of gains are compounded and some proportion of the gains are paid out to the federal budget why two reasons one you want some return for it secondly politically and from a public support perspective you want to show there are ongoing benefits from this fund and that's that's that's that's real politic right that's just the reality you want people to realize and value the fact that some of the federal budget is being funded by the Sovereign Wealth Fund.

1:08:44I would be inclined to make the base return something like 5 % goes to the fund, gets reinvested, and then either the rest or a portion of the rest gets returned to the federal budget. Now, the federal budget probably wants some sort of certainty of funding. So you've got to think about that. And again, this is where the kind of rubber hits the road. You don't want to have the federal budget have some years and none other years, but it needs to be not so much that you're talking about SuperRAM and take money out of super and they're having the capital base decline, you need the capital base to grow over time.

1:09:16So something like the first 5 % of the funds stay in the sovereign wealth fund, maybe the next 3 % go to the government and after that they share the difference or something. But that's kind of how I'd think about using that money. The beauty of that is by compounding the 5 % over and over again, the growth to the federal budget continues to grow. So each year, not every single year, depending on what happens with the share markets. But every year over time, the proportion of the federal budget funded by the Sovereign Wealth Fund grows. And eventually, you get to a point where 3%, 5%, 10%, 20%, 40 % of the federal budget is funded by proceeds from the Sovereign Wealth Fund.

1:09:52What does that do? It means we have the choice of either more national services and or lower taxes for Australians. And that is a wonderful place to be, and I think a wonderful inheritance to leave for those that come after us. I like all of that, mate. That was with a rant, sorry. No, no, no. I mean, the real art in it all would be setting up very clear mandates, I think, because it's just the last thing you want. You want it to be almost like a US Constitution kind of thing. Like there is something that's almost as good as set in stone to avoid tinkering from political actors down the track.

1:10:28Because it might not be that much of a big deal now, but in the year 2150 when it's, you know, however many trillion. and it just, there is nothing more tempting than a big pile of money. And short-term interests can make very, yeah. It just, you want to make it bulletproof. You want to make it that, no, you can't. This is how it is and this is what, basically the structure will always be this and it'll be this forever because you just be, it's just like having, I'm going to put all my money in this managed fund because it's a really good managed fund. I really like the manager. They've got a good track record.

1:11:05And then they quit and they install someone else who just completely runs it in a different way. You've still got your same – your money is in the same investment and yet it's in not anything to do with that original investment. And that would be the thing to really guard against, I think. Yeah, I agree. I would actually – it needs to be bipartisan to have a setup in the first place. And I would actually – honestly, mate, this sounds like it's over the top, but I think it is. I'd enshrine it in the constitution. Yeah. i think i think you would do no less than that for for reasons of making sure nothing gets screwed up here i would literally and and referendums have a terrible pass rate except when both parties support it and i think um honestly some people listening are saying and maybe if i was more realistic i would say the same chance of bipartisan support or something like this is almost zero um i i would i like to believe i like to pretend i like to hope that people of good faith despite my concern about some of our politicians can come together and say, you know what?

1:12:02Hey, Jim, hey, Angus, this kind of feels like it's in the national interest. Can we just kind of get together and do this? Let's put it forward. Let's make it a, you know, politics actually agree on most bills past parliament, right? We only hear about the disagreements. So I would hope at some level there could be agreement. Now, are we likely to get more royalties and resource rents increased and passed and put into the sovereign wealth fund? Maybe not. It can't work without bipartisan support because the next party would just rip it back down again. So you need to be careful with it. But yeah, that's what I would do.

1:12:31I think you need bipartisan support. I would try and get an enshrined in the constitution. I think that's the safest way to do it. I don't think, I think getting bipartisan support for the concept of it would be easy. I mean, how can you argue against it? I can't conceive of a way that you would argue against it. The trouble is, is like, well, that means we have to either raise additional money or divert the existing streams of money that we have now towards that. That's going to be the sticking point, right? It's just like, you mean I have to think beyond the next election or I have to ask people or companies or someone to tip in extra money.

1:13:05Like that's the problem. Everyone's in agreement until you go, great, let's pass the hat around. Yeah. No, thanks. That is the hard part. Again, you know, 2024, it sounds weird to kind of hope for better outcomes from politicians doing the right thing. And maybe I'm just being stupid by hoping for it, But it won't stop me pushing for it. Maybe I die and still don't have a sovereign wealth fund for Australia. And if that's the case, so be it. But it is the right idea. It only requires some people of good faith and intellect and, yeah, some sort of interest and care for the future to do this. It would be a landmark.

1:13:47It's not like superannuation. It's that big and that big a deal. Something like that done across the board. Interestingly enough, mate, we'll wrap it up. But the Greens, God love them, suggested we just tax mining companies more money because they're mining companies. And I think that's a stupid idea, except that it would be the one way you could fund a sovereign wealth fund nationally because the royals, resource rents for minerals that the oil and gas goes to the federal government, but minerals goes to the states. And they would have to see some of that. And it gets really complex. you could potentially add a tax for companies in certain sectors and industries that you could collect at national level or federal level and use for that and that might have to be the way you did it if the states wouldn't come to play and they probably wouldn't go states or states and they do their thing but again i think you know you ask me what is the right policy versus what's achievable there's a gap between those two but the right policy is a sovereign wealth fund funded by uh sale of national assets in one form or another and you might need to think long term with it as well in the sense that getting changes across the line that's going to make someone or something worse off is very difficult.

1:14:57But, you know, was it New Zealand who did it? I forget now because I remember it was always my how do you fix smoking in society? Because it was like every time you put the price of a pack of cigarettes up, it makes the smokers angry. It was always very difficult. And so I always thought the most elegant solution is you say, if you're a smoker, go for it. Fill your boots. We're not going to tax you anymore. We're going to make it freely available to you. But if you're 14 or pick an arbitrary young enough age, you can't do it. You need a license to do it. Once you've got your license, you can fit it.

1:15:30So anyone who's a smoker is like, okay, cool. So I can continue to do what I want. Yep, you can. And the only people who are impacted are the people who aren't yet addicted. So I would - New Zealand tried that. People born after a certain year could not buy it. That's why I think it was in New Zealand. Yeah, I think it was, right? I think the POMs are trying to do something similar, actually, I think. But it's a very long tail on that working because you've got to wait. But that's where I'm sort of coming at with this. So it might be, listen, you've invested. And to be fair, I'm not going to sort of – these big mining companies don't need me to stick up for them.

1:16:03But, you know, they did make investments under a certain expectation. And to move the goalposts, you know, that's a little bit unfair. But you can always say, okay, but going forward. So you can now make your capital allocation decisions with perfect clarity based on what's going to happen. Now, what's happened in the past? Now, I know that's not ideal. Again, if I was a dictator, I would do it very differently. But operating in the real world and the democracy that we live in, I think that's a way. It would be very slow to get started. But in 20 years' time, that's just how it is, right? So you get over that initial pushback because you're not making anyone worse off who's already got skin in the game.

1:16:43And you're just changing the calculus for those that may consider it going forward. And they won't do it if it doesn't make sense. As I've said before, I think even when you put some extra resource rents on there, it's like, oh, it still makes sense. Let's do this. Which is what Norway's lesson is, right? Yeah. But again, they can't say, well, you changed the rules. And I think it's a slower start. And it means that to reap the benefits is much further down the track. But at least it puts it in train. Like it gets it going. Mate, we are very deep in this podcast, but can I say one of my pet hates is you can't change the rules.

1:17:18Yeah. Yeah, me too. You're right. I hear what you're saying, and it's a very reasonable approach. I tend to be a reasonable guy or try to be. The idea that we have to let something stay in place because it was put in place at some point in the past. Yeah. I find no one can play that. The COVID payments, right? That's a great example. You always say we had to do it fast and we didn't have time to think. Fast being ugly. Yep. Totally agree. But you can change it, right? When Jerry's out there driving his Lamborghini saying, ah, middle finger to you all, I'm entitled to it. You go, let's wind it back.

1:17:51Yep. With the mining stuff, right? Like I just, no one ever says, oh, you can't give him a tax cut. They made the investment expected they'd pay more tax. Yeah, right. And yet we say, oh, you can't put the tax up because people thought, I get it. I know people made investments. I agree with you, by the way. I just mean to get past that BS. No, you're being very nice about it. I just want to add my thoughts because nothing drives me more crazy. It's like, you know what? there is no guarantee implicit or otherwise that governments won't make things harder for you the only it's like saying oh look i know that i know that the paint factory used to tip tip the paint into the river um look we'll let you keep doing that but if you ever build a new paint factory please don't do that anymore you know i just i just and i you again i was like dig at you you're being very very very very considerate i just people say to me all the time oh we can't change the royalties because bhp made some commitments based on a certain price so that's their bloody fault it's called risk it's called business it's what we do right if you're getting a guaranteed return, you're not a business anymore.

1:18:42You're a charity or a government instrumentality. If BHP want to give the dividends to the taxpayer for the privilege, good idea. Good idea, yes. If you want government protection, guess what? Be a government instrumentality. If you want to take risk in the market and you want the upside, then you're on the... It's like saying we have to subsidize BHP because bad China stopped buying iron ore. We'll have to buy it for them because they set up assuming China would keep buying iron ore. There is this idea that somehow governments... And by the way, government is us. We can't say as a community we'd like BHP to pay them a little more for that coal and that iron, please, because that seems reasonable.

1:19:17Nothing drives me more crazy than we can't somehow change the rules. Business isn't above taxpayers. That's not how this works, right? Society comes first, then businesses and the economy. That's how it works, not the other way around. Yeah. Well, another example there is the negative gearing argument. Yes. Well, again, you can change it. You can. Of course you can. But political reality is it won't. Yes. Too many. I will say, actually, I'm talking about both sides of my mouth. I would grandfather negative gearing. Right. It gets past it. Yeah. Because the individual taxpayer doesn't necessarily have the capacity.

1:19:49If you make BHP's profit$10 billion rather than$20 billion, I'm okay with that, right? No one's going hungry. You know? If you change someone's at a personal level, and again, property aside, whatever it was, a taxpayer who all of a sudden goes from being able to afford something to all of a sudden having to sell that thing, maybe at a loss because we changed the rules. the damage done to that person is more than just a bhp shareholder getting a dollar a share less dividend next year you know and yes those people shells have incomes and yes they have plans and whatever whatever um i just think i think the the proportional impacts i'm not i'm not i'm not asleep to i'm not saying we should charge a bhp anything i'm not saying we should send a broke because we want to try and you know really screw them over i'm just saying at some point we kind of could probably deserve a bit more of that 20 billion dollars than we're getting yeah yep no Totally fair.

1:20:36I feel better. Do you feel better? Very good question, Tim. Thank you for asking, mate. And yeah, maybe on behalf of anybody else, but on behalf of me, thank you for asking. Just gave me a chance to rant about it. As you can tell, I've thought a bit about the Sovereign Wealth Fund. I think it's one thing that if probably did nothing else, at least they would give some value to posterity. And in 70, 80, 100 years time, even 25 years time, the returns from that would be large and growing. You mentioned yourself, Matt, the size of the Future Fund from$29 billion to$285 billion. I mean, a 10x return in 18 years, that's – no, immediately that's been funded, but that would be the point.

1:21:12Sovereign World Fund would be funded ongoing. It's not just a one-off deposit, right? We would grow it meaningfully and quickly, and that would deliver really significant national benefit. I think it's an easy, easy decision. Yeah. Yeah. We live in hope. Well, yeah. I probably shouldn't, but I still do. I can't help myself. People say to me, why do you care? because they just have to believe we'll get better at some point, which is probably stupid, but look into my world. All right. That's probably enough for us, mate. You've got to get back out there. You've had your McMuffin, mate, so you're going to have to work that off with a couple of marathons this afternoon.

1:21:42I am. I'll get on the treadmill or something, yeah. Yeah, look forward to hearing about that next week. Until next Friday, if you want us, you know how to get us. Info at fool.com.au. Hit us up on the socials. Ram is at sage underscore simian or at strawmaninvest, both on Twitter. I'm on Twitter at tmfscottp. The Motley Fool is at The Motley Fool AU. Facebook at Scott Phillips Money. Until next Friday, have a great week and 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.

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