The Mind the Gap study has been conducted by Morningstar’s research teams since 2005. The study looks at the returns that investors achieve compared to investment returns. The difference is mostly down to behavioural tendencies that often lead us to act irrationally.

All six markets studied had a negative investor return gap over the period. What this means is that the investors’ timing of entering and exiting the market detracted from performance and their performance lagged the performance of the underlying investment. A hypothetical buy and hold investment fared better.

Investors in Australia and the UK suffered the smallest losses due to poor timing. The study suggests that this is because of the prevalence of more holistic financial advice in these markets. It is more common in other markets to have funds sold as isolated products.

In previous studies, Australia had a positive investor return. This was in the period between 2013-2018 – a healthy bull market. Investors did not have shaky markets to deal with, and this helped with investor performance. This has now turned negative, as investors struggle with the volatility.

However, there’s another large reason why Australia has traditionally performed better than other countries. Superannuation.

The latest episode goes through the lessons that we can take from superannuation and apply to all investments to replicate the success:

1. Invest in regular intervals

2. Minimises tax

3. Poor behaviour

4. Limited investment options

You can listen to the episode below:

Listen on:

Resources mentioned in the article:

You are able to see the accompanying article here, which includes data and graphs that complement the issues discussed in this podcast.

Shani’s article on share market returns over the long-term can be found here.

Shani's article that compares investing as an individual, company and trust can be found here.

Mark's article on why he does not sell his investments can be found here.

You can find the transcript to this podcast below:

Mark Lamonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.

So, Shani, last week we went to lunch with Luke.

Shani Jayamanne: Yeah, who is an Investing Compass listener and he wanted to try The Gidley burger.

Lamonica: Exactly. So, all of our years at this point talking about The Gidley burger and I guess just talking on this podcast got Luke to send me an email and we all went to lunch.

Jayamanne: We did, and he loved it. He said it was really good. It was worth the hype.

Lamonica: Yeah, and I agree. I would have thought less of him if he didn't like the burger.

Jayamanne: Well, I'm glad he liked the burger.

Lamonica: So, yeah. I don't know.

Jayamanne: We've got a third-party now that says that it's a good burger.

Lamonica: Exactly. Confirmation. That's all we need.

Jayamanne: Exactly.

Lamonica: So, what are we going to talk about today, Shani, other than The Gidley burger and going to lunch with a listener?

Jayamanne: Well, Mark, you know this, but financial services companies do love to do comparisons and that's because people love to compare themselves to the average person and see how they stack up.

Lamonica: Yeah, and that's why any data on average super balances does really well. That's why average salary by age is always searched. We all want to know how we're doing compared to other people.

Jayamanne: And in preparation for this podcast, I googled, what are Australians best at?

Lamonica: Okay, so this ought to be good. What came up in the results?

Jayamanne: Australia ranks first place as the world's friendliest country. We are ranked third for agility, which is very strange, and we are ranked eighth for adventure. Are you a friendly or agile person, Mark? Do you think now you're classified as an Aussie that you're included in these stats?

Lamonica: I mean, my passport says I'm Australian.

Jayamanne: Yeah. Well, there you go.

Lamonica: What is agility? I mean, I know what agility is, but how do they rank people?

Jayamanne: I'm not sure.

Lamonica: Like, I think they could say that Australians are good athletes, but agility seems like a very strange thing. But…

Jayamanne: Yeah, anyway.

Lamonica: All right. So, I don't know. I think I'm friendly sometimes.

Jayamanne: I think you are too.

Lamonica: Yeah, I don't know about agile. What about you? Are you an adventurous person, Shani?

Jayamanne: I think we can both agree that I'm not. I don't really like being outdoors.

Lamonica: You like going to the beach. I saw you drink out of a bottle of rum once on a beach.

Jayamanne: I did.

Lamonica: Yeah.

Jayamanne: Do we need to share that on the podcast?

Lamonica: Probably not, but…

Jayamanne: Yeah, I was like a pirate. But anyway, I guess it's true. In more relevant scores, we are third place for a comfortable retirement.

Lamonica: Okay, and that's what we're talking about today, not agility.

Jayamanne: No. And that is because in a recent study by Morningstar, Aussies came out on top compared to other countries, and it has been this way for a little while, while we have been conducting the Mind the Gap study.

Lamonica: And the Mind the Gap study has been done by Morningstar's research team since 2005, and the study looks at the returns that investors achieve compared to investment returns. And the difference between those two numbers is mostly down to behavioral tendencies that often lead us to act irrationally.

Jayamanne: And we do speak about this study a lot on the podcast, and it's because it's hard data on why long-term outlooks with a buy-and-hold strategy can provide good outcomes. And of course, that is easier said than done.

Lamonica: And we all inherently know to buy low and sell high, but of course, in practice, this is not what many investors do. We often follow the herd by investing in shares, ETFs, and funds that have done well recently. And that is, of course, buying high. We also often sell when markets or individual holdings drop, and that is selling low. And to see an example of this in practice, look at the annual superannuation performance results. The best-performing super funds have inflows immediately after the results are released.

Jayamanne: And the results of this poor behavior is a behavioral gap in investment returns.

Lamonica: The Mind the Gap study in 2023 had a little bit more information than usual. It had information on the outcomes of investors in different markets. And there were six markets outside of the US that were studied – so Australia, obviously, Hong Kong, Ireland, Luxembourg, Singapore, and the United Kingdom.

Now, Shani will rank people from all of those six markets on their agility if somebody comes out to lunch with us again. So, all six of those markets studied had a negative investor return gap over the period. What this means is that the investors' timing of entering and exiting the market detracted from performance, and their performance lagged the performance of the underlying investment. A hypothetical buy-and-hold investment fared better.

Jayamanne: So, investors in Australia and the UK suffered the smallest losses due to poor timing. For Aussie investors, their total return was about 5.92% annualized. Their investor return was 5.52%. There was a gap of 0.4%. This represents a 7% gap as a percentage of total returns. Hong Kong fared the worst. Investors had a 41% gap as a percentage of their total returns. The UK also had a gap of 7%, but they had lower returns with a net return of 4.14%.

Lamonica: Now, I've lived in Hong Kong and Australia. So where do you think I would fall?

Jayamanne: I feel like, as you said, you're an Aussie. So good returns.

Lamonica: Okay. That's why I'm so agile.

Jayamanne: Yes.

Lamonica: All right. Well, you wrote an article on this, Shani.

Jayamanne: Yes.

Lamonica: And you can find all of the figures on the article on Morningstar.com.au. We will put a link in the bio to this podcast. So why did Aussie investors fare better? Well, the study suggests that this is because there are more people with financial advisors in Australia compared to other markets where it's more common to have funds sold as isolated products. There's no doubt that this is one of the contributing factors to why Aussie investors have done well, but there's another large reason.

Jayamanne: In previous studies, Australia had a positive investor return. This was in the period between 2013 and 2018, a healthy bull market. Investors did not have shaky markets to deal with, and this helped with investor performance. This has now turned negative as investors struggle with volatility. But Australia has also traditionally performed better than other countries because of superannuation.

Lamonica: And we're not saying that other countries don't have pension funds or retirement savings schemes. Many countries have retirement savings accounts and programs. However, the compulsory enrollment and the outsourcing of investment management from superannuation funds to funds management companies means that the super system has a link between the aggregate investment and investor returns in Australia.

Jayamanne: And this is great for us. We have a great retirement savings system that not just protects us or minimizes poor behavior for most people, but it also has favorable tax rates, which means that those total return figures become even more attractive when you take that into account.

Lamonica: It is a great retirement system.

Jayamanne: Thank you.

Lamonica: Every Australian that I meet complains about super. I'm like, well, you should see the other options. But anyway, there are a few lessons that investors can take from these results to apply to investments outside of super or for investors that have self-managed super funds, where they have more discretion over the timing of investment. So, let's go through those lessons, Shani.

Jayamanne: All right. So, the first is a way that superannuation invests at regular intervals during your accumulation phase.

Lamonica: Super is invested at regular intervals. Of course, if you're a salaried employee, it will be a consistent amount every time. It is invested regardless of whether you think the market is overvalued or undervalued. It is invested if markets are volatile or calm if there is a bull market or a bear market.

Jayamanne: Consistently investing in the market over decades without the temptation to time the market means that you will be invested for the maximum amount of time and will not try to make tactical allocations.

Lamonica: And of course, consistently investing outside of super will give you the same benefits. Reducing the tendency to try to maximize your wealth and simply investing at regular intervals means you will have more time in the market, and you will avoid speculative behavior. The strategy can keep you focused over the long term and help you avoid the temptation to try to maximize returns.

Jayamanne: And this is something that I do in my portfolio. I have found that superannuation has been the best-performing investment account that I have ever had. This is because I've tried many different investment strategies and investments in my journey and got to know that having a set plan with strict rules helps reduce the anxiety I have around market volatility regardless of what is happening. I invest from every paycheck.

Lamonica: So, you've taken this lesson, you applied it outside of super.

Jayamanne: Yeah, exactly Mark. So, I think ultimately the assumption is I have all this research and data at my fingertips at work. I know a lot of people that work in this space, including yourself, that derive a lot of joy and pleasure from the actual investment process, thinking about investments and investment theses. And I think that there's a spectrum of investors, those that enjoy managing their investments and those that don't but understand that they need to invest.

I imagine a lot of the people that listen to this podcast fall into the former, but I resonate with the latter. My passion is at the beginning of the process, very much about setting yourself up correctly. In my opinion, the three biggest influences that determine whether you create a more comfortable life through investing is, number one, getting invested in the first place and two, portfolio structuring and three, asset allocation.

The selecting investments part brings a lot of joy to some people, but I think that for my personality and my approach to investing, investing regularly in the right allocation and committing to it is going to provide a much starker difference than choosing between two stocks. What about you, Mark? I know that you were pretty religious about your additional investments early on in your journey.

Lamonica: Yeah, I mean, certainly same thing. I really started investing in the aftermath of the dotcom blow-up and I invested all the way through the GFC, both very difficult times as an investor and difficult to keep plowing money into the market when you kept losing it the next day. But yeah, I think that discipline has really benefited me now that I'm an old man. So yeah, smart move.

Jayamanne: Okay. So, let's move on to the second lesson that we can take from super and that's tax. The primary benefit of investing in super is the favorable tax rates. Tax has a significant impact on your total return. We've done an episode before on tax over the lifetime of an investment and your total return really cops it. We can link an article with all the figures in the bio.

 

Lamonica: And basically, what it shows for tax is the amount of capital gains and income tax on an investment portfolio. So, I modeled out a scenario with $100,000 initial investment and $1,000 invested each month over 20 years. The result was a portfolio worth $1.391 million. However, that is before taxes. You would pay $180,000 in tax on income and an additional $170,000 in capital gains tax.

Jayamanne: And then poor behavior, switching in and out of investments or speculative trading will lead to even more taxes. This is a further $290,000 which accounts for unnecessary taxes and transaction costs that are incurred. And it's easy to see how investing in superannuation minimizes tax. And while the tax environment is not as beneficial outside of super, an investor will benefit from trying to minimize taxes.

Lamonica: And there are a few ways that you're able to do this. The first is by understanding which vehicle may work best for you from a tax perspective – investing as an individual, a company or a trust. So, Shani has written another article on this. This is like a big advertisement for everything that you've written.

Jayamanne: Yeah. Well, there you go.

Lamonica: Okay. So, Shani wrote another article on this and looked at the different tax rates and the types of investors that each vehicle may suit. And if there's even room left in the show notes, we'll put this in there.

Jayamanne: We'll put it in the bio. All right. So, the second is by limiting poor behavior and investing for the long term. Superannuation keeps investors focused on the long term because you are unable to withdraw the funds unless you meet a very narrow set of requirements. Mark has written an article about how he has no intention on selling his investments. We won't link that one.

Lamonica: No, nobody wants to read anything that I wrote. But we do obviously as investors, we need to be hardwired to seek – or we are hardwired to seek the best returns possible. And preventing poor behavior involves knowing yourself and your goals. From there, you're able to set up your portfolio with your goals in mind, means that you are able to avoid situations where you were just blindly trying to beat the market or your mates or any other benchmark that doesn't relate to your financial goals. And of course, we've said this 50 times on here, create an investment policy statement because writing stuff down can help guide your decision-making.

Jayamanne: The other lesson that we can learn from Super is a limited investment options, unless of course you're in an SMSF. In the superannuation industry in Australia, most investors are in retail or industry super funds. This may also contribute to why Australian investors have performed well in the Mind the Gap study. The majority of super funds partly outsource management to third-party fund managers for certain asset classes.

Lamonica: For example, if you look at the AustralianSuper Balanced Fund, they have invested in managed funds from companies such as Oaktree and State Street Global Advisors. What most people are choosing between are names such as conservative, balanced, aggressive. We've all seen that on superannuation websites. The clearcut choices for many Australians means that they're able to pick an investment and stick with it for the long term.

Jayamanne: Exactly right. What we see with a lot of investors is that they're offered too much choice, and this does one of two things to most investors. It either immobilizes them and they think that the choice is too hard, or it makes them have FOMO and have issues sticking to one fund.

Lamonica: And the issue for many investors when they're investing outside of super is that they want to be in the best-performing investment option at all times. Morningstar Asset Class Gameboard is a really good example of this. It's an image so you'll be able to see in the same link that we mentioned for 'Aussies are better investors.' And what it shows is the best-performing asset classes in each calendar year.

Jayamanne: And the image is so clear that there really is no one asset class that's always on top. The best-performing asset class changes every year. The worst-performing asset class changes every year. The frequent changes mean that an investor chasing returns will make constant changes to a portfolio. If an investor switches from investment to investment or asset class to asset class chasing returns, they will pay more in transaction tax and investment costs. They'll also earn lower returns as another asset class takes over with the top returns.

Lamonica: So how do you prevent this? Well, to limit performance chasing, create a list of parameters and investment criteria that align to your goals. This will guide your decision-making. Again, this is something that we always talk about on Investing Compass. It is ensuring that you have a written plan that will provide a guide for what you can and can't invest in. It will help you to make rational decisions that are in line with your investment goals and not just about maximizing your wealth. The second suggestion is to create a wish list. Find investments that fit your criteria that may not be at the right price, or you may not have the funds to purchase. We did a podcast about one that was on my list, American Tower, that has since come to a price that is reasonable enough for me to purchase. So, I did.

Jayamanne: So, invest consistently with your existing investments and the predetermined investments that fit the criteria in your investment strategy. Artificially limiting your options may help you make better decisions and help to tune out the noise of the best investments to make in the moment.

Lamonica: All right. Well, thank you guys very much for listening to learn about how agile Australians are. If you are not Australian and you're listening, you can aspire to the agility of an Australian. Thank you very much.

 

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

[Advertisement: We have an exciting sale on Morningstar Investor, which provides access to all of our stock, fund, and ETF research and comes with a free subscription to Sharesight. Save 33% of Morningstar Investor with our annual End Of Financial Year sale. Sign up for a free 4-week trial of Morningstar Investor today and use code IC33 at checkout to save 33% off your first 12-month subscription. Don't miss out. The sale ends on Sunday, 30 June 2024, and terms and conditions apply. Visit our website, go.morningstar.com/investingcompass to find information on how to sign up and the terms and conditions or find out more in the episode notes.]

 

Mark Lamonica: Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situation, circumstances, or needs.

 

So, Shani, last week we went to lunch with Luke.

 

Shani Jayamanne: Yeah, who is an Investing Compass listener and he wanted to try The Gidley burger.

 

Lamonica: Exactly. So, all of our years at this point talking about The Gidley burger and I guess just talking on this podcast got Luke to send me an email and we all went to lunch.

 

Jayamanne: We did, and he loved it. He said it was really good. It was worth the hype.

 

Lamonica: Yeah, and I agree. I would have thought less of him if he didn't like the burger.

 

Jayamanne: Well, I'm glad he liked the burger.

 

Lamonica: So, yeah. I don't know.

 

Jayamanne: We've got a third-party now that says that it's a good burger.

 

Lamonica: Exactly. Confirmation. That's all we need.

 

Jayamanne: Exactly.

 

Lamonica: So, what are we going to talk about today, Shani, other than The Gidley burger and going to lunch with a listener?

 

Jayamanne: Well, Mark, you know this, but financial services companies do love to do comparisons and that's because people love to compare themselves to the average person and see how they stack up.

 

Lamonica: Yeah, and that's why any data on average super balances does really well. That's why average salary by age is always searched. We all want to know how we're doing compared to other people.

 

Jayamanne: And in preparation for this podcast, I googled, what are Australians best at?

 

Lamonica: Okay, so this ought to be good. What came up in the results?

 

Jayamanne: Australia ranks first place as the world's friendliest country. We are ranked third for agility, which is very strange, and we are ranked eighth for adventure. Are you a friendly or agile person, Mark? Do you think now you're classified as an Aussie that you're included in these stats?

 

Lamonica: I mean, my passport says I'm Australian.

 

Jayamanne: Yeah. Well, there you go.

 

Lamonica: What is agility? I mean, I know what agility is, but how do they rank people?

 

Jayamanne: I'm not sure.

 

Lamonica: Like, I think they could say that Australians are good athletes, but agility seems like a very strange thing. But…

 

Jayamanne: Yeah, anyway.

 

Lamonica: All right. So, I don't know. I think I'm friendly sometimes.

 

Jayamanne: I think you are too.

 

Lamonica: Yeah, I don't know about agile. What about you? Are you an adventurous person, Shani?

 

Jayamanne: I think we can both agree that I'm not. I don't really like being outdoors.

 

Lamonica: You like going to the beach. I saw you drink out of a bottle of rum once on a beach.

 

Jayamanne: I did.

 

Lamonica: Yeah.

 

Jayamanne: Do we need to share that on the podcast?

 

Lamonica: Probably not, but…

 

Jayamanne: Yeah, it's like a pirate. But anyway, I guess it's true. In more relevant scores, we are third place for a comfortable retirement.

 

Lamonica: Okay, and that's what we're talking about today, not agility.

 

Jayamanne: No. And that is because in a recent study by Morningstar, Aussies came out on top compared to other countries, and it has been this way for a little while, while we have been conducting the Mind the Gap study.

 

Lamonica: And the Mind the Gap study has been done by Morningstar's research team since 2005, and the study looks at the returns that investors achieve compared to investment returns. And the difference between those two numbers is mostly down to behavioral tendencies that often lead us to act irrationally.

 

Jayamanne: And we do speak about this study a lot on the podcast, and it's because it's hard data on why long-term outlooks with a buy-and-hold strategy can provide good outcomes. And of course, that is easier said than done.

 

Lamonica: And we all inherently know to buy low and sell high, but of course, in practice, this is not what many investors do. We often follow the herd by investing in shares, ETFs, and funds that have done well recently. And that is, of course, buying high. We also often sell when markets or individual holdings drop, and that is selling low. And to see an example of this in practice, look at the annual superannuation performance results. The best-performing super funds have inflows immediately after the results are released.

 

Jayamanne: And the results of this poor behavior is a behavioral gap in investment returns.

 

Lamonica: The Mind the Gap study in 2023 had a little bit more information than usual. It had information on the outcomes of investors in different markets. And there were six markets outside of the US that were studied – so Australia, obviously, Hong Kong, Ireland, Luxembourg, Singapore, and the United Kingdom.

 

Now, Shani will rank people from all of those six markets on their agility if somebody comes out to lunch with us again. So, all six of those markets studied had a negative investor return gap over the period. What this means is that the investors' timing of entering and exiting the market detracted from performance, and their performance lagged the performance of the underlying investment. A hypothetical buy-and-hold investment fared better.

 

Jayamanne: So, investors in Australia and the UK suffered the smallest losses due to poor timing. For Aussie investors, their total return was about 5.92% annualized. Their investor return was 5.52%. There was a gap of 0.4%. This represents a 7% gap as a percentage of total returns. Hong Kong fared the worst. Investors had a 41% gap as a percentage of their total returns. The UK also had a gap of 7%, but they had lower returns with a net return of 4.14%.

 

Lamonica: Now, I've lived in Hong Kong and Australia. So where do you think I would fall?

 

Jayamanne: I feel like, as you said, you're an Aussie. So good returns.

 

Lamonica: Okay. That's why I'm so agile.

 

Jayamanne: Yes.

 

Lamonica: All right. Well, you wrote an article on this, Shani.

 

Jayamanne: Yes.

 

Lamonica: And you can find all of the figures on the article on Morningstar.com.au. We will put a link in the bio to this podcast. So why did Aussie investors fare better? Well, the study suggests that this is because there are more people with financial advisors in Australia compared to other markets where it's more common to have funds sold as isolated products. There's no doubt that this is one of the contributing factors to why Aussie investors have done well, but there's another large reason.

 

Jayamanne: In previous studies, Australia had a positive investor return. This was in the period between 2013 and 2018, a healthy bull market. Investors did not have shaky markets to deal with, and this helped with investor performance. This has now turned negative as investors struggle with volatility. But Australia has also traditionally performed better than other countries because of superannuation.

 

Lamonica: And we're not saying that other countries don't have pension funds or retirement savings schemes. Many countries have retirement savings accounts and programs. However, the compulsory enrollment and the outsourcing of investment management from superannuation funds to funds management companies means that the super system has a link between the aggregate investment and investor returns in Australia.

 

Jayamanne: And this is great for us. We have a great retirement savings system that not just protects us or minimizes poor behavior for most people, but it also has favorable tax rates, which means that those total return figures become even more attractive when you take that into account.

 

Lamonica: It is a great retirement system.

 

Jayamanne: Thank you.

 

Lamonica: Every Australian that I meet complains about super. I'm like, well, you should see the other options. But anyway, there are a few lessons that investors can take from these results to apply to investments outside of super or for investors that have self-managed super funds, where they have more discretion over the timing of investment. So, let's go through those lessons, Shani.

 

Jayamanne: All right. So, the first is a way that superannuation invests at regular intervals during your accumulation phase.

 

Lamonica: Super is invested at regular intervals. Of course, if you're a salaried employee, it will be a consistent amount every time. It is invested regardless of whether you think the market is overvalued or undervalued. It is invested if markets are volatile or calm if there is a bull market or a bear market.

 

Jayamanne: Consistently investing in the market over decades without the temptation to time the market means that you will be invested for the maximum amount of time and will not try to make tactical allocations.

 

Lamonica: And of course, consistently investing outside of super will give you the same benefits. Reducing the tendency to try to maximize your wealth and simply investing at regular intervals means you will have more time in the market, and you will avoid speculative behavior. The strategy can keep you focused over the long term and help you avoid the temptation to try to maximize returns.

 

Jayamanne: And this is something that I do in my portfolio. I have found that superannuation has been the best-performing investment account that I have ever had. This is because I've tried many different investment strategies and investments in my journey and got to know that having a set plan with strict rules helps reduce the anxiety I have around market volatility regardless of what is happening. I invest from every paycheck.

 

Lamonica: So, you've taken this lesson, you applied it outside of super.

 

Jayamanne: Yeah, exactly Mark. So, I think ultimately the assumption is I have all this research and data at my fingertips at work. I know a lot of people that work in this space, including yourself, that derive a lot of joy and pleasure from the actual investment process, thinking about investments and investment theses. And I think that there's a spectrum of investors, those that enjoy managing their investments and those that don't but understand that they need to invest.

 

I imagine a lot of the people that listen to this podcast fall into the former, but I resonate with the latter. My passion is at the beginning of the process, very much about setting yourself up correctly. In my opinion, the three biggest influences that determine whether you create a more comfortable life through investing is, number one, getting invested in the first place and two, portfolio structuring and three, asset allocation.

 

The selecting investments part brings a lot of joy to some people, but I think that for my personality and my approach to investing, investing regularly in the right allocation and committing to it is going to provide a much starker difference than choosing between two stocks. What about you, Mark? I know that you were pretty religious about your additional investments early on in your journey.

 

Lamonica: Yeah, I mean, certainly same thing. I really started investing in the aftermath of the dotcom blow-up and I invested all the way through the GFC, both very difficult times as an investor and difficult to keep plowing money into the market when you kept losing it the next day. But yeah, I think that discipline has really benefited me now that I'm an old man. So yeah, smart move.

 

Jayamanne: Okay. So, let's move on to the second lesson that we can take from super and that's tax. The primary benefit of investing in super is the favorable tax rates. Tax has a significant impact on your total return. We've done an episode before on tax over the lifetime of an investment and your total return really cops it. We can link an article with all the figures in the bio.

 

Lamonica: And basically, what it shows for tax is the amount of capital gains and income tax on an investment portfolio. So, I modeled out a scenario with $100,000 initial investment and $1,000 invested each month over 20 years. The result was a portfolio worth $1.391 million. However, that is before taxes. You would pay $180,000 in tax on income and an additional $170,000 in capital gains tax.

 

Jayamanne: And then poor behavior, switching in and out of investments or speculative trading will lead to even more taxes. This is a further $290,000 which accounts for unnecessary taxes and transaction costs that are incurred. And it's easy to see how investing in superannuation minimizes tax. And while the tax environment is not as beneficial outside of super, an investor will benefit from trying to minimize taxes.

 

Lamonica: And there are a few ways that you're able to do this. The first is by understanding which vehicle may work best for you from a tax perspective – investing as an individual, a company or a trust. So, Shani has written another article on this. This is like a big advertisement for everything that you've written.

 

Jayamanne: Yeah. Well, there you go.

 

Lamonica: Okay. So, Shani wrote another article on this and looked at the different tax rates and the types of investors that each vehicle may suit. And if there's even room left in the show notes, we'll put this in there.

 

Jayamanne: We'll put it in the bio. All right. So, the second is by limiting poor behavior and investing for the long term. Superannuation keeps investors focused on the long term because you are unable to withdraw the funds unless you meet a very narrow set of requirements. Mark has written an article about how he has no intention on selling his investments. We won't link that one.

 

Lamonica: No, nobody wants to read anything that I wrote. But we do obviously as investors, we need to be hardwired to seek – or we are hardwired to seek the best returns possible. And preventing poor behavior involves knowing yourself and your goals. From there, you're able to set up your portfolio with your goals in mind, means that you are able to avoid situations where you were just blindly trying to beat the market or your mates or any other benchmark that doesn't relate to your financial goals. And of course, we've said this 50 times on here, create an investment policy statement because writing stuff down can help guide your decision-making.

 

Jayamanne: The other lesson that we can learn from Super is a limited investment options, unless of course you're in an SMSF. In the superannuation industry in Australia, most investors are in retail or industry super funds. This may also contribute to why Australian investors have performed well in the Mind the Gap study. The majority of super funds partly outsource management to third-party fund managers for certain asset classes.

 

Lamonica: For example, if you look at the AustralianSuper Balanced Fund, they have invested in managed funds from companies such as Oaktree and State Street Global Advisors. What most people are choosing between are names such as conservative, balanced, aggressive. We've all seen that on superannuation websites. The clearcut choices for many Australians means that they're able to pick an investment and stick with it for the long term.

 

Jayamanne: Exactly right. What we see with a lot of investors is that they're offered too much choice, and this does one of two things to most investors. It either immobilizes them and they think that the choice is too hard, or it makes them have FOMO and have issues sticking to one fund.

 

Lamonica: And the issue for many investors when they're investing outside of super is that they want to be in the best-performing investment option at all times. Morningstar Asset Class Gameboard is a really good example of this. It's an image so you'll be able to see in the same link that we mentioned for 'Aussies are better investors.' And what it shows is the best-performing asset classes in each calendar year.

 

Jayamanne: And the image is so clear that there really is no one asset class that's always on top. The best-performing asset class changes every year. The worst-performing asset class changes every year. The frequent changes mean that an investor chasing returns will make constant changes to a portfolio. If an investor switches from investment to investment or asset class to asset class chasing returns, they will pay more in transaction tax and investment costs. They'll also earn lower returns as another asset class takes over with the top returns.

 

Lamonica: So how do you prevent this? Well, to limit performance chasing, create a list of parameters and investment criteria that align to your goals. This will guide your decision-making. Again, this is something that we always talk about on Investing Compass. It is ensuring that you have a written plan that will provide a guide for what you can and can't invest in. It will help you to make rational decisions that are in line with your investment goals and not just about maximizing your wealth. The second suggestion is to create a wish list. Find investments that fit your criteria that may not be at the right price, or you may not have the funds to purchase. We did a podcast about one that was on my list, American Tower, that has since come to a price that is reasonable enough for me to purchase. So, I did.

 

Jayamanne: So, invest consistently with your existing investments and the predetermined investments that fit the criteria in your investment strategy. Artificially limiting your options may help you make better decisions and help to tune out the noise of the best investments to make in the moment.

 

Lamonica: All right. Well, thank you guys very much for listening to learn about how agile Australians are. If you are not Australian and you're listening, you can aspire to the agility of an Australian. Thank you very much.

 

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)