How to Invest in Shares With No Risk

Hi Scott,

My partner and I are quite young (both 28) and have bought our first home already. We are now looking to invest in the share market, and would like to take out a ‘protected equity loan’ to do so. Yes, the cost of it is high, but after that you own the asset. We are in it for capital growth over time, so we can accept breaking even for 10 years or so, particularly with the potential for tax minimisation. The trouble is, I know you do not think highly of this product. Could you please explain why?

Angie

Hi Angie,

On first glance these things look like the best thing since sliced (gluten-free) bread.

Here’s how Westpac describe their protected equity loan:

“The potential of Australian shares. The certainty of capital protection at maturity.”

Let’s say you take out a Westpac protected equity loan of $1,000 and invest in an Aussie share fund. If in five years’ time the shares are worth less than $1,000, all you need to do is hand them back to Westpac, and just walk away Renee (or Angie -- word up to those 90s kids who got that music reference).

Hot diggity dang! Who doesn’t want the potential of shares with the certainty that you won’t do your dough?

Sign me up!

Trouble is, there’s no free lunch in the stock market, and Westpac sure ain’t handing out gluten-free dinner rolls.

The devil with these loans is the interest rate you’re charged. Westpac builds in the cost of the capital protection (otherwise known as a ‘put option’), then adds a bit of gravy.

How much gravy?

Well, Westpac charges an interest rate of 8.95%.‘Trời ơi!’, as my Vietnamese friends say.

Bottom line?

These fancy loans are dreamt up by bankers and flogged by financial planners with one goal: to make them fat ongoing fees … not to help you.I’ve been Barefoot for years now, and I’ve come to understand a few things:

First, most people make dumb decisions just to save tax.

Second, most people don’t have the ticker to invest in the market with their own money, let alone with borrowed money.

Third, most people borrow at the wrong time. Like right now, when the market has been going up for over a decade and everything appears ‘safe’. The time to go ‘balls in’ (as my father would say) is straight after a crash, precisely when no one wants to invest in the share market.

So what should you do?Stick to the Barefoot Steps.You’ve bought your home at a young age -- well done!

That’s Step 4 done and dusted. Now it’s time to move on to Step 5 and increase your super contributions from the basic 9.5% (paid by your employer) to 15% by salary-sacrificing some of your pay packet (up to the $25,000 cap per person per year).This has two benefits:

You’ll get a genuine tax deduction (possibly slashing your top marginal tax rate by almost two-thirds) and, if you choose a super fund with ultra-low costs, your returns won’t be eaten away by some banking fairy.

Scott

Do I Have to Pay Tax on Bitcoin?

Hi Scott,

I have just bitten the bullet and invested in Bitcoin (and it has been a wild ride over the past week!).

Judging from what the experts suggest, the price could hit $60,000.This got me thinking -- what tax will I pay on my gains?

Lloyd

Hi Lloyd,

If your purchase of Bitcoin was under $10,000, and you’re only using it to pay for goods or services, any capital gain you make will be tax free because the Tax Office considers it a ‘personal use asset’.

However, you’re speculating (i.e. hoping to ‘get rich or die tryin’, as Fiddy Cent says), so you’ll pay tax on any capital gain at your marginal tax rate. Having said that, if you hold on for at least 12 months, you’ll be able to claim a 50% capital gains tax discount.

Even though the Tax Office can’t track Bitcoin, they still want their share of any capital gain you make. So make sure you keep good records (transaction dates, how much you invested, the price you bought and sold for) in case you get audited.

Finally, if you cop a loss on your Bitcoin, you can use it to offset capital gains made that year, or you can carry it forward to offset against gains made in the future. (Losing money on Bitcoin? That’s never going to happen, right?)

Scott

Why Advisors Hate Barefoot

Hi Scott,

My husband and I would like to share with you a conversation he recently had with our financial adviser.

Husband: “My wife and I have been looking into our shared finances. We think we are paying too much for financial advice on your managed super fund. We will be switching to a ultra low-cost super fund.”

Adviser: “Sounds like your wife has been reading the Barefoot Investor.”

Husband: “I bet that’s the bane of your life.”Adviser: “Yes. Hmf. Well, our fund is better because …”

You can guess the rest. We are so thankful to you, Barefoot!

Meg

Hi Meg,

Just for kicks, let me visualise the rest of the conversation:

Adviser: “You’ll get better returns from our actively managed fund, which employs some of the finest fund managers in the world and has a history of outperforming the market.”

Meg: “Go on.”

Adviser: “Fees are important, but they’re not the only consideration. You need to consider long-term performance.”

Meg: “Do you have access to exclusive hedge funds?”Adviser (panting): “We most certainly do!”

Meg: “Well, did you read about the million-dollar bet Warren Buffett made in 2007? He bet that a basic no-brainer index fund that simply tracks the market would outperform the most elite hedge funds over 10 years. Guess what happened? The $1 million invested in the expensive hedge funds gained $220,000 … the ultra-low cost index fund gained $854,000.”

Adviser (closing his folder): “I’m late for my next appointment.”

Scott

Million Dollar Payday

Dear Scott,

I am 24 years old and I earn $40,000 a year working part time. Today I received a lump sum of $1,000,000 (after costs) due to being run over by a car seven years ago. I need to pay around $5,000 a year in ongoing medical costs. How should I invest this money, and is it worth setting up a trust and a ‘bucket company’ that reinvests in itself?

Max

Hi Max,

First up, you won’t have to pay tax on the payout itself, but you will pay tax on any investment earnings you earn on it. Now, would I invest the money in a trust and then distribute the investment income to a company?

Possibly. The trust will give you asset protection benefits, and the company acts as a ‘bucket’ to theoretically cap your tax rate at the company tax rate of 30 per cent. But know this: it’ll also gobble up a few thousand dollars a year in fees to your accountant.

However, let’s not put the cart before the horse.I

f I were in your shoes, I’d keep it simple:

I’d buy a nice little unit for cash (say $500,000).I’d put $15,000 into Mojo (high-interest online saver account).

I’d put $25,000 into term deposits with different maturities to cover any medical costs within the next five years.

I’d also kick $25,000 into your super.

Then I’d invest the rest ($435,000 or thereabouts) into good-quality Aussie shares (either via a trust, or in your own name), tick the ‘Dividend Reinvestment Plan’ option (so your dividend earnings are automatically reinvested rather into more shares), and let your money compound.

Scott

Should We Sell Our CBA Shares?

Hi Scott,

We got Commonwealth Bank shares when the bank was floated years ago. Until recently they were worth $100,000, but now they have plunged to just $74,000. We are retired and self-funded (income about $70,000 combined) and do not want to watch them disappear! What is your recommendation?

Bernice

Back it up,

Bernice!

I’ll answer your question in a moment, but first, for the benefit of younger readers, let me give the backstory:

The Commonwealth Bank floated on the share market in 1991, for $5.40 a share. The minimum you could purchase in the float was 400 shares -- so you BPAY’d your $2,160.

A few weeks later you ticked the ‘dividend reinvestment plan’ form.And then you sat back and ate kabana.

Fast forward to today.

Your $2,160 investment is now worth … drum roll please ... $138,400.

(So, given you say your shares have ‘plunged to $74,000’, I’m assuming you have sold some along the way.)

Yes, my nipples are getting hard, but let me give you one more amazing stat: last year CBA paid out $4.29 per share in dividends … that’s 80% of what you initially paid for each share!

Okay, so that’s the backstory. Now let me answer your actual question -- should you sell your CBA shares?

The answer is … it depends. If your CBA shares make up more than 30% of your portfolio, it would be wise to sell down part of your holding and diversify by investing in other companies. (This doesn’t just apply to CBA shares; it’s not good to be too reliant on any one company.) It’s even more attractive if you’re holding the shares in a self managed super fund (SMSF) and you’re in pension phase, as there are no tax consequences. Either way check with your accountant. Winner, winner, chicken dinner!

Scott

Borrow to Buy Shares?

Hi Scott,

My husband and I are both 40, have two very young girls, and have owned our home outright for three years. We are now down to one wage ($100,000), but have also managed to also put away $90,000 in savings. With an eye to growing our wealth, we have borrowed to invest in shares -- on the advice of our financial adviser. But we are worried that the interest each month is less than the dividends received, and think we could have been saving this money instead and investing our own cash. What is your take on this?

Natalie

Hi Natalie,

Getting the banker off your back is (financially) the best thing you could have done for your family.

Well bloody done!

Truth be told, you’ve got the one character trait that almost no broke people have: a savings mentality.

Now, the strategy your financial advisor has you on is negative gearing (in this case shares, not property). And while the gains from borrowing to buy shares can look awesome on a spreadsheet, the truth is that most people don’t have the ticker to stomach a stock market crash with borrowed coin.

There are two major purchases that money can buy you from hereon out: the financial security of never having to worry about money again, and the freedom to spend time with your family and friends. Here’s how to achieve them:

First, save up three months of living expenses in a Mojo savings account.

Second, max out your pre-tax super contributions of $25,000 each year. That’ll give you both a tax deduction and a secure retirement. If you go back to work, do the same (i.e. $25,000 for each of you).

Third, set up a long-term share investing program to fund your kids’ education, awesome family adventures, and weird hobbies. Invest in the lower-earning spouse’s name and, if you’re a nervous investor, do it without debt.

Scott

Should I Sell My Telstra Shares?

Hi Scott,

I was one of the sheep who bought Telstra in the floats (T1 and T2) when the government thought it would be a good time to sell off taxpayers’ assets. I have been a long-term investor -- I have been holding them for 20 years and they have delivered me bugger all! Now they have come out and cut their dividend, the share price has been shredded even more. So my question is, should I just sell this dog?

Tim

Hi Tim,

The first thing to understand is that the stock market doesn’t give a stuff about what price you bought Telstra for.

Seriously, it’s totally irrelevant.

The only thing that matters is what the price is today.

So you need to ask yourself this question: “Knowing what I know now, would I buy Telstra shares today?”

If you wouldn’t, sell them. If you would, keep them. It’s that simple.

Personally, I’m a Telstra shareholder … and I’ve been buying Telstra shares recently.

Why?

First, because data is about to explode, as the internet goes from your computer to syncing up to your fridge, your washing machine, and every other smart device.

Second, the NBN is proving to be quite the white elephant. While it’s true that Telstra has (sensibly) decided to stop paying out all its profits in dividends to shareholders … this decision is in part to fund the roll out of their 5G mobile network, which could eventually eat the elephant.

Finally, while the dividend has been cut, on the revised numbers it’s still delivering around 6 per cent fully franked. They’re my reasons for continuing to hold the dog-and-bone, anyway. Over to you.

Scott

Are we heading for a stock market crash?

Well, less than a year ago, the leader of the free world had this to say about the market:

“We are in a big, fat, ugly bubble. And we better be awfully careful.”At the time, the Dow Jones was trading at 18,000 points.

Recently the Dow broke through 22,000, but this time Trump tweeted triumphantly:

“Stock Market at an all-time high. That doesn’t just happen!”

Thought bubble?  Well, we all know the Tweeter-in-Chief has four of those before breakfast. (And if you’re trying to make sense of any of this, you haven’t been paying attention.)  Whether Donald likes it or not, the share market has a nasty habit of crashing (on average) every 10 years or so:1987 was the Black Monday crash.

1997 was the start of the Asian Financial Crisis.

2007 was the start of the Global Financial Crisis.

2017 is  … well, let’s not get carried away, because, just like the Trump presidency, there’s no logic to any of this.

(Case in point: the ‘tech-wreck’ happened around 2000, which didn’t fit the 10-year pattern.)

Again, to be clear, I’m not saying the share market is going to crash this year.

However, I am growing more cautious, and taking my cues from another US billionaire …Warren Buffett’s Berkshire Hathaway currently has $100 billion in cash in its war-chest. That’s the most they’ve ever had. As a percentage of Berkshire’s assets, it’s actually more than the prescient pile Buffett went into the GFC with, when he made good on his motto: “Be greedy when other people are fearful.”Tweet! Tweet!

Tread Your Own Path!

What’s Wrong with Ethical Investing, Barefoot?

Hi Scott,

I am currently reading your book. It interests me to read how lovingly you speak about your family, yet I have not come across any mention in the book of investing ethically, socially or environmentally. You suggest readers should switch to indexed super and stock funds, but do these align with your values? Having said that, I am currently getting ripped by high fees on a well-known ethical super fund. So what is the best and cheapest way to invest ethically?

Helen

Hi Helen,

Your ethical fund is ripping you with fees? That doesn’t sound too … ethical.Still, as an investment option within superannuation, socially responsible investing (SRI) is so freaking hot right now. It’s the financial equivalent of a paleo-approved, gluten-free, organic kale and almond milk combo shake (and you get charged through the nose-ring for both!).

My view? I think you need to be careful about outsourcing your ethics to a bunch of … finance guys. That being said, I strongly believe in ethical investing, so much so that I have an ethical fund: it’s called the Pape family portfolio, where we make our own investment decisions, based on our own convictions.

Scott

How to ruin your financial life

He didn’t even introduce himself.

An old bloke just walked straight up to me, poked his knobbly old index finger into my ribs, leaned in, and said:

“They don’t listen to you, do they!”

“Huh?” I replied, cowering like a schoolboy (I was at a function, and I didn’t know this old codger.)

“I’ve been reading your questions in the newspaper for years … and they don’t listen to your advice!”

He did have a point. Maybe my message just isn’t getting through. After all, each week I try and give people honest, commonsense advice to help them out.

Fat load of good that does!

So this week let’s try something different — a bit of reverse psychology.

If people don’t respond to good advice, maybe they’ll listen to some bad advice?

So in honour of the old bloke, let me give you half a dozen ways to totally screw up your financial life.

How to Lose Your Shirt in the Share Market

Buy shares based on the tips of your brother-in-law (a 43-year-old IT helpdesk employee who ‘dabbles’ in shares, porn, and sporting memorabilia).

Yet what if you are not lucky enough to have a brother-in-law who has outspoken views on things he knows very little about?

Easy.

Just read scary newspaper headlines: “Sell Everything!”, “Prepare for a Cataclysmic Year!”

(The Royal Bank of Scotland made these headlines in January 2016. Since then the US stock market has jumped 35 per cent, while our market is up around 18 per cent … not including dividends.)

And after you’ve bought some shares, make sure you watch them right throughout the day.

Do not take your eyes off them for a second.

The minute the shares go up, buy more. The minute they go down, sell.

Okay, so now let’s focus on losing money in something you are an expert in: property.

You’ve been living in a house your entire life … right? How hard can it be?

Let’s roll.

You: Property Mogul

If you buy an investment property, don’t buy a good-quality family home from your local real estate agent.

What do those losers know?

Instead, go to a wealth-creation seminar, preferably hosted at a suburban Holiday Inn conference room.

You want a tanned fellow from the Gold Coast who’ll teach you the ‘secrets’ the rich have been keeping from Domino’s-Pizza-munching plebs like you.

Ideally, you’d like a complicated strategy that involves you purchasing ten properties in ten years and will have you retired at 40 and living off $229,345 a year!

Go ahead and buy a property from the spruiker using ‘OPM’ (Other People’s Money), interest only (remember, the more debt you have, the wealthier you are). Location? Preferably South-East Queensland, though what matters most is that the property you buy at the seminar is located somewhere far, far away. While you’re at it, use their legal representatives and mortgage broking ‘team’. It’s so much easier than worrying about all those annoying details yourself.

Yet the real money is made (and lost) in business.

You’ve read Donald Trump’s The Art of the Deal, and look where he ended up.

Okay, so he did get a multi-million dollar loan from his father, but screw it — let’s do it!

How to Go Broke in Business Without Even Trying

Start a business you have no experience in, preferably in partnership with your ex-boyfriend … preferably funded with credit card debt.

Focus on ‘brand positioning’ (business cards, a fancy office, an agency-designed website) before you even think of finding any customers. If your product is as good as your friends on Facebook think it is (38 ‘likes’ — you GO girl!), customers will beat a path to your door.

And what if you can’t think of an idea for a business?

Easy. Just buy a franchise, like Pie Face, or 7-Eleven.

They always work out well.

Harness The Secret

Money can be attracted through your mind.

(Picture me rubbing my temples as I write this).

Let’s be clear: God wants you to be rich.

The 800 million people in sub-saharan Africa? … not so much.

But you? … Sure.

Now, one way to awaken the spiritual money muse is to always keep $2,000 worth of cash ($5 notes) in your wallet. It’s a sure-fire psychic signal to the universe that you are bathed in abundance.

And it works! Every time you open your wallet you’ll see your riches … and so will the sketchy dude waiting behind you at the Taco Truck on King Street.

Now repeat the affirmation: “please, take my money, just don’t hurt me”.

How to Find the Wrong Financial Advisor

Once you’ve got a bit of dough … you need to share it with someone. So it’s time to find the most expensive financial planner you can find.

Judge them on (a) their car, (b) their office, (c) their pinky ring.

Let them know you’re a player.

Explain that you want the most expensive super fund they have. Your retirement is no time to be a tightarse.

And when they explain it to you in terms you don’t understand – nod like an idiot.

And make sure you invest in things you don’t understand.

And if someone cold-calls you about an investment opportunity, under no circumstances should you Google them.

Who cares what other people’s experiences have been?

Let’s be honest, the interwebs is just full of freaks that like cats anyway. If you are tempted to go near Google, the only keywords you should use are: “get rich”, “lifestyle design”, “Barnaby Joyce”, and “Multiple Streams of Income”.

Let’s be honest though, the real reason to get rich is so you can exert control over your family, right?

Well, I’ve saved the best to last.

How to Ruin Your Relationships

If you’re dating, don’t talk to your partner about their financial situation, or their views on spending and saving.

Didn’t your mother teach you anything?

It’s rude to talk about money — and unless you’re loaded it’s not going to help you in the sack anyway.

Split everything down the middle except for: your secret shopping money, your secret mistress money, and your secret betting money. Oh and keep a little set aside that your partner doesn’t know about, just in case you have to run. Because you will, eventually. And divorce will be the final crowning achievement of your financial life.

So there it is: six simple ways to completely screw your financial life.

Are you listening? Don’t make me have to poke you in the ribs.

Tread Your Own Path!

How Would You Invest a Spare $10,000, Barefoot?

Hi Scott,

I’ve just turned 28, and after reading your book I came to the realisation that my savings have been sitting in my bank account for several years doing nothing. I have no investments whatsoever, but I do have $10,000 I could invest. Based on your previous advice, I am looking to invest $5,000 into AFIC and $5,000 into Argo. Is this a good idea, thinking about the long term (30-40 years)? And if I continue to add to them over time, is that better than adding the money to my super?

Rick

Hi Rick,

If you’ve read my book, you’ll see that I set out a time-tested plan: do a monthly date night (Step 1), set up your buckets (Step 2), domino your debts (Step 3), then start saving a 20 per cent deposit for a home (Step 4). Step 4 is where you’re up to at the moment.

So right now you have $10,000 sitting in a bank account. I want you to give that account a nickname, call it “my house deposit”. I know it sounds like I’m making you suck pea and ham soup, but make no mistake, the act of naming something is powerful. It gives you clarity and purpose.

If you’ve been Barefoot for a while, you’ll know that I love low-cost index funds as investments, but everything at the right time. Now, after you buy your home, you’re onto Step 5, where you boost your pre-tax super contributions from the standard 9.5 per cent to 15 per cent (or up to the annual cap of $25,000). If you can do that before you’re 35, your retirement will be soupy.

Scott

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.

Should I Buy Baby Bunting Shares?

Hi Barefoot,

I remember you saying in a column once that people should invest in companies they understand. Well, my partner and I are pregnant and have been spending a lot of time, and money, at Baby Bunting. So it got me thinking. I have been looking at the share price and it is down quite a bit. It hit a high of $3.20 last year, then dropped below $2, but recently it has been going up again. It seems like a good investment, but is now the right time to buy?

Andrew

Hi Andrew,

Over the past few years I too have dropped a large chunk of change at Australia’s largest baby goods chain, Baby Bunting. But I won’t be investing in them.

Right now Baby Bunting enjoys wonderful gross margins of 34.5 per cent (something I grumble to my wife about as we shop for strollers). However, they’ve got a stinky nappy that will soon need to be changed.

In the US, Amazon has a killer membership called ‘Amazon Moms’. For $99 a year, mums get 20 per cent off nappies (the high-frequency purchase), ultra-low prices on everything else (to add to your virtual cart when you’re getting the nappies), free two-day shipping, plus access to Amazon FreeTime, which is an all-in-one streaming service with “thousands of kid-friendly books, movies, TV shows, educational apps and games”.

When they roll this out in Australia they will crush the competition. After all, when you’ve got a newborn, there are two things in short supply: money and time. Amazon solves both.

Avoid.

Scott

Where to Invest $5 million?

Scott,

My wife and family are in a very fortunate position after selling our business in February this year. We have no debt, own our house valued at $5,000,000, own a beach house valued at $1,700,000, super $1,700,000, and approximately $5,000,000 in cash. We have sourced some advice on how to invest the $5,000,000 to provide an income stream of hopefully around 5 to 6 per cent per annum (they have suggested buying a commercial property and some investment properties). We now have financial advisors all over us like wet dogs. What would you do?

Gary and Helen

Hi Guys,

Congratulations on your success!

To get rich you will have concentrated your risk, and focussed all your effort into one business. However to stay rich you need to do the exact opposite: spread your money across a large number of investments, and take very few risks.

Therefore I’d run away from all the wet shaggy dogs that are trying to gnaw on your juicy assets. They have dollar signs in their eyes. Also, stay away from anyone who is recommending you invest directly in commercial or residential property. Reason being, it’s simply not diversified enough, and if you lose a tenant, you lose your yield!

Look, you’ve earned the right not to have to worry about your money. So if I were you, I’d keep a hefty amount of in cash (for opportunities, and because a $5 million home sounds kind of expensive to maintain!), and invest the rest in a broad mix of shares (local and overseas), via ultra-low cost index funds. The income you generate from dividends should be enough for you to live off without having to draw down on your capital.

Finally, you say that you’ve got got $1.7 million in superannuation, however, the cap is actually $1.6 million per person, so you may have the ability to contribute more. If you can, you should.

Scott

Paid Off the House … What Next?

Hi Scott,

My partner and I both turn 32 this year, and by January 2018 we will have our home paid off in full, all on a combined $150,000 a year. We are already thinking ‘what next?’ and would appreciate your advice. We think we will both put an extra 10 per cent of our wages into super, build up our Mojo, and save for an overseas trip. We are also considering buying an investment property or getting into the share market. And one more thing: we intend to start a family in the next year or two. Where is the best place to put our money?

Ella

Hi Ella,

O.M.G.

You paid off your home in your early 30s?

If you were standing in front of me, I’d give you both a big bear hug. Better yet, let your family and friends give you one -- plan one hell of a par-tay for January 2018! Seriously, paying off your home is one of life’s great achievements. Celebrate it.

(For anyone keeping score at home, you’ll notice that Ella gave the month she would be debt free. She’s focused on her numbers. This didn’t happen by accident.)

Okay, so what should you do now?

Well, first, avoid the Instagram-envy of thinking you have to trade up to a more expensive home. The ultimate status symbol isn’t a flashy home or car -- it’s having the freedom to travel and spend quality time with your kids (when you have them!).

Being debt-free at such a young age, you can’t help but become incredibly wealthy. I’d suggest you go through the Barefoot Steps: boost your pre-tax super contributions, and build up your Mojo to cover three months of expenses (which will be much less without a mortgage). Then, I’d look at setting up a family trust and investing in low-cost share funds (consider buying an investment property when the market crashes). If you’re able to invest just $30,000 a year, you’ll be looking at a nest-egg worth over $5 million by the time you retire.

Scott

The Most Important Investment Lesson In The World

“If you stick around till lunch, I’ll share with you what I believe is the most important investment lesson in the world”, Warren Buffett told me (okay, and 40,000 others) in Omaha last weekend at the Berkshire Hathaway annual meeting.

At which point my old man, an Omaha virgin, elbowed me in the ribs and said with a grin, “This is what we came here for”.What was Buffett’s secret?Smart beta? Emerging markets? Hedge funds?

Nope.

But if you’re a bloke from, say, Ouyen, it’s not a bad guess.

After all, it’s not hard to be intimidated by the world of high finance. Billionaires. Private jets. Sophisticated finance-speak.

Let’s face it, no one living in suburbia gets access to the hottest hedge funds on Wall Street. They’re closed shops. You need serious bucks and high-finance connections to get access to the most exclusive funds run by the sharpest investors in the world.

The refreshing news is that Buffett has spent years poking fun at Wall Street.

And, as always, he’s put his money where his mouth is.

You see, back in 2007 (when I was an Omaha virgin myself), Buffett made a famous million-dollar bet.He bet that a basic, no-brainer index fund that simply tracks the market will outperform the most elite hedge funds over 10 years.

A New York firm, Protégé Partners, took Buffett at his word and put their money into five of the best hedge funds they could find. We’re talking incredibly smart money managers with highly sophisticated strategies. They can bet against the market, they can get in and out of the market when they want, and they can scan the world for the best opportunities.

It was certainly a ballsy bet from Buffett -- particularly since the timeframe would include the Global Financial Crisis (a time when the index tracker, well, tracked the market straight over a cliff).

Back to Omaha.

Lunchtime came around, and Buffett gave his highly anticipated speech.

He began by putting up a slide showing how his million-dollar bet was going.

You guessed it: the no-brainer index fund had wiped the floor with the high-fee hedge funds -- outperforming them, to date, by a staggering 40 per cent.

Here starteth the lesson.

(As you read this, understand that Buffett is referring to stockbrokers, highly paid fund managers, financial planners and asset consultants.)

Over to Mr B:“Supposedly sophisticated people, generally richer people, hire investment consultants. And no consultant in the world is going to tell you, ‘just buy an S&P index fund and sit for the next 50 years’. You don’t get to be a consultant that way, and you certainly don’t get an annual fee that way.

“So the consultant has every motivation in the world to tell you, ‘this year I think we should concentrate more on international stocks’, or ‘this manager is particularly good on the short side’. And so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end. And then those consultants, after they get their fees, they in turn recommend you to other people who charge fees, which … cumulatively eat up capital like crazy.

“And they always change their recommendations a little bit from year to year. They can’t change them 100% because then it would look like they didn’t know what they were doing the year before.

“I’ve talked to huge pension funds, and I’ve taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money”, said Buffett as the crowd roared with laughter.

At this point, Buffett’s sidekick and Berkshire Vice Chairman, Charlie Munger (who is a sprightly 92 years old and who’d consumed more Coca-Cola and peanut brittle throughout the day than was at my three-years-old’s last birthday party), chimed in and said:

“Warren, you’re talking to a bunch of people who have solved their problem by buying Berkshire Hathaway … and that has worked out even better.”

He’s right.

From 1965 through to the end of last year, Berkshire shares have risen 1,598,284 percent, versus the S&P 500’s 11,355 percent (and less for most professionally managed funds).

In a few words, Buffett’s investment lesson was this: don’t pay over-the-top fees.

And I agree wholeheartedly. (At Barefoot, we have our own independent investment newsletter which has consistently beaten the market by focusing on ultra-low-cost funds and savvy stock picks.)

Says Buffett: “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”

Tread Your Own Path!

The Gag Falls Flat

What I took out of the deliberately boring budget, is that young first home buyers are screwed.

The government is clearly making property prices an election platform. That’s why they’re not touching negative gearing -- despite the fact that the Prime Minister has referred to it as an ‘excess’ in the past.

Coupled with that, the retrospective changes to super (cutting what you can put into super, both pre and post tax, and limiting how much you can hold), means many high income earners will divert their cash from super to property.

Finally, when you add in this week’s interest rate cut to a historic low of 1.75 per cent (with more to come), you can see what I mean when I say that young people are screwed.

The Prime Minister, in full election mode, suggested on morning radio that wealthy parents should ‘shell out’ to buy their kids a home. Okay, so it was meant to be a gag, but it was in poor taste for the millions of young families who are struggling to save up for a deposit.

Truth is my parents couldn’t afford to buy me a house. And I wouldn’t have wanted them to anyway. Saving up a deposit and buying a home under your own steam is one of life's great achievements. It’s a pity that this government doesn’t understand that, and instead makes it even harder.

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.

Why you should invest like a girl

It was  International Women’s Day last week, so I’d like to talk to you about a Q&A session I’m doing next week at a high school with a bunch of teenagers.

I’ve done a lot of work in schools over the years, and here’s what I can tell you: if you push them for an answer, most teenage girls will tell you that they see themselves getting married, buying a house, and having kids.

Whether they’ve given it much thought is debatable: the fact is, that’s what society has taught them to expect. Then again, society has also taught them that boys are more financially valuable than them.

We all know that women get paid less than men.

And it starts early. Last week the Heritage Bank released a study saying that, when it comes to pocket money, girls get paid 26 per cent less than boys.

Why?

I have no idea. I’m tempted to write it off as a publicity play from a third-tier bank.After all, it’s hard to imagine that parents would actually pay a girl less pocket money than her brother of the same age, right?

Then again, it’s hard to believe that adults in corporate Australia — with HR departments and remuneration consultants — would on average pay an educated, accomplished women 19 per cent less than a similarly qualified bloke.

All of this goes someway to explaining why a NAB Wellbeing study this week found that young women under the age of 30 are more likely to be stressed about their finances than the rest of us.

That being the case, here are three things that I say to teenage girls when I talk to them.

Women are better investors than men

THIS is, like, so not fair.

However, the truth is that you have a natural advantage over men when it comes to investing.

Repeated studies show that women are much better investors than men, because they think long term and don’t take unnecessary risks.

Women have less ego, and are more willing to reach out and follow professional advice.

US-based financial firm SigFig analysed 750,000 portfolio accounts and found that women outperformed men by 12 per cent a year.

Romeo may arrive in a rented Alfa Romeo

DO you want the good news or the bad news?

The good news is that you’ll find a partner (the maths majors at the ABS say so). And I predict (well, the ABS does) that you’ll be walking down the aisle when you’re 28.3 years old. And you will have been shacked up with him for a number of years.

I also predict (with a little more help from the ABS) you’ll have your first kid at 29. (Scandal! Yes that’s right, you’ll be pregnant on your wedding day!). And you’ll be done and dusted with kids by the age 34.

Okay, now the bad news.

Once the kids come along, you get to work around the clock … and not get paid!Worse, your husband could decide that because he’s the only one earning a wage, it’s time to treat you like a teenager (again) and ration out the cash.

Relationships Australia suggests that you will fight about money. Now, if you married a jerk, it will take you 8.8 years to work it out, suggests the ABS.(A quick recap for the cool kids in the back row: you get married at 28.3, you have your first child at 29, and you’re back on Tinder at 37 … as a single parent.But let’s not be too negative.

There’s a good chance you’ll marry that hot guy and live happily ever after (actually it’s two in three, says the ABS).

Until he dies.Yes, those guys at the ABS just do not let up! The statistics are again in your favour — chances are you’re going to outlive him by 4.2 years.

Here’s the thing: in my job I see a lot of older women who haven’t played to their natural strength in being a superior investor.

The upshot is they have no freaking idea of how to manage their money. They’re petrified, and that’s no way to live.

A man is not a financial plan

I’VE been having fun with the ABS statistics, but the truth is, you’re unique. I don’t know what’s going to happen with your life. And right now you don’t know either.

However, the one thing I do know is that right now you are more powerful than you know.

Seriously, right now you have the ability to lay down million-dollar habits.

What habits?

Saving. Not getting sucked in by marketers who aim to make you feel incomplete, so you’ll buy their stuff. And, of course, trying out your God-given talent for investing.

The reason it’s critical that you start doing it now — even with just a few bucks — is that today you don’t have anyone telling you that you can’t do it.

But over the next 10 years, believe me, you will.

It could be your boyfriend. It could be your boss. It might even be yourself.

Ladies, quite simply, a man is not your financial plan.

Now don’t get me wrong. The aim of all this is not to become rich.It‘s not about living a Kim Kardashian lifestyle.

It’s not about coming back all botoxed up to your 20-year high school reunion.

It’s about being in control. It’s about being able to stand up for yourself.

And it’s ultimately about being able to sidestep a lot of the crap that many other women have to deal with. And if you meet a guy who is intimidated by your financial prowess, that’s cool too ...

You’ve just saved yourself 8.8 years.

Tread Your Own Path!

Whisky...as an Investment?

The Lord moves in mysterious ways.

An interview I’d hoped to bring you this week fell over at the very last minute - leaving me staring at a blank screen. Yet in the darkness of my deadline, he reached out to me and sent a message from above. (Okay, it came via Gmail). It read:

Dear Scott,

I thought I would share something my husband and I are looking into: Nant Whisky from Tasmania. They’re offering a 9.5 per cent compounded return on a 4-year investment of $25,000. Seems better rates than any term deposit or savings accounts. We thought this could pay for a new car or holiday every 4 years ($11,000 profit).

Thoughts?

Nicole

My first thought was ‘thank you Nicole for saving my bacon!’

My second thought after reading the Nant Whisky investment pitch was that I needed a very stiff drink.

By all accounts Nant produces a damn fine drop -- it’s been referred to as ‘liquid gold’ by a liquor buff -- and they’ve won awards at the World Spirit Awards. They’re also expanding rapidly into whisky bars across the Australia and Asia.

Yet it was Nant’s ‘investment opportunity’ that was giving me a hangover.

Nant offers investors the opportunity to buy two barrels of their single-malt whisky for $25,000.

Then Nant ‘guarantees’ that, in four years’ time, they’ll buy back the barrels for $36,007 (precisely). That works out to be a cracking 9.55 per cent per annum compounded return.

As Nicole wrote, that’s an $11,000 profit in four years.

Sniff! Sniff! Something smelled off. So I called up the company and spoke to Nant’s founder, entrepreneur Keith Batt in Brisbane.

Barefoot: “So who is behind the guarantee to buy back the whisky?”

Batt: “We are.”

Barefoot: “But you’re a bankrupt. You owe $16 million. And the company behind your last venture is in the process of being liquidated owing $20 million!”

Batt: “I’m the General Manager. I’m not the Director.”

Barefoot: “How much money have you taken from investors?”

Batt: “We don’t give out those figures … we’re a private company.”

Barefoot: “Yes, but you’re taking the public’s money. Specifically from mums’ and dads’ SMSFs. You run national newspaper ads using Aussie cricket legend Matt Hayden to spruik your investment and your ‘guaranteed’ returns.”

Sniff! Sniff! Something smelled off. So I called up Matty Hayden, who was in Bangladesh.

Barefoot: “Mate! What gives?”

Hayden: “Look, I love their whisky but I’m not involved in the strategy of the business. I’m seeking clarification on my current contract … as I haven’t been paid for a few months.”

(Fair enough. I hope he really likes their whisky. Maybe they’ll pay him in booze?)

Anyway, as my day wore on, the more people I spoke to about the business, the more concerned I got.

Sniff! Sniff! Something smelled off -- and then I found it -- it was cow dung.

Nant’s latest ‘investment opportunity’ is for investors to “buy 10 purebred Black Angus breeding cows, for $30,000”. And just like with the whisky barrels, investors are being lured by a guarantee: Nant guarantees they’ll purchase the cows back in five years’ time for $47,335.

Guess what the annual return works out to be?

The same as the whisky barrel investment: 9.55% per annum, payable in five years’ time.

So I called Nant and spoke to their PR person, in Brisbane.

Barefoot: “I may be a little stupid, but shouldn’t there be a difference between the returns an investor would get on whisky and what they’d get on cows? Why are you offering EXACTLY the same returns?”

Nant spokesperson: “We’re a vertically integrated company and we have opportunities to be retailers.”

Barefoot: “Uh-huh.”

The truth is you should never invest in anything you don’t understand -- even cattle.

That rules me out.

I have two cows. They’re named ‘Cash’ and ‘Frank’, and they were a wedding gift from a mate.

After years of having them knock over our fences, eat my wife's roses, and crapping all over the place,  I finally announced at the dinner table (over beef casserole, I believe) that it was time to sell them.

My toddler Louie’s top lip began to quiver: “No! Don’t take my Cash Cow Daddy!”

(They’re both still here.)

Anyway, let’s get back to our tale of investment beef jerky.

By now the smell was overwhelming, so I called up one of Australia’s leading cattle farmers, David Blackmore in Melbourne. His award-winning wagyu beef is served in posh restaurants like Rockpool and Nobu, and he exports to over 20 countries.

Barefoot: “What do you think of the returns Nant are offering?”

Blackmore: “Well, I’d struggle to achieve that return on our wagyu cows. And to pay that return to investors and still make a buck! Well that would be very … difficult.”

Barefoot: “You’re being kind.”

Blackmore: “I’ve been in agriculture for over 50 years and I’ve never seen one investor make money out of any of these schemes.”

Throughout my frustrating conversations with Nant, they kept on reiterating that they weren’t offering a financial product. There’s a reason for that. If they were, they’d have to issue a Product Disclosure Statement (PDS), and be regulated like any other investment company by the Australian Securities and Investments Commission (ASIC).

“The investors, they own the cattle. At the end of the lease they’re free to take them ... and put them in their backyard if they wish.” said Nant.

Trust me on this -- you don’t want to do that. They’ll knock down your fences, eat your roses, and crap all over you. They’re not cash cows.So now let me get back to Nicole -- my gift from above -- and the woman whose innocent investment question kicked this all off.

Nicole, since I got your email I’ve worked my way around the world (well, Tassie, Queensland, and Bangladesh) and my advice for you is this:Grab your $25,000.Invest it in a simple online savings account -- which really is guaranteed (by the Government).

In a year’s time you’ll have earned roughly $875 (less taxes).

Not much? Sure.

But it’ll buy you a dirty big rib eye steak, and four bottles of Nant whisky.

It’s apparently a great drop.

Sniff, sniff!

Tread Your Own Path!