Where to start (and finish) your investment journey.

 Where to start (and finish) your investment journey.


Paul: G'day I'm Paul Clitheroe. I'm chairman of the Australian Governments Financial Literacy Board and I'm also non-executive chairman of the ASX listed company Invest Smart. My best investment, easy, it was backing myself and taking some risk. I started Ipac back in 1983 with my terrific partners and we built that into a very large company now looking after around $17 billion. My worst investment, do we have to speak about this? Myself and some uni buddies were in the pub one night and we decided ski fields were the go. We chipped in three grand each, bought a little house in Mount Beauty underneath the Falls Creek ski fields.

We had to knock it down, build a lodge. Didn't knock it down, didn't do anything and actually managed to lose all of our money over ten years. Brilliant. Ian: Hello. I'm Ian Irvine from the ISX. Joining me today is Paul Clitheroe. Paul is chairman of the Australian Financial Literacy Board as well as being non-executive chairman of ISX listed company Invest Smart.

Invest Smart is an information hub providing information to investors through publications such as the Eureka Report and Intelligent Investor. Today we're speaking with Paul around three ideas. Firstly what should those that are contemplating investing consider before they start? Secondly where is Paul invested at the moment? Then finally where does he see the future going? What themes would drive his investment decisions then? Paul thank you for joining us. Paul: Pleasure. Ian: If I go back to 1983 when I think you first entered the arena of financial services both the practitioner and since then as a financial commentator you will have seen plenty of people start investing.

What are some of the ideas and themes that you have developed over that period of time that may help those that are still standing on the threshold of getting into investments? Paul: In a sense investing is actually really a second order subject. The key issue for me is if people would just take control of their cash flow. Let's face it, people always want to talk to you about investment. Often they've got no money to invest, which I find really quite funny. The real issue is are you controlling your income? Is it an inheritance? Whatever it may be, the first issue for me is being in control of cash flow.

Particularly if you're younger then you've actually got a dollar we can talk about. In a sense, people get very excited about, "Do I buy property or shares?" The reality is both of those assets have been perfectly decent performing assets over longer periods of time. What I've often said and said regularly on my money program on TV is an advantage I have with shares over property or manages funds over property is it's damn difficult with your dollar to buy a property. What I'm really excited about in this modern world is that with the cost of brokerage so low now to buy and sell a share the cost of entry fees into so many managed funds is basically zero.

With many managed funds some of the index funds are charging about 4/100ths of 1% per . All of a sudden we're not going to get ripped off on small amounts of money so my advice is number one, get your money under control. Probably with small amounts of money I'm still arguing that shares or a managed fund, for me, are a great starting point. Ian: Okay so one of the concepts when you have a small amount of money is still achieving diversification? Paul: No. Ian: It's not? Paul: No. Ian: Tell me why. Paul: Well the issue here in a sense is that risk is your friend if you've got time.

In a sense risk is no longer my friend. I'm 60 now so my portfolio is very different, when you mentioned back in 1983 when I started Ipack. Basically what I did then is I did what any young person should have done in my opinion, and that is I concentrated my risk. Diversification is fantastic for me. Diversification lowers my risk. One thing goes down, something else goes up. In these volatile times diversification is fabulous for a 60 year old. When I was a young fellow in the 80s with limited money diversification is going to get me a modest but sensible return. I took every nickel I had, which by the way was about $20,000.

Ian: Not bad in those days. Paul: I had a job for a couple of years and I'd followed rule number one. Rule number one if you don't put any money aside you have no investments to make. Ian: Back to cash flow. Paul: Back to cash flow. I'd done that and I'd put a bit of money aside and with my four partners I started Ipac. I had 100% of my money in one company and I basically had all of my wealth in that business for some 25 years until we sold it. When you're young, ironically, concentrated risk is probably not a bad thing. Ian: Through knowledge and education of yourself back your view? Paul: Back your view I think but also in a sense that if a youngster, now lets go back to my age back then.

Go to your early 30s, late 20s or even younger. In a sense if you like, and I really encourage parents and grandparents to do this with children. The only thing I don't like about a managed fund or ETF, in a sense is the decisions are taken for you. In terms of managing risk, I really encourage parents or grandparent if they're buying a share for a youngster if you notice the youngster is having a can of Coke or something, which I'm not too sure about from a health view point we'll put that aside. Great company. Basically buy the youngster some shares in Coke. If the youngsters got a bank account with Westpac, why not buy the youngster a few shares in Westpac. Give them a sense of ownership. For me in a sense what we're doing here is if we put the youngsters thousand dollars into, let's make it up, let's go with a bank, go with Westpac.

We pop a thousand dollars into Westpac and we do portfolio analysis around a thousand dollars in Westpac and we start going, "Oh my goodness, you've got ..." It's a thousand dollars. Ian: Got you. Your view on investing has changed from when you first started back in the 80s to now. What are you invested in now? How have you evolved from that, back your idea, put into the company which you're an owner, now you're outside of that to some extend. What are you invested in? Paul: I'm now typical of my type. Part of the baby boomer generation, there's millions of us. The sort of people who are listening to this today actually. They're probably buying and selling a few shares. Pretty obviously I think we all start out with highly undiversified portfolios. Very quickly I started up with just about everything in the company. After two years I started to get a wage from the company. Then we were able to gear up and buy a property. Now I've got a wonderful portfolio. 100% of my company and the rest in a property pretty much 100% owned by the bank. I'm not going to do that today, so we need to be really careful here.

How I invest my money today is poor guidance for many Australians. My age and risk profile, where I am now is I am fully diversified across Australian shares, international shares, and I do use EFTs particularly internationally and managed fund. I don't think I could pick shares in Poland. That's not my thing. I use people to do that for me which all of us can access for next to nothing these days. A range of great managers for stock exchange can tell you about. I own a home and I don't have a problem with that, I own an investment property. Again mainly through listed companies I own parts of commercial buildings and retail and so on. The GPTs the Westfields. Then with the bottom part of my portfolio once we've got the big stuff out the way I probably hold more cash than most people would think sensible.

Probably about 10% of my portfolio. Why do I do that? My wife will kill me if I don't and there's a very important point about that. Ian: That's still even more liquid than some of the stocks listed on the ISX. Is that what it's about? Is it giving you forward cover for living, lifestyle, leisure? Paul: It's more of a matter, it's because I don't know. Basically look at my age, it's all very well to bang on about creating wealth. I am not creating wealth. I am preserving wealth. Cash is an awful asset.

I'm earning 2.6% on it. I pay tax on it. I know full well over the next 20 years that it's going to be the worst part of my portfolio categorically. It is so safe and it provides sleep at night. I'm not kidding about myself and my wife. We've been married now for 34 years and it's a critical relationship to me. Personally I'd whack 100% in shares. My wife would kill me literally. Also it doesn't' make a lot of sense so why do I diversify the way I'm doing is because I'm not trying to get high returns. I've worked bloody hard to get what I've got, I'm trying to protect it. Ian: This is sleep at night stuff. This is keep the family happy. Paul: It is sleep at night but with an override. The one thing I do fret about with the Australian population and just about any member particularly of a first world country. We just haven't got the hang of how much longer we're living. We just haven't got the hang of the fact that for over 160 years now on average we're living three months a year longer every year we survive.

Statistically, I may drop dead tomorrow, but statistically there's every chance either Vicki or myself will see 30 odd years. I look at my pool of money, never in human history have millions of people had to try and survive off a pool of money we create during our lifetime. I'm really fretful about my own money and I'm fretful about other people's money because we just don't seem to realize that in 1908 when the age pension started our forebearers chose a male retirement age of 65, not because we died at 65 in 1908.

We males died at 54. Now we're talking about living into our 80s and 90s. To me in a sense the reason for example, I wouldn't whack all my money in cash which is the best sleep at night test, if we survive 30 years I'm sure to be broke. In a sense I'm forced to take risk. I must take risk if I'm going to live longer. Ian: On that point we've heard how you started, where you are currently now, we're now talking about the future and who would have thought living longer would have been a bad thing. How are you preparing for that now? Is it still going to be the same for you? Holding that 10% cash and the other assets you hold them the same way? Will you vary that a little just to take that into consideration? Paul: Yeah, look I think the one place we can add value is I know I can't pick market cycles.

I can pick the top of the market ... what nonsense is that? I am a believer in themes. For example, I'm a really strong believer in common sense and I've got a chair in economics out at Macquarie Uni so I've got a little bit of knowledge as well as common sense. The issue for me is, and I remember being taught this as a youngster at school, is that all the economy is the net actions of individuals. In other words what you do and I do we add that together that's our economy right? I'm fascinated that if I live to my life expectancy, Australia is going to be close to 35 million people.

Think about what does that mean. Sydney is going to be 8 million and so is Melbourne. What does that mean to me? Everyone's telling me the property market's probably looking a bit overprices at the moment, it may fall. I go, "Hang on. Where are these extra 11 odd million people going to live? In a cave?" I figure that if I own well located property in my portfolio I don't care if it goes down next year or the year after. I think it's going to get rented by the way because the population's growing so my cash flow's good. I think with a life expectancy view it's a good asset. People are bagging banks at the moment but I reckon banks are going to keep making money with a growing population. People are bagging at the moment. I reckon we're going to keep eating. Ian: Paul thank you for joining us today. We sort of finished where we started. You started with cash flow as a way to start investing and we're finished up on it right now for those that are living baby boomers.

I'm including myself there, living longer. We need to manage our cash flow at the end as well. The way we invest needs to sit behind that so thank you for your time today. Appreciate your help. Paul: Pleasure. .



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