The old wealth-building playbook isn’t broken, but it does need updating.

In this episode, we explore why many of the financial assumptions that worked for previous generations no longer fit today’s reality.

From the role of property to the rise of low-cost investing and the dangers of information overload, we discuss what has changed, what timeless investing principles still hold true, and how to build wealth in a way that reflects the world we live in today.

You can find the full article here.

You can find the transcript 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, does not take into consideration your personal situation, circumstances, or needs. So, Shani, we were chatting before Will hit live on the audio and video. And you were looking at an old video and you said it looked like somebody had dug me up from a grave. That’s how I looked in the video.

Shani Jayamanne: You’re making me sound out to be a very bad person. You said this.

LaMonica: And I asked you. I said if I was buried alive and I had my phone and I sent you a message, would you come dig me up?

Jayamanne: And I just said there were a lot of variables to it. Is it raining? Is it cold?

LaMonica: Yeah, so basically you said if I was not buried in your backyard, then the answer is no.

Jayamanne: And even then. I spend a lot of time landscaping.

LaMonica: Okay. Well, I guess I would help to make your flowers grow in your yard. But we’re going to do a topic today off what I thought was a great article. See, this is me complimenting you of a great article that you wrote. So talk people through what we’re covering today.

Jayamanne: Yeah, so we want to talk a little bit about how the formula to create wealth has changed, and that is an issue for investors who are relying on yesterday’s assumptions to make financial and life decisions.

LaMonica: Yeah, and I think one of the reasons I think it’s such a great article is because, you pointed out in it that these financial decisions that led to growing wealth or led to wealth in the past are becoming increasingly difficult to apply in today’s environment. And this is not an exercise in bashing different generations, except for Shani bashing me.

Jayamanne: That’s a person.

LaMonica: Exactly, a person, not a generation. This is not saying that one generation had it harder than another. It’s really just an acknowledgement that conditions have changed and the assumptions we use too often, just using assumptions to make financial decisions, deserve another look.

Jayamanne: And millennials entered adulthood during a period of major financial change. Some of us started careers during the GFC and faced slower wage growth. As the first millennials considered purchasing homes, interest rates rose in response to post-pandemic inflation. And this really led to the assumptions that property is the only reliable path to build wealth.

LaMonica: And Alan Kohler went on the Equity Mates podcast recently, and he declared that property is now a bad investment. I will say something I said years ago, but I’m not Alan Kohler. He added that housing has to stop being the way that people build wealth. It just has to become a house, just has to become a place where you live.

Jayamanne: And nothing that we can tell you today will be breaking news about property, but it is constantly in the news cycle, and as Australians, we are hyperaware of the market. But for many of us, property has been the foundation of wealth creation.

LaMonica: Yeah, and it’s easy to look at what’s happened in the past, but it’s really important to go back and to figure out what are the things that shaped what are those unique combination of circumstances that shape that environment. And so if we go back and we look at previous generations, they had decades of falling interest rates. There was strong population growth, rising household incomes, and this led to a period where property values grew faster than what many people expected. And for younger investors, repeating that experience may be more difficult.

Jayamanne: And we’ve also seen access to credit evolve significantly over time. While earlier generations faced much lower borrowing limits relative to their incomes, we’ve seen households gradually gain the ability to borrow substantially more as lending practices have changed. And this increased purchasing power helps support rising property prices, creating a very different environment than the one that home buyers face today.

LaMonica: And given this backdrop, so the access to credit, the current market environment, it really isn’t surprising that housing has become less affordable. So this new environment should change the equation when you start thinking about the opportunity cost of owning a home.

Jayamanne: Yeah, and I think it’s just recognizing that assuming that buying a property automatically solves the wealth building equation, it’s likely going to leave you disappointed. Buying property might mean giving up the chance to build a diversified wealth portfolio in exchange for accumulating one single asset with a mortgage attached.

LaMonica: So a person with a $1.5 million home and limited investments might look really wealthy on paper, but their financial flexibility may differ from somebody with a diversified portfolio of shares, property, and cash. So we’ve spoken quite a lot about cash flow versus net worth, even though one of us was ridiculed about that. But having an asset that is -- it just has an unrealized gain on your balance sheet is just a very different situation to having liquidity and cash flow coming in.

Jayamanne: That’s right. Mark and I used to work in a financial advice firm, and this was over 10 years ago, but the rule was always a principal place of residence and at least $1 million in cash as a starting point to have a comfortable retirement. And that amount has probably changed since I left that industry. But housing was mandatory in this equation, and there’s a few reasons why it’s not anymore.

LaMonica: The first is cost. So the cost of buying a property, buying your primary place of residence and its maintenance is significantly higher today. So that makes the opportunity cost higher, as these expenses could be instead directed to assets that produce income and capital growth during an individual’s lifetime. The second is that depending on the state that you’re living in, rental protections have improved relative to what previous generations faced. So meaning stability as a renter is less of an issue. And then lastly, if most of your wealth is concentrated in one asset that needs to be sold to actually realize that wealth, your lifestyle is going to look very different than your net worth on paper would indicate, as we’ve spoken about before.

Jayamanne: And previous generations faced a different environment, assuming the same outcome from the same pathway isn’t realistic. The price of property, the impact on lifestyle through lower discretionary income, and the increased financial stress from more debt are all different to previous eras. This doesn’t mean home ownership is a bad path to follow. A home offers a sense of security, it’s a place to raise a family. It’s a source of stability in an uncertain rental market, but it is, however, not the only or mandatory pathway to building wealth.

LaMonica: Okay, let’s move on to your second assumption, Shani. And you need to wait, and that’s assumption is you need to wait until you’re wealthy before you start investing. So one of the biggest shifts that’s occurred in investing over the past decade is how accessible it has become for retail investors. So technology has made it easier than ever to invest small amounts and still get a diversified portfolio.

Jayamanne: So research from Canstar and Sharesight show how broker fees have trended down consistently over time. The data is a little bit dated, but it shows the average brokerage reduced 15% over a five-year period for a $1,000 trade. And this trend has continued with brokerage effectively free in some cases.

LaMonica: And, there’s this mental barrier that some people have that investing is only for the wealthy.

Jayamanne: And this was my mentality before I entered the industry. A lot of the people that I speak to that haven’t jumped into investing yet really view it that is something that’s out of their reach or not for people in their situation. And it’s an endeavor to undertake once you are financially established, and that’s such an arbitrary way to measure your readiness because it might be something that you just never reach. And that can be a really costly assumption.

LaMonica: Yeah. And so, it’s really important just to realize that investing has never been cheaper. It’s never required less capital. So young investors that do have that proper foundation in place can use time to their advantage to build wealth. And even if cash flow is tight, super is a great place to build wealth. And even small efforts early on can make a really big difference to retirement outcomes in the future.

Jayamanne: And ultimately what we want to say is that investing is not an all or nothing decision. A regular investment plan, even with modest amounts can create habits and build confidence. And if circumstances allow, increasing contributions as income grows, can be a powerful wealth building strategy.

LaMonica: And we’re going to move on to your next assumption, Shani, and that is that successful portfolios need to be exciting. And this isn’t necessarily a shift in mentality from previous generations, but the context in which we’re building portfolios has definitely changed. So we’ve seen investing culture change dramatically. Social media has created this constant stream of basically marketing commentary, stock ideas, and stories about investors that made incredible returns. And ASIC finds that nearly half of Australians rely on social media for guidance, and that’s even greater, a greater percentage in younger generations.

Jayamanne: And this can be a real problem, especially considering some of the advice that is given. And as a side note, Mark has actually filmed a reaction video recently where he runs through some of the advice that is given by FinFluencers on social media and what he thinks about it. And you can find that on our YouTube channel if you are interested. But it’s important to understand that boring and steady investment strategies do not garner views. So naturally the content tends to be quite provocative.

LaMonica: And after viewing a lot of this content, it’s easy to assume that building wealth means constantly trying to find that next big winner. And for a lot of younger people entering the market who grew up with this instant access to all this information, that temptation can be particularly strong.

Jayamanne: Successful investing is often less exciting than people expect. A diversified portfolio of low cost investments is not a compelling story to tell at a dinner party, and I’ve been told that many times. It doesn’t need to outperform every year. It might not benefit from every single market trend, but a boring portfolio has helped investors reliably build wealth over time, and there is some excitement to that.

LaMonica: Yeah, and you know, it’s right, Shani. Investing is not about finding the most interesting idea like a social media algorithm. We know that markets reward patience, discipline, and just staying invested. So these qualities are difficult to practice when every headline out there suggests that there’s a better opportunity somewhere else.

Jayamanne: Okay, so assumption four is that more information automatically leads to better investment decisions. And right now we’re just going through my employment history at this point. But when I worked at an active fund manager, the mantra was fund managers had an advantage over regular investors. The professionals have hordes of analysts to analyze swathes of data. They’re reviewing GPS images of shopping complexes to understand how many cars there are during busy periods. They’re using water usage data to understand how many swimming pools are in each suburb. This information gave them an informational advantage and an edge to make better decisions.

LaMonica: But things have changed. So access to this information is now democratized. Millennials have grown up with an unprecedented access to all of this different financial information. So it’s easy to assume that having more information naturally leads to better decisions. In reality, the opposite can often be true.

Jayamanne: Investors are constantly exposed to opinions about what they should buy, when they should sell, and which markets are about to outperform. A study from Oracle found that huge quantities of information leave individuals overwhelmed. The study found that 93% of Australians thought the volume of available data had made their personal and professional lives more complex. 72% of respondents also found that the volume of data had stopped them from making a decision at all.

LaMonica: And there’s of course a phrase for this analysis paralysis or choice overload. It often means that investors end up defaulting to the easiest option, even if it isn’t best for them. So there are approximately 56,000 companies and 12,000 ETFs listed globally. There are 3,700 managed funds just in Australia. The US market has 500,000 different corporate bonds. Then there’s private markets and more exotic investments. So investors have a lot of choice where to put their money.

Jayamanne: And we see analysis paralysis a lot with super. A large proportion of Aussies stick with their default funds. Many people find it overwhelming to change a superfund. The fees, looking at performance, fund options, the sheer number of superannuation providers, they all contribute to the reluctance to change funds. And that’s assuming that all of this information is easily accessible and not filled with jargon. It isn’t hard to see why people don’t engage with their super or change it.

LaMonica: And Morningstar Research from 2019 called Bigger Is Better, looked at the U.S. market, but these results are also applicable for Aussies. So they looked at 500 defined contribution retirement plans with over half a million participants. When the core menu of options grew from 10 to 30 funds for people to choose from, the percentage of members that stuck with the default option leapt from 74% to 84%. People are simply overwhelmed by choice. So yes, we do have more information than we had in the past. And yes, this should technically make markets more efficient than they were in the past. But what it can do is cause more people to hold back from a decision to make an investment or even invest in the first place.

Jayamanne: So weigh through the noise by understanding what your financial goals are, what you’re trying to achieve, and what investments work for your personal situation. And that can eliminate choices and make it easier to find a clearer path forward.

LaMonica: So those are the four assumptions that we believe need to be changed if you want to build wealth in today’s environment. But what has remained timeless is the foundation of successful investing. None of those steps have changed. So create a surplus, invest regularly, keep costs low, and avoid emotional decisions, and then just use time and compounding to your advantage.

So thank you very much for listening. We do appreciate it. Check out Shani’s article. It is great. There is a link in the show notes. And anyone who has read our book, we’d appreciate a comment or rating. 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.)

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