How to Use Behavioural Finance to Become a Better Investor

*This post “How to use Behavioural Finance to Become a Better Investor” may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  


“Behavioral finance attempts to explain and increase understanding of the reasoning patterns of investors,including the emotional processes involved and thedegree to which they influence the decision-making process.”

Ricciardi, Victor & Simon, Helen. (2000). What Is Behavioral Finance?. Business, Education & Technology Journal. 2. 1-9.

I am fascinated in research around human behaviour with money and investing. Over and over we hear the same cardinal rules about finance and investing:

  • Spend less than you earn
  • Regularly and consistently invest over several decades
  • Investing in low cost passive index funds is the easiest, cheapest way to grow wealth
  • Minimize fees including brokerage, management fees etc
  • Buy assets that grow in value or provide income rather than those that produce costs (particularly at the start of your journey)
  • Ignore the noise and just stick to your written investment plan

It’s not rocket science! Over the last decades the introduction of superannuation, cheap online brokers, and micro-investment apps have made investing attainable for everyone. It has never been easier to take the simple steps to secure a strong financial future.

So why do most investors struggle to stick to the script?

During the 1990-2000s, Behavioral Finance attempted to answer these questions.

Behavioural Finance: Why do We Struggle to Spend Less than We Earn?

Clever marketing surrounds us almost constantly. Most of us like to believe we are immune to advertising. But extensive human psychology research, aimed at manipulating the audience subconsciously, informs the design of these advertisements.

  • Colour – the background of an advert or show room is purposely chosen for a particularly subconscious association. This is proven to impact consumer behaviour
  • Subliminal messaging – hidden messages within adverts and other media
  • Emotional branding – manipulating consumer emotions to create a loyal customer
  • Autonomous sensory meridioal response technology – Do you experience a shiver or tingle with certain sounds? Brands intentionally create these pleasurable auditory sensations to engage you with online platforms or make consumers more likely to like the product advertised
  • Creating artificial scarcity – Consumers desire brand name product of which there are few available, which is why brands create demand through artificial scarcity.

We are probably far more affected than we ever realize.

Humans also have a natural tendency to prioritize the short term over the long term, so have a natural resistance to delayed gratification. And we are constantly surrounded by messaging encouraging the answer to our problems is a new product.

It’s no surprise so many fail to get past the first step – Spending less than you earn.

The Efficient Market Hypothesis.

The efficient market hypothesis of the 1970s assumed that all market participants are rational and self-interested, and aiming to maximize returns.

The theory suggests all available information is priced into the market already, making it impossible to “beat the market” unless you have inside information (which is illegal) or take additional risk (eg leverage).

It is clear that the stock market as a whole is not entirely rational. There have been many speculative bubbles. Price appreciation has resulted in irrational over-enthusiasm, and further price appreciation until eventually rationality kicked in, and the bubble burst.

Lots of speculators made a fortune during the tulip mania of the 1600s, and the dot com boom of the 2000s. Late adopters (or those that didn’t get out in time) were often wiped out when prices eventually crashed.

Warren Buffet is the most famous investor in the world. He is one of a handful of investors in history to have consistently taken advantage of stock market irrationality to make above-average returns.

Thousands of professional fund managers try to replicate this market arbitrage with a dismal success rate. It turns out, although the market can be very irrational, investors (even professionals) are the cause of that irrationality.

Unless you as an investor are less irrational than the rest of the market, the efficient market hypothesis may as well be true.

Below is an infographic from SPIVA demonstrating the underperformance of funds vs the ASX 200 over 15 years. Active funds actually outperformed the Australian index in 57.76% of cases over the past year, the most positive timeframe.

SPIVA | S&P Dow Jones Indices (

What chance as the average hobbyist investor got?

“People systemically depart from optimal judgment and decision making”

Barber and Odean


The need to invest regularly, no matter what the market is doing is widely advertised. Missing a few days of market returns by sitting on the sidelines awaiting a market correction can result in dramatic damage to overall returns.

Yet market timing is a huge temptation to most investors. It seems so easy to improve returns by just timing those investments a little better. The data tells us it is unsuccessful most of the time. But many investors can’t help but think they can beat the odds. Why is that?

Prospect theory/loss aversion/Regret Theory– Are all based on the fact we hate to lose money and will adjust decisions based on the anticipation of regret.

In fact, we hate losing $100 far more than we love to win $100. This skews our risk assessment. For many, this results in failure to invest at all, due to the fear of the market going down.

Excellent explanation of loss aversion by Quikeconomics

It also explains why investors are so tempted to remove their money from the market when a crash seems imminent. Unfortunately, massive market losses are predicted almost constantly, and the market is rarely predictable.

As a result, investors who divest for fear of a market crash are at a real risk of missing out on the best days in the market.

Delaying investing because of bad market predictions for fear of loss and regret is another example of how you are likely to lose profits by trying to avoid risk.

Anchoring Bias

Holding on to a poorly performing asset (eg poorly picked property investment or individual shares) despite all indications this is a long-term underperformer is also common. Investors cannot stand the pain of selling for a loss. They often demonstrate anchoring bias, waiting for the price to return to what they paid (No matter how long that takes). It’s the tendency for the first price to become anchored in our brains.

Investors struggle to overlook the anchoring to see the opportunity cost of having money tied up in a dud investment – that cash could actually be making money elsewhere.

Fascinating experiments on Anchoring bias – Quik Economics

Hindsight bias

Ever heard someone exclaim they knew something was going to happen, when in fact you know they did not make a strong prediction?

They’re not just lying, you probably do it too. Our brains play a trick on us when new information becomes available, in updating memories, often to include the new information.

When investing results appear predictable due to hindsight bias, it is easy to become overconfident in your ability to predict the future.


For most of us plain old vanilla investing has the best chance of getting us to our goals. But there is an ever-lasting temptation to try and beat the average with a more complicated plan.

The property next door goes up for sale. You know the neighbourhood inside out. It’s a comfortable investment. You may skimp on the research due to familiarity bias, a tendency to favour assets we feel familiar with. Although you might like your neighbourhood, this house is not necessarily the best choice for your portfolio. The decision should be just as rigorously researched as any other investment decision.

When researching an investment decision (and most other decisions), we are prone to confirmation bias, the tendency to screen out any evidence contradicting our desired action and only taking notice of information that supports our case.

Why Don’t We Ruthlessly Minimise fees?

Investors have a terrible habit of flip-flopping inside their portfolio, wasting returns away in brokerage costs as they are chasing the latest must-have stock. It is well documented that lower trading results in higher performance. Much like switching lanes in heavy traffic, it’s unlikely to get you anywhere fast.

Overconfidence is a huge risk to your investing returns. Most of us tend to think we are better than average, obviously, that is impossible! So when we look at the dismal results of the average investor compared with the index and assume we will do better, most of us are deluding ourselves. Those with high skills in other areas tend to assume they will also be better than average in finance, but the skills often do not transfer.

And then to compound this problem is the issue of self-attribution bias. When an investment choice goes well, we tend to take the credit and assume the success was due to our intellectual decision-making. When there is a poor result, some other sucker tends to get the blame!


Humans exhibit herd behaviour. It’s uncomfortable to go against the crowd.

If there are two restaurants next to each other, and restaurant A has a line up outside and restaurant B is empty we tend to assume all the people wanting to go to restaurant A know something we don’t and assume it must be better. Savvy restauranteurs offer free drinks on quiet nights to get the crowd started.

The fear of missing out is a powerful emotion. Reading about investors becoming millionaires investing Bitcoin certainly made me stop and wonder if I was doing it all wrong. It sounds so easy! And fast! I even downloaded a podcast to learn more about this. Alas, I am not convinced I can understand the case for bitcoin beyond the fact the technology has great potential, although we’re not exactly what for yet. Teaching is a great exposer of understanding. If you can’t explain something simple enough for anyone to understand I’m not convinced you understand the concepts well enough yourself.

“Don’t invest in something you don’t understand.”

Warren Buffett

Behavioural Finance Behaviour Modifications

Being aware of these biases we are all prone to is the first step in limiting their damage. The second is to build a system of behaviours that help counteract bias. Some suggestions include:

  • Direct debit your savings out automatically each pay so you have no choice but to spend less than you earn
  • Have a written investment plan that you refer back to when considering changes.
  • Have a time delay (2 weeks? A month?) before making the changes to your investment plan. Document why you changed and your new investment plan
  • Have a plan for when you are feeling nervous about market corrections (not to log into your account until you hear media reports of recovery, JLCollins stock market meditation)
J.L. Collins Stock Market Meditation!
  • Research investments thoroughly but set a time limit by which you need to take action. Accept there will always be some risk, you can only minimize it.
  • Have an investing advisor or knowledgable buddy who you can discuss your decisions with. They will be able to identify hindsight bias, familiarity and confront your confirmation bias
  • Read/listen to many sources of information, including some that don’t follow your investing philosophy. Challenge your assumptions and learn to understand the the point of view
  • Assume you are an average investor. Be realistic about your capabilities. Just because you’re an incredible neurosurgeon* (*insert own impressive profession) doesn’t mean you are also Warren Buffett.
  • Keep an investing journal. Look back to see if you really “saw it coming”.

Behavioural Investing Conclusion

“It is possible that an investors’ biggest problems and their most dangerous enemy is himself.”

Benjamin Graham.

Although traditional economists believe in the idea of rationality in individuals, financial models are oversimplified.

Emotional and cognitive biases heavily influence investor behaviour. The resulting irrational behaviours can cause huge losses.

Only by recognizing behavioral biases in our lives can an individual investor make logical decisions. Behavior-based financial research provides fascinating insights into real financial behavior.

Further Resources for Behavioural Finance Geeks:

From Efficient Markets Theory to Behavioral Finance (

Quik Economics youtube channel

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Investing How to: Limit Order vs Market Order

*This post “Investing How to: Limit order vs Market Order” may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

Limit Order vs Market Order Definition

A market order is designed to fill as quickly as possible. You agree to purchase a set number of shares (or dollar value) at the market value at the time. The order will be executed as long as there are enough shares to fill the order before the share price changes.

A limit order is when you set the price you would like to purchase shares at. The order is only executed if the share price reaches the limit order you have set.

How to Investing – Which Type of Order?

Have you recently started the plunge and started investing? Or still trying to work out the finance jargon before you take that leap? Market and limit orders are terminology you will come across when placing a trade (buying any share or ETF) on your broker’s platform.

The thing to remember is your overall investing style. Many readers will have a plan to continue dollar-cost averaging into the stock market on a regular basis, no matter what the market is doing. Remaining disciplined and following your strategy over the long term with dollar-cost averaging is a no-hassle way to get rich slow.

The biggest risk to your investment returns is your human nature. When the market drops, as it did just weeks ago, it becomes increasingly difficult to ignore the media doom spreaders and keep buying. Our brains prioritize short-term thinking.

Limit Order vs Market Order vs Dollar Cost Averaging

For those wanting to dollar cost average over the long-term, I am a strong advocate of automation.

Set up a direct debit into your investment of choice and avoid 90% of temptations to not carry through your plan. If you automatically invest no matter what the market is doing, you don’t need to know about market or limit orders.

Your automated investment will go through as scheduled as a market order no matter the market price at the time.

When the market is down, you will purchase more shares for your regular investment cash. There is no need to try and predict market movements (which seems impossible).

Options to automatically invest on a regular basis include using a micro-investment app (ideal if investing parcels <$1000), investing in a Vanguard diversified managed fund through Vanguard personal investor (quick start minimal research needed), or selecting your ETFs yourself and auto-investing with an online broker.

Micro-investment apps and VPI really suit beginner investors who just want to get started and are not interested/not ready to choose their own investments.

I have accounts with Pearler and Commsec so am in a position to step by step through market or limit orders with either.

Market Orders

As mentioned above, a market order is filled almost instantly (as long as there are enough shares available for sale at the market price at the time).

This is the traditional way to invest in the stock market before auto-investing was a thing. Many investors will still use market orders to invest at preset intervals, according to their investment plan.

It also may be how you would invest if you had come into an unexpected lump sum of cash. Statistically, you will be better off putting the entire lump sum into the market at once, rather than dollar-cost averaging. You do have to be able to stomach the volatility though, and admittedly this is much harder shortly after investing a large sum.

Market Orders with Pearler

Pearler specializes in auto-investing, but you can easily perform a one-off market order as well. Below is a screenshot of my Pearler platform.

You can type the ticker code into the search button at the top, or navigate to the “Invest” tab to choose from a selection of popular investments.

After selecting your chosen investment, the next screen displays the current market price and a graph of historical performance. The “buy” button is pretty obvious.

After selecting “buy” you are taken to the order screen.

Here you are again prompted with the market price and can enter how much you would like to buy.

Auto-deposit automatically debits the money from your linked bank account if there is not enough left in your money market account, but Pay ID allows immediate (particularly if not the 1st transaction) movement of money.

Brokerage is $6.50 with Pearler (unlimited amount) although this is planned to reduce shortly. Pearler brokerage can also be discounted down to $5.50 by paying for credits in advance. Feel free to check out my full Pearler review.

Market Orders with Commsec

Commsec remains the most commonly used online broker in Australia. It is more expensive than Pearler and other modern online brokerage platforms. But many investors stick with what they know and trust, and the longstanding reputation of Commsec keeps some investors loyal.

Again, the platform is pretty easy to navigate. There is a search button at the top of the site where you can enter your ticker code for the relevant investment.

Next, you are taken to a page displaying investment data and an obvious “buy” or “sell” option.

After pressing “buy” you are taken to an order page where you can enter how much you would like to invest today. If you want to purchase at the current price (market order) tick the “At market” box.

Once you have submitted this form, you get to confirm all the details on the next page before finalizing the order. On my first orders, I was worried about making a mistake but it’s all pretty simple as long as you check and double-check each detail.

Commsec brokerage is $10 for up to $1000, $19.95 for $1-10,000 and $29.95 for $10,000-$25,000 as long as you settle using their CDIA account.

Commsec offers T+2 trades, meaning you can purchase shares at the moment, and just have to have the funds cleared in your CDIA account (set up when you open a trading account with Commsec) 48 hours later.

Limit Orders vs Market Orders – Limit Orders

Limit orders mean you do not buy the investment immediately. Instead, you set the price at which you would like to buy and if the share price drops to that limit while your limit order is active, the order is confirmed and investments purchased.

There is a good chance that your limit order will never be fulfilled. If the share price goes up, or dips but not quite as low as your limit order the order will not go through. When there are inadequate shares for sale when the price dips to your limit, it will be partially fulfilled.

If you were relying on limit orders as your normal mode of buying, it is likely that you won’t end up investing as much. The stock market, after all, tends to go up over the long term. If you wait for market dips to invest, you are likely to end up worse off overall than dollar-cost averaging as you will have less time invested in the market.

Limit orders can be useful if you are interested in buying at a discount when the market dips, on top of your regular dollar cost investments. The argument still stands though that if you were going to invest this money, you should have done so as soon as possible to attain the highest profit.

However, I still “buy the dip” when the opportunity arises.

  • I dollar cost average every fortnight into Pearler, and superannuation
  • More savings are aimed at paying off my PPOR mortgage. At 2.6% this is likely to be inferior to stock market returns but provides more freedom (and I am so close I want the debt gone!)
  • When the market corrects 10+% I know eventually it will rebound, it is likely I will make outsized returns when this occurs.
  • The opportunity cost of paying down our mortgage instead of investing in the stock market becomes far greater.
  • I also feel more in control of the situation when the market is dropping by “doing something” that feels useful, I am less likely to panic and sell.

As a result, I have a very simple strategy of investing a set amount at set percentage drops from the high. I don’t monitor the market closely but find I can’t avoid hearing that the market is “crashing” so then set up limit orders to be fulfilled at my predetermined drops in value.

Limit Orders with Pearler

Pearler does offer limit orders. On the purchase page, you simply press “more options to find the limit order option. Pearler limit orders remain active until they are executed, or you cancel them (unlike Commsec below).

I tried this during a recent downturn. I simply used auto-deposit, but of course, by the time the money had cleared into my Pearler trust account, the price had rebounded.

Then the cash was stuck in my trust account earning next to no interest, instead of my offset earning a still unimpressive 2.6%.

Given I would prefer to work on fully offsetting my mortgage unless the market does a significant enough dip, this didn’t really suit me.

I made my 1st withdrawal from Pearler as a result. For those interested in Pearler, I had to provide a little further identification before making the 1st withdrawal and this took a couple of days to process. The money landed bank in my offset as expected after that.

Limit Order with Commsec

This is why I still have my account with Commsec. I can set up a limit order and the money only moves if the trade goes through, allowing my cash to keep saving me the interest in the meantime.

To make a limit order with Commsec, you go through exactly the same process but type the price you would like to purchase at in the “Price limit” box instead of ticking “at market”.

You are then taken to the confirmation page where you can check all the details and submit the order. With Pearler the limit order is active for 1 month, so you will need to keep resetting it if you want to.

When the trade is activated, you will receive an email with this information. You then have 48 hours to get money transferred to your settlement account or risk a fine.

Obviously, you will need to monitor your emails if you have limit orders set up and be ready to transfer the cash quickly. You must be confident your cash will clear in time before the settlement date.

Limit order vs Market order

Market orders are the traditional way to buy stocks. You simply log in and buy at the current price when it suits. But wealth is not often built through one-off or Adhoc investments. Most of us need consistent, regular investing over the long term to build significant wealth. Auto-investing makes this easier to stick to.

Limit orders won’t appeal to many new investors. If you have money that you want to put in the market, most of the time you will profit more by putting in as a lump sum immediately. But if, like me, you have a competing use for your investment, setting up a limit order may suit you.

A limit order means if you want to buy at a specific price you don’t have to spend your days obsessing over market prices (trying to catch the dip).

If you’re happy to watch the market and purchase opportunistically, a market order through a low-cost broker will be more cost-efficient.

Let me know which strategy you prefer – Autoinvest, market, or limit orders. Comment below to learn from each others perspectives.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Commsec Pocket Review

*This post may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

Last week, we reviewed the pros and cons of RAIZ. Another strong contender for 1st-time investors or FIRE chasers looking for an easy way to start investing in the stock market is Commsec pocket.

Commsec Pocket Features

  • $2 brokerage for investments of up to $1000 (expensive for under $1K)
  • Ability to automate regular investments
  • No management fee*
  • 7 investing options to choose from making getting started investing simple
  • Unusual amongst micro-investments to be CHESS sponsored – investors legally own the shares
  • *You need a CBA account to use the app. This will cost you $4 per month (more than RAIZ’s account fee anyway).
  • *If you already bank with CBA or can open an account and get wages ($2000 per month) paid directly in, no extra fees apply

How does Commsec Pocket Work?

The Commsec pocket can be quickly downloaded to your phone from the apple or google play stores. You will need a Commonwealth bank account to start investing.

The app is designed to be far simpler than Commsec‘s main online trading platform, still Australia’s most popular broker. Whereas Commsec offers investors all features they could possibly want, Commsec pocket avoids overwhelm by offering just 7 ETF options to invest in.

With Commsec pocket, investors can start investing with just $50.

I’m a bit of a fan of micro-investing. It’s such an easy way to get started, even before you have real money to invest.

Is Commsec Pocket Safe?

Commsec is Australia’s most trusted broker. Shares even with this micro-investment account are CHESS sponsored, meaning the investors legally own the underlying shares.

Newbie investors must understand with any of these apps, they are still exposed to the underlying risks (and rewards of the stock market).

Your balance can certainly drop dramatically and without reason due to market volatility. This can spook early investors, but volatility tolerance can be learned through exposure.

Over the long term, the stock market always goes up.

The aim of the game is to not freak out and sell during market dips. Easier said than done, but I have found this gets easier with time investing (and experience of these market dips and their rebounds).

What Are the Commsec Pocket ETFs

Unlike RAIZ who offer a range of diversified portfolios, Commsec pocket offer individual ETFs.

With RAIZ you just choose a portfolio based on your risk profile, and whether you are interested in sustainable investing or bitcoin.

But with Commsec Pocket you have to decide whether you want to invest in Australia or internationally, with a focus on dividends, emerging market, make sustainable investment decisions or invest in narrow ETFs focussed on healthcare or tech.

Here are the options available:

Investment optionETFUnderlying ETF Management Fee
Aussie Top 200Ishares core S&P/ASX 200 ETF – IOZ0.09%
Aussie DividendsSPDR MSCI Australia high yield dividend yield fund – SYI0.35%
Global 100Ishares Global 100 ETF – IOO0.4%
Emerging MarketsIshares MSCI Emerging Markets ETF – IEM0.68%
HealthWiseIshares Global Healthcare ETF – IXJ0.46%
Sustainable leadersBetashares Global Sustainability Leaders ETF – ETHI0.59%
Tech SavvyBetashares NASDAQ 100 ETF – NDQ0.48%

Now “health” and “tech” both sound like great investments in our current world. But narrow focus ETF just seem to me to be the new “stock picking”.

There is now extensive evidence that active stock picking will not match investing in a broad index ETF for the majority of investors, even professionals. With thematic ETFs investors are attempting to pick market segments that will outperform the average.

There are millions of investors out there. The institutional investors, with the largest investable funds employ full-time professionals to attempt to beat the market. Any advantage I can see in a market segment is likely well and truly priced into the market before I would identify it.

Beginner investors need broad diversification through the broadest (and cheapest) ETFs or index funds they can find. If you’re going to get fancy, at least wait until you have graduated to your mature broker account.

Does Commsec Pocket Pay Dividends

You will receive dividends, automatically reinvested. Each ETF will have it’s own dividend payment schedule. You will receive franking credits on dividends.

A quick explanation. Dividends are payments you receive from your stock market investments. They are rewards paid out to share investors if the company cannot put the funds to better use (growth). Many investors build a strategy around growing a dividend stream big enough to fund their retirement.

What makes dividends particularly attractive to Australians is franking credits. Companies pay 30% tax on profits. They then pay out dividends from that profit to shareholders as dividends. Because the company has already paid tax, you receive a 30% franking credit on already taxed (franked) dividends. This means if you are on the 45% tax bracket, you only pay 15% tax. If you are a retiree on a 0% tax bracket, you receive the 30% tax back as a sort of refund.

It is exactly the same as if the company paid no tax and you pay tax based on your marginal rate. But it is better than double taxation.

Graph thanks to

Commsec Pocket Review: What are the Fees & Charges?

$2 brokerage is not too back on a $1000 ETF purchase. On a $50 purchase, it’s predatory with the apparent aim of taking advantage of millennials who may not yet understand the significance of fees.

On top of this, if you don’t already bank with Commonwealth you will need to open an account and pay $4 monthly fee.

These may not seem significant amounts, but as a total of your investment portfolio they are way too much, and eating away at your returns.

The underlying ETF management fees are listed above. The Aussie top 200 is a great deal, with broad diversification in the Australian market for just 0.09%. Ideally ETFs fees should be under ~ 0.2%, with the exception of ethical funds, European and emerging markets which tend to charge a bit more.

What is the Difference between Commsec and Commsec Pocket?

The commsec pocket has far less features, and as a result is a lot more user friendly for beginner investors. With Commsec there is a minimum $500 purchase. With Commsex pocket the minimum is just $50.

The educational content in the pocket app is also a lot more appropriate to new (and long-term) investors. It has a fare more step by step approach than RAIZ.

Commsec PocketCommsec
$2 brokerage for up to $1000 (then 0.2%)$19.95 for $1000- $10,000
7 ETF optionsCan buy Australian and international individual shares and ETFs
No advanced (aka high risk) strategies offered)Advanced strategies – Margin lending, Warrants
Educational content aimed at beginner investorsEducational content aimed at traders (twice daily market update and lots of graphs)
 Can set market or limit orders

Commsec pocket for Kids

Unlike RAIZ, commsec pocket don’t offer investing for kids. To be fair, I don’t like RAIZ kids anyway.

Commsec Pocket Review: Performance

The investment performance of Commsec pocket depends on the performance of the underlying ETFs, minus the extra commsec pocket fees. Stockmarket performance over the past 18 months has been very strong, and pocket performance reflects this broad market strength.


Investors can withdraw their investments at any time. Expect it to clear in your account within 2 business days.

Commsec Pocket vs Pearler

Pearler offers management fee free investing, with $9.95 for any sized trades. You will need to invest $5000 at a time to make this a 0.2% fee. They do provide a lot more choice though, and some brokerage free ETFs. If you like a free ETF through pearler, your brokerage is 0% of your investment.

Commsec Pocket vs RAIZ

If you need to invest much less than $1000 at a time or don’t already bank with CBA, RAIZ may be a better option. This is brokerage free, but charges a management fee. This management fee can be offset if you can take advantage of RAIZ rewards.

Commsec Pocket vs Vanguard Personal Investor

Vanguard personal investor is also a very easy to use platform to use. You can invest brokerage and management fee free if you buy only vanguard products. Nothing’s perfect though, unlike with RAIZ and Commsec pocket, it is not currently possible to automate your investments with Vanguard personal investor. It is possible to direct debit or recurrently deposit your savings into the Vanguard cash account, but you still have to manually press “invest” for each purchase.

If you are looking for a round-up facility for savings, check out ING.

Commsec Pocket Review Summary

For those looking for an easy way to start investing, already bank with Commbank and want to invest $1000 at a time, Commsec pocket is a reasonable choice. If this doesn’t apply to you check out my RAIZ and Pearler reviews.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

4 Ways to Dollar Cost Average

*This post may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

What Does it Mean to Dollar Cost Average?

Investment in a security at regular intervals of a uniform sum regardless of the price level in order to obtain an overall reduction in cost per unit

Merriam Webster dictionary

Dollar-cost averaging is a powerful but simple strategy of investing the same amount of money at a set frequency, regardless of market movements.

For example, you invest $1000 per month in your chosen portfolio for the next 10+ years.

The secret of building wealth through the stock market will be disappointingly boring to some, yet refreshingly simple for others. It is to invest consistently over a long period of time.

Sounds easy right? Yet most investors will either fail to invest as they planned (due to fearful media coverage or competing financial priorities) or withdraw money during market volatility.

Investing regularly and consistently means finding some other way to fund car repairs, replace a broken fridge and the other little emergencies that come up in life.

I thought this graphic from Fidelity demonstrates pretty powerfully why investors need to stay in the market and stick to the plan. You really don’t want to miss out on any of the best 5 days to invest in the next 40 years.

Fidelity – A US brokerage and research house

Why it is Useful to Dollar Cost Average

Most investors do not consistently invest for decades. Many jump in and out of the market, or stop and start. Many switch strategies frequently and take excessive risks.

Individual investors routinely and significantly underperform the market return, year after year. Factors contributing to this performance include over trading, incorrectly timing the market and overconfidence being the most significant.


But anyone who has read a few articles on finance and investing will know you should buy low, sell high, hold long term and aggressively minimise fees.

So why are these investors failing to keep up with market performance?

Let’s assume you are far more intelligent and knowledgeable than the “Average investor”.

Surely you can at least match market returns?

Yet even professionals routinely underperform a simple index.

What’s going on? Why can the vast majority of investors act irrationally?

Turns out we are hard-wired to be underperform.

1. Dopamine and Short-Termism

Dopamine is a chemical messenger (a neurotransmitter in the brain). It is released in response to delicious food, exercising and sex. It reinforces pleasure, reward and motivation.

Rats who had no dopamine release will not move a few centimetres to get food, and instead, starve to death!

Parkinsons disease is caused by a reduction in dopamine and is treated with an oral replacement (sort of) dopamine. As the disease progresses, Parkinson’s sufferers can hardly move within hours of missing their medication.

Occasionally, Parkinson’s sufferers become addicted to their medication, overuse it and show addictive behaviours (such as suddenly starting gambling).

There is a theory that inherent dopamine deficiency contributes to addiction, along with genetic and environmental factors. Our brains process short and long term rewards differently. We are biased towards short over term rewards.

Online stock brokers stuff their website full of data in red and green, updated every few minutes.

We know that investing for the long term whilst minimizing trading and fees creates better performance. So why do these stockbroker platforms think investors need minute by minute updates? Even for well researched individual share investors, surely the minute by minute price is irrelevant?

Your Classic Trading Platform is Design to Keep you Addicted to Trading

These platforms are designed to be addictive, just like social media. The longer an interface can keep you hooked, clicking, trading, and paying fees the higher the profits from the stock broker.

If the price goes up a dollar, we are rewarded with a hit of dopamine. When the price goes down a dollar, our mood can be dented, panic can set in and investments sold (resulting in another fee).

They encourage short-termism and take advantage of our natural tendency to value short term wins over longer-term bigger gains. As a result, the trading platform makes bigger profits, and investors trade away a lot of their returns.

2. Herd Behaviour

It’s incredible how our instincts subconsciously manipulate behaviour. Herd behaviour is the tendency for people to behave consistent with a group, even when the individual wouldn’t choose to behave that way outside of the group.

Have you ever chosen between restaurants for dinner and went with the busiest, assuming it must be better? This is an example of the Bandwagon effect. Individuals assume if a large group make a certain choice, they must have more information than the individual and are unlikely to be wrong.

A savvy restauranteur may invite a few passersby to a free drink in the restaurant to attract the crowd that follows the apparent popularity

We are also social animals. The instinct to be accepted by the group remains strong. It influences how people dress, what they drive and how they behave. It is instinctual to try and “fit in”.

Herd behaviour has a very dark side, believed to contribute to the mob mentality and violence of rioters.

Herd behaviour is a useful instinct in avoiding danger. In investing, herd behaviour exacerbates extreme stock bubbles and the consequent crashes.

The Good News – Using Herd Behaviour to Your Advantage

The good news is that you can overcome these biases. The first step is to be aware of them. It is useful to have a “herd” moving in the same direction you want to go!

If all your friends and colleagues are spending their cash on status symbols and think the stock market is gambling, it’s going to be even harder to delay consumer gratification and hold steady during market dips.

“You are the average of the five people you spend the most time with”

Jim Rohn – Entrepenuer, author and motivational speaker

If you want to live a different life, less full of consumer purchases but more full of financial freedom, abundance, time and choice, it’s important to find a new “herd”.

Subscribe to Aussie Doc emails, listen to podcasts that you find motivating and join groups online that are full of people heading towards financial freedom, instead of away.

Look out for clues in “real life” for like-minded people and start a conversation about your favourite book/podcast/group.

Find habits to keep you on the straight and narrow. I find writing this blog helps me keep focussed.

The Good News – Dollar-Cost Average and Automate to Overcome Short-termism

Go out for a delicious meal, have great sex and enjoy some exercise. You don’t need a dopamine hit from investing.

Commit to dollar-cost averaging – investing a little bit every fortnight, month, or quarter. Increase your accountability by writing the goal down and sharing it with someone you trust – a partner, parent, sibling friend or mentor. Make a plan for what to do in an emergency, when you are short of cash and tempted to delay investing. Make a plan for when (not if) the market crashes and you feel tempted to withdraw.

Automation really takes it to the next step. If you have to log on to your computer (or phone) and press buy every fortnight, month or quarter there will be many opportunities to fail to invest.

If you really know that you need to stop your regular investment because of a true crisis, you will easily be able to stop the direct debit. Investors are far more likely to invest consistently if the investment is automated.

Dollar-Cost Average vs Lump Sum Investing

If you have a lump sum to invest because you have saved a lot, received a cash windfall or inheritance you need to decide whether to invest the lot at once or dollar cost average over a period of time.

The mathematically correct answer is to lumpsum invest. 66% of the time (according to Vanguard) investing a lump sum will achieve a better return than dollar cost averaging over a year. Because the market, over the long term, always goes up, the longer you delay investing the full lump sum the more returns you miss out on.

But many investors will be anxious about investing a large lump sum. If the day after they invest the market crashes by 50% investors need to know they can hold and tolerate the volatility. If lump sum investors panic and withdraw their lump sum after a crash, they will only have succeeded in losing a large chunk of your money.

So those with a lump sum, spend a week or two (max) working out what to invest in and either lump sum it or dollar cost average over a year or less.

How to Dollar-Cost Average

There are a few ways to dollar cost average your investments. Here we are purely talking about investing in the stock market.

If wanting to invest in property, you could to invest in a Real estate investment trust (REIT) listed on the stock market or through Brick X. By definition when you purchase an investment property directly, you are investing all the cash (including that borrowed by the bank) at the time of purchase, even though you pay it off over time.

Options to dollar cost average into the market

1. Invest Brokerage Free as Often as you Like but Pay a Management Fee

Investing using microinvestment apps like RAIZ generally have an ability to direct debit straight into investments. This is a very easy way to start dollar cost averaging, with a bit of money from each paycheque.

If you pay no brokerage you will generally pay a management fee – a set percentage of the total invested on an annual basis. These are currently $3.50 per month up to $15,000 invested, which seems pretty reasonable.

After this the fee becomes 0.275% this gets excessively expensive as your investments grow. Remember you pay the fee every year on an increasing balance, compounding the effects of the fees. Brokerage you sell once on purchase, and again when you sell.

The microinvestment apps are (including RAIZ) generally not CHESS sponsored. This means you don’t legally own the underlying investments but they are held in trust for you. This could be an issue if the provider closed. I personally didn’t mind this for a small balance, but don’t like this risk and would prefer CHESS sponsorship now my investments are more significant.

2. Invest less often, Pay Brokerage but no Management Fee

If you are paid fortnightly you are unlikely to want to pay brokerage every fortnight. You can open a separate account to save your “investment” to make investments regularly.

Working out how often to purchase investments to make the brokerage worthwhile involves estimating planned return and alternative return (from your money sitting in a savings account or offset.) Here is a link to a handy investing frequency calculator that can help you work it out.

If automation is important to you (and I feel it should be, see the problems with human brains above), I have found Pearler* an easy user-friendly way to automate investments.

Commsec Pocket also allows automated direct debit investments. This is a sort of a hybrid between the microinvestment apps and a brokerage. Commsec pocket charge no management fee, which is great. Their brokerage is $2 for $1000 investment. This is a similar cost ratio to Commsec but allows for much smaller investment amounts (perfect for paycheque investing). Unfortunately, the brokerage is still around double the cost of Self Wealth (that doesn’t have an auto-invest feature yet) or Pearler*.

3. Invest in Vanguard products Brokerage Free with Vanguard Personal Investor

I was about to start investing with Vanguard when the Vanguard personal investor commenced. I was pretty unimpressed with the new 0.2% management fee on retail investors as Personal investor was commenced. As a result I started my first investment with RAIZ, dabbled with Stockspot before opening a Commsec account and then switching to Pearler.

The good news is that Vanguard have significantly improved Vanguard personal investor. You can now invest in Vanguard products only brokerage free and without a management fee. Other ASX shares attract a $9 brokerage (excellent) and an annoying 0.1% annual management fee.

Many of my readers may only invest in Vanguard products so this may suit them perfectly. The one big issue remaining is the lack of automation. You have to press buy every week, month or quarter. Automation, for me, is a huge helper on keeping on track to goals.

Great news! Vanguard emailed me today (Nov 2021) a new auto-invest feature is now available on their managed funds. They remain brokerage and account keeping fund and you can invest from as little as $200 / quarter! This probably replaces the micro-investment app for many new investors and may last many investors through their investing career. Check out the offerings. (they have teased they may get auto-invest working with ETFs, but not yet).

4. Invest Brokerage Free via Superannuation

It is quite easy to direct debit each money into your superannuation with each pay. If you are not maxxing out your non-concessional limit of $27,500 per year (using salary sacrifice) the significant tax benefits should definitely be taken into consideration.

If saving1% in fees per year makes a massive difference to your investment returns over the long term, imagine what saving 15% in tax could do!

You do not pay brokerage fees for contributing to super, but there are obviously ongoing management fees.

I am pro-super. I’m over 40. It’s hard for those under 30 to fully appreciate the benefits, and tolerate the legislative risks that come with super. I would suggest everyone at least put some extra into super, maximising any “employer match” available.

Over 30, strongly consider investing up to your $27,500 concessional contribution cap.

The exception to this is if you are about to have a large increase in income. If you will breach your concessional cap within the next 5 years (~$275,000 gross “base” salary) you will be able to use catch up contributions for the first 5 years of the super high income to make up for not hitting the concessional cap in the years before.

For Example:

In 2021 you earn $150,000 base pay and end up with $25,000 in total employer, salary sacrificed and voluntary contributions.

In 2022 you are promoted to the “Boss job” earning $250,000 base pay and end up with $30,000 in total employer and salary sacrificed concessional contributions.

Normally you would have to pay extra tax for the concessional superannuation contributions over $27,500. Instead of paying 15% tax on the excess super contributions of $2,500 you pay your marginal rate of 45%.

But because of catch up contributions, as long as your super balance is under $500,000 you will be allowed the excess as a “catch up contribution and only pay the usual 15% tax.

Non-concessional cap come in handy over 50 when your closing in on your preservation age and really need to maximise super to benefit from the tax free income stream after 60.

Find out about opportunity cost.

Human brains are designed to fail at investing! Use any mental trickery and handy tools you find useful to keep you moving closer to your goals.

Your wealth accumulation journey starts as soon as you make the first step.

Subscribe to Aussie doc for a weekly email to keep you up to date on track to your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

education Investment Bond Review

*This post may contain affiliate links. This means if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

In 2014, shortly after reading the Barefoot investor*, I opened an education bond for my eldest child. Australia’s most popular finance book recommended an education bond for high earners. Read on to find out my experiences on the education bond, pros and cons. I have no affiliation with Australian Unity or other education bond providers, so this is an unbiased review as a consumer.

Education Bond Review: Set-Up Process

You require a financial advisor to set up an education bond. If you are among the minority who have found one they like and trust this is no issue. For those that don’t need a financial advisor, or have not been able to find one yet that they feel is trustworthy, this is a major stumbling block. Results include:

  • Procrastinating for months to years
  • Getting talked into something inappropriate by a financial advisor/sales person
  • Finding an honest and reliable financial professional who will guide your investing over the next decades

My financial advisor talked me into signing my super over to his management in 2016. He charged a 4% annual fee! He was very convincing that his superior management would more than compensate for the fee.

This may not come as a surprise to the savvier amongst you. It didn’t.

What can I say, I was naive and way too gullible.

Education Bond Review – Tax Benefits

Education bond earnings are taxed at the corporate rate of 30%. This avoids the punitive unearned child tax rates (up to 68%) or even the adult’s marginal rate of up to 45%.

Earnings withdrawn from the bond to pay for education expenses after 10 years benefit from that 30% Tax being refunded. So as long as you follow all the rules, these investments can be tax-free.

The investment has to be started in an adults name if a child is under 10 years old, but this can be transferred to a child without incurring a taxable event at aged 16.

Education Bond Review- Rules, Rules and More Rules

Apart from the brief 3 years the financial supervisor spent playing with my super, the education bond has been my most complex investment so far.

There are rules upon rules in this thing. All else being equal, it’s obviously easier to have simpler investments!

The appeal of the education bond is all in the tax benefits. Not following all the rules means missing out on tax benefits. Rules include

  • Minimum initial contribution of $1000
  • Maximum contribution of $590,000
  • Minimum regular savings contribution $100 monthly

To be eligible for the full tax benefits

  • Earnings must not be withdrawn before 10 year investment period. There is a partial tax discount from 8 years.
  • No more than 125% of the previous years contributions can be contributed each year. You can, however open multiple accounts if you have another lump sum to invest.
  • Earnings withdrawn to pay education expenses get the 30% corporate tax rate refunded. These can include tuition fees, books, uniforms and a “living away from home allowance” of currently $8,200 per year.

Change of Circumstances

The Aussie Doc household set up an education fund back in 2014, while both adults were working. The intention was to save for our toddler’s tertiary education costs.

At the time Mr Aussie Doc was on the 37% marginal rate, myself on the top tax bracket. The education bond, therefore, appealed due to the tax-free earnings.

In 2016, Mr Aussie Doc became a stay at home dad, a change in circumstance we hadn’t planned in advance. Now with the kids in school, he works a few hours but is still not hitting his tax-free threshold. There is no plan currently for Mr Aussie doc to return to work for significantly more hours or pay, but if the right job came up it could happen. Who knows what we’ll be up to in another 7 years!

With Mr Aussie Doc now on the 0% marginal tax rate, the education bond has no tax advantages for us.

Luckily, the education bond does allow withdrawal of contributions, tax-free and without penalty. In 2019 we withdrew our $25,000 contributions, leaving ~ $5000 in the fund. We can withdraw the remainder for education costs (school fees) from 2024.


Australian Unity offers 15 different investment options within the bond. The word “Bond” is confusing. This investment is nothing to do with bonds you can invest in. The education bond is just another vehicle, like your superannuation, in which all sorts of investments can be contained.

We ended up with “Perpetual balanced growth. It is actively managed by Australian Unity. The current asset allocation is:

  • 35.2% International equities
  • 31.78% Australian equities
  • 27.4% Money market
  • 4.91% Australian fixed interes
  • Other 0.78%
  • Global fixed interest -0.07% (not sure how)

7 years ago when I set this up, I knew pretty much nothing about investing. I trusted my financial advisor to select an appropriate investment.

In retrospect, I probably should have spent a bit of time learning for myself and choosing an appropriate investment appropriately. I did eventually!

Over the past 5 years, this portfolio has produced 5.3% growth per annum. Over the same period, the ASX 200 has produced ~ 10.27% total net annualized returns. The Vanguard diversified high growth fund. The Vanguard balanced index fund returned 7.47% over the past 5 years.

My education bond has underperformed comparable investment products, such as the Vanguard balanced index fund more than enough to wipe out any tax benefits.


And yet again, it all comes down to fees I suspect. Australian Unity, like many financial product providers, like to break down the fees. They charge an admin fee of:

  • 0.7% of invested amount
  • An investment management fee of 0.25%-1.1% of balance on top of the admin fee, depending on exact investment choice.
  • Some of the investment choices also charge a “performance fee” of 0.02-0.03% to reward investment managers for beating benchmark performance.

So in summary you will pay between 0.95-1.83% of your balance in fees per year.

The Vanguard balanced index fund we compared earlier charges 0.29% of the balance in management fees. I’m not recommending this fund, just providing some context to these fees. Superannuation fees tend to be a bit higher (perhaps to change when Vanguard start super), but Scott Pape suggests keeping fees under 0.85%.

Even the Australian unity product disclosure statement warns a 1% increase in fees can lead to 20% underperformance over 30 years!

On a more positive note, there are no contribution or withdrawal fees with Australian Unity. Over the long term, it is cheaper to pay brokerage and avoid account keeping fees.

You will have to pay $9.95 brokerage to purchase (and sell) an ETF Pearler*. Although you can get one free transaction with this link*.

Vanguard personal investor are now offering completely fee-free transactions (no brokerage or account fees) on Vanguard managed funds! The only fees I can see apply is the 0.29% per annum management fee and 0.5% on any money earned in a cash account.

Alternative Options

Alternative for saving for your childrens’ education include

  • Buying a broad based index fund and paying tax according to marginal tax rate (It will probably outperform despite higher tax)
  • Buying Australian foundation investment company in child’s name and selecting the DSSP option to defer any taxation until your child reaches adulthood
  • Open a microinvestment account in an adults name (advantage being you don’t have to select investments yourself)
  • Save in an offset (but with sub 3% returns you could do a lot better)
  • Purchase an investment property. Depending on your time frame you could sell it, or plan for it to be positively geared and fund child’s education.

Education Investment Bond Review Summary

Education bonds appeal to high taxpayers and those who want to avoid working out which investments to buy. It requires involving a financial advisor to open the account. My education bond drastically underperformed the ASX and similar managed funds over the past 7 years.

The good news is that if you have already signed up for an education bond and now regret it, you are able to withdraw all your contributions without penalty. There is likely to have been little growth so you will be able to withdraw the majority of your balance.

If you are still considering an education bond from Australian unity (formerly Lifeplan), read the Product disclosure carefully.

Your wealth accumulation journey starts as soon as you make the first step. Subscribe to Aussie doc for a weekly email to keep you up to date on track with your goals.

Aussie Doc Freedom is not a financial adviser and does not offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Active vs Passive Investing & Evidence-Based Investing

*This post may contain affiliate links. This mean if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded, but does introduce a conflict of interest.  

Source: SPIVA Scorecard 2020

What is Active vs Passive Investing

Active investing involves buying and selling specific stocks, or thematic ETFs.

Passive investing means buying and holding investments meant to match the return of an entire market (National or International).

Evidence-based investing is a rules-based system based on the best investing evidence available, aimed at reducing subjectivity in investing decisions.

The main differences in the two approaches to investing in the stock market are:

  1. The goal
  2. Time
  3. Expertise required
  4. Fees
  5. Results

The Goal of Passive and Active Investing

The goal of passive investing is simply to match the entire market, minus a very small fee. In contrast, active (or evidence-based) investors aim to beat this index.

Time Needed to Passive vs Actively Invest

Active investing is a time-consuming process. The investor or his/her hired help needs to extensively research each purchase and then monitor the company’s ongoing performance to ascertain if and when to sell. On selling, more research is required to find another good company to invest the cash in.

To become an active investor, you need to see digging through company data and reading balance sheets as a fun hobby and have plenty of time to invest in the process. Many who love the process choose a “core and satellite” approach. The majority of their investments are in broad-based index EFTs using a passive strategy. A small proportion of the portfolio is used to indulge in active investing.

Passive investing, on the other hand, can be a simple, lazy process. If you are a sloth-like investor like me you can even direct debit each pay to your chosen investment(s) with Pearler.

Expertise Needed for Passive vs Active Investing

Enough education to institute a reasonable passive investing plan can be gained from a weekend of reading. Passive investors can use this strategy without professional help, and very little time invested.

Active investing requires a significant time commitment. This is a professional sport, even most professionals failing to beat the passive investors a lot of the time.

Even hiring a professional for active investing requires a fair amount of expertise. How do you choose a fund manager? Last years winners are renowned for being next years losers. Picking the next winning fund manager is almost as hard as picking the winning stock itself!


Actively managed funds tend to charge far higher fees than passive funds. Even if the fund manages to beat the index, fees eat into the returns.

Active management means funds are brought and sold more often. Passive funds are generally held for the long term. Trading creates more fees, and this is significant.

As a result of reduced trading, Fidelity found their best-performing investors had actually died or forgotten about their accounts! Increased trading frequency is a predictor of poorer returns.

Minimising fees is critical to improving performance.


Warren Buffett’s won his famous bet in 2007 that a broad index fund would beat the 10-year prospective returns of 5 hedge funds.

Research since has confirmed the damning news for fund managers – passive investing is cheaper, easier and provides better returns most of the time.

The SPIVA score card has been reporting on active vs passive returns for the past 20 years. Here is a quote from their latest report:

“While the turmoil and disruption caused by the pandemic should have offered numerous opportunities for outperformance (by active managers), 57% of domestic equity funds lagged the S&P Composite 1500 index during the one-year period ended Dec. 31, 2020.”

SPIVA Report Card 2020

The Australian stock market is tiny in comparison with the US. It is also known to be highly concentrated in the banking and mining sectors.

With Aussie passive funds being so concentrated in a couple of industries, surely active management could outperform them?

According to SPIVA’s international data for Australia over the past 20 years, ~50% or more of active funds were outperformed by the ASX 200. And these are professionally managed funds, not amateur investors.

Why Do Investors Still Love Active Investing?

Passive investing is about as exciting as watching paint dry! It’s a strategy best suited to those who want the best returns, and are happy not to fiddle with their investments.

Active investing is intellectually challenging and has potentially infinite returns when it works out. Looking back at the 12,000%+ growth of Amazon stock since its Initial Public Offering (IPO) gets investors salivating! Greed and impatience tempt new investors to try and pick the next “amazon”.

The stock market is a device to transfer money from the impatient to the patient.

Warren Buffett

Returning “Alpha” means beating index returns, and it seems so easy. You can even find an investing newsletter to give you tips on which to buy.

Of course, if the newsletter producers could predict the next big thing, they probably wouldn’t be aggressively marketing their newsletter at you.

Similar to how we often feel safer driving our cars than being an airline passenger, active investing can provide a false sense of control.

Evidence Based Investing

This is a term that I am hearing with increasing frequency. Investing decisions are based on a set of predetermined rules, and actions led by results from academic investing research. The idea is to remove the subjectivity from active investing. Sounds great!

Or perhaps too good to be true?

Most non-physicians would assume we follow evidence-based medicine all the time.

The reality is that the evidence behind our management of disease is lacking, patchy, inconsistent, and difficult to interpret.

The evidence we read may or may not be relevant to the patient in front of us, due to an almost infinite number of variables.

Much of this research is funded by the very drug companies that stand to profit from a particular result. And it is well documented that journals rarely publish negative results, introducing more bias.

On reading a research paper providing evidence for a new treatment, the team looking after the patient need to consider all the above factors before deciding whether this new evidence should change practice. This requires skill, experience and involves far more subjectivity than is ideal.

Interpreting and applying investing evidence to investing decisions will also involve skill and plenty of subjectivity. It will be difficult to research whether “evidence-based investing” actually works, given the likely high variability in it’s application.

Active vs Passive Investing

Passive investing is cheap, easy and likely to give you a better return than active investing. It’s hard to argue with that. It is boring though, and that’s what puts people off.

Those with less of an interest in all things financial probably have an advantage here. They can work out a plan, set up a direct debit and forget about their investments.

They will probably do far better than those tempted to always checking their accounts, and looking for investing opportunities.

“By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”

Warren Buffett, 1993

Ready to make the next move? Find out how to choose an ETF portfolio

Aussie Doc Freedom is not a financial adviser and does need offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Portfolio rebalancing for australians

This post may contain affiliate links. This mean if you purchase through the link I will receive a small commission at no cost to you. It is the way sites like this are funded but does add a conflict of interest.

What is Portfolio Rebalancing?

Portfolio rebalancing refers to resetting your investment portfolio back to your intended asset allocation. Rebalancing can refer to restoring the asset allocation to each asset class, ETF or even individual stocks. It can occur at a pre-decided time interval (quarterly, bi-annual or annually). The purpose of rebalancing is to improve returns, and reduce risk and volatility.

Rebalancing forces the investor to purchase investments at a discount (when they are underperforming) and sell overperforming assets. It goes against our natural inclination to hold on to (and buy more “Winners”, right before they crash.

A predetermined percentage deviation from the intended asset allocation can trigger an investor to rebalance. If an intended asset allocation was 50% stocks, 50% bonds, the investor may rebalance once either stocks or bonds reaches 60% of total investments. The purpose of rebalancing is to reduce risk and volatility.

Examples of Asset Allocations – If you keep things simple and have one ETF per asset class, rebalancing is the asset classes and ETFs are the same.

Hopefully you have set goals, written down a financial plan, decided on active vs passive investing and decided on an asset allocation.

You now have to decide on a rebalancing strategy.

Is Portfolio Rebalancing a Good Idea?

In Vanguard’s white paper, average annual returns over 90 years of back testing were as follows:

  • No Rebalancing 8.74%
  • Monthly Rebalancing 8.39% (rebalanced if met threshold of 10% deviation from asset allocation)
  • Quarterly Rebalancing 8.26% (rebalanced if met threshold of 10% deviation from asset allocation)
  • Annually 8.20% (rebalanced if met threshold of 10% deviation from asset allocation)

This does not tell the whole story. Volatility affects investors emotions, and risks them selling at the bottom of a bear market, locking in losses. The timing of your need to draw down your portfolio also will dramatically affect whether you would have benefitted from rebalancing.

Volatility also has a direct effect on cumulative investment returns.

The annualised one listed above is an average of annual returns. The problem is, volatility reduces the actual returns received.

Take this fictitious example of two companies – one making dog jackets, the other dolls. The dog jacket company has stable and consistent 5% growth every year for 10 years. The doll company is far more volatile. Some years have great returns, others are negative. The average return overall is 5% for this company too.

Disclaimer – In case you hadn’t guessed, I have no idea of the investment potential of a dog jacket or doll company!

Investors who invested in the dog jacket company and held for 10 years have significantly more cumulative growth than investors in the doll clothes company.

YearDog Coats R US
Annual returns
$10,000 invested in
Dog coat company
Annual returns
$10,0000 Invested in
Average return5% 5% 

This seems counterintuitive. But to recover a 50% loss in your portfolio the following year, you need an annual return of 100% (not 50%). The effect of volatility and compounding is captured with an annualized return, calculated using a “geometric average”.

Does Portfolio Rebalancing Improve Returns?

Vanguard tested several rebalancing scenarios. The full white paper is here. They compared the effect of rebalancing on a 60:40 stock: bond portfolio. They back tested data over 90 years in several scenarios to compare returns and volatility:

  • No Rebalancing
  • Monthly Rebalancing
  • Quarterly Rebalancing
  • Annual Rebalancing
Vanguard White paper

As you can see from the lower graph, there is a slight improvement with quarterly rebalancing over no rebalancing over a 90 year period. There was minimal difference between returns for the monthly, quarterly and yearly rebalancing schedules.

Most of us don’t have 90 years to invest. Poor performance in the early years of drawdown can dramatically damage your portfolio longevity. This is known as “Sequence of Returns” risk. At times the unbalanced portfolio outperforms the balanced, at other times it underperforms. You can see from the graph above why many early retirees in 2008 had to go back to work.

A 60:40 stock: bond portfolio may be considered very conservative among readers A factor in the good long-term performance of the unbalanced portfolio in Vanguard’s white paper may be that over time the portfolio became more heavily weighted towards stocks, giving the investor a more aggressive portfolio over time. The end unbalanced portfolio would be far more aggressive, and be expected to perform better over the long term. Those with a more aggressive portfolio may find the benefits of rebalancing more significant.

Rebalancing makes sense. Why make an asset allocation at all if you aren’t going to stick with it?

How Portfolio Balancing Works

There are three main approaches to a portfolio rebalance strategy

1. Rebalancing Portfolio with New Money

During the accumulation phase of investing, the most cost effective way of rebalancing is to add funds to the underperforming asset.

If your 60:40 investment portfolio has become 70:30 stocks : bonds, your next investment will all go to bonds. This works well in the early phases of investing. But, as your portfolio grows, growth will dwarf your contributions (hopefully). If you have a million dollars invested and invest $1000 per month, you would never achieve a portfolio rebalance with this method.

With Pearler*, your account can be set up to automatically add your next investment into the lower performing asset, rebalancing each time without additional cost. Sign up for a free brokerage credit* through Aussie Doc freedom.

2. Selling Performing Assets, Buying more of the Underperformers

Once your portfolio reaches a certain size, you will have to sell and buy assets to rebalance. Unfortunately, both buying and selling assets costs brokerage fees. Fees eat into returns. Minimising fees is a powerful way to boost your portfolio performance.

Optimising your rebalancing schedule to maintain a reasonable asset allocation whilst minimizing fees is important. Most sources suggest rebalancing every year, and only if the asset allocation has deviated 5-25% from the plan.

Another strategy is to rebalance within superannuation. It makes little sense to me to ignore your investments inside super. This is still your real money, even if you can’t get to it for several decades. Invest outside superannuation to fill the gap, but approach asset allocation and rebalancing by looking at all your investments as a whole. Rebalancing your overall exposure within super is more cost and tax effective.

For those with a Self managed super fund this is pretty simple. For those of us in industry funds, choices are a little more limited. Some offer a “Self invest” option, but examine the fees carefully. Otherwise, adjust your asset allocations within super to roughly rebalance your overall portfolio. Note the set up and ongoing costs of a SMSF are significant, and not worthwhile for many.

3. Retirement Portfolio Rebalance Strategy

The opposite of the first strategy. Withdrawals are made preferentially from the highest performing asset. Initially, with a high portfolio balance, this is likely to be inadequate. But withdrawing from the winning asset will reduce brokerage costs of rebalancing with strategy 2.

When Should You Rebalance Your Portfolio?

There are 3 approaches to consider:

1. Time Based

Every year, as long as assets have deviated more than 5-25% from the intended asset allocation. This is easy and involves minimal emotion. So set a date such as your birthday, new year or tax time and check your portfolio. Adjust as required

2. Rebalance when there is a Significant Market Movement.

This involves monitoring the market, and rebalancing during a time of stress. Logging into your account during a major bear market risks panic and emotional decision making. In March 2021, the brief but dramatic COVID bear market had almost correctly corrected within a few weeks as long as you hadn’t sold. Selling the losers at this point locks in the losses. Experienced and professional investors may be able to use this and keep a level head. I ban myself from logging into investment accounts during a crash!

Active rebalancing also involves extra costs. Selling winners means you are crystallizing winners. High income earners generally want to defer income until they are no longer in a high tax bracket. Selling means you will have to pay tax on the gains, even if you are simply recycling the funds back into another investment. On top of that buying and selling assets cost brokerage fees. These are good reason to rebalance infrequently (yearly or even two yearly). They are also good reasons to optimise your purchases to keep investments inline as much as possible. Check out Pearler’s automated investment option with automatic rebalancing.

3. A Mixed Approach Combining the Two Above Approaches.

Many will review and rebalance at a set date but also if there are significant market movements. I try not to watch the market too closely (I’m working on it, OK?). But it’s almost impossible to avoid hearing about a significant market correction. So, my own easy strategy is to review and rebalance yearly, and invest extra during significant corrections. Corrections >20% are anxiety producing. Every news outlet and social media channel is screaming that the sky is falling. Working extra shifts and shovelling money into the market gives me something to focus on!

Asset Allocation Changes with Age

Asset allocation may need to change as you get older, or once you hit your goals. As you get older, investors can tolerate less risk. If you have already hit your goals, you don’t need to take as much risk.

This is different from portfolio rebalancing. Instead, this is a review every 5 years to assess whether your asset allocation is still appropriate. Reviews should be performed whilst the market is dull, and you are calm. They should be scheduled and this schedule followed to avoid disguising a speculative interest in a new asset as “reviewing your asset allocation”.

Portfolio Rebalancing Pros and Cons

Reduced volatilityBrokerage costs and tax on capital gains eat into benefits
Optimises return for level of risk appropriate for investorComplexity increases with investments inside and outside superannuation and property investments
Encourages you to buy assets at a lower price and sell at a higher priceMiss out on gains if rebalance part way through a bull run
 Involves checking your account and risks emotional decision making

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Aussie Doc Freedom is not a financial adviser and does need offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.

Pearler Review: Auto-invest with Low Fees

I have now been investing with Pearler for around 9 months! The platform has continued to improve since I signed up.

My original Pearler review can be found here. I wrote the original before I formed an affiliate relationship with Pearler. As time goes on my feelings have not changed.

As of March 2022 ASIC have made it clear affiliate relationships with financial products is not acceptable for finance bloggers without an AFSL, so there are no longer affiliate links.

I will continue to update my Pearler review in this article.

Pearler Review: The Bottom Line

Pearler designed its platform for long-term investors mainly interested in passive ETF securities. The ability to automate investments regularly is unique and the big selling idea of the platform.

They based the platforms on the needs of the financial independence crowd. But you don’t need to be a hard core FIRE enthusiast to use Pearler’s auto-invest feature.


Most investors perform dismally over the long term because they:

  • Fail to stick to the simple plan
  • Pick individual stocks and underperform the market
  • Buy stocks impulsively based on hunches and media articles
  • Waste much of their gains on brokerage fees
  • Panic when the market crashes and sell at the worst possible time
  • Fail to invest at all, because it’s too complicated and risky


Pearler aims to:

  • Prioritise automated investing to help investors stick to the plan
  • Providing a simple platform that’s easy to use
  • Encouraging long-term investing in diversified portfolios of index ETF securities
  • Forming a “Pearler community” of like-minded long-term investors
  • Charge low (and decreasing) Pearler brokerage fees
Aussie FIRE Book, funded and organised by PEARLER available FREE here.

What is Pearler?

Pearler is an online broker for long-term Aussie investors. It was founded in 2018 by three friends based in Sydney. It allows investment into a variety of Australian stocks and ETF products directly.


Pearler Review: Automated Investing

Pearler is the only broker to support automated investing. Automation is an incredibly powerful tool in helping investors resist the urge to self-sabotage. It’s the number one way to stick to a long-term investing plan.

If you have to cancel a direct debit to skip an investment, you are far more likely to stick to the plan of investing every quarter. If you have to press “buy” each quarter, it is more likely you will find an excuse not to. There are always competing priorities for our money.

Starting investing in the share market for the first time is initially exciting, but it quickly gets a bit boring. Once your balance starts to build, it doesn’t seem to grow much on its own and contributions don’t increase the balance quickly either. Once you get past this painful part, the growth in your investments will eventually be enough to encourage you.

But you’ve got to get past the boring painful bit. Automation will help.


Does Anyone Else Offer Automation?

At the time of writing, none of the other Australian trading platforms offers a fully automated investing experience.

Vanguard personal investor allows automated bpay or direct debits into its managed funds or cash management account (earning 0.35% interest).

It is easy to automate investing into super, through salary sacrifice or regular bpay deposits. It may also be the most tax-efficient way to invest for double-income couples.

My $115/ fortnight spouse super contribution (which attracts a $500 tax annual rebate) leaves my account quietly. Every few months I have to check it’s still working as I don’t recall noticing it!

Stealth investing is a thing.


Brokerage Fees vs Other Online Brokers

Pearler has competitive brokerage fees of $9.50 for an unlimited investment amount.

The fee is around half of Commsec brokerage and on par with Self wealth. Even cheaper brokerage is possible through non-CHESS sponsored accounts.

Investors don’t legally own the shares or ETFs in their non-CHESS sponsored account though.


Review Pearler: Free Brokerage

Pearler offers selected brokerage free ETFs with three ETF managers as long as you hold the investment for at least a year. You will have to pay brokerage on the eventual sale of assets. The brokerage-free ETFs I looked at had slightly higher management expense ratios (MER), around 0.4%.

The graph below shows investment returns paying brokerage and MER of 0.2% vs brokerage-free ETFs and MER of 0.4%. In this scenario, the investor is $1000 ETF every month. The brokerage-free option is advantageous in this situation.

In the next scenario, the investor purchases $3000 four times a year to save on fees. Paying brokerage is advantageous after a few years in this situation.

Whether the brokerage free ETFs are right for you probably depends on how much you are investing, how often, for how long, and whether the ETFs available suit your needs.

Is Pearler CHESS Sponsored?

Pearler Investments is a CHESS-sponsored broker. CHESS Sponsorship means you legally own the shares. If the Pearler platform collapses, your shares can be moved to another brokerage account via a share registry. In the case of Pearler and Commsec, Computer share is the share registry.

Some trading platforms are not CHESS Sponsored (notably Superhero) which means investments are held in trust for you.

A couple of days after purchasing your shares, you will receive a letter from Computershare, the CHESS registry.

If you wish to set up dividend reinvestments, you need to log in to Computer share and register for dividend reinvestments for each investment individually. It’s not hard to do, just worth knowing.

I had assumed as I owned the same investments through Commsec, the dividend reinvestment plans would continue with Pearler. Wrong! I had to work out how to deposit a cheque in 2021.


Pearler Review: Set Up Hassle

The actual sign-up process was quick and easy, I was able to complete it all online in less than an hour. Opening my Commsec account a few years ago seemed a lot more challenging. The set-up process with Pearler was far easier. It all seemed intuitive.

You need to verify your identity and link a bank account. Pearler makes the required steps as easy as possible.

Pearler offers the ability to share your profile with friends, but the privacy level is up to you. Adjust your profile between “Public”, “Within Pearler”, “Unlisted” and “Private”.


Accounts Available with Pearler

You can open an individual or joint accounts with Pearler.

A Self-managed super fund or trust account is also possible with Pearler.

You can open a minor’s custodian account. The taxation here gets a little complex, and it’s definitely worth checking with your accountant before opening an account.


Pearler Review: The Trading Platform

Pearler is a long-term investing platform. It is designed as a simple interface, in contrast to other platforms designed for short term traders.

Pearler provides the information needed by long-term passive investors.

Pearler now displays the live market price for instant direct buy/sell screens. If you are making direct stock investments, the exact price may be important to you.

Pearler displays CXA Stock Exchange (CHI-X) end-of-day market prices elsewhere on the platform, which may vary from the live price by small amounts. As a long term investor, this is more than adequate for me.

On opening your Pearler account, you come to the Dashboard where your current balance is displayed along with historic progress. You have tabs for Auto invest, invest and transactions.

Auto invest is where you can set and adjust your regular direct debit requests to Pearler.

Invest is where you can directly buy / sell with instant deposits.

Transactions will show all movement of money in and out of your account.

Investment Strategy

Make sure you have set goals and made a financial plan. If you don’t know where you are going you are likely to end up lost! You will structure your investment strategy to meet these goals.

Micro-Investment Accounts

Many online reviews will talk about how expensive micro-investment apps are. Certainly, once you get a certain amount invested, and over the long-term, they are more expensive than having your own brokerage account. But they can be the easiest way to end procrastination and get started. You can also generally direct debit into them, and automation is a very powerful tool in investing.

You could also reduce the cost with RAIZ, which has a “RAIZ rewards” section. If you don’t already use cashback, these savings can fully cover your RAIZ fees for some time (particularly for families who tend to spend more).

Pearler are releasing a micro-investment account, where new investors can start their journey to financial independence with as little as $5. The full details are not yet out, but watch this space!

This has the potential to take new investors from their very first investment as a student to building financial independence with the Pearler personal finance marketplace. I’m looking forward to find out if Pearler can complete with similar products already on the market.


Choosing a Target Portfolio

Seasoned investors can simply go to “Auto-invest” on the investing platform and search for the “ticker symbol” (abbreviated code) for the ETF securities or individual stocks they want.

You get to choose what percentage of your target portfolio you want to allocate. Your Pearler account now allows you to compare diversified portfolios with multiple target portfolios calculators.

Remember to consider any other financial assets as part of your overall asset allocation eg super, property, cash. If you have a large cash emergency fund in a bank account, do you really need some of your investment portfolio allocated to cash?

Most beginner investors, as well as financial independence seekers, will choose a simple allocation to ETF securities.


Methods Beginner Investors Have Selected a Portfolio Allocation:

  • Copying a micro-investment portfolio allocation. They are generally allocated to a range of ETF securities. This is simple to copy the asset allocation in your broker account
  • Starting with their super portfolio allocation. Either copying the allocation or adding ETF securities that are inadequately represented.
  • Choose a Vanguard diversified investment product that suits their risk profile. Buying through Vanguard, or copying similar allocation with a broker
  • Based on reading eg Simple Path to Wealth


Pearler Review: Template Portfolios

If you click on the portfolio and select to adopt it, Pearler automatically adjusts your portfolio allocation to match.

It’s important not to get stuck trying to achieve perfection.

Stop procrastinating.

Set a limit on your learning time, make a simple asset allocation and set it up. You can always adjust as you learn more.  Or get professional advice.  Just don’t leave it in the too hard basket (the years pass quickly!)

You can view profiles and portfolios of other Pearler investors who have chosen to be public. The profile sharing feature is not for copying someone else’s asset allocation. The idea is to allow comparison and perhaps encourage discussion and investigation.


Pearler Review: No research reports

Pearler has no due diligence and no research on the website. 

The other big online trading platforms such as Nabtrade and Commsec display data from Thompson Reports, Morningstar, and Trading Central. These big platforms provide lots of data for individual share pickers to delve into.

All this is absent in Pearler. It does not even display a PE multiple or volume on their website. This keeps the platform simple, without distractions.


Auto Invest Feature

You set your automated investing to invest by direct debit regularly by any set number of weeks or months.

In an ideal world, many of us would direct debit a small amount each payday into our Pearler account. However, paying brokerage monthly (or fortnightly!) is not cost-effective unless you’re investing large amounts each time.

The more you are investing each time you pay brokerage costs, the better deal you are getting. But the more time your money sits outside the market before investing, the longer you are missing out on market returns.

Pearler has a handy Investing Frequency calculator to work out the optimal frequency of investing for you. Mine is ~ 7 weekly.


Your Auto-Invest Cash Takes 2 Days to Invest

Your cash is invested according to your portfolio preferences.

If the share price doesn’t multiply neatly into your investable cash the leftover cash will remain in the cash account until you next invest. I have only had up to $75 in my cash account so far.

Your cash deposit is initially cleared into a Macquarie bank client trust account. This is not in your own name but held in trust on your behalf.

The money is held here until (for up to two days) Pearler invest your cash. You receive an email to confirm receipt of the cash and then again when it is invested.

You can choose to invest immediately or have them hold your cash until you reach a prespecified sum (say $5000) to save brokerage.


Manual Instant Pay One-off Investments with Pearler

Although automated investing is the number one feature that makes Pearler popular, it is sometimes handy to be able to buy ad hoc investments.

Pearler now offers instant deposits through OSKO or Pay ID. This invests your money immediately at market price, known as a market order.

Pearler has introduced the ability to use a limit order. This is when you set the price you would like to pay (below the current market price). The purchase goes through if the price drops to your limit.

If the price never drops to your “ideal price” you don’t get to purchase the investment.

For ordinary times, most people use a market order as they know the rough price, and want the order to go through (which it will as long as someone is selling the investment you want).

US Shares

Pearler now offers US shares through the NASDAQ and NYSE. Brokerage is $6.50 + 0.5% margin on the foreign exchange, currently ~0.37% of your investment amount. Superhero advertises free brokerage US investing but charge a 0.5% margin on foreign exchange.

In case anyone is suffering from the same misunderstanding I did, it is not necessary to invest in the US stock exchanges in order to purchase the US or international index ETF securities or managed funds. These are available through the ASX.


US investing is for those wanting to invest in specific companies, such as Google.

Mobile Phone App

Pearler obviously had to launch an app. It works well, is easy to download to your phone as is pretty much an identical replication of the easy-to-use website.

This is useful for those who don’t own a computer, but otherwise a dangerous temptation to check your portfolio several times a day!

I don’t need the encouragement!

If you have more willpower than me and think you’ll find it useful, download the app. For the weak-willed, keep investing apps off your phone.


Pearler Integration with Sharesight

Pearler integrates seamlessly with sharesight. This is an easy process to set up, involving just a few clicks on your Pearler platform.

At the end of the tax year, I printed out the promptly provided end-of-financial year summary and delivered it to my accountant. This provided all the information required for my accountant to claim franking credits and submit information accurately.


Are Your Investments Safe with Pearler?

Sanlam Private Wealth Pty Ltd is the Australian Financial Services Licence holder for Pearler Investments pty ltd. Pearler is an Authorised Representative of Sanlam Private Wealth.

Pearler is a CHESS-sponsored broker. This means the investments legally belong to you and can be transferred to another investing platform whenever you like.

Pearler has bank-level security with 2-factor identification for changes to auto-invest or one-off financial transactions.

Customer Support

Phone contact, email and online chat directly from the website (the easiest way to get a response). This has been fabulous so far.

I provided feedback and received a response within an hour. Initially, the auto-invest had limited flexibility, I let them know I would like to invest 7 weekly (random!) and they quickly reassured me they were already working on it.

Within days, the auto-invest function had changed to a completely customizable number of weeks or months. Impressive!


Financial Independence with Pearler

Pearler is an investment platform designed for financial independence or other long-term investing goals. You can purchase exchange-traded funds, US and Australian direct shares.

Pearler focus on low fees, automated long-term investing, and easy tax reporting through Sharesight. It is a secure, safe, and popular online broker.

Pearler is growing and improving rapidly. Pearler investors now have over $140 million invested!

If you are a long-term investor looking for a broker with automated investing, Pearler is worth looking into. 

Aussie Doc started investing with Pearler in January 2021. I use auto-invest to regularly add to my small, but growing portfolio of ETFs. We are considering opening a small custodian account in Pearler for children to watch some of their education funds grow over the next decade.



Aussie Doc Freedom is not a financial adviser and does need offer any advise.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any financial decisions.

How to Choose Your Best ETF Portfolio

Are you ready to start investing in the stock market, but feel overwhelmed trying to find the best ETF portfolio? It’s easy to get stuck in analysis paralysis when looking at the number of investment choices available.

Time in the market is, by far the biggest predictor of return so it is important to get in promptly. Investing regularly ready, and staying invested for the long term are the next important factors.

Choosing a sensible portfolio is far more important than finding the best ETF.

The good news is that investing in the stock market is pretty simple, if you follow the evidence. Passive investing will outperform active strategies most of the time. It makes no sense to start investing with trying to stock pick when you can build a diversified passive portfolio pretty easily. Most will stick with this approach exclusively. Those that want to dabble in the world of active stock picking should build their passive portfolio first.

But even with a passive investing strategy, there is the challenge of designing an asset portfolio. Selecting the best ETFs to invest in is a time where beginners can gets stuck, and delay investing.

This article will step you through picking a reasonable asset allocation, and selecting your investment funds.

Are you Ready to Pick the Best ETF Portfolio?

This article is aimed at those who have an investment plan (even if basic) have saved an appropriate emergency fund for their situation. It is aimed at those for whom investing outside superannuation makes more sense than inside. To find out where you stand, check out the mega step by step guide to building wealth.

First you need to consider whether investing in the stock market is appropriate for your situation. Investors should have at least a basic emergency fund saved. They also need bare minimum of 5-7 years that they are happy to keep investments in the market.

Given the unpredictable volatility of the market, this is rarely the place to save your home deposit. Only invest money that, if you were to lose 50% of the value of your investment, you would be willing to wait out up to 5 years for the market to recovery.

I confess, I did invest savings intended for an investment property. It was a gamble, given I only had a two year time frame. Were the market to drop, I was willing to wait for it to recover and delay property purchase.

For me, this paid off, but could easily have delayed my real estate investment plan. If you want to buy a property (and don’t want to wait 5 years), be a little more patient and invest in a savings account, offset or term deposit.

To start with a traditional stock broker, you probably want at least $2000 to invest at a time. The brokerage cost of each investment is between $5 and $20 with an online broker (to sell and again to buy). As a result, it is worth building up savings and investing less regularly to save on costs.

Consider a Microinvestment App if You Don’t have $2000 to Invest

If $2000 seems far too much to save, or you really want to invest with every pay, consider starting with a microinvestment app.

Many of these charge no brokerage, but often charge a management fee as a percentage of your investment portfolio.

They are more cost effective for small and frequent investments. They also limit investment choices to a smaller selection, which helps beginner investors decide.

Once you know how much you want to invest at what regularity, compare the fee structures to work out which will be best for you.

Don’t be fooled into thinking it’s not worth it until you have $2000 to invest. Small amounts invested regularly can grow surprisingly quickly, so it is worth starting with whatever you have.

Once you have enough, you can graduate to a regular online broker. I started with a RAIZ account, before graduating to broker accounts with Commsec and Pearler.

Micro-investing is also helpful for learning and confidence building in investing. Whilst micro-investing, I experienced multiple market drops, hyped by the media to sound like the end of the world.

It was nerve racking, and I was tempted to withdraw my cash several times. Each time, the market recovered, and I grew more confident in ignoring the media hype and keeping my money invested.

Choosing an Asset Allocation

Asset allocation refers to the broad categories you invest in, in what proportions. The main categories of investments are

  • Shares
  • Real estate
  • Bonds
  • Cash and other fixed interest investments

Your asset allocation will be affected by your age and risk tolerance. There is no ideal asset allocation.

There are traditional rules of thumb for the proportion of stocks vs bonds, which may be a starting point.

100 minus age = % stocks

Often considered too conservative, now we are living longer. A new rule of thumb has been proposed

120 minus age = % stocks

Investors should write down an ideal target asset allocation to refer back to and invest to achieve. You can review your asset allocation, and should at pre-determined points, perhaps every 5 years.

Stock market losses require significant time and growth to recover. A 50% drop in the market, requires 100% growth to recover back to it’s former high.

The closer you are needing to withdraw money from your investments, the more punishing bear markets are, and the less risk investors are generally advised to take.

Asset allocation review should only occur when the investor is calm and the market steady. This should not be changed in the middle of a market crash.

Assessing Risk Tolerance

It is actually really hard to understand your risk tolerance without experiencing being invested. There is a fantastic explanation of risk in this article. There are online risk tolerance calculators that reflect what you believe your risk tolerance is, but not how you will react to a market crash.

The media whips into a complete frenzy, and every article, podcast and barbecue discussion tend to be dominated by the disaster, and how much worst is to come.

Media predictions, in the 14 years I have been observing, seem to be completely uncorrelated (perhaps even negatively correlated) to actual outcomes.

At all costs, you want to avoid panicking at the bottom of a bear market and selling. Many investors do this, and it is the worst possible outcome for your portfolio performance. If in doubt, assume you have a lower risk tolerance than you think, most people do.

Assessing Risk in Each Investment

Risk has to be assessed for each investment you consider purchasing. This should be considered before being seduced by suggested returns

With great risk comes great returns. But also with great risk comes complete financial devastation.

Aussie Doc Freedom

You want to optimise your returns for minimum risk.

Risk in investments is often portrayed in a graph as shown

Theoretical risk profile of investment classes

Shares are portrayed as highest risk, followed by property, then bonds and cash.

But there are Different Kinds of Risk

Volatility and risk of capital loss are often lumped in together as investment risk. The risk of losing your entire invested amount altogether, in my opinion, is very different from having to be able to tolerate short term volatility before recovery of a market.

Cash, considered the lowest risk actually has the largest risk of losing value relative to inflation. Inflation is the amount that a cost of goods and services increase annually. It varies with economic conditions, but invariably increases faster than the interest rate available on “high interest” savings accounts.

In real terms, cash allocations in your portfolio are losing value over time. This risk is known and predictable. Cash should be kept to cover short term needs and emergencies. It is not really an investment.

Property is generally purchased utilising leverage, which increases the risk of investment. This is likely to be higher risk than purchasing a broad based international passive index ETF. Purchasing individual shares exposes the investor to the risks of that underlying company, likely more risk than the property investment.

In summary, risk is not as simple as the graph above implies. Risk needs to be considered based on individual investments. Consider the risk of capital loss initially, and separately from volatility.

Buying the wrong asset, be it with property or shares (or even “junk bonds”) is associated with significant risk or capital loss. Minimise this risk ruthlessly. Extra risk should only be taken on if fully understood, Greater risk must be rewarded with greater return.

Detailed Asset Allocation

Within the main categories described above, there are subcategories you will also need to decide upon


  • Australian stocks
  • International stocks
  • Other eg commodities, gold etc


  • Government bonds
  • Corporate bonds

Real Estate

  • Australian residential physical or REIT
  • Australian commercial physical or REIT
  • International physical or REIT

Cash and fixed interest

  • Term deposits
  • Cash


I think most readers will have an understanding of diversification.

Don’t put all your eggs in one basket is a well known phrase, and easy to understand.

If you have researched, and believe Australian Real estate is the best way to build wealth over the long-term, it is still wise to have other investments. No-one can predict the future. Unimaginable events could lead to Australian real estate losing significant value and never recovering.

This would be a disaster if you have invested in Australian real estate as I have, but less of a disaster if you at least have other investments.

Owning investments in all major classes and purchasing broad passive ETFs achieves a good degree of diversification quickly. Of note, the Australian stock market is tiny, and heavily concentrated in the top 10 stocks. Investments in only Australian ETFs is not diversified.


Correlation refers to the amount investment returns tend to move with each other. The Australian stock market tends to follow the US. Consequently, the two are positively correlated. Choosing assets with low correlation means your overall portfolio is more protected against major losses.

Going back to our example above, international stocks have a low correlation with Australian real estate. I have chosen to increase my exposure to international stocks to compensate for my over exposure to Australian property.

Here is a table of historical correlation.

Superannuation Asset Allocation

Don’t look at your portfolio outside superannuation in isolation. Particularly if your superannuation balance is already significant.

If you are happy for your super fund to continue managing your investments, check your investment options.

What is your asset allocation inside super? Does it suit your risk tolerance, age and preferences? Do you need to change this?

Are you fairly happy with your superannuation portfolio, but would prefer to tweak the asset allocation?

Tweaking your Portfolio

Taking control of your superannuation often involves a significant increase in fees. An easy work around is to use your investments outside superannuation to move your overall asset allocation towards your ideal scenario.

For this reason, my asset allocation outside superannuation is simple. I wanted to invest in physical residential real estate, using leverage to produce equity over the years. I would also like a slightly higher stock vs bond/fixed interest allocation than my super fund allows.

As a result of my two investment properties, I am over exposed to Australian risk. I have chosen to increase my exposure to international equities, which have a low correlation with Australian property.


Australian vs International

Within the shares allocation, you need to decide an allocation to Australian shares vs international. Australian investors traditionally love domestic equities due to franking credits, not available on dividends from overseas.

The Australian ASX only represents around 2% of the global market. Most investors down under will be excessively concentrated in Australian shares.

The Australian share market is also dominated by just a handful of companies, making even the ASX 300 relatively concentrated. The ideal percentage of international equities is under debate. Passive Investing Australia has some useful guidance. Read the article, pick a number and move on.

Hedged vs unhedged

With your international equities, will you pay extra to “Hedge” currency risk? If the Australian dollar is strong when you want to withdraw, you will benefit from the investments being hedged. If the Aussie dollar is weak, you would have been better off unhedged.

Unfortunately there is no way to tell the future of how the Australian dollar will fare. If you plan to retire outside Australia, there is little sense in paying to hedge to a currency you may not even be using. If you plan to retire within Australia, it probably depends on the state of the Aussie dollar at time of investment, and personal preference.

Read more here. Again, choose hedged or unhedged or 50:50 and move on.

Passive vs Active

Passive investing has become incredibly popular over recent years. It’s simple, low cost and anyone can do it. Amazingly, passive investing appears to have beaten laborious and expensive investment management most of the time.

It’s easy for beginners to assume beating the index should be easy. Evidence tells us it’s very hard, even for full time professional investors. I doubt anyone would argue that a passive strategy is at least a good way to start an investment portfolio.

Not all ETFs are passive, or broad index funds. Listed investment companies (LICs) are Australian actively managed funds, but at comparably low fees. Check out the article on ETFs vs LICs if you want to read more about the differences.

Capital Growth vs Income

All investments can be categorized as capital gain, income focussed, or mixed. Early in your investing journey, a capital gains focus is more efficient because it isn’t taxed.

Eventually you will need your investments to produce an income. With the stock market this is easy, withdrawing your investments is essentially the same as allowing a dividend to be paid out.

With property, investors often end up “asset rich, cash poor” unless they pivot to income investments once they have accumulated enough equity.

Many investors like dividend investing. I feel this is better suited to low income earners (they benefit far more from Franking credits). I like the approach of efficiently building equity using capital growth before pivoting more into stocks that can be easily withdrawn as income.

Past Performance in Choosing the Best ETF

Past performance should largely be ignored when comparing ETFs or super funds. Chasing last year’s top performer has been found to be a great predictor of poor performance the next year. Past performance does not predict future performance. Repeat ad infinatum. Seriously! Ignore it when choosing the best ETF.

Fees in Choosing the Best ETF

Fees are the only predictable part of performance. Given two similar ETFs you are torn between, the lower cost fund is likely to perform better.

ETF fees are commonly 0.2-0.4%. If you are paying more than 0.4% there should be a very good reason for this.

Choosing the Best ETF Portfolio

Find Three ETFs that suit your requirements.

Make a shopping list such as:

  • Broad passive Australian index fund ETF
  • Broad passive international hedged index fund ETF
  • Australian government bond ETF

Check out these three websites and list best ETF that match your list:



Ignore anything “synthetic” or “derivative”. You are looking for passive funds that track a broad index. Choose the lowest cost ETF. Read the product disclosure statement to check for small print.

The size of the ETF becomes relevant if the liquidity may be an issue – small ETFs without many investors could be difficult to offload when you want to sell. This shouldn’t be an issue with broad ETFs with the major providers.

“Tactical tilts” using narrow ETFs aimed at one industry (eg tech) should only be considered by experienced investors after significant research. Keep it simple to begin with, you can always add more complexity later.


Physical Real Estate will Screw Up Your Asset Allocation

Do you want to include real estate investing? Whether physical investment properties, or real estate investment trusts (REITs), the ideal percentage of your final portfolio should be considered.

Physical real estate appeals to me, because the data tells me it has a low correlation with the stock market. If there is another 50% + drop in the stock market after I retire, I do not expect rental income to immediately drop. It may decrease eventually, but it weakens my reliance on stock market returns for income.

REITs seem an ideal way to invest in real estate, except the listed ones are highly correlated with the stock market.

Physical real estate screws up your portfolio asset allocation completely. As such a lumpy asset, spending $500,000+ on a single property will make investors overweight on property in their portfolio.

Asset Allocation with Property Investments

My approach to this, is to design my ideal portfolio prior to retirement, and purchase real estate towards that goal.

It is then easier to remove the real estate from the asset allocation. Out of the rest, I work out the proportions of stocks, bonds and other asset allocations.

Find a StockBroker

You will need to choose a stock broker in order to buy your 1st investment. Check out the stock broker article.


To maintain your asset allocation, investors are often advised to regularly rebalance. Find out how to perform portfolio rebalancing.

Keeping your investments close to the target asset allocation, means you are forced to buy the assets that are doing poorly and sell (or not buy) those that are performing well.

This is in opposition to human nature, which is out to make sure we underperform, by encouraging to buy when the price is up, and sell when assets are on sale.

If you can purchase (instead of selling) investments to maintain asset allocation, you will save on brokerage. But at times of major market movement you may need to sell.

Choosing the Best ETF and Asset Allocation

Which ETFs did you choose? Comment below and let us know why you made the choice you did.

Aussie Doc Freedom is not a financial adviser and does need offer any advice.  Information on this website is purely a description of my experiences and learning.  Please check with your independent financial adviser or accountant before making any changes.