Bitcoin Explained – Exploring Bitcoin and Its Promising Potential

Welcome to Bitcoin Explained. Today I’m going to cover Bitcoin and explain its role in the monetary system. I’ll explain what Bitcoin is, what its role is as a monetary unit and how it has and continues to be used as a store of value. I’ll compare it to fiat currencies (government-issued money) and gold to highlight its financial use-cases and potentiality for adding upon or even replacing these mediums of exchange in the future.

Bitcoin Explained – What is Bitcoin?

Bitcoin is a digital currency that was created to address problems related to centralised currencies. Most modern currencies such as fiat currency are centralised to banks and regulated by the government. As such, banks and governments can heavily influence these currencies’ values through things such as inflation and taxes. Bitcoin was created to be a decentralised currency, where there is no bank or central authority to govern them. Instead, Bitcoin relies on a network of users who verify the monetary transactions. The result is an easier, cheaper and quicker way to spend money.

How Does Bitcoin Differ from Traditional Forms of Money?

Many transactions that occur with fiat currencies are processed digitally. Wages are issued electronically; bills are paid digitally and online shopping is becoming more prevalent. However, these digital transactions are known as intermediated payments. Intermediated payments require a trusted third party to handle the money transfer between two parties. Cheques, credit cards, debit cards, bank wire transfers and apps such as PayPal are all utilise intermediated payments.

Bitcoin alternatively, is decentralised and doesn’t rely on a centralised third party such as these traditional monetary systems. Instead, Bitcoin relies on a peer-to-peer network where every member on the network can verify Bitcoin transactions. As such, Bitcoin is the first example of true digital cash that doesn’t rely on a trusted third-party intermediary.

Why Do People Not Want a Trusted Third-Party?

By their nature, a third party adds security weaknesses. By involving an extra party into the transaction, there are inherently more possibilities for theft and technical failure. Intermediaries also increase vulnerability to surveillance and bans by political authorities. For example, political authorities can stop payments under pretexts of security or money laundering.

Additionally, there is a heightened risk of fraud which in turn increases transaction costs and can delay settlements of payments. For these reasons, many people naturally prefer decentralised digital currencies. As the Proof of Work (PoW) system eliminates this need for trust, Bitcoin is a faster, more efficient and more trustworthy digital cash.

How Can Bitcoin Operate Without a Trusted Third-Party?

With Bitcoin, all transactions can be recorded by every member on the network. This is done so that they all share a common ledger of balances and transactions. When a member of the network transfers to another member, all members of that network can then verify that the sender has a sufficient balance. Nodes then compete to be the first to update the ledger with the new block of transactions. This occurs every 10 minutes.

This involves processing power and electricity on behalf of the node, as it needs to solve a complicated mathematical problem. The problem is difficult to solve, but the correct solution is easy to verify. This is what is known as the PoW system. For the PoW system to work, a correct solution must be committed and verified by all participating network members. The node that commits a valid block of transactions receives a block reward in the form of new bitcoins which has been added to the supply along with transaction fees. This is known as ‘mining’ as it requires physical time and resources (electricity) to extract the resource (Bitcoin).

The nature of having a difficult problem to solve that is easily verifiable has been chosen for specific reasons. Firstly, by making it hard to solve the problem, nodes have to compete to solve it promptly. This requires a lot of processing power and electricity on behalf of the node. It is this processing power that gives Bitcoin an intrinsic value, as it is linked to the time and processing output required to mine the new Bitcoin.

Secondly, under the PoW system, all participating nodes on the network verify that the correct solution has been committed. PoW makes the cost of writing a block extremely high, yet the cost of verifying its validity is extremely low. This in turn eliminates the incentive for anyone to try and create invalid transactions. If someone were to try, they would be wasting electricity and processing power without receiving the block reward. As such, Bitcoin can be understood as a technology that converts electricity into truthful records of transactions through the expenditure of processing power.

Is Bitcoin a Replacement for Traditional Forms of Money?

Bitcoin shows a lot of promise in replacing traditional forms of money. It has been used extensively in countries whose fiat currencies have failed or continue to be hyper-inflated such as Venezuela and Nigeria. However, in recent years, Bitcoin has shown a greater potentiality for being used as a store of value, due to its strict scarcity.

Nevertheless, Bitcoin was introduced as an alternative to traditional forms of money and continues to be used as one to this day. To truly understand Bitcoin and how it fits in the world of money, it’s important to explore the history and role of money.

What is the Role of Money?

The quintessential function of money is its ability to be a medium of exchange. A medium of exchange is an intermediary instrument that is used to facilitate the purchase, sale or trade of goods between parties. To enable a medium of exchange to be successful, it needs to represent a standard of value that is accepted by both parties.

Throughout history, many mediums of exchange have been utilised to facilitate trade. These include seashells, stones, beads, salt, silver, gold, gold-backed government money and government-provided legal tender (fiat currency). Each one of these mediums of exchange at some point in time possessed the key property that leads to a good being adopted as money – salability.

According to Carl Menger, the father of the Austrian school of economics, salability refers to the ease with which a good can be sold on the market whenever its holder desires, with the least loss in its price. However, three key components enable optimal salability. These components are salability across scales, across space and across time.

What Makes Money Work?

Bitcoin Explained - What is Salability?

Salability Across Scales

A good that is salable across scales can be conveniently divided into smaller units or grouped into larger units. This alteration of units enables the holder to sell it for whichever quantity is desired. This is why fiat currency consists of coins and notes, as it would be unfeasible to pay for something such as a house using coins. As such, salability across scales is essential in ensuring that the good can be used for all transactions, regardless of their size.

Salability Across Space

A good that is salable across space is one that can be easily transported or carried by the possessor. This is why good monetary media typically have a high value relative to their unit of weight. For example, paper currency holds high value despite weighing virtually nothing. Salability across space has been further enhanced through money becoming digitalised in recent years. Instead of freighting money internationally (a costly and time-consuming practice), billions of fiat currency can be digitally sent at the click of a button.

Salability Across Time

A good that is salable across time is one that retains its value into the future. These goods need to be immune to rot, corrosion and other types of deterioration. Therefore, should a good not deteriorate over time, it can be used as a store of value. By being a store of value, the holder is incentivised to hold onto or save the asset. This ensures that the good remain valuable over time and enables it to continue being a viable form of money. The previous two components of salability can be relatively easy to implement. However, salability across time remains an issue for most stores of value, including fiat currency.

The Transition from Other Forms of Money to Fiat Currency

Fiat currency is essentially paper money, as it is not backed or guaranteed by a commodity. Traditionally, government currencies were backed by gold (the Gold Standard) and as such, that currencies’ value was inextricably linked to gold. Under the gold standard, citizens of that country were able to exchange paper money for gold, which was kept in banks. This gave paper money an intrinsic value, as it enabled the direct exchange of gold at a rate set by that country’s government. The Gold Standard era ended during the first world war. As governments were printing money at astronomical rates to fund war efforts. These conditions made it impossible to maintain gold convertibility and over time, countries abandoned gold-back government currencies.

Fiat currency gradually overtook traditional forms of money such as cattle, seashells, rocks, gold-backed government tender and precious metals due to its salability. Being easily divisible (notes and coins) and able to be transported electronically, it possesses high salability across scales and space. Although, an issue lies in fiat currency’s salability across time. While it is true that paper currency can rip and deteriorate over time, it’s not the physical integrity of fiat that results in its loss in value over time. Instead, it is the government’s ability to generate endless supplies of fiat that damages its salability across time.

The Issue with Fiat Currency

For a good to maintain its value, it can’t increase too rapidly during a set period. As such, it has been a common characteristic throughout time for money to have some mechanism of restraint on the production of new units. Such a restraint helps maintain the value of existing units. For example, gold cannot be printed or created out of thin air (alchemists may disagree). Instead, there is a finite supply in circulation and a finite supply that can be mined. While the supply can increase over time through mining, it is an expensive and time-consuming process. This is what has enabled gold to maintain its store of value for thousands of years.

Contrastingly, it is extremely easy for governments to simply have more money printed. It is an automated and inexpensive process that can be done indefinitely. This process of printing money can result in hyperinflation. The real cost isn’t the direct cost of running the printing presses. Instead, it comes at the foregone economic activity that would have occurred through the exchange of goods to acquire the fiat. Additionally, the sudden influx in the supply of a nation’s fiat currency devalues that currency in relation to foreign currencies.

This has catastrophic consequences for that nation’s economy, as import costs rise significantly, resulting in diminished business returns and higher rates of unemployment. As such, hyperinflation constitutes a complete breakdown of the economic structure and production built by a society over centuries and millennia.

Examples of Fiat Currency Failing

German Papiermark

Following WW1, Germany discovered that it was unable to pay its war reparations set forth by the Treaty of Versailles. With Belgian and French armies occupying the most productive, industrialised areas of Germany, the German government resorted to mass printing their fiat currency, the Papiermark. They then exchanged the Papiermark for foreign currencies to cover their war reparations.

This severely damaged the value of the Papiermark. Before 1923, the largest denomination was $50,000 but this later climbed to 1 Trillion by 1923. The Papiermark became so devalued due to hyperinflation that people began using it to heat furnaces. As it was considered more efficient to burn the currency for warmth than it was to use it for trade.

Zimbabwe Dollar

Between 2008-2009, it is estimated that Zimbabwe had a monthly inflation rate of around 80 billion per cent. This resulted in workers being unable to afford basic goods, as prices rose faster than wages. Subsequently, the term ‘poverty billionaires’ was termed, as workers may have had a one-billion-dollar salary yet couldn’t afford a two-billion-dollar loaf of bread.

Hyperinflation devalued the Zimbabwe dollar to such an extent that bartering became common practice for the first time in centuries. In 2015, the Zimbabwe 100-Trillion-Dollar Note was worth approximately USD 0.40, causing potentially irreversible damage to the Zimbabwean economy.

List of Other Failed Fiat Currencies

Chinese Yuan
Roman Denarius
Greek Drachma
Belorussian Ruble
Yugoslavian Dinar
Angolan Kwanza
Peruvian Sol and Inti
Argentine Peso
Chilean Escudo
Austro-Hungarian Pengo

Countries Currently Experiencing High Annual Inflation

InflationChart
Image via Reserve Protocol

What Makes Bitcoin the Best Medium of Exchange?

Bitcoin Explained - Bitcoin Salability

Bitcoin Explained – Salability Across Scales 

Each Bitcoin contains 100 million Satoshi’s. This high degree of divisibility makes Bitcoin the most scalable medium of exchange in recorded history. As such, even if the value of Bitcoin were to hit astronomically high prices, it can still be used for day-to-day transactions. For this reason, Bitcoin has immensely high salability across scales.

Bitcoin Explained – Salability Across Space

Bitcoin and all cryptocurrencies are exceedingly salable across space as well, due to being digitalised. While it can take weeks to transport gold internationally and days to transfer fiat electronically, Bitcoin can be sent anywhere across the globe. This is usually achieved within a 10–20-minute time period, as that is how long it takes to validate the blockchain. Smaller transactions have been processed in a manner of seconds, making it one of the most salable mediums of exchange across space.

Bitcoin Explained Salability Across Time

The Difference Maker

Salability across time has always been an issue for various forms of money. In some instances, such as with food, salability across time is impossible due to rot and deterioration. Sometimes, salability across time is unachievable due to the ease in which new monetary units can be produced. Forms of money that require minimal effort and resources to produce such as fiat currencies are prone to hyperinflation. To combat this, a mechanism of restraining new units is imperative to prevent an over-abundance of that monetary asset.

A form of money that is hard to produce is referred to as ‘hard money’. Money’s hardness can be understood through the stock-to-flow-ratio. Stock in this instance refers to the existing supply which consists of everything produced in the past minus what has been consumed or destroyed. Flow refers to the extra production that will be made available in a given period.

Image by Sabrina Jiang © Investopedia 2020 
 

Stock-to-Flow-Ratio – What Makes Bitcoin Hard Money?

Bitcoin has a finite supply of 21 million. This means that no matter how much the demand for Bitcoin grows, there can only ever be a total amount of 21 million in existence. Of that figure, there is a black area of missing Bitcoins that are no longer in circulation. There are numerous reasons as to why the actual Bitcoin supply is lower than 21 million.

These include: incorrect transactions to the wrong address, owners who died without passing on Bitcoin, seized Bitcoin by government entities/law enforcement and wallet owners who lost their seed phrases among others. For this reason, the actual supply of Bitcoin may be much lower than 21 million. This creates scarcity, which aids Bitcoin in retaining and even growing its value over time. However, perhaps the most useful feature of Bitcoin for preserving its salability across time is the difficulty associated with creating new units.

Bitcoin Mining – What Gives Bitcoin its Production Value?

Bitcoin Explained - Mining

All Bitcoin transactions are recorded by members of the network to ensure that everyone shares a common ledger of balances and transactions. Whenever a member of the network transfers a sum to another member, every member of the network can verify that the sender has a sufficient balance. Nodes then compete to be the first to update the ledger with this new block of transactions. This is what is known as proof-of-work (PoW) and it is crucial for ensuring that Bitcoin remains a legitimate and accountable medium of exchange.

PoW involves network members competing with one another to solve mathematical problems. These mathematical problems require time and electricity, which gives Bitcoin its inherent production value. The first node to produce the correct solution broadcasts it to network members, who then verify its legitimacy.

Once verified, the transactions are then committed to the new block and the node that commits the valid block of transactions receives a block award consisting of new bitcoins added to the supply in addition to the transaction fees paid by the people who are transacting. This PoW system is akin to mining, as it rewards miners (network members) with Bitcoin (gold) as compensation for the resources they committed to PoW.

Subsequently, Bitcoin mining helps ensure that Bitcoin remains hard money, as expenditure of electricity and processing power is quintessential for producing new coins. The high expenditure of these resources also incentivises nodes to not include invalid transactions, as it is far cheaper to verify transactions through PoW than it is to solve the PoW.

As such, nodes that enter invalid transactions are almost guaranteed to be rejected, resulting in no rewards for the expended processing power and electricity. For these reasons, Bitcoin mining is one of the fundamental drivers for ensuring that Bitcoin remains hard money and that it stays salable over time. However, there is an additional component of mining that enhances salability over time – the halving.

Bitcoin Explained – The Halving

Bitcoin Explained - The Halving

The following is an exert from The Bitcoin Standard by Saifedean Ammous

Bitcoin blocks are added to the shared ledger roughly every ten minutes. At the birth of the network, the block reward was programmed to be 50 bitcoins per block. Every four years, roughly, or after 210,000 blocks have been issued, the block reward drops by half. The first halving happened on November 28, 2012, after which the issuance of new bitcoins dropped to 25 per block. On July 9, 2016, it dropped again to 12.5 coins per block and will drop to 6.25 in 2020. According to this schedule, the supply will continue to increase at a decreasing rate, asymptotically approaching 21 million coins sometime around the year 2140, at which point there will be no more bitcoins issued.

To put this into perspective, imagine if the rate in which gold could be mined halved every four years. There would be a higher demand for it due to its new relative scarcity. Bitcoin halving is a similar phenomenon that has traditionally resulted in parabolic price increases. With each halving, Bitcoin becomes harder to mine which in turn increase its value. Due to an increase in value, more miners compete for a smaller Bitcoin yield. The increase in competition for a scarcer resource, drives up value, as more electricity and processing power is needed. Additionally, the added number of miners results in a more efficient PoW system, as more people can verify transactions.

Bitcoin Explained – What is it’s Role as a Store of Value

Due to the unique features that make Bitcoin salable across time, namely, it’s finite total supply, the cost and effort required to mine it and the halving, Bitcoin has the potential to retain its value almost indefinitely. As such, it is currently the most salable currency in human history and its most promising store of value.

Until Bitcoin’s invention, all forms of money were unlimited and thus, were unable to effectively store value across time. Bitcoin’s finite supply combined with its continuously diminishing mining rate makes it have an exceptionally high stock-to-flow ratio. It is this stock-to-flow ratio that ensures that Bitcoin remains hard money and organically grows over time. Bitcoin is designed to not only retain value over time but to increase in it. As such, Bitcoin is perhaps the cheapest way to buy the future, due to its unmanipulated, organic growth throughout history.

Bitcoin Explained Summary – A Way to Invest in the Future

Before the inception of Bitcoin, numerous issues plagued various forms of money and other stores of value. Things like hyperinflation, a lack of salability, physical deterioration, counterfeiting, security and centralisation have proven fundamental flaws in these various mediums of exchange. However, Bitcoin solves all of these problems and more due to its well thought out design.

It is decentralised and operates under a PoW system that not only gives Bitcoin an organic, inherent value but incentivises network members to increase its security by verifying correct transactions. Being digital and divisible into a hundred-million units, it is the most salable medium of exchange across space and scale. However, what particularly separates Bitcoin from traditional stores of value is its immense salability across time.

Bitcoin is finite, its stock-to-flow ratio is immensely high, it is hard money and over time it gets more expensive and harder to produce. These unique features such as mining, halving and decentralisation make Bitcoin the first true form of digital cash and the most promising store of value in human history. For these reasons, Bitcoin is perhaps one of, if not the greatest way to invest in the future.

Want to Buy Bitcoin or Other Cryptocurrencies?

How to Buy Bitcoin on Coinbase, Step by Step (With Photos) - Bitcoin Market  Journal

My personal favourite place to buy Bitcoin and other cryptocurrencies in Australia is Swyftx. Swyftx is an Australian exchange that offers low trading fees, access to 179+ cryptocurrencies including popular ones such as Bitcoin and Ethereum and it allows users to deposit and withdraw AUD.

Binance is another popular exchange that is used more commonly by the global market. It has no deposit or withdrawal fees, has low trading fees and supports Osko transfers. Binance is also a great place to earn passive income on your cryptocurrencies through their staking and earn features.

Sign Up for Swyftx (Australian Exchange)

Sign up for Binance (International Exchange)

Want to Learn More About Bitcoin and Cryptocurrency?

The Bitcoin Standard by Saifedean Ammous is a great resource to learn about the fundamentals surrounding Bitcoin. It was the main resource used when compiling this post and I highly recommend it for anyone trying to learn more about Bitcoin.

You can buy the book as a Hardcover, Kindle or Audio Book here

Want to Increase Your Security with a Crypto Hardware Wallet?

If you’d like to securely store your Bitcoin, it is advisable to use a hardware wallet, I recommend using Ledger and Trezor as these are two of the most reputable and reliable hardware wallet providers.

Buy Ledger Wallet Here

Buy Trezor Hardware Wallet Here

Hardware Wallets Explained

The 10 Best Books on Personal Finance – Wealth-Building Resources

The 10 Best Books on Personal Finance

Today I’ll cover what I have found to be the 10 best books on personal finance. Covering saving, investing, real-estate, shares, index funds, money psychology, habits of the wealthy, entrepreneurship, saving, cryptocurrencies and Australian-centric finance, there is something here for everyone.

The Millionaire Next Door by Thomas Stanley and William Danko
10 Best Personal Finance Books

This book is a fantastic starting point for anyone beginning their journey to wealth building. Breaking down common myths about millionaires, the authors highlight common traits of the wealthy and they are surprising.  
 
By revealing how average people can amass fortunes, Thomas Stanley and William Danko discuss tried and tested techniques to grow wealth. The best part, is that these are surprisingly simple things that anyone including me or you can do. As such, I highly recommend this book for anyone with an interested in becoming financially independent. It’s also useful for understanding how middle-class people can become wealthy.  

For those reasons, I view this as the best book on personal finance in my opinion.

Buy it Here!

The Richest Man in Babylon by George Clason
10 Best Books on Personal Finance -The Richest Man in Babylon

Written in 1926, this timeless personal finance classic still applies more than ever. Using simple, Babylonian parables, George Clason demonstrates ancient principles of wealth accumulation.  These parables make this the best book on personal finance for those who learn through stories.
 
Mr Clason explores timeless concepts such as thriftiness, financial planning and wealth building. Demonstrating age-old methods for reaching financial independence that have withstood the test of time. I highly recommend this book for people just starting off on their personal finance journeys for these reasons. 
 
Get the Book Here!

The Psychology of Money by Morgan Housel
10 Best Books on Personal Finance - The Psychology of Money

At the end of the day, money can influence us to act in different ways. The Psychology of Money covers the strange ways that people think about money. It also teaches us how can we make sense of money. 
 
By providing 19 short stories surrounding the way people perceive money, this book is an excellent way to explore the role that money plays on the human psyche. This clear-cut and entertaining read is a must have for anyone interested in the psychology of money and the role is plays regarding human behaviour.  

Get the Book Here! 

Set for Life by Scott Trench

For people fascinated by the idea of reaching financial independence and retiring early (FIRE), this book is a must-read. Set for Life lays out the blue-print for reaching financial independence. It covers the essentials such as how to reduce your spending, increase your salary and how to invest in appreciating assets.  

Aimed primarily at people under the age of 30, this book provides a laconic break down of everything need to reach FIRE. For those reasons, it is a great read for people wanting to pursue financial independence.  

Get the Book Here! 

The Barefoot Investor by Scott Pape

While Set for Life is tailored to a younger demographic, The Barefoot Investor provides a more defensive investing style suited for older investors. This book is great for people just starting out and people with a low risk-aversion. 
 
The Barefoot Investor covers a lot of Australian-specific investment strategies. As well as explaining the basics of personal finance. As such, Aussies who are looking for a starting point need look no further.  

Get the Book Here!  

The Book on Rental Property Investing by Brandon Turner

Let’s be real, every man and his dog in Australia will tell you that investing in real estate is the way to go. However, while it is easy to suggest this, many people fail while pursuing the ‘Australian Dream’. Why you may ask? Because they don’t understand many of the basics of real estate investing.  

This clear-cut guide explains everything that you need to know about real estate investing. It covers things like how to effectively use leverage and how to find the best deals. In addition to how to increase returns and how to manage your properties directly.  
 
For anyone interested in gaining a more comprehensive view of real estate investing or people looking to enhance upon their current properties, this is a must-read. Easily the best real estate investing book on personal finance.

Get the Book Here! 

The Intelligent Investor by Benjamin Graham

A timeless investing classic written by the greatest investment advisor of the 20th century. While few can beat the market, Benjamin Graham and his protégé the infamous investor Warren Buffet have managed to do so consistently for years.  

Covering all the fundamentals of investing in the stock market, this is a must have for anyone considering this investment style. The author highlights how hard it is to beat the market and the principles behind sound investing. Making it a must-read for anyone with an interest in equities, shares, ETFs, LICs and the stock market as a whole.  

Get the Book Here! 

The Simple Path to Wealth by J.L. Collins
10 Best Books on Personal Finance - The Simple Path to Wealth

Real estate investing and share investing have always been popular in Australia, but what if there was a simpler path to wealth? J.L. Collins breaks down how investing in a simple, low-cost index fund can help you reach financial independence. 
 
Covering the basics of saving and investing, this is a simple yet powerful guide on how to build wealth. As such, this will always be one of the best books on personal finance. For those seeking to learn more about the stock market, while also keeping their investment strategy as straight-forward as possible, this book is essential. 

Get the Book Here! 

The Bitcoin Standard by Saifedean Ammous 

We’ve covered real estate and the stock market but what about Bitcoin and other cryptocurrencies? Due to being a new technology, cryptocurrencies are often feared by investors due to a lack of understanding surrounding them. However, it is becoming more and more apparent that these currencies may be here to stay.  
 
The Bitcoin Standard is the most concise and easy to comprehend book about Bitcoin. Explaining the concept of money and its history, the author makes a compelling case for why cryptocurrencies may very well be the next evolution of money. As such, for people who want a more thorough understanding of Bitcoin, cryptocurrencies and money as a whole, I highly recommend this book. 
 
Get the Book Here!

Hustle Harder, Hustle Smarter by Curtis Jackson

While 50 Cent may not be the first person who comes to your mind when you think of entrepreneurship, he is an expert. Having made it from the rough streets of Jamaica-Queens as a teenage drug dealer to a multi-platinum recording artist to a high-ranking cable executive; Curtis Jackson has proved that anyone can achieve success in the world of business. 
 
Breaking down his journey step by step, this book highlights the mentality behind success in the business world. This underdog story makes Hustle Harder my favourite book for aspiring entrepreneurs. It’s also what gives it its place in the best books on personal finance.

Get the Book Here! 

The 10 Best Books on Personal Finance Summary

All of the above books have been monumental in helping me develop a more comprehensive overview of personal finance. For that reason, they are the best books on personal finance in my opinion. As such, I recommend everyone read these books to gain an overview of wealth and financial independence. While you may not initially be interested in a specific subject or investing style, you may find later down the line that you gravitate towards such a style.

Do you have a favourite book that isn’t on the list? Feel free to share it below, I’d love to hear about it!

Still Want to Learn More?

Before checking out the 10 best books on personal finance, you mind find these beginner guides to personal finance useful:

Saving Guide
Budgeting Guide
Emergency Fund Guide
Debt Elimination Guide

If you would like to learn more about the investment options covered and some ones that weren’t mentioned, I have created the following guides:

ETFs Explained
LICs Explained
REITs Explained
Micro-Investing Explained

Reviewing 5 of The Best Money Saving Apps in Australia

Today I’ll discuss the best money saving apps in Australia. Covering everything from insurance to petrol to groceries, these apps and websites can help you save thousands each year.

The Best Money Saving Apps in Australia

The Best Cashback App – Cashrewards  

THE BEST MONEY SAVING APPS IN AUSTRALIA - 2021 - CASHREWARDS

What is it? 

Cashrewards is an Australian cashback reward program that was founded in 2014. It is partnered with 1,500 popular Australian companies, including Groupon, Amazon and Dan Murphy’s. By shopping at these stores through Cashrewards, users are credited with cashback rewards. These are redeemable through PayPal and linked bank accounts.  

How Does it Work? 

When a Cashrewards user purchases something from one of the supported stores via the app, Cashrewards receives a commission. Cashrewards then shares part of this commission with the user as a cashback reward.  
 
Users can shop online through the Cashrewards app or link their debit card to make in-store purchases. When a user receives rewards totalling $10.01 or more, they can withdraw the money. This can be redeemed through PayPal and bank accounts.  

How Can I Start Using It? 

Simply sign up to the Cashrewards app and begin making purchases. This can be done by linking your debit card and using it at popular retails as you normally would. Alternatively, you can load websites through the app to receive cashback rewards.  

Sign Up for a Bonus $20 

By signing up through the above link, you can receive a $20 bonus that is credited once you make a purchase of $20 or more. Saving you $20 off your next shop at eligible retailers.  

The Best Coupon App – Honey

THE BEST MONEY SAVING APPS IN AUSTRALIA - 2021 - HONEY

What is it? 

Honey is a browser extension and mobile app that automatically applies coupons to online purchases. Applicable on over 30,000 sites, it will automatically apply coupon codes to ensure that you get the best possible deal.  

Honey also offers a rewards program called ‘Honey Gold’. When users shop at 5,000+ supported stores, they receive Honey Gold once they finalise their purchases. Honey Gold can be redeemed for gift cards. These gift cards are redeemable for eBay, Spotify, Amazon, Coles and Woolworths among others.  

How Does it Work? 

Users need to sign up and download the Honey browser extension. Once downloaded, a small ‘h’ icon will appear in the user’s browser extensions. When shopping at supported stores, Honey will automatically apply coupons as the user reaches the checkout screen. It will then tell the user whether or not they have the best possible deal. 
 
Honey Gold is also automated when these coupons are applied. This means, that users receive the best possible pricing while receiving additional rewards from the Honey Gold program.  

How Can I Start Using It? 

Simply sign up to Honey on your browser and download the extension. Once it’s up and running, it will automatically start working at applicable stores. 

Sign up for a 500 Honey Gold Bonus 

By signing up through the above link, you can receive a 500 Honey Gold bonus that is credited once you earn gold on a purchase. If you require any additional help signing up or have further questions, this is a useful guide

The Best Fuel Prices App – Petrol Spy

THE BEST MONEY SAVING APPS IN AUSTRALIA - 2021 - PETROL SPY

What is It?  

Petrol Spy is a website and app that compares petrol prices in specific regions.  

How Does it Work? 

Simply enter your suburb or postcode and it will update the map to reflect all of the petrol prices of various service stations in your local area. By choosing the cheapest outlets, users can save hundreds per year on fuel.  

How Can I Start Using It? 

You can use this link to access the Petrol Spy website. Alternatively, it is available on Google Play and in the App Store for users who want to download it to their phones. 

The Best Price Comparison Website – Finder

What is it? 

Finder is an Australian website that compares prices on thousands of brands and categories. These categories include loans, credit cards, utilities, insurances, internet plans and phone deals among others.  

How Does it Work? 

Simply input the brand or category you are interested in and it will generate a list of providers in that area. You can further specify it by selecting specific providers and using filters to limit your search.  

Where Can I Start Using It? 

You can use this link to access the Finder website. It is not necessary to sign up, but it can be useful to stay on top of the latest deals.  

The Best Bitcoin Cashback Website – Lolli

What is It?  

Lolli is a free browser extension that rewards users with BTC cashback for shopping at popular online retailers such as eBay, Cotton On and Apple.

How Does it Work? 

When you shop online using the Lolli browser extension, it will notify you if you’re on one of its partner sites. If you enable Lolli on these sites, they will receive a commission from that site in exchange for Lolli directing you to make a purchase. Lolli then gives you a portion of this reward in the cryptocurrency Bitcoin as an incentive for using their extension, resulting in a win/win for both you and Lolli.

How Can I Start Using It? 

Sign up using this link and receive a $5 BTC bonus on your first eligible spend.

The Best Money Saving Apps in Australia Table

Site/App Niche How It Can Save You Money 
Petrol Spy Petrol/Gas  Identifies the cheapest fuel in your area  
Honey Automated Coupons Automatically applies coupons to online purchases  
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Looking for More Tips to Save Money?

I have covered other ways that I personally use to save money in the following guides:

5 Simple Tips to Save More

High-Interest Savings Accounts – How to Make the Most out of your Savings

DHHF Review – Exploring Australia’s First All Equities Diversified ETF

Today I’ll be reviewing BetaShares new Diversified All Growth ETF (DHHF). In this DHHF review, I’ll be covering what DHHF is, what its underlying holdings are, the pros and cons of investing in DHHF and how it compares to the Vanguard Diversified High Growth Index ETF (VDHG).  

DHHF Review – What is DHHF? 

Since the 1990s, exchange traded funds (ETFs) have emerged as one of the most efficient, cost-effective investment vehicles. This is due to their ability to provide diversification across different asset classes, markets and sectors. However, in recent years, there has been an emergence of diversified ETFs that consist of several different underlying ETFs. These diversified ETFs are designed as set and forget investment vehicles that offer a predetermined allocation of various asset classes that are dispersed across different markets.  

Previously, these ETFs have typically consisted of a mixture of Australian equities, international equities, bonds, cash and properties. Although, BetaShares new Diversified All Growth ETF (DHHF) has changed this mixture by offering the first pure equities diversified ETF, with an emphasis on maximising growth. As such, the lack of defensive assets such as bonds and cash make this the most high-risk, high-reward diversified ETF available to Aussie investors. 

DHHF Asset Allocation:  

DHHF consists of four different ETFs that make up a 37% Australian Equities and 63% International Equities split. The four funds included are: 

Funds Target Percentage Allocation 
BetaShares Australia 200 ETF – A200 37% 
The Vanguard Total Stock Market ETF – VTI 35.1% 
The SPDR Portfolio Developed World ex-US ETF – SPDW 20.3% 
The SPDR Portfolio Emerging Markets ETF – SPEM 7.6% 
The international allocations will float with cap weight, these allocations are examples from October 2020 and are subject to change.
  

What are They? 

A200 – Australian Equities (37%) 

BetaShares Australia 200 ETF or A200 is an ETF that tracks the performance of an index consisting of the 200 largest companies by market capitalisation on the ASX. Its largest portfolio holdings are CSL LTD, CBA, BHP, NAB and WBC. Sector-wise, it is primarily allocated towards Financials, Materials and Healthcare.  

VTI – US Equities (35.1%) 

The Vanguard Total Stock Market ETF or VTI is an ETF that tracks the performance of the CRSP US Total Market Index. Of its 3590 portfolio holdings, the largest are Apple, Amazon, Microsoft, Alphabet (Google) and Facebook. Sector-wise, it is primarily allocated towards Technology, Consumer Discretionary and Healthcare.  

SPDW – Developed Markets ex-US Equities (20.3%)  

The SPDR Portfolio Developed World ex-US ETF or SPDW is an ETF that tracks the performance of the S&P Developed Ex-U.S. BMI Index. Of its 2099 portfolio holdings, the largest are Nestle SA., Samsung, Roche Holding AG, Novartis AG and Toyota Motor Corp. Sector-wise, it is primarily allocated towards Industrials, Financials and Healthcare. The top-weighted countries are Japan, the United Kingdom, Canada, France and Switzerland.  

SPEM – Emerging Market Equities (7.6%)  

The SPDR Portfolio Emerging Markets ETF or SPEM is an ETF that tracks the performance of the S&P Emerging BMI Index. Of its 2477 holdings, the largest are Alibaba, Tencent Holdings, Taiwan Semiconductor Manufacturing Co, Meituan Dianping Class B and Reliance Industries Limited Sponsored GDR144A. Sector-wise, it is primarily allocated towards Consumer Discretionary, Financials and Technology. The top-weighted countries are China, Taiwan, India, Hong Kong and Brazil. 

Why Would Someone Invest in DHHF’s Holdings?  

Each one of the four underlying ETFs offers different incentives for people to invest in them.  

A200 provides exposure to the largest 200 companies on the ASX. While the Australian market only accounts for roughly 2% of the world’s global economy at the time of writing this, a lot of Australians choose to invest heavily in Australian assets. Through investing in the Australian market, Aussie shareholders receive higher dividends than those offered by other markets, in addition to receiving tax benefits through the franking system. This often makes investing in the ASX an appealing prospect for Aussies. 

VTI is currently the highest performing ETF offered through DHHF, which does not come as a surprise given that it holds major tech giants such as Apple, Amazon, Google and Microsoft. This ETF provides exposure to the large, mid and low-cap companies in the US. The US accounts for almost one-quarter of the world’s global economy and has remained the largest economy since 1871. As such, investing in the US market is a common practice, due to its prior performance and its high exposure to the tech sector.  

SPDW provides further diversification by moving away from the US market, which is dominated by the tech-sector. Through gaining exposure to different world markets and sectors such as Industrials, Financials and Healthcare, holders can increase their diversification. This prevents an over-concentration of the US market and tech sector. While this may seem disadvantageous at first, given their high prior performance, it is an important investing principle to acknowledge that past performance isn’t indicative of future results. As such, diversifying away from the US is a useful investment strategy, as it prevents concentration bias and provides exposure to a range of markets and assets that may out-perform the US and tech in the future.  

SPEM is the riskiest asset of DHHF, as it comprises of emerging markets. These markets are more susceptible to currency swings, political corruption and economic volatility, due to things such as natural disasters. However, given that these economies are new and have a lower overall market cap, their growth potential is significantly higher than in developed markets. For this reason, SPEM can be a useful asset to hold if you’re willing to tolerate the high-risk, high-reward potentiality of emerging markets. 

Pros of Investing in DHHF:  

Pros for Investing in DHHF

Diversification 

One of the main benefits of investing in DHHF and similar investment vehicles is their immense diversification. By investing in DHHF, you are receiving exposure to over 8,000 stocks spread across the global market. This provides exposure to every sector in virtually every economy. Diversification also acts as a way of mitigating against any significant losses. As while one or two of the underlying holdings may under-perform on a given year, it is unlikely that every holding will underperform. Unless there is a significant global event.  

Conversely, it’s important to note that this diversification while useful for mitigating against significant losses, can also offset significant gains. However, ETFs are used primarily for their risk-mitigation, so this diversification is often regarded as a pro, particularly by passive investors. 

Convenience

Probably the main attraction to DHHF is the convenience. You don’t have to worry about rebalancing your portfolio, you don’t have to worry about your asset allocation, and you don’t have to spend hours of research each day or week researching individual stocks or market indexes. Its simplicity makes it a set and forget type of investment. This is particularly useful for investors with a long-term investing horizon, as you can simply buy DHHF, make frequent or semi-frequent contributions, set up DRP and watch it compound over time. 

Tax Efficiency (Underlying ETFs)

A significant benefit of DHHF that separates it from other popular diversified funds is that the fund exclusively holds ETFs. DHHF’s main competition, VDHG for example, contains managed funds. With managed funds, if more units are sold than purchased, the fund is required to sell assets. This results in capital gains for all investors of the fund, which means that investors can realise gains without selling their units. Alternatively, the structure of ETFs means that capital gains are offset until the investor sells them, making ETFs and DHHF inherently, more tax-efficient than diversified funds that rely on managed funds.

passiveinvestingaustralia summarises this laconically with the following:


In plain English, pooled funds (with the exception of ETFs) pay tax at the fund level and therefore are taxed gradually in small amounts each year, whereas, with ETFs, you don’t realise those gains until you actually sell“.

For more information on the issue with pooled funds and the tax implications of holding ETFs and managed funds, I highly recommend passiveinvestingaustralia’s guide

Niche – The Only Pure Equities Diversified ETF 

Currently, DHHF is the only diversified ETF that consists entirely of equities. Equities are often regarded as the highest consistent growth asset class, as historically most market indexes have outperformed other asset classes over a long-term horizon. This is reflected in the current yearly reports, which have the above funds yielding 2-13% during this year. This says a lot given the severe damage COVID has caused to most industry sectors. Based on the pure equity asset allocation, DHHF is currently the highest risk diversified ETF with the highest growth potential. As such, it has the potential to outperform its competition during long investment horizons.  

Potential Cons of Investing in DHHF:  

Potential cons of DHHF

Lack of Defensive Assets  

While cash and bonds typically underperform equities over the long term, they do provide more reliable, stable returns. This can act as a hindrance for people with long-term investment horizons (10+ years). However, risk averse investors or people closer to retirement may prefer these more stable, lower-yielding options, as they can hedge against market corrections and recessions. Subsequently, DHHF provides a much higher risk, higher return investment option than what some traditional investors are used to.   

For these reasons, risk averse individuals or people who are planning to sell down their holdings within a 10-year time frame may prefer more defensive diversified ETFs such as VDHGDZZFDGGFDBBF or VDCO.  

Alternative Diversified ETFs That Include Defensive Assets: 

Fund Name Equities Allocation Defensive Assets Allocation 
VDHG90% 10% 
DZZF90% 10% 
DGGF70% 30% 
DBBF50% 50% 
VDCO30% 70% 

However, should you decide that you want more defensive assets later down the line, you can still maintain DHHF holdings while diversifying into a bond ETF such as VGB or GBND. An added perk to holding a separate bond fund is that you can sell them independently. Subsequently, with this portfolio design, you can avoid selling equities when the market is down. This is contrary to diversified funds that contain mixes of both asset classes that require the selling of both assets due to their fund structure.  

Pre-Determined Holdings 

While having a pre-determined portfolio offers convenience, it can be viewed as a con by more active investors. For example, if you aren’t a fan of one of the underlying portfolios, then you are stuck with a fixed allocation of your investments going towards that ETF. Similarly, should you decide that you want to lower one of your holdings down the line, you are locked in at the pre-determined allocations offered through DHHF. If you would like to increase one of the underlying holdings, you can do so by purchasing more units of that specific ETF. However, that requires manual rebalancing and will incur additional MER and brokerage fees.  

For investors wondering tossing up between using a diversified fund such as DHHF or creating their own portfolio, I weigh up the pros and cons here: Diversified Funds or DIY Investing

Not Australian Hedged  

Hedged investments are investments where the fund manager takes active steps to attempt to offset the impact of currency fluctuations. The intent behind this is to prevent changes in currency values altering the overall returns of the underlying asset classes. As 63% of DHHF holdings are international equities, some investors may wish to hedge part or all of these holdings for these reasons.  

How Does it Compare Against the Competition (VDHG)?

DHHF vs VDHG
DHHF versus VDHG Comparison Table 
Differences DHHF VDHG 
Growth Allocation (Equities)  100% 90% 
Defensive Allocation (Bonds) 0% 10% 
Hedging to AUD No Yes (16% Equities, 7% Bonds)  
Australian Equities Allocation 37%  36% 
International Equities Allocation 63% 54% 
Emerging Markets Allocation 7.6% 5%  
Small-Cap Market Allocation  8.31%  6.5% 
MER (Management Fees) 0.28% p.a. (effective cost) 0.27% p.a.  

Key Differences Explored – DHHF vs VDHG

Defensive Assets – Do you Want Exposure to Defensive Assets?  

Defensive assets serve as a hedge against volatility as they provide lower, yet more consistent returns. In the event of market corrections and recessions (events that cause equities to take significant hits), these defensive allocations can often increase in value. This is due to bond prices typically increasing as a result of lowered interest rates, which is a common strategy utilised by the government during recessions to provide people with more money to spend on goods and services.  

However, while defensive assets such as bonds provide more stability during things such as market corrections and recessions, they can result in performance drag over long investment horizons. This is particularly true when compared to equities, which are one of the highest growth assets. As such, if you plan on investing for a long time (10+ years), the additional growth assets in DHHF may yield higher returns. Conversely, VDHG is likely more suited to investors who wish to diversify into defensive assets or investors with lower risk tolerances.

The Management Fees (MER)  

On paper, DHHF has a MER of 0.19% p.a., which makes it appear to be a cheaper option than VDHG’s MER of 0.27% p.a. However, DHHF contains SPDW and SPEM, which are US domiciled funds that contain non-US assets. These funds incur a thing called tax drag, which Eli from passiveinvestingaustralia.com summarises as:  

When an Australian fund holds a US fund which holds stocks from companies in non-US countries, you cannot claim the dividend withholding tax credits paid by the fund that you could claim if the Australian fund held them directly. 

As such, the Reddit user HockeyMonkey_19 did the calculations And determined that the combined cost of MER when factoring in tax drag brings the total to approximately 0.28% p.a.


For more information on tax drag, please refer to passiveinvestingaustralia’s guide: Fund Domicile and Avoidable US Taxes.

Hedging – To Hedge or Not to Hedge?  

Hedging is an investment strategy in which the fund manager takes active steps to offset the impact of currency fluctuations. The intent behind this is to ensure that the returns (income and capital appreciation) are not impacted by currency fluctuations. VDHG has a 16% allocation to VGAD, which tracks an international shares index that is hedged into Australian dollars.

Similarly, VDHG also hedges its entire international bonds allocation of VBND. This acts as a safety buffer and added precaution against currency fluctuations, which can impact the income and capital appreciation of VGS. Also, if the Australian dollar were to increase in relation to the USD by the time that you wish to sell down your underlying funds, having hedged options would yield greater returns. 
 
Conversely, DHHF has no allocation to hedged investments. This can be viewed as beneficial for two main reasons. Firstly, it reduces concentration risk to the Australian market. While both portfolios contain similar allocations to the Australian market, VDHG has additional hedging that is linked to the Australian dollar. This can lead to market concentration, which occurs when one person is heavily invested in a singular market.

Australian investors risk this inherently due to their location, as their salary, superannuation and housing values are typically already largely linked to the Australian dollar’s performance. When you provide additional exposure to the Australian market through direct investments and AUD hedged investments, you increase your reliance on this market doing well.  

Subsequently, this can result in greater gains and losses, depending on how the Australian market compares with the rest of the world. As such, a lack of hedging to the Australian dollar can be viewed as a more diversified investment strategy. In a similar vein, should the AUD drop in relation to the USD by the time you plan to sell down your DHHF, having an unhedged portfolio will result in higher returns. 

Underlying Holdings: ETFs or Managed Funds?

As mentioned in the pros section, DHHF’s underlying holdings are ETFs. Conversely, VDHG while also being a diversified ETF, contains managed funds as part of its underlying holdings. These managed funds are less tax-efficient, as if more units are sold than purchased, the fund will need to sell some assets. This results in capital gains. Subsequently, these pooled funds are taxed gradually in small amounts each year. It is also worth noting that these capital gains occur when there are more selling than buying across the entire fund, which is outside the control of the investor. This can offset long-term gains, as the realised capital gains could have otherwise been left to compound under a pure ETF structure.

By investing in a fund that exclusively holds ETFs however, such as DHHF, these gains are not realised until the investor sells. As a result, there is more potential for capital growth, due to the full fund being able to compound over time. Furthermore, by the time that investors draw down on the fund, it is likely that their tax bracket would be lower. This provides another layer of tax-efficiency, as it is likely that a financially independent person would be paying less tax on their capital gains.

Market Allocations – Australia/International Markets Split

DHHF and VDHG are both in cap weighted proportions once Australian equities are factored in. Therefore, the most fundamental difference between the funds is in their Australian and International equities split. DHHF and VDHG share similar equity allocations to the Australian market and 40% respectively. Subsequently, DHHF allocates 63% of its equity portion to the international market and VDHG allocates 60% of its equity portion to it.  

While these splits are relatively similar, it is worth noting these differences. VDHG has a higher equity split towards the Australian market and DHHF has a higher equity split towards the international market.

DHHF Review – The Overall Verdict 

DHHF is a pioneer, being Australia’s first pure equities diversified ETF. It provides exposure to 8000 + stocks in the Australian, US, developed and emerging markets. Therefore, this diversified ETF offers a cost-effective way to diversify across multiple economies and sectors. For people with a long-term investment horizon, DHHF may be a useful, set and forget-type investment vehicle. Assuming that they are happy with the underlying holdings and their percentage allocations. 

However, for risk averse investors and those wishing to hedge foreign investments, the alternative diversified ETFs mentioned in the review may be more suited to your investment goals. Similarly, investors who want to take a more active role in their investment journey may prefer to roll their own portfolio with individual ETFs.  

Currently, its main competition is VDHG which while similar, differs in a few ways. Both are suited to growth-oriented investors with a long investment horizon. However, the difference in underlying allocations and factors such as hedging and whether you want underlying managed funds or ETFs, will likely be the deciding factor on which one you choose. Investors who want exposure to defensive assets and AUD hedging will gravitate towards VDHG. 

Conversely, investors who want a pure growth portfolio without AUD hedging will lean towards DHHF. Regardless of which one you pick, both investment vehicles are great long-term investments that provide a convenient and cost-efficient way of diversifying into the global economy.  

Want to Have a Look at Similar Products?

As previously mentioned, DHHF’s main competition is Vanguard’s VDHG. For those of you who wish to learn more about VDHG and how it compares, I have attached my in-depth review of it below:

VDHG Review

Want to Purchase DHHF but Don’t Have a Brokerage Account?

If you would like to invest in DHHF or any of the aforementioned diversified ETFs, I recommend using SelfWealth. As it this CHESS-sponsored trading platform offers low flat-rate brokerage fees. For more information, you can find my in-depth review on SelfWealth Here.

If you would like to sign up and receive 5 free trades during your first month, you can also use my referral link.

Special Thanks

The Reddit user Hockey Monkey provided valuable input that was essential for creating this review. I would like to take this opportunity to thank him for reviewing the content. As he helped me amend it to reflect the most relevant content. His knowledge on tax drag, equity splits and DHHF, in general, made this review as accurate as possible.
 
passiveinvestingaustralia also provided great resources with the following:

Fund Domicile and Avoidable US Taxes
The Problem with Pooled Funds
DHHF and Other VDHG Alternatives

These posts expand upon several points raised during my review and I encourage anyone who wants further clarification on these topics to read over them.

Diversified Funds or DIY Investing – What’s the Best Investing Strategy?

Welcome to my Diversified Funds or DIY Investing analysis. Today I’ll be discussing the key differences between investing in diversified funds and utilising a DIY (do it yourself) investing approach. I’ll cover the pros and cons of both approaches and help you identify which one is better suited to your investment style.

What is a Diversified Fund?

Vanguard Australia - New Vanguard ETFs offer diversified portfolios in one  trade

A diversified fund is an investment fund that contains a broad spread of underlying holdings. These underlying holdings track different markets, sectors and asset classes. As such, they offer a convenient way of diversifying. Diversification is an investment strategy that ensures that you aren’t overly concentrated into a single area. This reduces the chance of portfolio volatility and provides more reliable returns. For these reasons, diversified portfolios are commonly sort after by investors. In the case of diversified funds, they provide a very simple and efficient way of gaining diversification due to the wide spread of their underlying holdings.

What is DIY Investing?

DIY Investing Tips, Learn How to Invest Money, and Where

A DIY investing approach is when you actively choose your own portfolio holdings. Rather than selecting a diversified fund that has pre-allocated holdings at set percentages, the DIY approach enables you to customise your holdings. This requires the investor to take a more active role, as they have to physically select and rebalance their investment portfolio. However, it is useful for investors who want specific holdings and asset allocations.

Why Do People Choose Diversified Funds over DIY Investing?

The main appeal behind diversified funds is their convenience. As these funds contain multiple underlying assets, investors only need to make a single purchase to gain diversification across various markets, sectors and asset classes. Additionally, the holdings are pre-allocated, meaning that investors don’t need to work out their holding allocations. A benefit for this approach is that investors are less susceptible to human error, as they can’t FOMO into one holding or panic sell another one, as they are all comprised within the fund.

Subsequently, investors of diversified funds do not need to rebalance their portfolios, as it is done automatically. This frees up time by removing the need to analyse different markets, determine asset allocations and manually rebalance holdings. As such, beginners, passive investors and people looking to minimise time focussed on investing will likely gravitate towards diversified funds.

Why Do People Avoid Diversified Funds?

One of the main drawbacks with diversified funds is their fixed allocations. While fixed allocations can mitigate against human error, they can also predispose investors to unwanted or underperforming assets. For example, the popular diversified fund VDHG contains bonds which a lot of growth-oriented investors tend to avoid.

Similarly, DHHF while not containing bonds, has a relatively high allocation to emerging markets. Emerging markets have traditionally been relegated to small allocations in investor portfolios due to their volatility. Similarly, the percentage allocation of these underlying holdings is also fixed. This makes diversified funds less malleable than a DIY approach, as you can’t change the holdings or their allocations over time.

Pros and Cons of Diversified Funds

Diversified Funds or DIY Investing - Cons of Diversified Funds

Why Do People Choose DIY Investing over Diversified Funds?

The main appeal behind the DIY approach is the flexibility. Investors can directly choose each of their investments. This ensures that the investor only gains exposure to assets, markets and sectors that they want to invest in. Similarly, they can set their own allocations, so that they gain as much or as little exposure as they deem necessary.

This flexibility in allocations is useful over long-term investment horizons, as investors may wish to gain more exposure to defensive assets as they near retirement. Alternatively, a new investment product may be released that the investor would like to add to their portfolio. Another benefit is that a DIY approach often has less MER than diversified funds. As such, investors who want to take a more active role with their investments will gravitate towards this approach.

Why Do People Avoid DIY Investing?

One of the main drawbacks from the DIY approach is how much effort it takes to manage the portfolio. This approach requires constant research into the underlying holdings, determining appropriate asset allocations and manual rebalancing. Investors need to ensure that holdings don’t overlap and also need to make more frequent purchases compared to diversified fund investors.

As such, the complexity behind the variables associated with DIY investing often deter investors, particularly beginner investors and passive investors. Another issue is the potential for human error. Emotional investors may panic sell assets that are experiencing short term drops, resulting in a net loss on their investment. Contrastingly, they may also panic buy assets that are experiencing short term rallies before they correct. As such, beginners, passive investors and people prone to emotion are more suited to diversified funds.

Pros and Cons of DIY Investing

Diversified Funds or Roll Your Own - Pros and Cons of DIY Investing

Diversified Funds or DIY Investing Summary

Diversified funds provide a simple, convenient and cost-effective way of diversifying into a range of different assets. They are automatically rebalanced and require minimal investor involvement, freeing up time for investors. This comes at the expense of higher MER and these funds having fixed allocations.

These fixed allocations may contain exposure to holdings that you otherwise wouldn’t invest in. It also means that you can’t increase or decrease the funds underlying holdings without resorting to a DIY approach. As such, diversified funds are suited to beginner investors, investors who don’t want to take an active approach and people who are happy with the underlying holdings.

The DIY approach allows investors the ability to select their own portfolio and change their allocations over time. This malleable approach enables investors to increase, decrease and replace their holdings. Another perk is that the MER for a DIY approach is typically lower, as it’s on the investor to rebalance their portfolio instead of the fund manager.

However, this approach requires a lot more time researching the underlying holdings. Additionally, investors using a DIY approach have to manually rebalance their portfolios over time and will need to make more purchases. The active nature of DIY can also result in human error, due to things such as personal bias, panic selling and over-concentration. As such, DIY investing is suited for knowledgeable, level-headed investors who want to take an active role in selecting and managing their portfolios.

Micro-Investing Explained – Is it a Good Investment Strategy?

Today I’ll be covering all things micro-investment related. I’ll be discussing what micro-investing is, the pros and cons of using this investment strategy, the most popular Australian micro-investing apps and whether they’re worth using.

Micro-Investing Explained – What is it?

Micro-Investing is an investment method in which people invest small amounts of money into a range of different assets, typically on a frequent basis. This differs from traditional investing, which requires a brokerage account and a large amount of starting capital.

As such, micro-investing is tailored to beginner investors who do not have brokerage accounts or a lot of disposable income. Investors can get begin investing in micro-investment products with as little as $5, which is why it is also sometimes referred to as ‘pocket-money investing’.

Why Would You Start Micro-Investing?

Micro-investing offers a lot of perks, particularly for beginner investors or people who don’t have a great deal of financial knowledge. They provide an easy, simple way of investing for people who otherwise would be unable to invest, either due to a lack of initial funds or a lack of investment knowledge.

Before the rise of micro-investing and micro-investing apps, people who wanted to invest would have to go through the hassle of opening a brokerage account, saving enough capital to start investing (which can range from hundreds to thousands of dollars and having to research what investments they wanted to pick. Now, it is as simple as linking your debit card to an app, picking from a list of pre-selected investment options and pressing ‘buy’.

The convenience and simplicity of these micro-investing platforms make them attractive options for beginner investors looking to do something with their spare income.

Micro-Investing Explained – How Does it Work?

How Does Micro-Investing work?

Micro-investing is offered through a range of different mobile and web-based apps. Depending on the app you select, they will typically offer units of exchange-traded funds (ETFs) or managed funds. These types of funds contain exposure to a range of different assets, markets and sectors. By linking your debit card and/or bank account, you can invest small amounts of money into the fund of your choice. You can do this either through an investment plan, one-off investment or round-up, depending on the app that you select.

Investors who choose to use an investment plan can invest recurring amounts of money on a weekly, fortnightly or monthly basis. This automates the investing process, provides an easy way to dollar-cost average (DCA) and can be aligned with your paycheck to ensure that you only invest when you have the funds.

One-off provides the ability to make singular investments. This can be useful for people who want to deposit large sums on an infrequent basis. It is also useful for people who would like to make a single large sum investment before adopting an investment plan.

Round-up works by automatically rounding up all your purchases to the nearest dollar. This amount is then set aside and invested in your chosen profile. This can be useful for automating the investment process, as you can make small investments with every purchase you make.

What Micro-Investing Options Exist?

The most common investment options offered by micro-investment apps are ETFs and Managed Funds. ETFs are typically passive and seek to replicate a specific market index, such as the top 200 companies in Australia for example. ETFs typically have lower management fees due to being passive, as they are simply designed to reflect an index.

Alternatively, managed funds include assets and stocks that are individually picked by a fund manager, who tries to outperform a specific market. Managed funds typically have higher management fees, due to the fund manager taking a more active role in allocating investments.

These investment vehicles are commonly offered by micro-investment apps, as they are diversified. Diversification is an investment strategy that ensures that investors have exposure to a range of different assets, as this increases the likelihood of your portfolio containing high performing assets and reduces the impact of poorly performing assets.

What are Micro-Investing Apps?

Micro-Investing Apps Australia

Micro-investing apps are mobile and web applications that offer people the ability to invest small amounts of money regularly. Also known as loose-change investing, these apps streamline the investing process, by providing an easy, cost-efficient way of investing smaller sums of money into popular investment options. The most popular micro-investing apps offered in Australia are currently Spaceship Voyager and Raiz.

These apps are great for beginners starting on their financial journeys, as they eliminate the hassle of having to set up a brokerage account, having to decide between thousands of investment options and allow users to invest with low amounts of capital. As such, micro-investing apps serve as a pivotal stepping stone for people who have just begun embarking on their investment journey, with some investors deciding to use these apps long-term, due to their convenience and simplicity.

Micro-Investing Explained – The Pros

Convenience

Micro-Investing apps provide immense convenience. Being tailored for beginner investors, they provide a convenient and simplistic way of being able to invest in a range of diversified funds. These are easy to navigate, have a narrow range of investment options to avoid confusion and typically provide investors with simple guides on finance.

Accessibility

Investing has traditionally been an esoteric venture, with investors typically requiring a great deal of financial knowledge and start-up capital to begin investing. Through these apps, people from all walks of life, regardless of their income or financial prowess can gain exposure to investment options that they otherwise wouldn’t be able to.

Easy to Use

Being technology-based, micro-investment apps are very easy to use and navigate. They typically provide all the information that you need on their main screen and can be set up in a manner of minutes. They provide concise descriptions of their investment options and keep them limited, to ensure that you can get started on your journey with as much ease as possible.

Micro-Investing Explained – The Cons

Fees

Due to micro-investing apps offering convenience and accessibility, they typically come with fees for these perks. Spaceship Voyager does not charge fees for balances under $5,000, however, balances above $5,000 incur 0.05% p.a. and 0.10% p.a. fees depending on which profile you select. Raiz charges $3.50 – $4.50 per month for balances under $15,000. For balances above $20,000, they charge 0.275% per year, charged monthly and computed daily.

Lack of Investment Options

There are hundreds of ETFs and managed funds available on traditional markets, in addition to thousands of individual stocks. However, micro-investment apps only have a few investment options available, with Spaceship offering 3 portfolios and Raiz offering 7. This is due to these apps being tailored for beginners and to prevent confusion when deciding on an investment. However, for more seasoned investors, these apps may not offer enough variety.

Underperformance

There are other funds and assets out there that have cheaper fees and experience greater returns. This is to be expected, due to the small range of investment options offered by these apps. However, it is worth noting that Spaceship Voyager’s Universe Portfolio experienced a very impressive yearly return of 35.07% during 2019. However, it is unclear whether it can maintain those returns over a longer investment horizon.

Micro-Investing Explained – Pros and Cons Summary

Conclusion – Are Micro-Investing Apps for You?

Micro-Investing apps are great for beginner investors starting on their investing journeys. They provide convenient, easy to use investment options for people who don’t have a lot of initial funds to invest or people who may be unsure about how to invest via traditional means. Their convenience and accessibility are second to none in this regard, making them a very popular option for people who prefer a more simplistic investing experience.

For more seasoned investors or people seeking a wider array of investment options, these apps may not be appropriate, given their higher fees, lack of investment options and potential to underperform options that are available elsewhere. However, for the most part, these apps are very useful for a wide range of Australians and are a great first step for people on their journeys to reaching financial independence.

Want More Information?

If you would like to read more information on Spaceship Voyager vs Raiz, I have attached links to my more thorough reviews on them below, in addition to one that compares them both side by side. In these reviews, I cover the pros and cons of investing with both platforms and take a more in-depth look at the portfolios and features that they offer.

Spaceship Voyager Review

Raiz Review

Spaceship vs Raiz

Want a Bonus $5 to Get You Started on Your Investment Journey?

If you would like to join either platform, you can use the following referral codes to get a $5 deposit bonus when you sign up and deposit $5 or more.

Spaceship Referral Code: S80I90C97K

Raiz Referral Code: P2S2CH

Spaceship vs Raiz – What’s The Best Micro-Investing App?

Today I’ll be comparing Australia’s two most popular micro-investment apps: Spaceship Voyager vs Raiz (formerly known as Acorns). I’ll be comparing them side by side on 5 different metrics to help you determine what the best micro-investing app is for helping you reach your investment goals.

What are Micro-Investing Apps?

Micro-investing apps are mobile and web applications that offer people the ability to invest small amounts of money regularly. Also known as loose-change investing, these apps streamline the investing process, by providing an easy, cost-efficient way of investing smaller sums of money into popular investment options.

These apps are great for beginners starting on their financial journeys, as they eliminate the hassle of having to set up a brokerage account, having to decide between thousands of investment options and allow users to invest with low amounts of capital. As such, micro-investing apps serve as a pivotal stepping stone for people who have just begun embarking on their investment journey.

Some investors may even use these apps long-term, due to their convenience and simplicity. In Australia, the two most popular investing apps are Spaceship Voyager and Raiz. I’ll be comparing them side by side against five metrics to provide a simplistic way of helping you decide on the best micro-investing app for your reaching financial goals.

How Do They Compare?

Spaceship Vs Raiz – App Design

The main appeal for micro-investing apps is their simplicity and ability to be used by people with limited or no investing experience. As such, having a slick design with an easy to navigate user interface is essential for providing an optimal investing environment.

Spaceship Voyager has a very easy to navigate user-interface, combined with a slick design. The home screen provides access to essential information such as your to-do list, account balance, portfolio performance, recent market movers and your transaction history.

There are also news articles located underneath from blogs, major financial institutions and Spaceship themselves, covering market performance and how-to guides that cover the basics of investing and saving. The side-tab also has access to the following features: Invest, Portfolio, Transactions and Refer.

Raiz Like Spaceship, also has a relatively easy to navigate user interface and a simple design. The home screen highlights your current account balance and the ability to review your past account balance and forecast your future account balance. The home screen also shows your portfolio’s performance over the last month. However, there are a lot more adverts on the Raiz screen redirecting you to other products offered by the Raiz platform, such as their Superannuation, Offsetters Membership and My Finance (budgeting) feature. The side-tab also has access to the following features: Invest, Rewards, Super, My Finance and Invite Your Friends.

Spaceship vs Raiz – App Design Winner

Spaceship Voyager

I prefer the look and layout of Spaceship Voyager. It contains additional features that aren’t readily available on Raiz such as a useful to-do list, updates on holdings performance through market movers and access to your recent transaction history. Additionally, it contains fewer ads and provides more useful guides that are tailored to beginner investors. They also offer some articles that more seasoned investors may take interest in, such as market reports. For these reasons, Spaceship comes out on top in terms of app design and user interface.

Spaceship vs Raiz – Diversity

Diversity is an incredibly important principle of investing, as it ensures a wider spread of investments. In line with the phrase “don’t put all your eggs in one basket”, having adequate diversification in your investment portfolio eliminates things such as concentration bias.

Concentration bias is when you have most or all of your investments allocated to the same asset or market. This increases volatility significantly and makes your portfolio reliant on the performance on one or two investments. Should these investments do poorly, your entire portfolio will suffer, which is why diversification is a very important and often necessary aspect of investing, particularly over the long term.

Spaceship Voyager currently offers three investment portfolios: Spaceship Origin, Spaceship Universe and Spaceship Earth. All of these portfolios are designed for investors with a high-risk tolerance and the Spaceship team recommends holding these portfolios for at least 7 years to experience optimal returns

Spaceship Origin is a passive index fund that tracks the top 100 Australian shares and the top 100 Global shares by market cap. This is currently the only passive fund offered by Spaceship Voyager, with the other two portfolios being managed. As such, this is a popular option for people who just want to have the convenience of tracking the top companies by market cap in Australia and the global market. It also contains the most diversity out of all three options, comprising of 200 companies, compared to Universe’s 100 and Earth’s 30-50.

Spaceship Universe is an actively managed portfolio consisting of 100 Australian and global securities that have been selected by the Spaceship Voyager investment team under their ‘Where the World is Going (WWG) criteria. The WWG criteria are used by the Spaceship team to determine what they view as high quality, differentiated and defensible companies. The theory behind this is that these companies are less susceptible to competition and technology disruption over time, meaning that they are theoretically more likely to prosper over long investment horizons. Subsequently, investors willing to take higher risks for the possibility of generating higher returns will likely be drawn to this portfolio.

Spaceship Earth is an active portfolio consisting of 30-50 Australian and global securities that have been selected by the Spaceship Voyager investment team under their WWG criteria. Spaceship Earth Portfolio also utilises a negative screening process to preclude companies that are involved with things such as fossil fuels, controversial weapons, gambling, nuclear power and animal cruelty among others. The fund is designed to provide capital growth by investing in companies that contribute to the advancement of the UN Sustainable Development Goals Agenda. As such, this may be a popular choice among ethical investors.

Raiz currently offers seven investment portfolios: Conservative, Moderately Conservative, Moderate, Moderately Aggressive, Aggressive, Emerald and Sapphire. These portfolios contain similar assets to Spaceship Voyager such as the US market, the Australian market and ethical companies. However, they do have a much higher allocation of defensive assets such as cash, corporate bonds and government bonds.

They also have exposure to the Asian market and the cryptocurrency Bitcoin, depending on which profile you select. These portfolios cater for risk averse people who prefer higher allocations of defensive assets, in addition to growth investors with higher risk tolerances. To save time, I have made a table that breaks down the portfolio, its main holdings, the risk levels and predicted returns.

Spaceship vs Raiz – Diversity Winner

Raiz

Raiz offers more portfolios than Spaceship and these portfolios also contain additional asset types such as Cash, Government Bonds, Corporate Bonds, Asia Large Cap Stocks and Bitcoin. As such, Raiz caters for a wider demographic of customers, due to offering low, moderate and high-risk investments. Alternatively, Spaceship is currently only orientated towards growth investors with a high-risk tolerance.

As such, if you are a high-risk investor with an investment horizon beyond 7 years, you will most likely prefer the Spaceship portfolios. If you aren’t, you will most likely prefer one of the low-moderate risk portfolios offered by Raiz.

Spaceship vs RaizPerformance

Performance is arguably the most important aspect of any investment. With the goal of investments being to generate wealth, it makes sense to choose the best performing asset or in this case, app. A common saying in the investment world is that past performance is not indicative of future returns and this certainly rings true, as last year’s performance can differ significantly from this year or the next. However, it is still worth noting the prior performance of certain portfolios to determine whether they have underperformed or overperformed similar portfolios in recent years.

Spaceship Voyager received well above average returns during 2019, with the Spaceship Origin Portfolio and Spaceship Universe Portfolio yielding yearly returns of 25.99% and 35.07% respectively. These are significantly higher than most competitors and alternative ETFs/managed funds. These returns are attributed to these funds’ large allocations to the US market and the tech-sector.

The US market traditionally been one of the best performing markets. In recent years, the US market has done particularly well due to it containing a large allocation of technology stocks such as Tesla, Google, Apple and Microsoft among others. Spaceship Voyager portfolios which contain large allocations of these stocks have subsequently performed very well as of recent. It is also worth noting that as these portfolios are almost entirely growth oriented (equities), they are more likely to result in higher returns on years where the markets excel and lower returns when the markets experience corrections.

Spaceship vs Raiz - Performance

Raiz returned respectable returns during the 2019 financial year, with the worst performing fund yielding a 6.88% yearly return and the best performing fund yielding a 10.92% yearly return. These returns align with similar ETFs and managed funds that contain the same underlying assets. However, they are significantly lower than Spaceship Voyager’s returns during the same year.

The main reason for this, is that Raiz portfolios have significantly lower allocations of the US market and subsequently, their underlying tech stocks. Additionally, Raiz contains defensive asset allocations through cash, government and corporate bonds. Subsequently, these more stable yet lower yielding assets are reflected in the lower overall returns.

Spaceship vs Raiz - Performance

Spaceship vs Raiz – Performance Winner

Spaceship Voyager

Evidently, Spaceship Voyager portfolios significantly outperformed Raiz’s portfolios, with yearly returns for 2019 ranging from 25.99% to 34.07% for Spaceship Voyager. This can be largely attributed to Spaceship Voyager consisting of pure equities allocations (growth assets), having a much higher concentration of US stocks and a greater exposure to the tech-sector.

Conversely, Raiz had much lower overall returns which is attributed to these portfolios consisting of cash, government bonds and corporate bonds (defensive assets). Furthermore, these portfolios have much lower allocations to the US market and the underlying technology stocks contained within it. While this can provide more stability to yearly returns through stability to defensive assets and less concentration bias to the US market, these portfolios have had poorer returns since their inceptions.  

With all this being said, past performance is not indicative of future returns. However, prior performance is worth noting when making investment decisions.

Spaceship vs Raiz – Fees

Fees are another important thing to consider when utilising micro-investment apps. Due to these apps not charging brokerage fees when buying units, they typically come with higher management fees in order to remain profitable. As such, it is important to pay attention to these fees as they can add up over time.

Spaceship Voyager offers a unique fee structure, where investors aren’t charged any fees or management expenses on balances below $5,000. Once investors accumulate a balance greater than $5000, they are charged 0.05% p.a. for the Spaceship Origin Portfolio and 0.10% p.a. for the Spaceship Universe and Spaceship Earth Portfolios.

Raiz comes with fees for its services and compared to other competitors (particularly Spaceship Voyager), they are substantially high. Raiz charges $3.50 – $4.50 per month for balances under $15,000 – $20,000. For balances above $15,000 – $20,000, they charge 0.275% per year, charged monthly and computed daily.

Spaceship vs Raiz – Fees Winner

Spaceship Voyager

In this instant, Spaceship Voyager is the clear winner. With no fees for balances under $5,000 and a flat rate of 0.05% and 0.10% p.a. depending on your portfolio holding. This is significantly different from Raiz’s $2.50 monthly fees for balances under $10,000 and their 0.275% p.a. fees for balances over $10,000.

As such, if you were to have balances above $10,000 in both portfolios, it would cost you 2.75x more to hold a Raiz portfolio than it would to hold a Spaceship Universe or Spaceship Earth portfolio. If you held a Spaceship Origin Portfolio in this instance, it would cost you 5.5x as much to run a Raiz portfolio.

Spaceship vs Raiz – Unique Features

Unique features are niche items offered by the apps that give them a competitive edge over their competition. As micro-investing apps are tailored to beginner investors, these features are typically added to make the investing journey easier. While these fees serve more as bonus perks than anything, they can in some instances be the deciding factor between which app you choose.

Spaceship Voyager offers the ability to invest through an investment plan or via a one-off. Investors who choose to use an investment plan can invest recurring amounts of money on a weekly, fortnightly or monthly basis. This automates the investing process, provides an easy way to dollar-cost average (DCA) and can be aligned with your paycheck to ensure that you only invest when you have the funds. One-off provides the ability to make singular investments.

This can be useful for people who want to deposit large sums on an infrequent basis or people who would like to invest a lot starting off before adopting an investment plan. Spaceship also provides lots of useful articles that are tailored to investors to cover topics such as how to save, how to budget and the basics of market analysis.

Raiz offers investment plans and one-time investments like Spaceship. However, they also have an additional round-up feature. This feature works by automatically rounding up all your purchases to the nearest dollar. Raiz then sets aside this money and invests it for you into your chosen profile. You can increase this limit to round up to the $5, $10, $20 or $40.

This method can be useful for people who struggle with setting aside money to invest or people who want an automated way of investing while making their everyday purchases. However, for people who have issues with budgeting or people who tend to splurge, this can be a very financially draining method and should be pursued with caution.

My Finance is another feature offered by Raiz that can be used to track your spending habits. This can be a useful tool for determining how you spend your money and what you are spending it on. For investors who do not track their spending habits or those looking to gain a greater insight into their budgets, this is an attractive feature.

Another feature that separates Raiz from other micro-investing platforms is that it offers a rewards program. By utilising the Raiz app to buy from popular brands such as Bonds, eBay and Ray-Ban among others, you the companies will invest a % of the purchase price to your Raiz profile. This can be a useful tool for investing without ‘investing’ assuming that you were going to purchase these items anyway.

Spaceship vs Raiz – Unique Features Winner

Raiz

Raiz is the clear winner in this case, with more investment options, the ability to track your spending habits and the addition of a rewards program that invests a certain allocation of specific purchases for you. These features are unique and can be a great way to expand your investment capital. However, they should be approached with care, as these features can result in overspending if used incorrectly.

Spaceship vs Raiz – The Final Scores

Spaceship vs Raiz – Which App is Better?

The Final Verdict

Spaceship vs Raiz - Final Verdict

Based on the above metrics, Spaceship Voyager is the best micro-investing app, as it has an easier to navigate user-interface, higher portfolio performances due to their US market and tech-sector allocations and significantly cheaper fees. For people with high-risk tolerances who are looking to maximise their investment growth over a long horizon, Spaceship is a clear choice. As such, Raiz’s significantly higher fees and lower past performances make it a more costly, less growth-oriented investing platform.

However, what Raiz lacks in these traits, it makes up for in providing unique features and greater portfolio diversity, making it potentially more useful for particular groups of investors. If you are someone who frequently makes purchases on brands offered through the Raiz rewards program, the additional account fees may be offset in some part by the Raiz Rewards you receive.

Additionally, if you are a risk averse investor who wants to have a higher allocation of defensive assets such as cash and bonds, Raiz Is your only option out of the two investment apps. Alternatively, investors with an even higher risk-tolerance that would like exposure to Bitcoin and the cryptocurrency market might lean towards Raiz due to its 5% allocation in the Sapphire portfolio.

For these reasons, there is no clear-cut winner regarding which platform is the best overall. However, it is apparent which investors will gravitate towards which micro-investing app. If you are a growth-orientated investor, looking to invest over 7+ years, Spaceship is your best bet. This is due to its higher portfolio performances, higher equities allocation and lower management fees. Alternatively, if you are a risk-averse investor and want portfolios containing more defensive assets such as bonds or want specific exposure to Bitcoin, Raiz is more suited to your investment style.

As a growth-orientated investor, I prefer Spaceship and personally use it to this day. I find the app easier to navigate and use, their past portfolio performances are significantly higher than Raiz’s and their lack of fees under $5,000 and overall lower management fees for higher investments make them second to none in these regards.

Want More Information?

If you would like to read more information on Spaceship Voyager vs Raiz, I have attached links to my more thorough reviews on them below. In these reviews, I cover the pros and cons of investing with both platforms and take a more in-depth look at the portfolios and features that they offer.

Spaceship Voyager Review
Raiz Review

Want a Bonus $5 to Get You Started on Your Investment Journey?

If you would like to join either platform, you can use the following referral codes to get $5 deposit bonus when you sign up and deposit $5 or more.

Spaceship Referral Code: S80I90C97K

Raiz Referral Code: P2S2CH

VDHG Review – Is This The Best All-In-One Investment Option?

Welcome to my VDHG Review – Today I’ll be reviewing the Vanguard Diversified High Growth Index Fund (VDHG).  I’ll be covering what VDHG is, the asset allocation and what each holding is. I will also touch on the pros and cons of investing in VDHG and its underlying assets.

VHDG Review – What Is VDHG?

VDHG is a diversified ETF that is comprised of seven different ETFs that track multiple markets and assets. An ETF is firstly a fund (the ‘F’), and therefore holds multiple assets in it. Secondly, it is exchange traded (the ‘ET’), meaning that you can buy and sell the same ways as with shares via a stockbroker. This is opposed to unlisted funds, which you must buy direct from the fund manager.

Long-term investors often choose ETFs, as they provide a convenient way of diversifying investment portfolios. This is due to ETFs tracking market indexes. Market indexes can encompass hundreds or thousands of individual assets.

Vanguard has taken this one step further, by providing an all-in-one type of investment vehicle. VDHG subsequently, provides exposure to the Australian market, large-cap, mid-cap and small-cap companies in developed and emerging markets and bonds. These holdings equate to VDHG being 90% growth (equities) and 10% defensive (bonds).  

VDHG Asset Allocation

VDHG Review Asset Allocation

There are seven different ETFs in VDHG that equates to the following target allocations: 
 
36% Australian Equities 

38% International Equities 

16% International Equities Hedged 

10% Bonds

 Funds   Target Percentage Allocation  
 Vanguard  Australian Shares Index Fund (Wholesale) – VAS   36%  
 Vanguard  International Shares Index Fund (Wholesale) – VGS   26.5%  
 Vanguard  International Shares Index Fund (AUS Hedged) – VGAD   16%  
 Vanguard  International Small Companies Index Fund (Wholesale) – VISM     6.5%  
 Vanguard  Emerging Markets Shares Index Fund (Wholesale)- VGE   5%  
 Vanguard Global Aggregate Bond Index Fund (Hedged) – VBND    7%  
 Vanguard  Australian Fixed Interest Index Fund (Wholesale) – VAF   3%  
 Total   100.00%  
These are not actually ETFs; they are managed fund versions of these ETFs. However, for simplicity, they will be referred to by their ETF names.

What Are They?

VAS – Australian Shares (36%)  

The Vanguard Australian Shares Index ETF or VAS is an ETF that tracks the performance of an index consisting of the 300 largest companies by market capitalisation on the Australian Securities Exchange (ASX). Its largest portfolio holdings are CSL LTD, CBA, BHP, NAB and WBC. Sector-wise, it is primarily allocated towards Financials, Materials and Healthcare.  


VGS – International Shares ex-Australia (26.5%)  

The Vanguard International Shares Index ETF or VGS is an ETF that tracks the performance of an index consisting of the 1547 large-cap and mid-cap companies listed on exchanges of the world’s major economies, excluding Australia. Its largest portfolio holdings are Apple, Microsoft, Amazon, Facebook and Alphabet (Google). Sector-wise, it is primarily allocated towards Technology, Healthcare and Consumer Discretionary. The top-weighted countries are the US, Japan, the UK, France and Switzerland.  

VGAD – Hedged International Shares ex-Australia (16%)  

The Vanguard MSCI Index International Shares (Hedged) ETF or VGAD is the same as VGS but it is hedged to Australian dollars. Hedging is an investment strategy in which the fund manager takes active steps to offset the impact of currency fluctuations. The intent behind this is to ensure that the returns (income and capital appreciation) are not impacted by currency fluctuations. By incorporating VGAD, the overall returns of VDHG are less susceptible to being impacted by currency fluctuations, adding a defensive measure against these potential impacts.  

VISM – International Small Companies ex-Australia (6.5%) 

The Vanguard International Small Companies Index Fund or VISM is an ETF that tracks the performance an index consisting of 4032 non-Australian small companies from developed countries. Its largest portfolio holdings are Etsy, Pool Corp., Horizon Therapeutics, Monolithic Power Systems and Generac Holdings Inc. Sector-wise, it is primarily allocated towards Industrials, Information Technology and Consumer Discretionary. The top-weighted countries are the United States, Japan, the United Kingdom, Canada and Sweden.  

VGE – Emerging Markets (5%) 

The Vanguard Emerging Shares Index Fund or VGE is an ETF that tracks the performance of an index consisting of 1252 companies listed in emerging markets. Its largest portfolio holdings are Alibaba, Tencent Holdings, Taiwan Semiconductor Manufacturing Co., Samsung and Meituan Dianping Class B. Sector-wise, it is primarily allocated towards Consumer Discretionary, Information Technology and Financials. The top-weighted countries are China, Taiwan, Korea, India and Brazil.  

VBND – Hedged Global Aggregate Bonds (7%)  

The Vanguard Global Aggregate Bond Index Fund (Hedged) or VBND is an ETF that tracks the return of Bloomberg Barclays Global Aggregate Float-Adjusted and Scaled Index hedged into Australian dollars. It comprises of 9286 bonds spread across 2404 global issuers. Sector-wise, most funds are derived from Treasury, Corporate-Industrial and Corporate-Financial Institutions. The top-weighted countries are the US, Japan, France, Germany and the United Kingdom. 77.3% of bonds in VBND have an A credit rating or higher.  

VAF – Australian Fixed Interest (3%) 

The Vanguard Fixed Interest Index Fund or VAF is an ETF that tracks the return of the Bloomberg AusBond Composite 0+ year Index. It comprises of 586 bonds spread across 187 Australian issuers. Sector-wise, most funds are derived from the Treasury, Gov-Related-Sovereign and Gov-Related-Agencies. 97.4% of bonds in VAF have a credit rating of A or higher.  

Why Would Someone Invest in These Holdings?  

Each one of the seven underlying ETFs offers different incentives for people to invest in them.  

VAS provides exposure to the strongest companies on the ASX. While the Australian market only accounts for roughly 1.7% of the world’s global economy at the time of writing this, a lot of Australians choose to invest heavily in Australian assets. Through investing in the Australian market, Aussie shareholders receive higher dividends than those offered by other markets, in addition to receiving tax benefits through the franking system. This often makes investing in the ASX an appealing prospect for Aussies.

VGS is currently the largest ETF by fund size offered through VDHG, which does not come as a surprise, given that it holds major tech giants such as Apple, Amazon, Google and Microsoft. This ETF provides exposure to the world’s dominant global market and the tech-sector which in recent years has become one of the highest performing sectors. 

VGAD tracks the same index as VGS, however, it is hedged to Australian dollars. This acts as a safety buffer and added precaution against currency fluctuations, which can impact the income and capital appreciation of VGS. Also, if the Australian dollar were to increase in relation to the USD by the time that you wish to sell down your VGAD, this hedged option would provide greater returns.  

VISM provides exposure to small-cap companies. Small-cap companies are more volatile than large-cap and mid-cap companies because they are less defensive, more leveraged and are impacted more by currency fluctuations. However, having a small market cap can also be viewed as advantageous, as these companies have more room to grow. Subsequently, VISM provides a higher risk, higher return layer of diversification to VDHG, which may potentially result in higher returns over a long-term investment horizon.  

VGE is probably considered the riskiest aspect of VDHG, as it comprises of emerging markets. These markets are more susceptible to currency swings, political corruption and economic volatility, due to things such as natural disasters. However, given that these economies are new and have a lower overall market cap, their growth potential is significantly higher than in developed markets. For this reason, VGE can be a useful asset to hold if you’re willing to tolerate the high-risk, high-reward potentiality of emerging markets.  

VBND provides exposure to bonds, which are considered a defensive asset. Defensive assets are used as a mitigation strategy for market fluctuations. For example, while bonds typically underperform equities over long investment horizons, they typically hold up better during market corrections and recessions. In fact, they can often increase in value, as bond prices typically increase when interest rates fall. The government often lowers interest rates during recessions to provide people with more money to spend on goods and services to help prop up the economy.

Lower interest rates can also incentivise people to use leverage to purchase luxury items that they otherwise wouldn’t. As such, VBND offers diversification into defensive assets that can potentially offset some losses encountered to the other underlying funds during market corrections. 

VAF is similar to VBND, in that it provides additional exposure to bonds and provides a further level of risk mitigation. Although, VAF primarily utilises Australian bonds, meaning that you have an added layer of investment in the Australian economy. This can be viewed as a positive or a negative depending on which side of the fence you sit on. However, VAF has a significantly higher allocation of A, AA and AAA credit rated bonds, making it a lower yielding, yet potentially more stable defensive asset than VBND.  

VDHG Review – The Advantages of Investing in VDHG

Diversification 

Diversification is an investment strategy in which investors invest in a range of different assets and markets to ensure that they gain exposure to multiple forms of revenue. This is akin to the saying ‘don’t put all your eggs in one basket’. The benefit of having a diversified portfolio is that even if a few of your holdings under-perform in a given year, your other holdings may provide above-average returns. This provides more stability to your investment portfolio, which tends to yield more consistent returns.  

As seen in the above portfolio holdings, VDHG contains exposure to the Australian market, large-cap, mid-cap and small-cap companies in developed and emerging markets and bonds. Another way of looking at this is that by investing in VDHG, you are essentially investing in 8,000 + stocks split across the global market and almost 10,000 bonds. Subsequently, by investing in VDHG, you gain access to one of the most diversified investment vehicles on the market.  

For investors who want to invest in all of the underlying holdings of VDHG, this provides a cheaper alternative. Through purchasing VDHG, you only need to pay one transaction fee to buy a fund that comprises of these other seven ETFs, making VDHG a very convenient way of diversifying your investment portfolio.  

Convenience

Like the above point, VDHG and other diversified ETFs are perhaps one of the most convenient forms of investment products. The reason behind this is that they offer an all-in-one, set and forget type of product. Unlike more active portfolios that require you to stay on top of your underlying holdings, file separate tax documentation for each asset and require manual rebalancing, VDHG has this all covered.

Admittedly, this convenience comes with a cost of having a higher Management Expense Ratio (MER) than most ETFs at 0.27% p.a. However, the convenience of being able to have your portfolio remain diversified, whilst also automatically rebalancing is often regarded as worth it in the eyes of investors who like this style of investing.  

Lastly, by not having to think about your asset allocations, having to manually rebalance your portfolio on a frequent/semi-frequent basis or having to make frequent purchases of different ETFs, VDHG is very much a set and forget type investment. As such, for passive investors who do not have a great understanding of different markets or those who wish to spend their spare time on other ventures, VDHG is one of the best-suited investment vehicles.  

Mitigates Against Human Error  

When it comes to investing, there is always a risk of human error. Inherently, some people are better suited to investing than others. Things such as personal bias, fear of missing out (FOMO), panic selling or constant changes in investing habits can significantly diminish returns and in some instances, can result in losses.  
 
Regarding personal bias, people with an affinity for certain stocks or ETFs may greatly overweight their profile towards a certain market or sector. This can of course work in their favour, but a lack of diversification can also result in significant losses should that asset take a hit. By utilising VDHG, you have enough diversification to suffer a loss to one or several of your holdings. This is because you avoid having all of your funds in the worst-performing asset class, mitigating against permanent decimations to your profile and providing more overall stability. 

FOMO occurs when an investor decides to buy something at an all-time high, expecting it to rise even further. It can also occur with someone selling at an all-time low, expecting it to lower further. These are usually impulsive, emotionally based decisions that result in people losing a lot of their hard-earned, compounded growth. In other portfolios, it can be easy to liquidate one or two of your assets under stressful circumstances.

However, if VDHG is your only investment vehicle, it is less likely that you will FOMO your way into a poor decision by selling off your only investment under times of stress. For this reason, it is advised that you hold VDHG for a long investment horizon and check on it as infrequently as possible, as it has been designed to grow over time without external manipulation. 

Lastly, some people change their investment strategies frequently. While this may be useful in some instances, it most often hurts the overall returns of a profile. This can be seen in investors who hold 10 or more holdings, as they are constantly chasing a new product under the guise that it may outperform their previous ones. Through constantly picking up new ETFs or other assets, investors can encounter significant costs concerning brokerage fees and MER.

Investing frequent, lower sums of money into different assets can also result in over-diversification or performance drag, which can reduce your overall returns. This occurs due to owning so many investments that you are more at risk of having poorer performing ones that can offset better-performing ones, lowering the likelihood of experiencing high growth.

For these reasons, VDHG is an excellent option for impulsive buyers who are prone to these common investment mistakes, as it is designed as a set and forget type of product that doesn’t need human interference to work.  

VDHG Review – The Disadvantages of Investing in VDHG

Risk of Over-Diversification (Performance Drag)

While diversification is a good thing, some people may view VDHG as being too diversified. For example, before the inception of VDHG, a very common practice among the FIRE community was to invest in VGS and VAS. This meant that Aussie investors had only two holdings, which gave exposure to two of the most invested markets. Similar allocations exist with people simply adding VBND for more bond exposure or VGE for exposure to emerging markets. These require manual rebalancing and more diligence in deciding on an appropriate allocation, However, it gives investors the ability to invest solely in holdings that they wish to invest in.  

Subsequently, investors who have portfolios that consist of fewer holdings may find it easier to track their overall returns. They can also adjust their asset allocations accordingly to suit their intended investment outcomes. For example, if someone decides that they want to be a more dividend-focused investor, they can increase their allocation to Australian assets. This is due to Australian assets such as VAS or LICs utilising dividends as a more prominent investment strategy. Alternatively, someone who is nearing retirement age may wish to have a higher bond allocation. As a higher weighting of defensive assets can reduce portfolio volatility while they are drawing down on their funds.

With VDHG, you are also locked into your asset allocations. This wide range of diversification can be viewed as a positive, as more holdings mean more spread. By having a greater spread, it is less likely in each time frame that all assets will under-perform. Meaning that even if some of the underlying ETFs perform poorly, the high-performing ETFs can offset this to some degree.

However, this may also be viewed as a con. As some investors who would prefer to roll their portfolios may not want such a large spread. This is due to the higher likelihood of VDHG containing more under-performing holdings. At the end of the day, this widespread and diversification can be viewed as a good or bad thing. So it’s important to consider whether you want such a wide diversification.  

Pre-Determined Holdings/Allocations 

VDHG offers a lot of convenience as an all-in-one investment vehicle, with exposure to seven different ETFs. However, the holdings and more particularly, their percentage allocations of the overall portfolio may discourage some investors. A risk-averse investor may want a higher allocation of bonds and no exposure to emerging markets or small-cap companies. As this will provide more stable returns.

Investors with higher risk tolerance levels may want no exposure to defensive assets. Instead, opting for a greater allocation of exposure to these riskier markets, due to the higher growth potential. Subsequently, VDHG will likely contain ETFs that investors would otherwise not invest in. With these investments otentially impacting your overall returns by being too volatile or too defensive.  

Similarly, to the above point, an issue that comes with VDHG is that the holdings and allocations are pre-determined. By having pre-determined allocations, you must weigh the inner investments per VDHG’s management. This may be considered a pro for people who are happy with the way that the portfolio is constructed. Particularly for investors who are perhaps new to the game or don’t want to think about their allocations.

However, certain investors such as dividend investors would likely prefer a higher portfolio weighting towards Australia. As Australian equities offer higher dividends with unique tax advantages. Similarly, growth-oriented investors with long investment horizons may want a 100% equities-based portfolio, to optimise growth.

Alternatively, someone may prefer to only hold large-cap companies in developed economies. As they are less volatile than their developing country counterparts. If you fall into this category, you may find that a roll your own approach is more appropriate. As you can choose the holdings that you would like and give them allocations that you are happy with. This comes at the cost of doing more research into holdings. In addition to having to rebalance your portfolio and requiring more work around tax time. . However, investors who have a sound understanding of markets and prefer to take a more active role in their investing journeys may outperform VDHG by using this method.  

Allocation of Defensive Assets 

Defensive assets are a touchy subject for investors. Some people prefer to have no exposure to optimise growth. Alternatively, others like having a small amount for peace of mind. Risk averse investors prefer a much higher allocation to prevent volatility. As VDHG is a high growth asset, these defensive assets while useful for mitigating against short term market fluctuations. However, they can hinder long-term performance. This is because equities have a history of outperforming bonds over greater periods, due to their higher annualised returns.  

These defensive assets may not be appropriate for people with high risk tolerances and long investment horizons. Conversely, investors who are nearing retirement, may want a greater bond allocation to avoid dramatic fluctuations in their portfolios. If this is the case, VDHG’s 10% allocation may be perceived as too low. For more risk-averse investors or those nearing retirement age, Vanguard offers other diversified ETFs with higher allocations of defensive assets. These are VDGR – Growth (70/30), VDBA – Balanced (50/50) and VDCO – Conservative (30/70).  

Vanguard VDHG Review - Allocations

If you have already invested in VDHG and wish to increase your defensive asset allocation, you can buy more VBND or similar bond ETFs. This requires manual rebalancing and will incur additional MER; however, it may be a useful strategy for people in this situation.  

VDHG Review – Pros and Cons Summary  

 Pros   Cons  
 Diversification   Risk of Over-Diversification (Performance Drag)  
 Convenience   Pre-Determined Holdings/Allocations    
 Mitigates Against Human Error     Allocation of Defensive Assets    

VDHG Review – Conclusion

VDHG is one of the most popular investment vehicles among Aussie investors chasing financial independence and for good reason. It offers a convenient and cost-efficient way of diversifying into almost 18,000 assets split across Australian, developed and emerging markets. This simple, all-in-one, set and forget type of investment vehicle offers convenience, diversification and mitigates against human error.  

However, it may not be suitable for more active investors who would like to narrow down their investment holdings and decide on their asset allocations. Similarly, higher-risk investors and risk-averse investors may prefer other alternatives. Due to these alternatives catering to more aggressive or defensive investment approaches. For individuals who fall into these categories, a roll your own approach may be more appropriate. As you can augment your portfolio to reflect your risk tolerances and financial objectives with this approach.

Alternatively, other diversified ETFs such as DHHF which is 100% equities may be more suited for growth-oriented investors. Whereas more risk averse investors may prefer to utilise more defensive diversified ETFs such as VDGR, VDBA or VDCO.  

All things considered, I personally like VDHG and view it as a suitable investment vehicle for most Aussie investors. Beginners, passive investors, emotional investors and people who are happy with the underlying holdings of VDHG, can utilise VDHG over a long-term horizon to reach their financial goals. This comes without the hassle of rebalancing, doing frequent market research and making frequent brokerage transactions. As such, VDHG is one of the most convenient investment vehicles to assist people with reaching financial independence.  

Want to Have a Look at Similar Products?

Currently, VDHG’s main competition is the BetaShares Diversified All Growth ETF (DHHF). This is a more aggressive diversified ETF that contains exposure to global and Australian equities without any exposure to defensive assets (bonds). You can read my in-depth review of DHHF and how it compares to VDHG below:

DHHF Review and VDHG Comparison
Want to Purchase VDHG but Don’t Have a Brokerage Account?

If you would like to invest in VDHG or any of the aforementioned diversified ETFs, I recommend using SelfWealth. As it offers the lowest flat-rate brokerage fees among any CHESS-sponsored trading platform in Australia. For more information, you can find my in-depth review on SelfWealth Here.

If you would like to sign up and receive 5 free trades during your first month, you can also use my referral link.

Special Thanks to Eli at Passive Investing Australia

Eli at passiveinvestingaustralia.com provided inspiration in writing this review from his previous review entitled: VDHG or roll your own. He was also kind enough to go over this review to make sure everything was correct. I highly recommend his website and VDHG review to gain a more holistic overview of passive investing options in Australia.


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