Nick Bruining Q+A: There’s a key difference between investing and trading (spoiler, one is more like gambling)

Question

I have just started my first job and am still living at home with my parents.

My medium-term plans are to travel, work overseas, and then return to Australia in about five to seven years to settle down.

I am keen to start investing, and can set aside a few hundred dollars a fortnight.

Can you recommend any investment apps that I can use that will easily allow me to invest in shares and other assets?

Answer

Congratulations on your job and future ambitions.

Setting aside an amount each pay day is an excellent habit to get into. It can be as simple as an arrangement with your bank to sweep the fortnightly savings amount into a high-interest bank account.

There are hundreds of “investment” apps and platforms available. Conceptually, however, most tend to confuse trading with investing. This is because most of them make their money by executing trading orders and collecting commissions on the trades.

But investing is not trading. Investing involves putting money into real assets which generate income through that asset’s activities. That might include shares, property, and income securities such as bonds.

Making money from trading is a high-risk approach, and some experts liken these apps to gambling apps and platforms. Indeed, some investment apps operate in a similar way, pushing through notifications encouraging you to trade with annoying frequency.

These often allow you to access non-conventional but extremely high-risk things like cryptocurrencies and “prediction markets” — which is the latest term for gambling.

A better option may be to set up an online account with a reputable and established online Australian broker. Many also have associated apps linked to your account and portfolio.

A regular arrangement that adds to a portfolio of blue-chip shares or even exchange-traded funds is genuine investing.

ETFs are pools of diversified share holdings. As an investor, you benefit from the growth of the underlying shares, and receive the full benefits of dividend distributions and their associated tax credits.

Question

I am becoming a bit concerned by reports overseas that many large private credit funds have begun to restrict redemptions.

Like all retirees, I am keen to generate the best return on my money, and wonder what government guarantees might exist with these investments which I see daily on TV and social media.

Answer

The short answer is “none”. There are no guarantees. And,indeed, the “small print” makes it very clear that the return of all or even some of your invested capital is not guaranteed.

Investors in Westpoint, Rothwells, Teachers’ Credit and a string of other failed private credit schemes have bitter memories of life savings lost.

At the heart of the issue is what happens with the money you invest, and how those above-market returns are generated.

The promoter takes your money and, in turn, lends it to someone else. These might be individuals, property developers, builders, or other businesses.

Operating on a similar 2 per cent margin to banks, to pay you, for example, 6.5 per cent, they will need to charge 8.5 per cent to the borrower.

Given that most people can borrow money for about 6 per cent, the only people forced to pay 8.6 per cent are those the banks probably won’t touch — in other words, risky borrowers.

The other issue is that if a significant number of people want their money back at the same time, the fund may not have enough cash to meet the redemptions. In this case, the manager may have to freeze or severely limit redemptions.

One overseas fund is currently only repaying 5 per cent of redemptions. They are then forced into a process of selling their loan books to raise the cash.

This often leads to a fire sale in which the value of the loans being sold off is heavily discounted, resulting in reduced cash being available to meet redemptions.

There are often significant payout delays, which often run over years. Sometimes a slightly higher return is not worth the risk.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association