Since we launched the Aussie FIRE podcast in 2023, our community has grown into a vibrant group of passionate listeners. And over the past few months, we have been receiving some really thought-provoking questions from you all. So, we're excited to host our very first audience Q&A session.

In this episode, we dive into some questions about long-term investing and Financial Independence . You might find that some of them are ones you've been asking yourself:

• Cons of “buy low, sell high” strategy
• Franking credits in shares versus ETFs
• Comparing dividends of US versus Australian shares
• Thoughts on ethical investing in its current state
• Put more money into super? Or maximise pension?

Of course, when we answer questions like these, we're only sharing what we've learned from our experiences chasing FIRE. But when it comes to making any investment decisions, be sure to seek professional advice that suits your personal situation, needs and objectives.

“When shares are up, what are the cons of selling and buying when/if they drop again?”

Great question. It seems like a no-brainer at first, right? The idea is to lock in gains at the top and scoop up bargains at the bottom. But let's take a closer look at why this strategy might not be as foolproof as it sounds…

You pay more for capital gains which erodes potential long-term gains

Let's say we decide to sell our shares today because the market seems high. The first thing we face is paying taxes on the capital gains we've made. In Australia, if you’ve held the shares for more than a year, you get a 50% discount on your capital gain. But that doesn’t change the reality that you owe tax on the profits.

So, straight off the bat, our initial gains are reduced by the tax amount. That means when we try to buy back in later, the market needs to drop enough not just to cover our initial sale price but also the tax we've paid. And you guessed it: you’ll need to be really good at timing the market, which we believe is a fundamentally flawed idea .

The cost of doing nothing is often less than the cost of overdoing it

Imagine you’re on a long road trip. You know your destination, and you’ve got a full tank of petrol. Now, you could keep stopping at every little town, checking out the sights, and then getting back on the road. But each time you stop, you lose a bit of time and momentum, right? Investing is a lot like this road trip.

Every time you decide to sell your investments when they’re high, hoping to buy them back when they’re low, you’re stopping at one of those little towns. It might seem fun at first, but soon it becomes stressful.

You start second-guessing yourself. When should I get back on the road? What if the next town has even better sights (or, in shares, what if the price hasn’t bottomed)? This constant decision-making wears you out mentally. It’s like trying to predict the weather for your entire trip – it’s exhausting and often inaccurate.

Overanalysing and trying to beat the market will only burn you out

Making the decision to sell is just the beginning. Once you're out, you're constantly watching the market, waiting for the right time to jump back in. This creates ongoing stress and second-guessing: "Was that the right time?" "Should I wait longer?" It's mentally draining.

In reality, research shows that most calendar years see the market go up or at least pay dividends. By trying to time the market, we’re likely betting against the odds. And beyond the numbers, there’s the mental toll of constantly worrying about our next move.

So, while timing the market sounds appealing, it often proves to be more trouble than it's worth. Staying out of the market can often mean missing out on gains (although we can never predict future market returns for certain, which we'll cover in the next point). The mental toll of trying to time the market isn't worth the slim chance of success.

We simply don’t have the ability to predict the future

Of course, it’s easy to get lost and feel uncertain about our investment choices if you pay attention to the noise.

We tend to seek out information that confirms our existing beliefs. Some of us might read various analyses or listen to doomsday predictions and become convinced that a crash is happening soon. If we think the market will crash, we’ll pay more attention to analyses predicting a downturn.

However, the reality is that markets are irrational and unpredictable. Even the self-proclaimed experts get it wrong. But, if you just look at history, markets tend to rise more often than they fall. So, betting against this trend is usually a losing game.

We believe the best way to combat the noise is to do nothing. By that, we mean investing regardless of what happens in the market. The events that truly cause downturns are usually the ones we least expect.

Take the global financial crisis or COVID-19, for example. This event blindsided us and sent markets into a tailspin. If you’re thinking of buying back the market at the lowest point possible, you’d have to predict similar moments in history, which is incredibly difficult. Otherwise, we wouldn’t have been so surprised (and traumatised) by the pandemic.

Hence, it’s a massive waste of energy to keep guessing when to buy or sell. This is why we follow a dollar-cost averaging . By investing a fixed amount at regular intervals, we spread our purchases over time, which naturally smooths out the highs and lows of the market. It seeks to take the guesswork out of investing and reduce the stress of trying to predict market movements.

It’s easy to get sucked into chasing losses

The thing is, once you start buying and selling based on market fluctuations, it's hard to stop. You might get lucky once and make a profit, but this often leads to a false sense of skill. It's a bit like gambling: winning once makes you think you can win again.

Even so, you’re likely to make a wrong call eventually, leading to bigger losses. And if you do it long enough, that chase can turn into a cycle of stress and regret. That’s not what we want you to feel about investing.

The point of chasing Financial Independence is to live life in your own terms at some point. In our view, that means focusing on two things you can control (and are biggest forces in building wealth): how much you save and how often you invest regardless of market conditions. That’s it – and then let the power of compounding do the rest.

When you commit to these two fundamentals of long-term investing, we believe you really don’t have much to worry about.

“Should I invest in individual shares since they have more franking credits than ETFs?”

Yes, it's true that some individual shares can be fully franked, whereas many Australian ETFs usually have dividends that are about 75% to 80% franked. This difference comes down to the companies within the ETFs. Not all companies pay fully franked dividends, which affects the overall franking level of the ETF.

Companies that don’t generate franking credits usually fall into two categories.

Some, like multinational corporations, earn a lot of money overseas and don't pay enough tax in Australia to pass on franking credits. Others, like Real Estate Investment Trusts, are taxed differently – they pay out most of their earnings directly to investors without paying corporate tax. Hence, there’s no franking credits to pass on.

Now, while it might seem attractive to aim for the most franking credits, it’s not necessarily better. Franking credits come from taxes already paid by the company. So, more franking credits simply mean more tax was paid beforehand. It’s not ‘extra’ money.

For example, Listed Investment Companies (LICs) typically have fully franked dividends because they pay corporate tax. We can’t say the same with index funds that operate as trusts and don’t pay taxes directly. They just pass on whatever dividends (and franking credits, if there are any) they receive. Each investor is then responsible for paying taxes on their share of the income.

With that said, we wouldn’t really bother optimising an investment portfolio purely for earning franking credits. As we said, franking credits are not some sort of free money you can claim. The credits simply prevent you from being taxed twice.

So, there’s nothing you’ll get from holding 20 or 30 fully franked shares other than inconvenience and huge brokerage fees. If it’s diversification you’re after, we believe you’re better off investing in a diversified ETF . With this approach, you can automate with a “set and forget” strategy without eating into your gains.

Of course, there may be unique situations where it’s worth digging into for some people, which is why it's best to talk to a financial adviser or accountant. But if we were to grab and average Australian investor, again, we feel it’s probably not going to pay dividends (pun intended).

“How should I think about dividends from US shares vs Australian shares when they seem very different?”

Generally, US shares and ETFs pay lower dividends compared to their Australian counterparts. The reason behind this lies primarily in the tax system.

As we mentioned earlier, in Australia we have the franking credit system, which incentivises companies to pay out more dividends.

When an Australian company pays tax on its profits, it gets these franking credits. However, the company can't use these credits for anything. But if they pass them on to us, the shareholders, those credits reduce the tax we pay on the dividends we receive.

Hence, Australian companies have a strong incentive to distribute more of their earnings as dividends. It’s the only way to make those franking credits valuable. They do it because it benefits us, the shareholders, and keeps us happy. And happy shareholders are more likely to hold onto their shares or even buy more. That’s why Australian companies often pay out around 70% or more of their earnings as dividends.

(As a side note, it’s worth mentioning here that dividends are not ‘free money’. While dividends provide us with income now, they also generally reduce the company's value a little. And since they keep less profits or assets, the company is unable to reinvest much more into the company’s growth. This isn't bad – it's just a different way to receive returns compared to waiting for the share price to grow over time.)

In contrast, U.S. shares pay out a lower proportion of their earnings as dividends, typically around 30-50%. Instead, they reinvest the earnings back into the business.

This reinvestment can include buying new technology, hiring more people, or buying back shares (which can boost the company’s growth and increase earnings per share . This strategy contributes to the higher capital growth that we see with U.S. shares.

Now, despite the differences in payout ratios, there’s no “correct” choice between U.S. shares and Australian shares. All it means to say is that U.S. companies retain more earnings for growth, while Australian companies prioritise returning cash to shareholders.

Put another way, do we want more income now, or are we aiming for more growth in the future? Neither is inherently better. Like all things investing, it’s just about what fits your goals and situation best.

”What are your thoughts on ethical investing? Where should we put aside some of our ethical concerns in order to get ahead? And where might some of those concerns be unfounded?”

This is a complex topic, but we’re happy to share our thoughts.

First off, ethical investing sounds fantastic, right? Who wouldn’t want their money to support good causes? But let’s unpack it a bit…

Ethical investing – or ESG (Environmental, Social, & Governance) investing – involves putting our money where it will do good, or at least not harm. We might think that if we invest in companies doing bad things, we’re contributing to those bad actions. Conversely, if we withdraw our money, we might hope these companies will change their ways. But in practice, it’s not that straightforward.

When you sell shares, you are only passing them on to someone else

When we invest in shares, especially through index funds, we’re actually buying those shares from other investors, not directly from the company itself. So, we’re trading ownership among ourselves rather than putting new money into the company.

Put another way, avoiding these shares doesn't financially impact the company as much as we might think. Someone else will just buy those shares.

The company’s real lifeline is their profits from selling products or services, not from their share price. So, if we really want to make a difference, we need to focus on reducing their profits by not using their products.

Now, if we’re keen on supporting companies that align with our values, we might look into startups or equity crowdfunding. This way, our money directly supports their mission, which can be incredibly impactful.

Ethical funds are expensive to manage

Fund managers have to do a lot of homework. They have to dig deep and verify that companies are genuinely ethical – not just claiming to be. And the more stringent the ethical criteria, the higher the management fees that’s typically required to monitor the portfolio. These higher fees, in turn, can reduce your potential investment returns over time.

Lack of clear standards makes it easy for some funds to stretch the truth

The lack of standardisation is a big problem in ESG investing. What this means is that there isn't a single set of rules or criteria that everyone follows to determine what makes an investment ethical.

Different funds have different criteria, and what one fund considers ethical, another might not. Each fund might also have its own way of measuring and reporting on their ethical practices.

Obviously, ethical funds still want to make money. So, some of them might make their own ethical rules to include companies that are profitable but not entirely ethical, to ensure they earn impressive returns. Without standardised criteria, it’s easier for these companies to get away with it because there’s no clear benchmark to hold them accountable.

However, even the most well-intentioned ethical funds can sometimes fall short. There have been instances where funds marketed as ethical ended up investing in companies that didn't fully meet those standards. They discover too late that a company they invested in isn’t as good as they thought (for instance, the company was responsible for human rights issues within the supply chain).

As it is now, experts say that ESG investing is far from perfect. Because there’s no universal standard, it’s hard to measure the real-world impact of our investments. Are we actually driving positive change, or just feeling good about our choices? It’s tough to tell.

Since there's no single standard, we need to do a lot of our own research. This means digging into the fund’s criteria, understanding what they exclude or include, and constantly staying updated.

Obviously, not everybody has the time to do all of that, and some of us might just buy shares of whichever ethical fund seems to have the strongest track record. Either way, as long as you really understand the potential risks and trade-offs we mentioned, ethical investing can be a meaningful way to put your money to work.

What ethical means varies from person to person

If you ask ten different people what makes a company ethical, you might get ten different answers. Some people might focus on environmental issues, wanting to avoid companies that pollute. Others might care more about social issues, like how a company treats its workers.

Even so, without a common standard, it’s hard to know for sure if a company or fund is truly meeting ethical criteria. It’s also entirely possible that what seems ethical today might not be viewed the same way in the future, and vice versa.

In the end, we have to acknowledge that investing ethically is not black and white. The entire conversation is nuanced and requires a lot of thought and research.

We also want to say: don't feel obligated to make investment choices just because they seem to be the socially expected thing to do. If you’re not ready to dive deep into ethical investing now, that’s okay. It’s your money. You can always adjust your portfolio as you learn more and feel more confident about alternative ways to invest.

Maximise the pension or put more money into superannuation?

The question wasn't phrased exactly like this, but here's how we understood it:

” If I have $600,000 in superannuation and other assets, I can qualify for the full pension from the government once I reach pension age. This pension would help fund my life along with the dividend income from my super investments.

So, the question is: why should I work harder to grow my super from $600,000 to a million dollars or more? Increasing my super could mean getting fewer government benefits, as there's a point where the government reduces support for those considered wealthy.

How should I balance between working hard to become wealthier and just coasting along to maximise both my pension and dividends? ”

We want to reply with a comprehensive answer, but the reality is that it really depends on what retirement looks like for each of us. The key is understanding the trade-offs and what aligns with our personal financial goals and lifestyle preferences.

To start, consider your lifestyle goals. If you’re okay with a modest lifestyle, then coasting along with a mix of pension and super might be just fine. But if you’re dreaming of more – like traveling regularly or enjoying some luxuries – a pension and smaller super balance might fall short. Growing your super could be the key to maintaining the lifestyle you want.

Another thing to keep in mind is that the rules can change. Today, $600,000 might be the magic number for getting the full pension, but who knows what it’ll be in the future? Governments tweak these thresholds over time, especially as the overall wealth of the population changes. So, planning precisely around today’s rules can be a bit tricky.

Ethically, some of us might also feel uneasy about depending too much on government support. If almost all of us depend on full pension, there might be less to go around. So, the government might have to increase the pension age or raise taxes to keep up with the costs.

By growing up our super (and not being at the mercy of what the government will give), we are more in control of our financial future. At the same time, we are essentially leaving more for those who didn’t have the same opportunity to get ahead in their finances.

And lastly: the home ownership factor. If we own our home outright, our need to grow our super might not be as pressing. This is because we won't have to worry about rent or mortgage payments. But if we’re renting or still paying off a mortgage, having a bigger super balance could provide the financial cushion we need.

As we said at the beginning, it boils down to our personal goals and how much risk we’re comfortable taking. If we cherish Financial Independence and a higher standard of living without relying on what the government will give, then pushing to grow our super makes sense. But if we’re okay with a simpler life, you may be fine just coasting along.

Final thoughts

We’ve reached the end of our first Q&A session, and what a ride it’s been! They’ve sparked some great discussions and, honestly, they’re the kind of questions we often ask ourselves too.

So, if you’ve got more questions, don’t hesitate to send them our way. You can email us at hello@aussiefirepod.com or find us at Strong Money Australia on Facebook or @pearlerhq on Instagram. We’re genuinely excited to cover more questions in a future Q&A episode.

And if you’re listening to this on a podcast app, there’s usually an option to leave a comment directly below the episode. The main thing is: we love hearing from you. Whether it’s your own stories, questions about our experiences, or just anything that’s on your mind, we’re here for it.

Until next time, and happy investing!

Dave and Hayden