Stacked Finance

A look at the world of Finance…

Test that Theory: Acorns AU

I have had this app for about six months after seeing an article written about it. I’d done nothing with it until tonight. Now that I’ve set it up, I decided to turn my experience into content. Presenting Acorns AU:

Acorns is an American company that branched out into the Australian market in 2016. You can find the Product Disclosure Statement here.

So what is the Acorns app?

The app allows the user to invest their small change in the stock market and build a portfolio. According to their site, the construct and optimise 5 diversified portfolios with help from Nobel Prize winning economist Dr Harry Markowitz.

The portfolios are constructed using ETFs on the Australian Stock Exchange and basically depending on your chosen portfolio invests a percentage of the money you transfer into each category on your behalf. Hopefully, this grows your portfolio to the point you can then withdraw the funds and invest on your own or continue to grow the portfolio.

An ETF is an Exchange Traded Fund which is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares.  So kind of like a an investment trust where a bunch of people pool their money together to buy an asset, an ETF owns all of the assets and the bunch of people invest into the ETF. Often these are called Investment Vehicles, so don’t be surprised if I change the terminology slightly.

How does it work:

Once you’ve signed up, including a small identity check to comply with ASIC regulations, you’re asked to link a bank account. This bank account is your spending account and the app monitors how often you spend, only so that it can round up your purchases and invest the change. For example buying a coffee might be $3.40 and so Acorns would take the 60c to round it up to $4 and add it to your investment account. You can then also set up a funding account to either initially transfer funds to get your portfolio started or set up a daily/weekly/monthly top up.

You can also choose from 5 different portfolio types:

  1. Conservative;
  2. Moderately Conservative;
  3. Moderate;
  4. Moderately Aggressive; and
  5. Aggressive.

Each portfolio weights different cap stocks for your portfolio and invests accordingly. These weightings are based on risk.

So a Conservative portfolio has a higher weighting in Australian Corporate Bonds, Money Market and Government Bonds and less in the Large Cap stocks in Australia and overseas. These are then on a sliding scale across the portfolios and start to form opposite weightings in the Aggressive portfolio. As we learnt recently, the more agreesive the portfolio, the more risk and in turn the larger the expected returns.

The choice of portfolio is up to you and you can change at any time, although a warning does pop up, as changing your portfolio will change the outcomes and frequent changes can cause a lot of issues.

You’re also able to make voluntary Superannuation payments from the account, when you withdraw. It’s not an automatic set up. There is even an option to earn extra top ups by shopping with partnered retailers like CottonOn, Nike or Dan Murphy’s.

In the News:

Simply because it’s innovative and new, Acorns AU has featured in the news and of course it’s not all positive. So as with anything you do, research is key. What may work for me wand what I am comfortable with, may be the complete opposite for you.

There is an article in the Australian Financial Review, which you can read here and another here.

Final Thoughts:

I like the simplicity the app offers an otherwise complicated process. Given I’m still waiting for my account to be approved, it’s still a work in progress and that’s all I really have to say at the moment. Keep your eyes peeled for an update.

In Brief: Growth v Income…

So we were discussing a topic in my Channel on Campus Society and I thought it would be a good blog post as well, so here we are.

The question posed:

Would you quit your job, if you won 1 million dollars?

Surprisingly, a large number of responses were yes. Clearly they aren’t following this blog lol

From my work and current limited knowledge, in today’s economic climate I don’t believe $1,000,000 is enough to retire on and never work again. Recent studies have shown that Australians looking to retire soon need that at least just to see out their retirement before the aged pension kicks in. So how is the average millennial or Gen X supposed to make that work?

I then posed the question:

What if you were to invest it?

Arguably you could turn that million dollars into a decent income stream although, untested by yours truly, could you live off that income? Anyone willing to give me a million dollars to invest and find out, please let me know. This begged the question, what is an income stream? And thus, this post was born.


An income stream is where investments are made into income bearing streams that the investor then uses to either supplement their income or to live off. You can do this with a Self Managed Super Fund (SMSF) or your retail super fund may have the same option once you hit pension phase. This is where you would invest in things like Managed Funds that offer a monthly distribution or elect to receive dividends quarterly from stocks instead of reinvesting the money. These can be paid into a bank account which then transfers the funds at intervals or simply into your account and you spend at will. The benefit here is obviously the income, although your principle amount doesn’t change, the dollar value should increase over the investment lifetime.


A Growth stream is similar, although instead of receiving regular distributions, your investment grows instead. Similar sort of theory as a high interest savings account just with a better interest rate. You could elect to have the distribution or dividend paid out or you could have it reinvested and watch the investment amount grow further.

The key difference is whether you want the money now or in the future and of course all investments carry risk. The best person to talk to would be your financial advisor to see which option works best for you and your goals.

So there you have it, a brief rundown of the difference between Growth and Income streams.

This content has been prepared without taking account of your objectives, financial situation or needs. In deciding whether to acquire or continue to hold an investment you should consider the Product Disclosure Statement (PDS) available from your Advisor and assess, with (or without) your financial adviser, whether products fit your objectives, financial situation or needs. This content does not constitute advice and should not be used as basis for financial decisions.


Securities Wrap Up…

I didn’t give this subject enough credit. It was hard, but it was also interesting, and so I guess I enjoyed it.

Next up I’ll be doing Managed Investments and I’m trying to convince my boss to let me do the Superannuation subject as well.

We shall see…

Topic 7 – Regulation, Documentation & Tax

Ok kids, last chapter for this subject. I’ve already day submitted the stuff and enrolment forms for the third and final subject in this beast so it won’t be long before you get more. Next up is Managed Investments. Should be a breeze 🙂 now let’s finish this bad boy off. 

You will not find a more highly regulated, legislated and compliance ridden industry than the Finance Sector in Australia. Hands down. We have to comply with so many regulations its ridiculous. Due to the nature of our industry and who and what we deal with, we have to be careful with what we say, promote and do. We have an entire team of people at work dedicated to compliance and legal and they are always flat strap. 

Any regulation body is basically focused on making sure we aren’t scamming investors or leading them to believe investing will be better than it is. Non-compliance could cost us our Licence which means our business wouldn’t be able to operate. For a global company that’s a pretty big deal. So we make sure we ask the right questions and any marketing or public facing material goes through two lawyers, our compliance manager and the company secretary. I’ve been part of the editing process for a document and the smallest things like tone are absolutely ravaged by compliance and legal. It’s cray. 

Insider Trading is a big deal too. Essentially, buying or selling shares based on knowledge not in the public space is insider trading and you’re naughty and will end up in jail, fined and out of the industry permenantly. This includes for example, if I told my mum or you guys to buy or sell shares because an event was happening that hadn’t yet been announced and you made a gain or loss from that, we would both be guilty. 

Even the types of documents that must be provided are highly regulated and must be approved by the Australian Securities and Investments Commission (ASIC) or at least lodged with them. The ASX also likes a different set of docs to be lodged with them, for different reasons and at different times. Just for fun, none of the documents are the same. 

Then there’s tax. God damn tax. Again we have a team of about 8 people just for tax stuff and they are always busier than any person needs to be. Tax here is complicated and this book doesn’t give a proper overview. I find that disappointing but I’m glad I don’t have read more. 

That brings Securities to a close. See you for Managed Investments!

Topic 6 – Evaluating & Trading Securities…

Second last topic. Hallejulah! Rejoice! We are almost there!

I found valuing shares to be painful in the Finance subject I completed last term, yet I passed this section on my recent exam no problems. The world is a really strange place.

Pricing a share is not easy, although managed funds generally start at a dollar a share, some stocks will rise. Even looking at the ASX top 50 companies, prices range from small $2-$5 per share all the way up to $124 per share. So, are these shares fairly priced? I don’t know, but technically, this is what the market has set them at based on the company’s current value.

Initial Public Offering:

When a company floats on the stock market someone sets a price per share. Difficult as it is, the factors considered include, future dividends, subscription rates, capital gains, and expected returns. This is a tricky process. The underwriters must take up any surplus stock if the IPO is undersubscribed and must prorata if it is oversubscribed. Neither option is good for the investor or company. If the share isn’t priced properly it can also attract stag investors who buy and sell quickly, looking to make a quick profit. 

Analysts need to look at future cash flows and interest rates to determine the best discount rate and calculate the Net Present Value,which is then used to evaluate the share and its viability on the market. 

Intrinsic Value: 

Intrinsic value is the opposition to market value. Essentially, what it’s worth vs what it’s trading at. If the IV is less than the MV, the share is overpriced and selling should be considered. The reverse is also true. 

Other Considerations:

Comparing peers, ratio tests and Price-to-Earnings Ration for comparison are all actions also undertaken. Gearing is also considered, as the company’s debt will play inthe process of pricing. 

Even the media makes an impact on share offer, their discussions of the company, it’s directors and the share offer can impact an investors decision to purchase or sell. 

Choosing Stocks:

Apparently there is a method to this and my method of picking by colour or price is apparently not the way. There are things like dividend yield, growth and relative value to consider as well. 

All this said, I’m sure a savvy person could do their research and consider the stocks to purchase. For me, I’d rather pay someone else to do it or invest in a managed fund that has exposure across the industries. Less work for me, but equal gains.  

Topic 5 – Debt Securities

Warning: If I make any kind of 60’s reference, I’m listening to a 60’s playlist while I read, so that should explain any language variations.

Debt Securities are exactly as the name suggests. Debt. A large number of securities are issued to fund government budget deficits. Comforting.

Even though the investor is essentially purchasing debt, Debt Securities are still saleable in the marketplace. So if you don’t like the debt anymore, pass it onto the next poor sucker.

At least these are higher yielding than cash. I’m lead to believe though, that investing in cash is pointless as it provides super doper amounts of risk protection and next to nothing in returns. Woah hold up, Debt can be used to stabilise a portfolio? Ok I can see how that would work, diversification and all.

Ok so it’s kind of like an interest only loan where you make regular interest payments and then the principle on the maturity date. So really the profit is in the interest.

Debt market and interest rate market are interchangeable terms, and also confusing. Could be the lack of coffee though. Ah it’s a bank thing, they apparently trade billions a day on the market. No biggie.

Apparently our market has two segments, coz one wasn’t complicated enough.


Oh good, Debt is more of a wholesale investor dealio. Although, apparently the Baby Boomers wanted a piece of the pie. Retail investors have been gaining increasing exposure to debt instruments through ASX-listed debt securities including:

  • corporate listed debt
  • exchange-traded Treasury bonds (ETBs)
  • exchange-traded bonds (corporate bonds — XTBs)

There’s a range of participants in the market as well. Obviously there’s only two categories, Borrowers and Investors, but it’s basically a free for all as who can play those roles.

Depth and liquidity are relational in this market as well, I’m starting to think, that’s across the board though and it makes sense. The more people willing to buy, makes it a seller’s market. Just like the property market.

There’s also apparently a lot of security and turn over in Government guaranteed securities. No faith in the Government themselves, but lots of faith in the monies. Although Australia had no Treasury Notes to poke a stick at between 2003 and 2009 because we had no deficient! Go team!

Just so we are clear, Interest Rates are so boring.

Observed or actual interest rates are often called ‘nominal rates’. Expected inflation is subtracted from the nominal interest rate to give what is referred to as the ‘real rate of interest’.

Did I read that right? I think someone was confused that day. Would it not be more efficient to have the correct wording, where observed or actual interest rates are the ‘real rate’ and the calculated ones are nominal. That doesn’t make sense.

Short Term Interest Rate Securities:

Held for a period less than 365 days, a short term security is used for short term savings. The types include Cash, Treasury Notes, and Repurchase Agreements. The purchase price is less than the face value at maturity by the amount of interest that will be paid throughout the term. For example, the Note may have a Face Value of $100,000 and its calculated payable interest is $10,000 so the purchase price would be $90,000.


Long Term Interest Rate Securities:

As the name suggests, Long Term Securities are held for a minimum of 365 days. Typically, LTS types include, Bonds and Tenders.

Due to the nature of LTS, there are a lot of different benefits and dangers. They use the discounted cash flow valuation method.


Wait, you can calculate volatility? What will they think of next? Volatility is the degree to which the purchase price of a security moves with a change in yield. Price volatility measures the change in purchase price for a given change in interest rates (usually 1%).

Usually, the longer the maturity date, the higher the volatility. Largely because none of us have a crystal ball and don’t know what the future holds, so a longer maturity gives the market time to do all kinds of weird and wonderful things which may mean that the initial investment is not returned in full.


Topic 4 – Equity Securities

As at the end of January 2016, the ASX totalled 1.24 Trillion dollars! Making our market the 16th largest in the world. Makes you feel a little small doesn’t it?


We’ve already defined Equity Shares, but basically if you own an equity, you own a piece of the company that issued the shares. You are entitled to a portion of the profit equal to your share and also have an opinion on how the company progresses also in proportion to your shares.

Equity capital is also referred to as risk capital as there is no guarantee that the initial investment will be returned or that any dividends will be paid. Even if the company is subsequently wound up, equity investors are last on the list of repayments.

Other investment types linked to equities are derivatives, which do not infer ownership of the company.


Equity securities are a primary element in portfolios and can be held directly or through an exposure in a managed fund.

The Australian equities market is quite volatile and subject to commodities due to a large portion of the market weighting in resources (ie. Mining). The other dominant sector is Financial Services (Go Team!)

Market Liquidity is super important and really keeps the whole market going. The more buyers and sellers in the market, the more liquid it is, which means investors have quicker access to their funds.

In Australia, we have two types of investors, Retail and Wholesale. In my job though, we recognise Retail as split into every day investors and Sophisticated or Private Wealth Investors. Generally, the latter has over $750,000 invested with us alone.

Wholesale is considered by the text as any investment over 500k, we like to raise the bar though. This distinction is made though because under the Corporations Act, we need to treat them differently.

I was right, the rest of the chapter is big spaced out paragraphs about the different types of investment vehicles. Not that special.

Topic 3 – Foundations of Securities

A Security is documentary evidence of the ownership of a financial asset that is exchangeable or saleable in a securities marketplace.

They come in two categories: Equity or Debt securities.

Equity securities refers to a security that is ownership of an asset in part and commonly known as a share. Shares and Equity are generally interchangeable terms as well.

Debt securities are an obligation by a person or company to pay specific amounts to another party. Essentially a loan, not an ownership of an asset.

Both markets can then also be subdivided into the primary and secondary markets.

Primary equity markets are generally where capital raising (floats) happens. For example, the recent IPO of Snapchat would have been in the primary market.

The same sort of deal happens in the debt market; the terms are just different. So instead of being an investor or shareholder, you’re a lender.

The secondary market then facilitates the subsequent buying and selling of the shares issued in the primary market. This is where the daily trades are.

The ASX is the Australian equivalent to the NYSE or LSE and is a multi-asset class exchange group. Also, its listed on its own stock exchange and we did it first. Australians are a bit wanky like that

We all love a short chapter.


Topic 2 – Assessing Financial Risk for Client Portfolios

Each of these chapters are around the same amount of pages…cue heavy sighing.

So what is risk? Apart from a crappy board game it is the concept that for each action there is an inevitable reaction and risk is the chance we run that the reaction will be bad or negative or perceived to be shitty. However you want to colour it, that’s how it is.

For example, I choose to walk across the road without the light. There are a number of reactions, but the end goal is to get to the other side unscathed. The risk is that I may not, because I was hit by a truck, or a giant Hippogriff swooped down to take me off to Hogwarts. That’s the risk I take.

Same if I took 100k and invested it into the stock market in a company. I run the risk of losing every cent. I also run the risk of doubling my money.

At least that’s how I see risk.

According to my little (Read: Insurmountable) book:

Risk is defined as the chance that an unexpected event will cause loss or injury and can be categorised into two different types – pure risk and investment risk.

I like my explanation better.

Pure Risk can be slightly mitigated by insurance but essentially is every day risk. For example, I could have a car accident on the way home and write my car off. The risk is there but slightly mitigated by the fact I have insurance.

Investment Risk is the chance of loss or gain being made.

Investors generally act rationally is a load of horseshit! I work in Investor Relations and I can absolutely attest to that being a steaming pile of horse manure.

Risk Profiling:

Put simply is the method used to determine and Investors highest acceptable level of risk. Basically, you’re not allowed to assume the Investors predisposition to risk. You need to know their goals and fears, time horizon, and also their moral code. For example, would your investor be ok with investing in a company that makes pornographic material, or tobacco and alcohol companies? Yes, this is a thing. Interestingly, this is actually a legislated obligation under the Corporations Act.

This book makes out that Investors aren’t capable and that’s why they need a financial planner, and the financial planner wears the responsibility if something goes wrong. They have to take on almost a psychologist role to cajole and comfort investors. Not the case. That’s bull. If you are investing money, do your own research as well. Arm yourself with the knowledge and don’t be an idiot.

Model Portfolios:

Bell Curves: Hated them in school, still find them thoroughly unattractive.

However, they apply here. So there are seven types of models in Australia and they range from ultra-conservative to super-risky. My words, not theirs. The bell curve applies to how many people are in that model. So models 4 & 5 being in the middle have the most, and then it sort of peters out as you get to the edges. Kind of like the political spectrum. Most people are in the middle with views and then you have the outliers on the fringes. We call them the extremists or fundamentalists. Fiscally speaking a fundamentalist, or super conservative model isn’t going to earn you large sums of money, but its virtually risk free. The Extremists are sitting over there with model seven wearing the most risk but also the higher return potential. So really no one on the outliers are real winners, because of the risk v return factor. Also kind of like politics. The future is in the middle.

Of course people react negatively to a loss. What do you expect? Not everyone understands Capital Gains and Losses. I don’t fully but I get in some portfolios a loss counteracts the gain for tax purposes and this is not a bad thing.

Reviews are also important in this process especially after significant life changes, like marriage, children or divorce.

Risk Measurement:

Standard Deviation:

Horrible little calculation this one. I learn every time I repeat the statistics course at uni, and promptly forget it. Maybe they have an easier way of remembering it. So far, I understand that the higher the Standard Deviation, the higher the risk. Alternatively, the larger the spread of returns, the more volatile the asset is.

Correlation Coefficient:

Used to measure how similar the return patterns are for two investments. Results come in three forms, Positive, Negative and Independents. Positives have a similar return pattern, Negatives have a dissimilar, Independents are just marching to the beat of their own drum and have no discernible similarity. In other words, the hipsters of the coefficient world.

Interestingly, Negatives give the maximum in diversification and risk reduction. Also Independents give smoother returns for Investors.


Basically the relationship of the investment or portfolio to the market or chosen benchmark. It’s basically the degree in which the investment moves. A Beta of 1 will move parallel with the market whereas a Beta of 2 will double the market movement. The higher the Beta, the higher the risk as well.

The downside to Betas is that they are calculated on historical data so their relevance to the future is a lot less.

Limiting Risk:


Gotta Risk It to get the Biscuit

Limiting risk is what everyone wants to do, but how far can you limit it?

The formula to do this is below:


Looks scary right? It kind of is, but also kind of not if you have all the information to input. There are other, scarier formulas, which you can see here.

Interestingly, having a negative correlation between assets is a good thing. Mainly because it means they won’t be doing the same thing at the same time and so you won’t have super gains or super losses at the same time across the portfolio and will keep the portfolio level.

Efficient Portfolios:

Didn’t even know this was a thing. Apparently a portfolio is efficient if no other portfolio offers higher expected returns with the same or lessor risk. Seems legit.

Diversifiable Risk and Risk Control:

Diversification of asset classes and is possibly the only risk reduction technique.

We have different versions of Diversifiable Risk:

  • Business Risk;
  • Liquidity; and
  • Credit Risk.

Diversification done well offsets the effects of a single or few poorly performing assets in a portfolio.

Market Risk however cannot be controlled by diversification. For example, the sub-prime crisis in the US was an event that affected the entire market and so everyone felt the pain.

Sharpe Ratio:

A way of calculating the risk-adjusted return of an asset class is by dividing the annualised excess return by the risk. Also known as the Sharpe Ratio.

Sharpe ratio = (Asset Return − Risk-free rate)/Standard deviation

Pretty simple stuff.

Risk Minimisation and Management Methods:

Separable Assets:

Where the asset can be split so it can be sold in parcels rather than as a whole asset. For example, units in a trust can be sold according to limits in the PDS, whereas if your asset is a house, you would need to sell the whole asset instead of a portion.

Cash Floats: Basically keeping cash on hand in very liquid stocks or cash itself to cover any short term cash requirement of the investor.

Setting Limits and Return Targets:

Limiting the variables of a portfolio by setting a limit to the total risk the investor is willing to bear.

Regular Communication:

Basically talking to the investor instead of acting alone.

This chapter was so long and really hard to focus on. We got there in the end. At least Chapter three is less than half the size.

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