Investing In Index Funds
After calculating my returns on ten years of investing in more or less whatever sounded good I realized that I really needed to learn something about investing.
So I read and read and read everything I could find about investment (not really everything - there is a whole aisle dedicated to investment at the university library). The idea of Value Investing grabbed me most. It's the method made popular by the world's most famous investor, Warren Buffett.
The idea is simple. Buy good companies at good prices. So first I went about finding good companies. To me these are those with
I spent months going through the market meticulously reading annual reports and calculating fair prices for the companies that met my criteria. Then I bought shares in those whose prices gave me the biggest margin of safety.
Now, two years down the track I'm excited to bring you the results.
I was totally wrong.
After all those hours pouring over data and spreadsheets, the shares I had tagged to sell (eg Telstra, Wesfarmers) outperformed my new purchases (eg ASX, Westpac) more than significantly.
There goes my career as a professional investor.
But it made me appreciate the difficulty of predicting the future.
Now I've given up picking stocks and I don't believe fund managers can do it either, so I just buy index funds at whatever price they're at. Investing in an index fund is like investing in everything on the market. It's a way of saying "despite all its shortcomings, capitalism does work".
Take a look at the fees on these index funds vs some of the managed funds I've invested in before:
|ETFs||Entrance Fee||Annual Fees||Buy/Sell Spread|
|Barclays iShares MSCI200||0%||0.19%||na|
|Vanguard Diversified Bonds||0%||0.75%||0.5%|
|Vanguard FTSE High Yield||0%||0.90%||0.3%|
|CFS ASX200 Index||1.11%|
|CFS Diversified Nil Entry||0%||2.15%||0.20%|
The entrance fee is charged when you enter the fund and the buy/sell spread is like a brokerage charge that is factored into all your transactions. ETFs are Exchange Traded Funds which you can enter and exit via the ASX as if you were trading company shares.
I still don't believe I paid nearly 5% + 2% per annum to support some fund managers luxury lifestyle / gambling habit. Then there are the practical advantages of investing index funds vs conventional investing:
Finally you may notice how dirty cheap the fees on the ETF funds are. The downside is you have to pay brokerage and possibly a buy spread caused by supply and demand which adds to the cost. Wouldn't it be great if you there was a way to invest in an index fund at these rates but without the brokerage?
Well there is!
But you'll have to wait for next time until I tell you about that.
Roger Keays is an artist, an engineer, and a student of life. Since he left Australia in 2009, he has been living as a digital nomad in over 40 different countries around the world. Roger is addicted to surfing. His other interests are music, psychology, languages, and finding good food. Click here to subscribe to his weekly blog, or stalk him on Facebook and Twitter.