Investing In Index Funds

By , 31 January 2014

Investing In Index Funds
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

  • a simple business model
  • relatively few staff
  • high margins
  • a track record of reducing expenses
  • dominance in their niche
  • high return on equity
Investing In Index Funds

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
Vanguard ASX300 0% 0.15% na
Barclays iShares MSCI200 0% 0.19% na
SDPR ASX200 0% 0.29% na
Index Funds      
Vanguard Cash 0% 0.70% 0.0%
Vanguard Diversified Bonds 0% 0.75% 0.5%
Vanguard ASX300 0% 0.75% 0.3%
Vanguard FTSE High Yield 0% 0.90% 0.3%
CFS ASX200 Index   1.11%  
Managed Funds      
CFS Cash 0% 1.10%  
CFS Balanced 3.0% 1.81% 0.15%
CFS Diversified 4.0% 1.91% 0.20%
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:

  • distributions are more regular and predictable which helps me budget
  • I don't waste time doing research of questionable value
  • I can invest more regularly in smaller amounts
  • I feel like I own a piece of Australia

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.

About Roger Keays

Investing In Index Funds

Roger Keays is an artist, an engineer, and a student of life. He has no fixed address and has left footprints on 40-something different countries around the world. Roger is addicted to surfing. His other interests are music, psychology, languages, the proper use of semicolons, and finding good food.

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