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What on Earth is an index fund, anyway?

How do I choose which stocks I buy?

That’s the big question on my mind when I’m thinking about investment. Warren Buffet recommends index funds. They beat 99% of mutual funds over a 40 year period (I believe that the only mutual fund that has fairly consistently beat the market over a 40+ year period is Berkshire Hathaway—if I’m wrong, tell me in the comments).

An index fund has low costs (less than 0.5% generally) and tracks the market. Overtime, the market goes up and down, but the long term trend is up. This means that the most important thing is the amount of time an investor has in the market. Noel Whittaker, in “Wealth Made Simple” quotes the figure that $20, 000 invested in an Australian Index ETF in 1980, would be worth around $1 150 000 in 2019.

Think about it this way: if I buy individual stocks, and that stock fails, I lose my money. If I buy index funds and a company fails, the index might drop in price but it will naturally come back when a new company takes its place. This means I am highly unlikely to ever lose everything and historically I will almost certainly make gains.

One potential problem with index funds, is if I only invest in one country’s index and that country has a bad run. So for example, if all my money is in Australian Index ETFs, and the Australian economy tanks, my income and assets will significantly drop. If my money is invested across several country’s index funds and bonds, property etc, and Australia’s economy tanks, I’ve got much less chance of losing lots of money through sequence of return risk.

The biggest Australian index fund is Vanguard Australian Shares Index ETF, worth $5 748 Million. BetaShares also has an Australian ASX 200 ETF worth $809 Million. VanEck has an equal weight ASX ETF worth $1 167 Million.

Index funds have some of the lowest fees on the market. Vanguard VAS has a MER of 0.10% per annum. BetaShares has a MER OF 0.07% per annum. VankEck is the highest, with a MER of 0.35% per annum.

The buy-sell spread, or slippage, of all of these ETFs is less than 0.05%, except VanEck which sits at 0.10%. VAS is the most liquid, with approx $17 Million of daily transaction value, VanEck MVW  is the least liquid, with approx $2.5 Million of daily transaction value. Over the last five years, VanEck has had the highest return at 8.98%. Next is Vanguard at 7.33%, and BetaShares has only been around for two years, and thus can’t be included in a five year analysis.

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By reading this blog, you agree that you read it under your own risk, and Gill’s Practical Bookkeeping is in no way responsible for any harm or prejudice to yourself, your business, or any fictional examples above.

I am not a financial advisor. I do not have an AFSL. I am a chick who likes to read, think, write, and has access to google. You should treat this blog with the same seriousness that you would treat anyone whose main qualification is access to google. This blog is for entertainment purposes only. It’s a little like watching Big Bang Theory for finance nerds.

Anything you take from this blog is your responsibility. Nothing in this blog, even if you are mentioned by name, address, and telephone number, pertains to your personal situation. Anything you agree with, or disagree with, you are welcome to comment on, but your opinions belong to you. You are responsible for your comments. If they are offensive, I will remove them.

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