New to index funds: where to start?

Hi,

I want to start investing some money in index funds.

I'm 28, income 55k, married, about to start family.

I have about 10-20k which is available for investing and want to leave it there for the next 10-20years or so.

I'm interested in Vanguard, but I don't know where to start.

How much to invest? What to invest in? Do I need to make contributions regularly? How regularly, how much?

Any help would be great to get things started, thanks

 

Welcome to IC

Vanguard has some very good offerings for index investing. There are two main options - Exchange Traded Funds (ETFs) and Managed Funds - you could look at which suit you best based on some pros and cons.

ETFs
- Have absolute lowest fees regardless of amount.
- Are traded on the ASX like any stock
- Require brokerage to be paid to purchase/sell
- Aren't ideal for small regular contributions as you pay brokerage each time - minimum with big four is $14.95 a trade (NAB Trade I think). Need to be purchasing in $2k-$3k lots at a minimum IMO.
- VAS (Vanguard Australian Shares) and VGS (Vanguard Global Shares Ex-Australia) are the two first stops for indexers.

Managed Funds
- At Vanguard these are "retail" or "wholesale". Both have similar investment options, however you need a larger sum to invest to get into the wholesale funds (they quote $500k, I have heard you can get in with $100k vs $5k for the retail), the wholesale funds have the advantage of been much lower fee.
- Can set up a Bpay regular payment (I believe at no cost)
- Have diversified options in one product which include Australian and International shares, property, bonds etc. (you may not want this)

Small differences in fees add up over the long term. For example the retail Australian shares fund fee is 0.61% pa. higher than the VAS ETF (both invest in the same thing), at the minimum investment of $5k for the retail fund that is $30.5 extra fees pa - which will only get higher.

Hope that answers your questions.

Disclaimer I own vanguard ETFs

 

This was very helpful!

Thank you! It's great to be in the presence of like-minded people

1) Could I say purchase 10K in a VAS or VGS and leave it until another 20+ years?
2) Do I need to make any obligatory contributions to keep my account active?

Also, I'm looking through the Vanguard application form.
3) I don't have a broker/adviser. Is it recommended that you have to have one? Does CommSec count?
4) I have a CommSec account, does that count?
5) "reinvest distribution": Does this mean reinvest the dividends? Does this incur a brokerage fee?

 

Yes, you might also purchase $5k of each or whatever split you would like. ETFs are a great choice to set and forget for 20+ years.

No requirement at all. Many online brokers charge some kind of maintenance fee if you don't make a trade in x amount of time (these vary, some are a calendar year). From what I remember some are around $20 p.a.

Commsec is CBAs online trading platform, so you could use Commsec to purchase. You need a broker (online ones are cheapest) to trade ETFs. I use Commsec as that is who I bank with and I don't trade (buy and hold), they are not the cheapest however, especially in you don't qualify for their Internet Preferred rates.

This link - Trade Shares Online from $14.95, conditions apply - nabtrade - has pricing for the big four (CBAs Internet Preferred rates are there for the comparison)

Last I looked all offered a number of free trades when you sign up so you may not pay any brokerage for your initial purchases.

The adviser front it is a tricky one, I don't have/use one.

My experience with them are; My folks have one and I am not overly impressed with the advice they have received. The advice I received in a free consultation (which I did out of interest for laugh) was just generic based on matching me to a cookie cutter investment strategy. From what I have seen most planners sing a similar song, not sure if this is based on regulatory requirements, the popularity of things like modern portfolio theory, covering their asses or something else. There is strong evidence that they won't be able to give you returns above simple indexing (especially after fees).

Having said that I think there is a lot of value in good financial planners who are familiar with structuring investments efficiently for people with or planning to have substantial holdings (at least $200k-$300k from what I understand).

Yes, "reinvest distribution" is referring to reinvestment of dividends, often known as DRP or DRIP (dividend reinvestment plan). Using a DRP does not incur any brokerage and is a great way to compound your returns (DRP will not count as a trade, so will be required to pay the account maintenance if you don't make any trades).

Keep in mind I am just an amateur and these are just my opinions and experiences.

 

Yay for low fees

Do we need to create a Vanguard account to purchase these funds? Or if you have an existing online trading account eg CommSec, that would work just as well?

Great! Even less fees. Why didn't I discover this earlier? I discovered Vanguard on Youtube and propertychat forums. This should be taught at school

You make me feel bad

This has been great, I feel more confident buying index funds. Next stop, read PDS. Will update how things go

 

If going for the ETFs just use your online trading account

Interested to hear what you decide. Can't go too far wrong looking at what you are.

 

Have you thought about Vanguard US Total Market Shares Index ETF (VTS)?

I've been reading the book "The Simple Path to Wealth" by JL Collins.

Throughout the book he advocates the Vanguard Total Stock Market Index Fund (VTAMX) (ER/management fees is 0.05%) because:

- "you own a piece of virtually every publicly traded company in the U.S."
- "you are tying your future with the most powerful, wealthiest and most influential country on the planet"
- It is "self-cleansing": some stocks fade away and new ones are always on the rise

Chapter 17 he talk about what if you can't buy VTSAX, then you buy (from Vanguard):

- a low-cost index fund
- a total stock market index, but a S&P 500 index fund is just fine

Then if you can't buy any Vanguard products (eg. you're overseas and your country does not have Vanguard), then you buy:

- lower cost ETF versions (but tend to avoid due to sales commissions and/or spreads. He warns the trading costs when you buy it)

This now leads me to VTS, which is offered by Vanguard Australia: Invest 10K, set and forget for the next 20+years

 

I have, some thoughts;

- VGS is similar(ish) to VTS (~60%) + VEU (~40%)

- VTS and VEU (world ex-USA) are more diversified than VGS, and have slightly lower expense ratios if purchased individually.

- VGS is domiciled in Australia which reduces forms at tax time (by one) I believe. A brief summary can be found here Location, location, location! Is your ETF Australian domiciled? - Cuffelinks

- VTS and VEU together or individually are a more flexible solution to broad index investing.

For me, I am lazy and don't want to think too hard or do too much, international investments represent a small portion of our holdings and will likely continue to do so. Also I was looking to index the world vs index the US.

If you are following "The simple path to wealth" strategy (haven't read it but believe I have an idea of the concepts and the idea is solid in my mind) then based on what you posted VTS is the way to go.

*not advice

 

I previously had VTS & VEU but have since started adding VGS

With VTS there has been some benefit from currency moves also

Interesting to look back at all over various periods 3 month, 6 month, 12 month, 24 month

 

Here's a good comparison (from elsewhere) also

VTS+VEU
Pros:

• Lower fees
• Better liquidity
• Access to small cap and micro cap stocks (approximately the bottom 15% of the US market, possibly similar %s for other countries).Access to emerging markets

Cons:

• Extra work (W8-Ben form every 3 years).
• Requires two ETFs to balance
• No dividend re-investment
• Everything I've read seems to suggest you'll be subject to US Estate taxes for non domiciled persons. Because of Australia tax treaty you'll get $13k credit for the first $60k. Beyond that it's taxed at 35%.

VGS

Pros:

• One single ETF
• Easier administration
• DRP available
• No estate tax

Cons:

• Slightly higher fees
• Less liquidity (at the moment)
• No emerging markets (can be counter acted with VGE but higher expenses and then you're back to balancing two ETFs again)
• No small cap/micro cap

 

You need to be careful about buying any US-based assets if you plan to die soon. My father died recently and the estate is going to have to pay US estate tax on his US shares. If he had sold them before his death, there would have been no US tax at all.

 

index funds come in several flavours , equal weight , equal weight and smart beta , etc.

each has its own strengths and weaknesses 'equal weight ' for example equal weight means the same percentage of each stock held in the portfolio ( as close as they can ).

ETFs may become simple to invest in , but the extra research ( and close inspection of the PDS ) before buying is well worth the effort ,

I hold VAS , VHY and several other ETFs from other companies .