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Index Investing Newbie!

Discussion in 'Managed Funds & Index Funds' started by Investaholic, 2nd Sep, 2018.

  1. Investaholic

    Investaholic Member

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    Hi all,

    While I am well versed in real estate investing, I am only starting to learn the nuances surround the share market and had a few questions I was hoping to acquire some help with! Apologies for the extremely elementary questions, though I really am starting from the ground up here and would love some support.

    At the moment my wife and I have around 20-30,000 to invest (as well as a kid on the way) and (due to aforementioned child) are looking for passive investing strategies, such as Index investing with Vanguard. We are extremely good with our money and are just looking for a platform that we can invest passively and have our money compound for us in the background. We are now 29 and 28 and our desire is to build our wealth to ensure that we can retire comfortably in our 50s. This would be a 20-25 year play. Our aim is to diversify our index investing with investing in real estate.

    1.) Is Index investing an effective way to build wealth if we are looking at contributing approximately 1000 per month for the next 20-25 years? How 'passive' is index funding?
    2.) I have been listening to a variety of US based podcasts on share investing (which is somewhat confusing me), though which Vanguard fund(s) would you recommend I start with if my goal was wealth accumulation? Would it be better to simply invest in only the Australian market, or diversify into the US too?

    Many thanks in advance!!
     
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  2. twisted strategies

    twisted strategies Well-Known Member

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    welcome to InvestChat

    first see if this appeals ( works for YOU )
    Dividend Reinvestment Plan
    Dividend Reinvestment Plan - DRIP


    The Perks Of Dividend Reinvestment Plans
    The Perks Of Dividend Reinvestment Plans

    secondly although i hold several flavours of ETFs , i also hold several LICs

    and each has their flaws and strengths

    TIMING can be very important ... would saving those monthly buys to say a 3 month or 6 month buy ( or whatever is in that account if the market dips ) be better for you

    regarding Vanguard products i bought VAS and VHY in 2011 ( and DRP both ) depending on how you judge performance VAS is doing better BUT if you look at unit growth via the DRP VHY has done better ( made those 'good moments ' work better for the holding )

    'passive' can be as passive or active as you like , you might start off with one ETF and then buy a second ( different ) one the next time or sometime later .

    since you have experience in real estate , i am going to guess you have a good grasp of financial details and contracts ... reading all the pesky literature on EACH ETF will help you no end those tiny details can make a BIG difference to your outcome .

    ( currency ) hedging and leveraging can be a godsend or curse depending on your timing and financial needs ( i prefer neither , but that is just me ).

    US domiciled funds have extra tax implications ( which may or may not annoy you )

    Investment Products


    Investment decision-making: Avoid shortcuts

    Investment decision-making: Avoid shortcuts


    i am not a big fan of international shares ( too hard to get accurate research unless ASX listed )

    i prefer to hold individual international shares ( most are ASX dual listed ) and some exposure via LICs the only international focused ETF on my radar is IKO hoping the the 2 Koreas work towards unification

    again timing of what you buy will make a big difference to your outcome ( especially if you DRP as well )
     
  3. Hodor

    Hodor Well-Known Member

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    Index investing is as passive as it gets. Given the vast majority underperform the index post fees it should be a no brainer for most. If you stay the course and regularly invest you are basically gauranteed to do well, better than 80 to 90% of people.

    There are a number of ways to index with Vanguard.
    Retail funds, wholesale funds (100k min) and etfs. The funds allow bpay which is great for your 1k a month set and forget. The retail fund fees are a little high given your goals (over 25 years with a growing balance they add up). Wholesale and ETFs have similar fees, ETF you need to use a broker (commseC or similar) which incurs some brokerage when buying and selling.

    Finally you need to pick what to index, Australia, US, world developed etc. Or there are some diversified products that include a range of each.

    I can't make recommendations, I'll mention some of what we have done and a basic overview.
    For the index part of our portfolio I went ETFs as I didn't have the funds to jump into the wholesale fund.
    I think a home country bias makes sense for an Australian, balances currency risk and franking credits are a bonus. So a 50/50 split between VAS and VGS is where I started. VAS is ASX300, the 300 biggest listed aus companies. VGS is world developed excluding australia making it about 60% US. VTS is just US however it is domiciled in US which makes for tax considerations.

    There are other options aside from Vanguard too in this space. Although I don't consider any superior to vanguard some might offer an index you like (such as australian domiciled us indexes)
     
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  4. Investaholic

    Investaholic Member

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    Thanks so much twistedstrategy! I really appreciate your ideas. I will definately have a look at the dividend reinvestment plan (sounds interesting, and have never read anything about this before!)

    Many thanks again
     
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  5. Investaholic

    Investaholic Member

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    Thanks for the simple and easy to understand info Hodor! Yes, at this point my wife and I both enjoy our jobs and aren't looking for a way to get rich quick, though we just want a safe and (relatively) reliable way to be able to have the freedom to cut back on work in 20-25 years. So I think mixing our real estate investments with some low risk index investing sounds exactly like what we're after.

    I have read that the wholesale funds are the way to go. However, like you, I don't think we would be able to get 100K together without a loan. Do you know if there is a minimum weekly/monthly repayment needed if using the wholesale fund? So, if I did go with ETFs now (I agree that I would want to minimise fees) I would just need to sign up with a broker and start the process...and later down the track possibly sell and buy into the wholesale fund? Is that possible/worth doing?

    Many thanks
     
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  6. twisted strategies

    twisted strategies Well-Known Member

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    this concept works much better over a long term and if combined with the DRP can be very nice

    Investing 101: The Concept Of Compounding

    Investing 101: The Concept Of Compounding

    again you have to think carefully about what suits you best

    i started out in 2011 going for the DRP at every opportunity but my circumstances have changed so am NOW preferring 50% DRP and 50% cash ( to help resist inflation but to help improve my income at the time .

    but right at start of your investing adventure is a brilliant time yo consider these concepts ( to embrace them or dismiss them )

    cheers and good luck

    your real estate experience will also be ( sometimes ) helpful in shares and ETFs
     
  7. twisted strategies

    twisted strategies Well-Known Member

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    i chose to buy my ETFs through a ( on-line ) share broker because i already had an account to facilitate the transfer of a share portfolio i had inherited .

    now an interesting question is IF i had not inherited those shares , would i have continued to invest in property ( and improving those properties ) exclusively

    by buying via on-line broker i can be very flexible buying different ETFs by style and provider as i see opportunities ( not always relying on index gains to do the heavy lifting )

    but again what suits you best is the correct answer for you
     
  8. Hodor

    Hodor Well-Known Member

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    I haven't read the product details in a little while. I believe there might be a minimum of some sort on wholesale contributions, not sure if it is flexible if you set up a regular BPay every month.

    An online broker is the cheapest and easy enough. The major banks all offer online broker services, there are some other players that are cheaper. You are probably looking at $15 or less a trade (up to $5k purchase), maybe quarter purchases would be something to consider with your monthly contribution amounts as a balance of having cash in the market vs sitting in offsets.

    You can sell up and go wholesale down the track, the problem arises that you then have a CGT event so you need to consider the benefits and costs of doing so.

    DRP is a cheap way to reinvest the dividends, which you can take as cash or automatically reinvest. You do need to keep track of date and price of each DRP for CGT etc. I just add it all to a spreadsheet once a year, some people find this too much. There are plenty of arguments of the pros and cons of DRPs. Good elements are that it takes the human factors out of the reinvestment process and ensures you reinvest dividends. You can always switch to taking the dividends as you wish. I use DRP of most of my holdings and new capital to maintain the allocations I want (ie a 50/50 split on my international/aus index) if the allocation drifts too far I would take the dividends and top up the under performing allocation.

    *All my investments are buy and hold, not all are indexes however. In hindsight this is more to keep me interested than necessary and probably won't enhance my returns much if at all.
     
  9. Investaholic

    Investaholic Member

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    Thanks Hodor!! Lots of extremely useful stuff here (I think I will be continually returning back to this post).
     
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  10. Investaholic

    Investaholic Member

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    I'm also wondering what the main benefits of investing in index funds over pumping money into superannuation are? I have known people who have salary sacrificed into their super for many years to minimise their taxable income and to put away a nest egg, though it seems that this is generally frowned upon? I know all about the inability (or expense) in pulling out these funds if needing/wanting to stop work early compared to selling shares/property. Also, with some funds you can be paying much more than with an index fund in terms of fees (I am with First State and get quite a reasonable rate), though are the percentage returns much higher if investing in Index Funds over superannuation (taking into account the tax benefits of reducing taxable income)? Very interested in the thoughts of the community!
     
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  11. twisted strategies

    twisted strategies Well-Known Member

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    index funds as the name suggests try to track the targeted index accurately ( not outperform it )

    low fees ( and arguably lower risk ) is the main selling point

    other types of investments will have better and worse results than the index ( at varying times ) because they try to outperform the market ( when they can ) but take on more risk to do so and incur more costs

    one of Buffet's rules is to NEVER lose money and an index fund is pretty close to guaranteeing to do that ( while hopefully growing courtesy of inflation )

    now a falling share ( or property ) market is not a bad thing if you are able to buy at that time

    a formalized super fund ( no matter who manages it ) is 'a pot of money ' and that will attract politicians who need to spend ( other folks money ) to buy votes .

    so therefore what you hope for the future is likely to conflict with political designs ( and tax obligations )
     
  12. twisted strategies

    twisted strategies Well-Known Member

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    i went outside formal super , because i needed to grow the nest egg quickly and aggressively ( but not recklessly )

    i felt asking a manager to do that on my behalf ( and within my comfort zone ) was too much to ask
     
  13. Hodor

    Hodor Well-Known Member

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    Super is a low tax structure. Concerns for many are access and changes, both will possibly change over time. Hard to imagine the tax benefits of super becoming worse than individual names, I won't say never, it would destroy most of the incentive however.

    Returns (in same tax environment) are a tough one, historically the returns have been ok with some of the low fee funds and the volatility has been lower.
    If you are a strong believer in indexing you can implement a pure index super through low fee industry super funds if you look about, no need to go SMSF. I haven't looked closely, I would suspect the major industry super funds holdings aren't too far off indexing the listed markets with a little spice from private equity in some.
     
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  14. Investaholic

    Investaholic Member

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    Yeah, access and changes is currently my concerns as well. I was salary sacrificing into my super for a while, though stopped to build up my offset and savings (not sure whether I should have just kept contributing or not!!).

    Hodor we're just in the process of having some property vald - I was contemplating using 100K of the equity to buy into the wholesale funds with Vanguard rather than using to buy more (nothing has really got my attention at this point in time in real estate and the perfect storm that is APRA and interest rate rises has me a little concerned). What are your thoughts on using equity to purchase shares? Bank has already said that they allow it and is fine. I assume that it works in much the same way as using equity to buy property (apologies if this is a pretty obvious question!!)
     
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  15. twisted strategies

    twisted strategies Well-Known Member

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    personally i am very debt adverse ,

    and more so on leveraged equities ( and obviously ETFs )

    the exception i MIGHT consider , is a margin loan taken out AFTER the market melts down ( risking a double or triple bottom )

    your ability to watch the market closely should be considered here ( i have heard complaints uf stop losses not working with 100% certainty )
     
  16. Hodor

    Hodor Well-Known Member

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    I feel the same way, rising rates without corresponding wage growth may result in a flat property market for a time. No certainty, not willing to have all my eggs in the property basket in part for this reason.

    You need to be careful with the movement of funds to show they are clearly used for investment purposes to maintain destructibility, dropping them in a transaction account before buying shares may not be suitable - speak to your accountant.

    Is your purpose just to use equity to buy shares, or is it to get into the wholesale fund so you have access to it for long term? If so confirm with Vanguard they still accept $100k as things change.

    Distributions from some funds (potentially the ones you are looking at) can be lumpy and irregular, will this make repayments difficult? (I don't like the high yield plays from anyone)

    As for leverage I'll just speak about some of my/our thoughts and situation, take what you want.

    Leverage is something I have thought over for our circumstances. I will consider further leverage in a market crash type situation as the risk of a market crash shortly after I invest and having a negative equity type situation (loan greater than share value) doesn't sit right with me. We also have a young family and a mortgage that takes up a greater portion of our income than I would like so that has been factored in. A debt recycling strategy on our PPoR is something we will explore once things settle a bit, for this VAS/VGS and LIC index proxies when at a discount will be the main choices.

    Property isn't something that interests me much as an investment these days due to expense, ongoing maintenance and possible interest rate headwinds. Our investments will ideally be lazy and offer us flexibility. We only have a couple of IPs and I hope to sell one once my price target is reached and move proceeds into shares. Property may likely still be the fastest way we could grow our wealth, the risk and effects of a lost decade with IP investments would hurt vs our share strategy.

    I am becoming more so myself

    My thoughts differ here, if I need a microscope to see it then it isn't obvious enough. Events that slap me in the face that I can't hide from are the kind of events I am looking for. IMO the market is otherwise rather efficient and hard to exploit for most. My strategy is stay the course.
     
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  17. twisted strategies

    twisted strategies Well-Known Member

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    using second-hand experience on this ( i don't have a margin loan )
    an associate does have a margin loan and while an experienced ( non-professional ) trader , and using moderate leverage , he DID have a business during the period 2010 to 2016 and was margin called several times in that period , including one time during a business related road trip to Sydney .

    having a margin call and inconsistent phone/internet signal AND in a state where finding a bank branch is not so easy ( not a BIG 4 bank and traveling in rural areas ) , made for some stressful moments despite having adequate cash reserves but in the wrong place .

    the said associate is mostly cash at the moment but that road could have been very costly ( considering it was a lender panic attack that inspired it ,)

    a slip of 25% ( ish) is very possible in the current nervous market .