Index funds | Slack Investor

Spaceship … Let Me Out Here!

Hey you Millennial dudes and hipsters… Suh!

Space … sounds good … its so snatched! … Spaceship … even better. Come on … lets get on board. Superannuation is so boring … but Spaceship .. Its so now – isn’t Elon Musk working on one?

What Slack Investor is referring to is the reach out to the younger crowd of cool new investor products that will look after your superannuation in a really cool way. Spaceship, is just one of the new breed of disruptors (e.g, Zuper, MobiSuper, Grow Super) that is encouraging you to put your super investments into a high tech sounding enterprise that focuses on new technology companies. It seems that their marketing push has been successful with at least $100 million in funds under management for Spaceship.

Now, Slack Investor has a soft spot for disruptors that make use of new technology to help the investor work more efficiently through lower costs and new platforms. However, Spaceship and their ilk are not, so far, disruptors. They are just a repackaging of the same old greedy financial industry that are trying to separate the investor from their hard earned loot.

We had a look at the critical importance of fees in investment in an earlier articles here and here. Despite the marketing fluff, Slack Investor is getting off the couch and drilling down. A highly recommended process before you part with your money to anyone. Spaceship fees are 1.6% plus administration, MobiSuper fees 1.5% plus admin fees, Grow Super fees are 1.85%! Fees are critical to investment returns.

The same drilling down process can be done in the USA with Individual Retirement Accounts (IRA) or employer sponsored 401(k) plans. Google is your friend – Long term performance and Fees Fees Fees is what you are looking for. A good articles for the USA on fee impact can be found here, And for the UK here.

The Australian Securities and investment commission (ASIC) says

A 1 % difference in fees can lead to a 20 per cent difference in the value of a superannuation benefit over 30 years.

From Hostplus – Money Magazine Best of Best 2017

The above table shows some existing funds that have established long-term returns and with a fee structure less than 0.5% for $50000 invested.

So get out of the spaceship … and relish life on planet Earth with some low cost super funds … they are so “On Fleek” as far as your money is concerned.

Volatility … Its Scarey! … Take a deep Breath!

The range of one year share investment returns over a 10-year period – From Fidelity

In the above data collected by Fidelity, it is sobering to look at the range of returns that a share investor can expect over a one year period. By setting stop losses, you can help protect yourself from the very worst of declines – but even with this protection, there will be some bad investment years. Lets look at the worst investment year for Australian Shares shown above (-40%). Even with stop losses, your portfolio might lose 10-25% due to prices rapidly falling before you can act. This is a major hit on your savings and during the 2008 GFC many experienced losses in their investment and superannuation savings that have turned them off share investment forever. This, in hindsight, has not been the best decision as cash returns have been relatively low and, up till June 2016, median balanced funds have improved 86% since this global financial crisis.

But volatility is not for everyone – You must be able to sleep at night!

This week, Slack Investor just had the shock of one of his stocks dropping in price by 37% on an earnings update. Price swings like this on your hard-earned investment dollars are hard to take and the volatility of the stock market – particularly with individual companies – make share investment a difficult environment for many.

To Slack Investor this is was not great news and though I prefer to make my investment decisions at the end of each month, the price revision has triggered the “not very slack” procedure of a review of this stock. Are the companies earnings still forecast to grow? There is now a daily review of this stock – with a view to sell. The correction may be an over reaction … or just the start of more bad news.

The things that protect me in these moments are diversification and the fact that Slack Investor is a long term investor. There are always at least 20 stocks or managed funds in the Slack Portfolio.

Although at the time of buying, by doing a bit of research on past and future earnings, I am convinced that each individual company will be an enormous contributor to the retirement fund. However, I have been investing long enough to know that things don’t always pan out as forecast … and I have realized that it’s not necessary to get all your investment decisions right … just so long as you get a good portion of them right!

Investing can be tricky at times and during times of market volatility it is useful to take the long view. The 15-year extract above (Shown on a compressed Logarithmic scale)- from Fidelity – indicates what would happen to a $10 000 investment over 30 years in index funds in various markets. For Australian shares the average yearly return is 8.5% over 30 years – but there were some boom times over this time frame. Over a shorter period, Canstar reports a 10-year average return for the Australian Index of 5.5% compared to the, admittedly risk free, cash option of 3.1% over 10 years.

Particularly in these times of low bond and cash yields, if you can accept the volatility of the share market, be willing to live with the occasional investment mistake and have a diverse list of well-managed growing companies in your portfolio – take a deep breath and you will be OK!

Not Index Funds Again … This is Boring!

This site spends a bit of time talking about index funds, here and here. As well as the blog, the Slack Investor site hosts pages following the ASX Index, US Index and UK Index. This is because Slack Investor likes, and is invested in, these type of funds. Each page is dedicated to a rules-based method of following these type of funds in a (mostly!) profitable manner … and, in the Slack Investor tradition, a minimal amount of energy needs to be spent on these investments.

The astute reader will peruse my portfolio page and ask the question

Why does Slack Investor keep going on about these funds when only ~4% of his portfolio is invested in them?

The explanation is that Slack Investor started out 100% in Index funds … and, with some experience started trading in individual shares. I currently have a mixture of both. Index funds are a great place to start your journey into share investment.

There are some eloquent arguments against using the broad index funds as an investment tool. Montgomery maintains the theme “why fill the saddlebags with bad companies!” in this article.

However, despite these funds labelled as “dumb investing” by some, Index funds become more popular each year and have some solid support in the investing community. Slack Investor has developed a simple rules-based method for (usually!) profitable trading in index funds that only requires monthly monitoring. At the end of each month, I will look at the monthly chart of each followed index on Incredible Charts and make one of three decisions – buy, sell, or move my stop loss.

The simplicity of this approach is appealing for its slackness!

Details of this method will be eventually posted on the index pages – Not because I’m secretive, … just because I’m a little slack … and I think it will make an interesting future post … but for now, monthly decision points will be posted as soon as they are made.

This “index trading” method is different to how individual companies are traded by Slack Investor. There are greater risks involved in trading just a few individual companies … but the potential rewards are also much greater! One of the few advantages of being in the investment game a long time is having enough capital to have positions in at least 20 companies … this limits “individual company” risk as each company is just a small fraction of my total portfolio.

Slack Investor is currently enjoying the decisions associated with trading individual companies … even though a bit of effort goes into researching the companies – and they require more monitoring (work!). I am rational enough to know that there will be a time where this extra work will lose its appeal … and then I will revert back to index investing … “dumb” perhaps … but hopefully still profitable.