#107: To index or not
Explicit content warning
07/01/18 • 62 min
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Dhiraj asks us to defend our index-tracking strategy in this episode. It’s hard to do when the theory works but the practice hasn’t delivered the goods in four years. At this point I can only cling to the success others have had with this strategy and hope.
Even index-tracking product providers are increasingly offering products that will give investors an opportunity to outperform the market. The index weighted by market capitalisation has turned into the ugly stepchild that nobody wants to talk about anymore.
Nobody ever knows WTF is going on in the stock market. Lots of people pretend they do, but since they all keep showing up for work instead of retiring in the Bahamas, we can assume they don’t. Maybe the market will do what it’s always done. Maybe we’ll look back at this period in our investment history, discover the yodelling goat formation and know this is when it all ended.
The index-tracking strategy makes sense to me for all the reasons Simon and I discuss in this podcast. However, when that stops being true, I will jump ship. I am not a salesperson for the ETF industry. I’m an investor, and I want to see my money grow above inflation after fees by any means at my disposal.
That said, I also know pivoting an investment strategy every time I don’t feel I’m making money is a surefire way to incur costs. When I got into investments, I knew anything less than five years is not an investment time horizon. Since I’m only at four years (and, to be fair, I’ve pivoted my strategy a few times already), I’ll hold out and see what shakes out.
Dhiraj shared a video.
You make a case for investing in a broad market index fund over the long term for cost effective wealth creation?
This Youtube video makes a case that one must study the intricate details of the share markets and invest in selected shares for best long-term risk/reward trade-offs.
It provides evidence that there have previously been extended periods where the S&P500 produced zero returns.
How would you counter his views on index fund investing?
Christiaan wants to know if it’s a good idea to have his entire portfolio, including his pension fund, in index-tracking funds.
I am a teacher. Through work we are forced to have a pension fund with the ‘Green Monster’. They have recently brought out a Balanced Index Fund with fees of just 0.30% p.a. It’s invested in the FTSE/JSE Capped SWIX Index Fund, which I have never heard of, as well as the expected bonds, cash and property.
Is it a good idea to have all my retirement assets in these, including my company pension fund?
Lady Kabelo isn’t sure what is passive and what is active in unit trusts.
I have an Allan Gray unit trust, and I'm looking to shift towards ETFs. When we talk about actively v passively managed funds, I think of ETFs as passive and unit trusts as active.
In episode 75 Simon talked about being invested in passively-managed unit trusts. I'm no longer certain that my understanding of the distinction is correct. Could you explain the difference between an ETF and a unit trust, and how a unit trust can be passively managed?
Lloyd has a three-month old daughter and would like to know where to save for her education.
TFSAs don’t seem a clever instrument for education investment because it erodes the potential before the real savings kick-in from long term holdings.
What is a better vehicle for me to save for my 3 month old daughter’s education. I am more worried about high school and tertiary so perhaps the investment time could be 10 years or more.
I am thinking the right ETF portfolio. How should I set this up to be best positioned from a tax perspective?
Wins of the week: Dan Gobble wrote a word of encouragement for Mpho and Rinaldo.
We turned the corner at just about three-quarters of R1m in useless debt - not car or home loans. I am talking revolving loans, credit card debt and overdrafts from living expenses and starting a business, which promptly failed. Rinaldo is only dipping into it with his 140k :) We swallowed our pride and went to family for help, now all the debt is consolidated with my in-laws at a ridiculously low interest rate. And we are on track to have it sorted in two years.
Also Mbasa, who is FINALLY starting their TFSA journey in July!
What ETFs would you recommend?
I...
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- Subscribe or rate us in iTunes.
Dhiraj asks us to defend our index-tracking strategy in this episode. It’s hard to do when the theory works but the practice hasn’t delivered the goods in four years. At this point I can only cling to the success others have had with this strategy and hope.
Even index-tracking product providers are increasingly offering products that will give investors an opportunity to outperform the market. The index weighted by market capitalisation has turned into the ugly stepchild that nobody wants to talk about anymore.
Nobody ever knows WTF is going on in the stock market. Lots of people pretend they do, but since they all keep showing up for work instead of retiring in the Bahamas, we can assume they don’t. Maybe the market will do what it’s always done. Maybe we’ll look back at this period in our investment history, discover the yodelling goat formation and know this is when it all ended.
The index-tracking strategy makes sense to me for all the reasons Simon and I discuss in this podcast. However, when that stops being true, I will jump ship. I am not a salesperson for the ETF industry. I’m an investor, and I want to see my money grow above inflation after fees by any means at my disposal.
That said, I also know pivoting an investment strategy every time I don’t feel I’m making money is a surefire way to incur costs. When I got into investments, I knew anything less than five years is not an investment time horizon. Since I’m only at four years (and, to be fair, I’ve pivoted my strategy a few times already), I’ll hold out and see what shakes out.
Dhiraj shared a video.
You make a case for investing in a broad market index fund over the long term for cost effective wealth creation?
This Youtube video makes a case that one must study the intricate details of the share markets and invest in selected shares for best long-term risk/reward trade-offs.
It provides evidence that there have previously been extended periods where the S&P500 produced zero returns.
How would you counter his views on index fund investing?
Christiaan wants to know if it’s a good idea to have his entire portfolio, including his pension fund, in index-tracking funds.
I am a teacher. Through work we are forced to have a pension fund with the ‘Green Monster’. They have recently brought out a Balanced Index Fund with fees of just 0.30% p.a. It’s invested in the FTSE/JSE Capped SWIX Index Fund, which I have never heard of, as well as the expected bonds, cash and property.
Is it a good idea to have all my retirement assets in these, including my company pension fund?
Lady Kabelo isn’t sure what is passive and what is active in unit trusts.
I have an Allan Gray unit trust, and I'm looking to shift towards ETFs. When we talk about actively v passively managed funds, I think of ETFs as passive and unit trusts as active.
In episode 75 Simon talked about being invested in passively-managed unit trusts. I'm no longer certain that my understanding of the distinction is correct. Could you explain the difference between an ETF and a unit trust, and how a unit trust can be passively managed?
Lloyd has a three-month old daughter and would like to know where to save for her education.
TFSAs don’t seem a clever instrument for education investment because it erodes the potential before the real savings kick-in from long term holdings.
What is a better vehicle for me to save for my 3 month old daughter’s education. I am more worried about high school and tertiary so perhaps the investment time could be 10 years or more.
I am thinking the right ETF portfolio. How should I set this up to be best positioned from a tax perspective?
Wins of the week: Dan Gobble wrote a word of encouragement for Mpho and Rinaldo.
We turned the corner at just about three-quarters of R1m in useless debt - not car or home loans. I am talking revolving loans, credit card debt and overdrafts from living expenses and starting a business, which promptly failed. Rinaldo is only dipping into it with his 140k :) We swallowed our pride and went to family for help, now all the debt is consolidated with my in-laws at a ridiculously low interest rate. And we are on track to have it sorted in two years.
Also Mbasa, who is FINALLY starting their TFSA journey in July!
What ETFs would you recommend?
I...
Previous Episode
#106: Debt in high-income households
When we get into debt, we think it’s a temporary state of affairs. We’ll get rid of it once we earn more money. However, nothing is more delicious to a financial institution than an indebted individual getting a raise. As our income increases, so increases our access to credit.
Think of someone you know who appears to be very wealthy. Now think about the debt required to maintain that appearance. An expensive home loan, car debt, credit cards and store cards all work together to make it seem like money is no object. As we discuss this week, the price we pay to appear wealthy is often the very thing that destroys true wealth.
This week Rinaldo inspired us to tackle debt in high-income households.
I am a high income earner with money problems...
I contribute 18% of my salary to my employer provident fund and R500 a month to an education endowment plan for my boy who is five years old. That is the sum total of my investments. Oh, and I bought a buy-to-let apartment two years ago and what a disaster. Battling to sell the money-chowing, headache-causing thing now.
I need to invest more but I’ve got the following bad debt:
- Credit card of R40,000 at 14.5% interest
- Revolving credit of R40,000 at 17% interest
- Overdraft of R60,000 at 15% interest
I’ve got a deficit in my budget due to the credit repayments and I'm considering a debt consolidation loan, but don’t want to stuff up my credit record which is rather good because up until now I've serviced my debt well. Should I consider a consolidation loan and where and what will be the impact on my credit score?
No emergency fund, which caused the debt.
How did you do it?
Next Episode
#108: I can't save
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Crushed under the weight of debt and desperate to get out, a younger, dumber version of me would often resolutely put money away - either toward debt repayments or honest-to-goodness cash. As often, I would have to cover some unexpected financial event (some more legitimate than others) and my resolution would dissolve. Eventually I’d accept I’m bad at saving and give up. It was easier than living with failure month after month.
For most people, repaying debt and saving at the same time is impossible. Just like we want to be rich right away, we want to sort out our money right away. Resolution is the work of a single insight, so a systematic solution is frustrating. Sadly, implementation happens payday by payday.
Sean asked, “My wife and I are going into our 30s and have no savings other than our provident funds and RAs. We earn a net income of R28,000 and have R10,000 debt in total. We can’t afford to save more than R1,000 a month.
Whenever we save, something seems to go wrong and we use that savings to bail us out. We never go out or get take aways. The last time we bought new clothes was three years ago so we look like hobos. Our cars are fucked and we can’t replace them because there is no extra money in the budget. My wife and I don’t drink, so there is no wastage there.
I’m not sure what we are doing wrong.”
In this episode, we discuss what Sean might do differently.
We have two winners this week. Both win because of the homework they did.
Sally did a lot of legwork to understand an interest payment amount. She deserves a win for that.
I changed my debit order date (on my home loan) recently. I wasn't aware of this, but apparently if you do that they charge you interest twice.
She did a lot of investigation, calculations, eventually got in touch with her home loan provider and discovered the following
Because you change the debit order date, they work out the interest you owe from the original date until the date you change it.
Then they calculate the interest again on the day after your new debit order date.
Together they’ll make a month’s interest. So they do charge you twice, but not double.
She deserves to win, because:
- She knew immediately that two interest deductions went off her account.
- She did her own calculations.
- She wasn’t afraid to ask for clarification from her financial institution.
- She really loves horses.
Nadia wrote us in the financial crisis episode to ask if she has the right exposure in her ETF portfolio. I sent her a link to the article on the six questions to answer before you buy an ETF. She did that, sent me her answers and in the process read up a lot more about the ETFs she holds. I’m very proud.
In the episode on preparing for a financial crisis, we spoke about Sanlam dangling a carrot for Wim to keep his RA with them. Brett wrote to explain how the echo bonus works.
I started an RA with Sanlam at the age of 22 which was based on their Echo bonus feature.
This means that all contributions that I made to the RA during its life would be tallied up and given to me at retirement on top of all my investment returns and original contributions. This bonus sounded great, but of course the fund had fees of 3.5% per year, and I am sure you know how the rest would go.
I did some calculations on this and wrote about it in the following article (although I did not name the fund):
http://www.etfenthusiast.co.za/2016/08/fees-matter.html
Sally also has experience with the Echo bonus. She currently has that RA, as well as a 10X one because she didn’t have enough invested in the Sanlam RA to qualify for a transfer.
If I assumed the same rate of growth and contribution from my side, to just compare fees between the two, you pay less fees at 10x (as expected) and the fees at Sanlam are more over the entire term.
However, because of that Echo bonus, the end amount I got from the Sanlam RA was similar to the 10x one with the reduced fee.
That was my situation specifically because the Echo bonus works on how long you are invested with them and all that (the longer you are with them, the higher your percentage).
You miss out on the compounding over time, but at the end of the day, it was much of a muchn...
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