I’ve been interested in investing for several years now. And I started off naive and inexperienced. I listening to advise from the likes of Warren Buffett and Mr Money Mustache. That is to invest in low-cost index funds.
“Consistently buy an S&P 500 low-cost index fund, I think it’s the thing that makes the most sense practically all of the time.” -Warren Buffett
So I got started with investing- found several index funds on the now-defunct RaboDirect NZ and started my investment plan. I knew I wanted to aim for early retirement, and MMM showed me that there was away. So I knew I had to invest.
I started off investing at about the same time I bought my first house. I had it set up as an automatic process, buying into 4 funds periodically.
Here is where I made a few mistakes.
Firstly- I made one of the most common mistakes when it comes to investing. Choosing funds based on past performance rather than analysing what the underlying investments of the index fund were.
The second mistake was that I didn’t know much about the whole thing. With everything happening at once; starting a demanding job, moving to a new city, writing a thesis, and working on improving the house, keeping healthy, and socializing, I had little time. I just bought the funds that I had an inkling for and then just left them. I had little energy left to do research.
So little did I know at the time that I was actually investing in managed funds with fees around 2%. Rather than what I wanted to invest in, which were the low-cost index funds all the personal finance blogs were talking about.
When you start off investing the jargon can all become a bit too much. Index funds, managed funds, exchange-traded funds. What are these things? Which is best for me?
This is one of the common reason why some people never start investing. The jargon is all too much. It is overwhelming. You just need to start investing anyway. The understanding will come later.
I think this is the best way to learn because having skin in the game will actually motivate you to learn. Thinks about it. You have access to the entire internet, and there are free courses and information about absolutely anything you could think of. But have you become an expert in many subjects? No. Why. Because you don’t have skin in the game.
Once you have invested money or purchased a course, you are more likely to actively learn.
It’s time to Simplify my funds
Recently, I looked into the fees charged by all the funds I was invested in, and what effect fees can have over a long period of time. And there were quite a few that are on the high side when it comes to fees. I did some calculations to show that they really do matter in the long run.
Fees for index funds and ETFs are in a race to the bottom at the moment. They weren’t always like that, but in recent years more providers have started to make it easier for people to access. Think of Sharesies and InvestNow
When it comes to index funds, fees are actually really important when it comes to long term investing. They can have a huge effect on the final balance. 0.5% over 30 to 50 years can cost you north of $100k.
My funds had high fees.
The second reason I wanted to simplify my portfolio was that I had gone on a fund buying spree. I knew diversification was key to long term investing. Totally neglecting the fact that many index funds are actually very diversified themselves.
The number of funds I was invested in had become a bit excessive, and some had very high fees, I have decided to simplify my investment portfolio.
Below is a table of all the funds I am invested in and their associated fees.
|Fund Name||Fees Charged|
|Fisher Funds New Zealand Growth Fund||2.35 %|
|OneAnswer Single Asset Class NZ Share Fund||1.84%|
|Vanguard International Shares Select Exclusions Index Fund||0.20 %|
|Smartshares - NZ Mid Cap Fund (NS) (MDZ)||0.60%|
|Smartshares - Total World Fund (NS) (TWF)||0.56 %|
|Smartshares - Europe Fund (NS) (EUF)||0.55%|
|Smartshares - NZ Top 50 Fund (NS) (FNZ)||0.50 %|
|AMP Capital NZ Shares Index Fund||0.39%|
|Smartshares - US 500 Fund (NS) (USF)||0.35%|
|Nikko AM Core Equity Fund||0.98 %|
|Nikko AM Concentrated Equity Fund||1.84 %|
|ANZ Growth Fund KiwiSaver||1.11 %|
|Average Fee||0.94 %|
The main offenders when it comes to high fees are Fisher, Nikko, and one answer funds. Fees ranging from 0.98% to 2.35%. So they were all out.
It’s not that I am getting rid of them because they are managed funds. I don’t have anything against managed funds. I am getting rid of them because the fees are too high. I don’t believe that for the extra fee that a manager can formulate a portfolio that will outperform an index fund.
Since I had gone on an index fund purchasing spree, many of my other funds overlap each other as well. For example, the US 500 is already covered by the Vanguard fund, except that the vanguard fund screens out some of the companies for ethical reasons.
The Smartshares NZX-50 Index fund can be swapped for the AMP capital NZ shares fund. The first having a fee of 0.5% and the second having a fee of 0.33, with the only difference being that the AMP fund tracks the NZ-50 index closely, whereas the Smartshares NZX-50 fund has a maximum weighted cap of 5% for individual companies making up the fund.
On top of that, I’m adding an Australasian property fund to add some diversity to my overall portfolio. Giving me some exposure to property, rather than entirely shares.
I am already somewhat diversified into property because I have a home already (well the bank owns a large percentage of it, but I am working on that). But to me, there are still reasons to buy into a property fund.
- My house doesn’t earn anything unless I sell it. And even then I would still need a house, so if I purchase a similar house in the same market it will probably cost me a similar amount. So the property market doesn’t really affect my bank account, sure my property value on paper may have increased, but unless I was moving to another market then it doesn’t mean anything.
- A property fund lets me actually tap into national shifts in rental and house prices without needing to become a landlord or flip multiple properties.
- An Australasian property fund gives me geographic diversity. My own home is not very geographically diverse. There is a greater risk of my one house burning down, or my neighbourhood’s value dropping over an entire property portfolio burning down or all dropping in value.
- Diversity by adding another type of investment to your portfolio making it more robust. My mortgage is more like a bond (fixed payments on a loan over time), and not really property investment (I already have the house and I sell it, my mortgage payments only affect my interest paid overtime, not the price of my house).
So I now invest regularly into four funds, with a combined average fee of 0.30%.
This I think is a diversified set of funds- although somewhat weighted towards the NZ economy. The Vanguard fund gives me exposure over 1500 of the worlds largest companies. The NZX-50 and NZ Mid expose me to NZ stocks. And the Australasian property fund gives me exposure to property in Australia and NZ.
I am a bit nervous about the property index fund- given what I keep hearing and reading about the property market on the cusp of collapse. Then again, I don’t pretend to know anything about when that will happen. And again, I am in it for the long run and can ride out any losses.
There might be room to find a fund that exposes me to the Australian stock market, as well as possibly more stocks in Europe. Although the Vanguard is supposed to be international, it is highly weighted to the United States, comprising over 60% of the portfolios, and it excludes Australia.
Simplifying Your Investments
I am a great advocate for invest and forget. Setting up an automatic investment plan into several index funds. Funds are chosen for diversity and your risk tolerance. Once it is set up, you don’t need to actively check the balance every week, rather, you just let it go. Only checking every few months. But I think annually you should re-evaluate your portfolio. Do the funds still align to your risk tolerance, stage in life, morals even. Are the fees reasonable, is there a cheaper option available?
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