Check my maths - Managed fund vs. ETF

[Jono S]

Hi,

I am new to investment and thought that I would start by investing in either a managed fund or an ETF.

I would be looking to use a technique such as dollar cost averaging, consistently investing a small amount over the long term.

I was trying to figure out, when looking at fee's and brockerage charges which would be cheaper, using an ETF or a managed fund.

Taking Vanguard as an example. . . .

If spent $1000, then sold after a year (amusing no change in value to make things simpple)

Fund
Buy = 0.2%
Fee Per Anum = 0.75%
Sell = 0.1%

Spend $1000, get $998 worth

1 year Annual fee = $998 x 0.0075 = $7.485 so have $990.515 left

Sell after 1 Year cost = $990.515 x 0.001 = $0.99

Therefore have $989.525 left

Total Cost = $10.475

ETF
Brockerage = $20
Fee Per Annum = 0.27%

Spend $1000

$20 brockerage = $980

Anual Fee = $980 x 0.0027 = $2.646, so have $977.354 left

Sell after 1 year = $20 Brockerage = $977.354 - $20 = $957.354

So total fee’s = $42.65


So it looks like the fee's associated with investing in a managed fund are less?

I just realised I haven't taken into account that if I am investing say 10 lots of $1000 over the year, if sold the sell spread will apply to the whole lot, while the brokerage will likely be a flat rate. . .

Still, I think funds seem like a more reasonable option?

Just hoping someone could check over my thinking, make sure I haven't made any mistakes

 

[Tysonboss1]

Re: Check my maths?

Good Start, I suggest investing in an index fund for begineers, you will earn a credible safe return.

On your maths you are right. For such small amounts a managed fund is best because the resulting fees are less than brokerage, and you can add in smaller amounts. Say $100 a fortnight rather than $1000/ six months, so your dollar cost averaging will be more effective.

Once you start dealing in larger amounts of say $10,000 contributions you could easily see that the brokerage would work out cheaper and exchange traded fund might be best. because $30 of $1000 = 3% But $30 of $10,000 = 0.3%.


Might I suggest one important thing if you are taking the dollar cost averaging approach, you Have to be very disaplined and keep contributing the same amounts no matter what the stock market does, Don't increase your contributions because the share market has risen and don't stop contributions because it has fallen, the strengths of dollar cost averaging is that your dollars buy less when the shares are expensive and more when they are cheap.

Offcourse you can Increase you contributions, But it has to be part of a plan to maintain higher contributions through thick and thin.

 

[Lone Wolf]

Re: Check my maths?

As per what TysonBoss said above.

It looks like you have a managed fund in mind already. Just check the details such as minimum initial investment and minimum additional investment. Some funds also have a higher initial investment fee or startup fee.

Brokerage - You can get cheaper brokerage than $20 per trade. Interactive Brokers, CMC Markets, Bell Direct, First Prudential Markets... DYOR.

Another point to note is how easily you can access your funds. With an ETF you can buy or sell immediately, at any time you like during market hours with the click of a button. With a Fund you have to submit a request which they will then process for you. You can only sell at the closing price. It could be today's closing price, it could be tomorrow's closing price. It depends on what time you make the request and how efficiently they do their paperwork.

In my case I have to fill out and sign a redemption form, scan it in and email it to the relevant people, then call up and ensure the email was received. Then I sit back and wait to find out which day my redemption was processed. I guess you could say that it all balances out. Sometimes you'll be better off for the delay, other times the delay will cost you. But personally I'd like to have direct control over what price I buy and sell at.

On the other hand, being more difficult to sell may prevent you from selling too soon when you get nervous about a market retracement. This is an investment plan after all, you shouldn't be looking to sell very often.

 

[Julia]

Re: Check my maths?

Jono, have you considered the alternative of using the education and research offered on broker websites, and buying your own shares? If you look at some of the results achieved by managed funds, they're pretty miserable, and you pay their fees regardless of whether they make you money or not.

Always better to look after your own money, unless you are simply unprepared to acquire some basic education.

Do not assume that 'professional fund managers' will achieve a better result than you can yourself.

 

[So_Cynical]

ANZ Online Investment Account

http://www.anz.com/personal/investments-advice/products-services/online-investment-account/

I wonder how this account shapes up in comparison (cost wise)

https://www.aussiestockforums.com/forums/showthread.php?t=20999

 

[Tysonboss1]

Re: Check my maths?

Do not assume that 'professional fund managers' will achieve a better result than you can yourself.

Thats why I recommend an index fund. Before he thinks about trying to beat the market he has to be certain that he will not do worse.

 

[Jono S]

Thanks everyone for the great replies!

I have read through the intelligent investor a few times, and that was enough to turn me away from "professional" managed funds.

The funds I was referring to in my initial post were the "Vanguard Index Australian Shares Fund", and the ETF was the "Vanguard Australian Shares Index ETF".

I've decided that I want to start getting some market exposure and an indexed fund would be a good way to go about doing this. I'm planning on investing mostly in the index initially, while leaving myself a small amount to use to invest in specific companies based on my own research. Will hopefully learn more about this in the future, but for now an index seems like a solid option

The only thing that makes me a bit hesitant about the indexed fund is the initial contribution is $5000. This is a large portion of my current savings. I know it's very hard and not advisable in most cases to try "time" the market, but I can't help thinking that I don't want to put it in at the wrong time.

I'm fine if I can't instantly sell and access my money. This investment is for the long term like I said before (10+ years).

Fee wise it seems like the best option for me will be to initial invest in a index fund while I am making consistent, small contributions. In the future when I have more money to invest (hopefully!) then I will have to consider the benefits of ETF's.

 

[So_Cynical]

I know it's very hard and not advisable in most cases to try "time" the market, but I can't help thinking that I don't want to put it in at the wrong time.

You should always be trying to "time" the market, not to be confused with "perfectly timing" the market as that's almost impossible...however keeping your average price for any investment below average means you will get above average returns.

 

[Tysonboss1]

You should always be trying to "time" the market, not to be confused with "perfectly timing" the market as that's almost impossible...however keeping your average price for any investment below average means you will get above average returns.

For the enterprizing investors point of veiw yes I aggree, But the begineer investor does not have a good understanding of the market Dollar cost averaging is more effective that market timing.

Most unskilled or begineer investors end up refraining from buying at the bottom but load up at the top because they listen to the media rather than their own thorough analysis.

 

[Tysonboss1]

Thanks everyone for the great replies!

I have read through the intelligent investor a few times, and that was enough to turn me away from "professional" managed funds.

The funds I was referring to in my initial post were the "Vanguard Index Australian Shares Fund", and the ETF was the "Vanguard Australian Shares Index ETF".

I've decided that I want to start getting some market exposure and an indexed fund would be a good way to go about doing this. I'm planning on investing mostly in the index initially, while leaving myself a small amount to use to invest in specific companies based on my own research. Will hopefully learn more about this in the future, but for now an index seems like a solid option

The only thing that makes me a bit hesitant about the indexed fund is the initial contribution is $5000. This is a large portion of my current savings. I know it's very hard and not advisable in most cases to try "time" the market, but I can't help thinking that I don't want to put it in at the wrong time.

I'm fine if I can't instantly sell and access my money. This investment is for the long term like I said before (10+ years).

Fee wise it seems like the best option for me will be to initial invest in a index fund while I am making consistent, small contributions. In the future when I have more money to invest (hopefully!) then I will have to consider the benefits of ETF's.

Mate, I congratulate you on making such a rational start to the investment process.

with such a plan I think you will do well over time, Dollar cost avwraging into the index will give you an ok return while you study and learn and take a measured entry into making some of your own investments outside of the index fun.

 

[So_Cynical]

For the enterprizing investors point of veiw yes I aggree, But the begineer investor does not have a good understanding of the market Dollar cost averaging is more effective that market timing.

Most unskilled or begineer investors end up refraining from buying at the bottom but load up at the top because they listen to the media rather than their own thorough analysis.

I don't think one has to be "enterprising" or any type of financial wizz to carry out a little simplistic "market timing" even with a simple dollar cost average plan, avoiding buying into a top, tips the return from average to above average...just passing on 1 month could make a % point of difference.

Lets assume jono has been DCA into a ASX200 Tracking fund over the last 12 months (chart below) you can see jono's average buy in price is well below where the market is now, so leaving jono with a clear choice to either.

• Continue with his DCA strategy and average up (average return) or
• Put this months 1K payment into a high interest account and wait for the index to get closer to the average price line (above average return)

I would argue that jono's DCA strategy has worked well for him over the last 12 months...he has a low average buy in price and that should be protected by some vigilance and discretion....even something as simple as deferring the next deposit if its above the price of the last deposit would work to jono's advantage.
~

 

[Jono S]

The idea of "keeping your average price for any investment below average means you will get above average returns" does sounds appealing.

I've tried playing around with a few different methods in hindsight using data from 2000 up until late 2010 on excel.

Initially I got the price of the ASX 200 at the start of every month (from 2000 - 2010) and entered them into the spreadsheet.

After I compared these methods. I used an arbitrary figure of investing $1000 per month.

1. Buy the same amount at the start of each month, regardless of price (dollar cost averaging)

2. Buy only if the price was lower then it was last month. If not save the money and invest it when the price is lower.

After spending the same amount using both methods, over the same time period, there was negligible difference in the amount of "units" held at the end of the time period.

I was expecting the 2nd method to perform better because I thought you would be waiting to buy more units when the market was "cheaper". I thought that maybe what was happening was that when there was a long rise and money was being saved, it would all be invested initially as soon as the monthly price dropped below that of the previous month, then as it declined consistently, all that was invested was $1000 per month, just like dollar cost averaging.

I thought that a better way to go about it would be to invest more the longer the market declined for. I checked this method

3. Invest when the price at the start of the month is less then that of the start of the previous month. Invest $1000 initially and then increase this amount by $1500 each consecutive month that the price was lower then that of the previous.

Quick example to show what I mean

Month 1 Price - 4600
Month 2 Price - 4850
Month 3 Price - 4800 (buy $1000 worth)
Month 4 Price - 4400 (buy $2500 worth)
Month 5 Price - 4300 (buy $4000 worth)
Month 6 Price - 4500
Month 7 Price - 4400 (buy $1000 worth)

After applying this to the data from 2000 - 2010, after spending the same amount, the return was about 2% better then that of dollar cost averaging.

I just realised that this hasn't taken into account the return that the money would be making while it was saved before being invested.

I'm also very aware that my calculations could be very wrong!!!!

 

[Tysonboss1]

I don't think one has to be "enterprising" or any type of financial wizz to carry out a little simplistic "market timing" even with a simple dollar cost average plan, avoiding buying into a top, tips the return from average to above average...just passing on 1 month could make a % point of difference.

Lets assume jono has been DCA into a ASX200 Tracking fund over the last 12 months (chart below) you can see jono's average buy in price is well below where the market is now, so leaving jono with a clear choice to either.

• Continue with his DCA strategy and average up (average return) or
• Put this months 1K payment into a high interest account and wait for the index to get closer to the average price line (above average return)

I would argue that jono's DCA strategy has worked well for him over the last 12 months...he has a low average buy in price and that should be protected by some vigilance and discretion....even something as simple as deferring the next deposit if its above the price of the last deposit would work to jono's advantage.
~

The idea of "keeping your average price for any investment below average means you will get above average returns" does sounds appealing.

QUOTE]

BY attempting to time the market you are defeating the purpose of dollar cost averaging in the first place.

You may cancel the contributions thinking a down turn will come only to see the market make new highs, so then you get itchy feet and pile all your cash in, only to see a correction.

Market timing is almost usless and it is garanteed by mathamatics that most people will fail at it. Market Pricing however will produce a much better result however requires a certain skill set that takes time to learn and temparament that not everyone has.

In my veiw, you have to decide to be totally passive dollar cost averaging investor, or an enterprizing investor there is not really a safe middle ground.

If you decide to take the passive dollar cost average route you are garanteed to earn the market rate, is you mess with the system you may better the market but you may do alot worse, I suggest making a decision and sticking with it.

 

[So_Cynical]

In my veiw, you have to decide to be totally passive dollar cost averaging investor, or an enterprizing investor there is not really a safe middle ground.

If you decide to take the passive dollar cost average route you are guaranteed to earn the market rate, is you mess with the system you may better the market but you may do alot worse, I suggest making a decision and sticking with it.

I think doing anything in the market with a totally passive (victim) attitude is a mistake....all im suggesting is DCA with a little tweak...i think there is heaps of safe middle ground, look at my chart, all im talking about is the extremes, DCA for the bulk of the time in the safe middle ground and just keep an eye on the index and if your averaging up simply ask yourself.

Should i really be doing this? perhaps there's an advantage to be had here?

 

[Tysonboss1]

I think doing anything in the market with a totally passive (victim) attitude is a mistake....all im suggesting is DCA with a little tweak...i think there is heaps of safe middle ground, look at my chart, all im talking about is the extremes, DCA for the bulk of the time in the safe middle ground and just keep an eye on the index and if your averaging up simply ask yourself.

Should i really be doing this? perhaps there's an advantage to be had here?

Keep in mind I am only suggesting the passive dollar cost average investing style for index investing. So the participent is just dollar cost averaging into an index not a stock.

We can Agree to disagree on this point though.

 

[burglar]

...
I've tried playing around with a few different methods in hindsight using data from 2000 up until late 2010 on excel. ...
!

Remember, this time frame includes GFC I, a 1 in 100 year event.
An event without precedent ((how sad, no trend for trend-followers)).

 

[Tysonboss1]

Remember, this time frame includes GFC I, a 1 in 100 year event.
An event without precedent ((how sad, no trend for trend-followers)).

The Gfc would have had little effect on the dollar cost averaging methods results.

 

[Jono S]

Ultimately I hope to gain the skill to be a more enterprising investor.