Are Index Funds the right choice for me?

Hello everyone!

Over the past few years I managed to save a decent amount of cash, purely by hard work, so I would like to hear some of suggestions about potential viable investments.

Originally my idea was to invest in Perth housing market, however I think that's not the best idea now when the market is slowing down. So in the mean time, I'm planning to invest around 300k cash in a low risk investment and hold the investment for 1-3 years. I expect in that time frame Perth housing market will start to recover and that's where I would jump in. The investment property would then become my PPOR in approximately 10-15 years if everything goes to plan.

As I said, I'm not keen to take any risk. My money is currently sitting in a 3.25% interest savings account. Recently I thought about index funds as a reasonably safe option. Do you think they would be a good option for me considering my circumstances?

Cheers!

You're not keen to take any risk, and you are looking at using the money in 1-3 years.
No; index funds are not the right choice for you.
You had the right idea with the fixed-interest. Stick with that.

Hi Realist

Congratulations on your savings. I admire your discipline. If I knew the answers to your questions, I would charge for it (only joking). No one here is allowed to give specific financial advice I think.

All I can say is study. Read "The Intelligent Investor" by Benjamin Graham. I only suggested that book because I am guessing that you are more inclined to be a long term investor rather than a short term trader?? I think everyone has a bit of both in them

Since I am the least qualified and probably poorest person in this forum. I hope the experienced and better members can give you better ideas than what I am going to suggest.

I am tempted with index funds but I am leaning towards choosing my own stocks first.

If you wanted to invest in a general Index Fund like ASX200 for example, would you buy a massive amount right now because you are convinced now is the bottom. Then you would buy a monthly amount each month. Or if you are not sure if now is the bottom, you would buy an average amount and each month you will continue to buy roughly the same amount: so that you get an average value over a long period of time.

There are various index funds which charge fees to manage a large amount of shares but it is probably much cheaper than paying a fund manager. There are smart beta index funds I think?? Those type of funds go over my head and I am not sure if they are "smart" at all??

I heard one Fund Manager call Index Funds is 'dumb' investing because you are buying the biggest companies instead of 'good' companies. If you went with him, he will choose the 'good' companies for you (as long as you are prepared to pay for his work.) Some like Active Fund Managers because they believe it is worth paying someone to do all of the research, work, etc to choose and buy a variety of shares from them. Others like me think many fund managers are nothing more than Index huggers, and therefore you may as well just buy an Index Fund.

If you brought an Oil EFT 18 months ago, you would now be losing. If you buy it now, you have to confident that the price oil will rise. (Well, that is another debate.)

You have probably studied your options much better than I can give any suggestions.

Index Funds are risky. Holding Term Deposits are even more riskier because you are guaranteed to lose against inflation if you keep them forever like my dad did and my mum is doing now because she was instructed to by my dad before he passed away.

All constructive comments welcome.

Actually, I should withdraw my last post. I think systematic is correct. I was typing my reply and forgot to account for your timeframe of 1-3 years. Also whilst I was typing, systematic had already posted his answer.

Maybe I will keep it there for general information that someone else can comment on.

Thanks very much guys. All valid points!

It sounds like I should be better off just keeping money in the bank, saving now and waiting for the next property boom (hopefully in Perth). And then hopefully jump the ship when the prices tank enough.

However, just for my reference, I'd be keen to see how much I would have lost/gained if I put my money last year in one of the popular index funds. And how much are month to month to month fluctuations. Would you know of any good site where I can find info like this?

You could have a look at the iShares table or the Vanguard ETF'S

systematic said:

You could have a look at the iShares table or the Vanguard ETF'S

Click to expand...

Thanks very much Systematic!

Realist35 said:

As I said, I'm not keen to take any risk.

Click to expand...

In that case I would leave it where it is and take the 3.25%.

Recently I thought about index funds as a reasonably safe option. Do you think they would be a good option for me considering my circumstances?

Click to expand...

No I don't. You know we have already had a 20% correction? By that I mean, if you had bought the ASX 200 ETF at around 5,900 (where it was last year) you would be loosing 20% of your money now. A lot of technical posters here on this forum are predicting markets could fall a lot further. If that's the case, do you really think index funds are a safe option?

Note: I do invest in index funds but not short term and I am fully aware of the risks, cheers.

Realist35 said:

Thanks very much guys. All valid points!

It sounds like I should be better off just keeping money in the bank, saving now and waiting for the next property boom (hopefully in Perth). And then hopefully jump the ship when the prices tank enough.

However, just for my reference, I'd be keen to see how much I would have lost/gained if I put my money last year in one of the popular index funds. And how much are month to month to month fluctuations. Would you know of any good site where I can find info like this?

Click to expand...

History does not repeat, as they all say. Since the market, and the index that represents them, will have all tanked the past couple of years. Meaning it will get worst; also could mean it will likely get better; or just stay the same for a while... who knows.

You were saying you work hard for that savings you got. Don't take offence but why would putting it into anything else for higher gain than the risk-free bank deposit or gov't bond could mean less hard work and also less risk?

To really know how risky or how fairly or not fairly price a managed fund or an index fund is, you'd need to look at all the companies that made up that index/fund. Since you wouldn't be investing in a fund if you could do that easily so an index fund is, relatively speaking, less risky than individual stock picks.

But as Bill said above, it's not risk free and you'd need a longer time horizon than a generic 3 years to make it.

The market is pretty low now, but could go lower... or could go higher. To invest in an index is somewhat like investing in the general Australian economy... you're betting that it will grow over time, chances are it will because we're awesome at mining and banking and farming [?] but there's no saying when or if we'd grow or decline.

Maybe decision ought to be whether you're happy with the dividends (above the 3.5%) and that over a longer term period the capital gain would at least be the same or hopefully also higher. When is something you can live with... else stock is probably not the place to put the cash.

I would stay away from funds of any sort. They shave much profit by fees. Go with your study and gut in the market. BHP atm are at a ridiculously low price for example. Getting an online broker and buying a spread of shares will give you gains in the medium to long term.
gg

Garpal Gumnut said:

I would stay away from funds of any sort. They shave much profit by fees. Go with your study and gut in the market. BHP atm are at a ridiculously low price for example. Getting an online broker and buying a spread of shares will give you gains in the medium to long term.
gg

Click to expand...

Thanks very much gents.

I made up my mind. Since I'll be buying a home in the next couple of years, I'll play safe and satisfy myself with bank savings rate. When an opportunity arises I'll try to jump in the rising property market and take the advantage of both rental yields and CG. By that time I'll have enough cash to get loans for a couple of properties.

Cheers!

Hey Realist is your 3.25 Rate a td or normal savings account ? If not a td which bank ?

Realist35 said:

Thanks very much gents.

I made up my mind. Since I'll be buying a home in the next couple of years, I'll play safe and satisfy myself with bank savings rate. When an opportunity arises I'll try to jump in the rising property market and take the advantage of both rental yields and CG. By that time I'll have enough cash to get loans for a couple of properties.

Cheers!

Click to expand...

fraa said:

Hey Realist is your 3.25 Rate a td or normal savings account ? If not a td which bank ?

Click to expand...

Good question Fraa!

It's bankwest hero saver account (savings account). It's actually only 3.15%. I was comparing today different savings accounts, and me bank offers 3.6% interest, so I'll jump the ship

Realist35 said:

Good question Fraa!

It's bankwest hero saver account (savings account). It's actually only 3.15%. I was comparing today different savings accounts, and me bank offers 3.6% interest, so I'll jump the ship

Click to expand...

Hah I thought so as I recently looked and found 3.15% is highest with fewest strings attached. Mebank requries me to use the card each week which is not as easy as I am overseas.