Index Funds - Where, Who and What one?
This week I received an email from Simon, who has stumbled upon the big wide world of investing and at the age of 40 has suddenly had their mind blown with the possibilities. He specifically asked about index funds and I also knew I had met a kindred spirit when he said: “compound interest is a new favourite term”. So, because my blog is meant to be about investing, but I do get incredibly sidetracked, I thought I would just write a really brief one about one of my investment vehicles of choice: Index Funds.
Simon actually had three specific questions about these funds:
1. Where do I start?
2. Who can I trust?
3. What one to use?
Where do I start?
Investing is just one part of a bigger puzzle, so to read up on the rest of it, please do read this blog post that I wrote back in May 2019 which gives a kind of “whole of life” plan for your money: Steps to Achieving Financial Independence
If you have your financial house in order and are ready to start investing then your next piece of homework is to either read this book: The Simple Path to Wealth: Your Road Map to Financial Independence and a Rich, Free Life - JL Collins
Or listen to the same author interviewed about his book on this podcast: THE STOCK SERIES - JL Collins
And then to round out your education you can read this post that I wrote: Mutual Fund, Index Fund, ETF. Please explain?
By then you should be educated enough to understand that by choosing to invest in a diversified index fund, instead of trying to pick individual shares, you are making a good choice for your future.
ETF’s are a passive investment, that charges low fees. The intention is that you buy and hold them, reinvest the dividends and stay ‘in the market’ for at least 10 years. Any share investing should be thought of as a LONG term strategy, you don’t want to be frequently buying and selling because the chances of you losing money if you do that are high. Instead of buying a share in one or two companies, you buy a tiny piece of ALL of the companies that make up that index. Some will fail and fall off the index and be replaced by the next top performer and others will soar and do incredibly well. Being in an index fund gives you the average of all of the companies in it. I used to think that being average was a bit defeatist, I’ve since learned otherwise!
In New Zealand, our stock exchange, the NZX, has a product called SmartShares. They have 31 exchange-traded funds (ETF’s) that you can choose to invest in. Instead of going out and buying individual shares in a range of different companies so you can spread your dollar around, aka diversify, you can just buy a single fund (or a couple) and it will do that for you.
To keep my explanation simple, SmartShares “make” the units once a month, they are what I think of as an “ETF producing factory” and once a month, when the factory is in operation I can buy them. In turn, there are many other providers in NZ who sell the units that SmartShares have already produced. And because those units are now out in circulation, you and I can buy and sell them any time we like Monday to Friday.
So, buying a simple ETF is a perfect solution, I don’t have to endlessly research companies (or pay someone else to do it on my behalf), I just have to purchase a fund and get on with it.
Who can I trust?
Trusting your own instinct would be a good place to start, but try not to overstate your own intellect and get too cocky. When I first started learning about investing I kept looking for outside influences, people, companies and products to guide me. That just led me into the labyrinth which is the financial services industry, which I’ve said before and I’ll say again, has a major image problem and excludes such a large portion of Kiwis, because let’s be honest, most of us don’t understand what they are on about right?
So, by reading and listening to the resources above, stumbling upon the wise words of the likes of New Zealander’s Martin Hawes and Mary Holm at just the right point in time, I trusted my own counsel in the end. None of the books, podcasts or people I’ve mentioned was trying to sell me anything, instead, each was trying to educate me and help me make good choices for myself.
Plus, I never rushed into things, I observed and learned and then dipped my toe in the water. Once I understood how the system worked then I felt comfortable investing more and by that stage, I knew I would stick with this new investment.
What one to use?
The day I signed up to KiwiSaver back in 2007 was the day I unwittingly started investing in shares, and I’m thankful that I’ve now been ‘in the market’ for all of that time because as luck would have it the share market has had a steady rise since.
Of course, my KiwiSaver is locked away until the age of 65 and I knew that I didn't want to have all of my money somewhere where I could not touch it. That’s what prompted me to look for an investment vehicle I could use that would still allow me access to my money IF I needed it.
I purchased our first ETF back in January 2016 by buying the NZ Top 50 fund (FNZ) direct with SmartShares. Ever since, on the 18th of each month, I have an automatic standing order and I have purchased monthly and without fail ever since. Also, when cash allows I make a ‘bulk purchase’ into this fund and when they share a dividend payment in June and December I always reinvest this into the fund.
In June 2017, once I had that ticking along nicely with the balance building up and I got a feel for how the system worked, I started a monthly purchase of the US 500 SmartShares fund (USF). Once again, I’m purchasing directly with SmartShares so can only buy once a month, which I do on the 18th of each month. As cash allows I also make a bulk purchase into this fund and also reinvestment dividends that are paid out in June and December.
Then sometime around May 2017, I was actually at a seminar listening to Martin Hawes speak and amongst other things he talked about owning commercial property, not by betting the farm on ONE building, but instead by buying into a large property fund which contained hundreds of commercial buildings. I filed this thought away and then when a secondary seller of SmartShares funds, Sharesies had come into being, I began to purchase NZ Property (NPF) through them. Now, I just have a standing order with them as well where I purchase on a steady and consistent basis. I’m always pretty upfront by saying that I only signed up to Sharesies so I could blog about it, but I pretty quickly formed a habit of using them, so I’ve stuck with it!
And here is how things are looking for me at the moment for my three funds:
Of late, for newcomers to investing, choosing which fund to buy has become more problematic because we are now spoilt for choice - with 31 funds to chose from. When I started, just a few short years ago, we had less choice and less confusion about what to choose. In time I might add a bond fund, but for now, I’m aggressively invested in shares and I’m sticking to this path and not being tempted into adding more funds.
The key to choosing which funds to invest in is to just keep it simple! Just like you don’t go into the supermarket and buy one of every food product, the same is true for buying ETFs. Just because a provider offers 31 funds (Sharesies currently offers 39), does not mean you should buy them all. There is “diversification” and then there is completely watering down my investing dollar and spreading myself far too thin.
Therefore, now I have just these three funds and they cover the top 50 New Zealand companies, the top 500 American companies (many of whom are international companies) and I also feel like I’m invested in this property boom we are in by investing in commercial properties here in New Zealand.
Choose your own provider
There are many ways and many providers who YOU can use here in NZ to help you invest. Apart from SmartShares who I feel are different because they create or issue the units, everyone else has a platform to allow you to buy and sell units. I have chosen the path I have and if you do a quick search, you will find many conversations around whether my choice of provider is genius or fraught. There is always a lot of debate, particularly in the personal finance community, around the fees a provider charges you. My brief thoughts on this are that each provider listed below is working at the low fee end of the market and although there are differences between them, they are small and you should also pay attention to the user experience and how easy their site is to navigate and how easy their product offering is to understand. At the end of the day, I just had to stop my indecision and my dithering and make a call about who to use.
So, just to round out your research that little bit more, here are some other providers who you can purchase ETF’s through right here in NZ:
www.smartshares.co.nz - owned by NZX, maker and seller of ETFs
www.sharesies.co.nz - easily the most user-friendly platform and great for first-timers
www.investnow.co.nz - a huge range of funds on offer, which can be confusing
www.hatchinvest.nz - gives you access to the United States share market only
www.superlife.co.nz - also owned by the NZX and sister company to SmartShares
For more detail, another NZ blog has done a break down on all the options here: What’s the difference between InvestNow, Sharesies, Simplicity, Hatch, and more?
Hopefully, that helps Simon answer his question, it’s always tricky when I write a blog because I want to provide enough details to guide people, but not so many that I bamboozle people. As always, just get in touch if you have any questions.