Managed Funds vs. ETFs vs. SMAs

Discussion in 'Share Investing Strategies, Theories & Education' started by radson, 19th Feb, 2016.

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  1. Bran

    Bran Well-Known Member

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    @inspiredbyprop I'm near finishing 'A Random Walk down Wall Street' which was on @The Falcon 's recommended reading list. In it, he makes a compelling argument for the ETF/index funds.

    For small scale investors, the long and short of it (pun intended), is that a properly diversified portfolio is very difficult to attain. Thus, your risk profile, returns and ease are demonstrably higher using an index. I've got about 100 bucks each of VAS, NAB and TLS, the latter because they were cheap on the day. I'd pour more into VAS of the three after reading the book. Dabbling (as I did) is not the place for single shares as far as I understand, but as I've said before, nothing got me more interested to learn than dropping a few bucks into something I didn't understand too deeply.

    The bearish market is perfect for those of us with a long investing time-frame. I'm itching to start pouring more money into it.
     
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  2. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Thanks Ouga. That validates my understanding.

    Do you mean the compound return? or since 2006, the 10-year return is only 8.11% which is less than 1% annual return.

    Thanks Bran as always, I will start reading the book soon.

    If I could draw a conclusion on the growth in the VAS and a general investment property (all types) in the 5 top cities around AU, property may look like a more reliable outcome for growth.
    I mean for 2 people who is retiring this year... One with an IP may be smiling with the better outcome than the one with VAS who is seeing their money not going anywhere after all the hard work.

    Now comparing with shares and property again.
    I also see that for shares in general, perhaps the wiser strategy would be to buy and sell more often (when time is right) to maximize the (better) outcome, rather than hold for a very long period. And I think this is supported by lower transaction cost (total buy+sell may be <1% for amount > 5k and settlement period usually quicker) for shares investors to do buying/selling more often than property investors (almost more than double transaction cost and settlement may take weeks/months). But of course, there is no stopping any property investor to buy/sell more often when the price is right.
     
  3. The Falcon

    The Falcon Well-Known Member

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    Interesting conclusions.
     
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  4. BingoMaster

    BingoMaster Well-Known Member

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    Inspiredbyprop - it seems to me you are drawing some seemingly logical responses to rather incomplete information about the stock market.

    The idea that timing the market and buying and selling more often is more wise. There is a vast amount of data which shows the majority of people cannot do this, and lose money. In fact, in a study of US mutual funds, the best performing accounts were those that belonged to people who either forgot they had an account, or were dead. Of course this doesn't stop the majority of people trying. A few get very rich, and the vast majority lose money vs simply buying and holding.

    For people such as myself and austing, we're much more focussed on the income produced by the shares, not the prices. This income, which frequently comes with franking credits attached to enhance it, has been stable or steadily growing over a large period, with only a slight reduction during large catastrophic events such as the GFC.

    But the main thing is the time horizon. Go out thirty or forty years, or more, and then talk about what's a reliable option for growth. You will also see that the boom in Australian property which seems to give it it's high annual returns, happened relatively recently in that period.
     
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  5. radson

    radson Well-Known Member

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    @inspiredbyprop

    Nooo

    8.11% p.a is per annum. i.e per year. That's with no expenses aside tax on dividend income. But not considering benefits of franking dividends either.

    As has been alluded above you are working backwards. You have started at your conclusion and working backwards to justify it.
     
  6. Zenith Chaos

    Zenith Chaos Well-Known Member

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    Track the All Ordinary index if you want to accurately estimate VAS historical performance before its inception.

    The advantage of VAS over an actively managed fund is that the fees are cheaper (although I noted that some of the LICs have low MERs) and generally speaking, it will outperform the actively managed fund, especially once fees are considered. This statement may spark debate, but it is a generally true statement. There are probably active managers out there who have beaten the index on an ongoing basis. The longer you track the market, the more likely the passive fund will win in my opinion.

    ^^ this is not advice
     
  7. Hodor

    Hodor Well-Known Member

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    Not at all, as others have stated, I am just learning and almost all the evidence shows the highest sustainable returns are achieved by those who buy and hold for the long term.
     
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  8. Northy85

    Northy85 Well-Known Member

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    What would happen if Vanguard went bankrupt? is there any risk of just investing in VAS and VGS, apart from market volatility of course?
     
  9. The Falcon

    The Falcon Well-Known Member

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    Vanguard is just a manager. Each fund (ETF) is a company, the assets owned by stock holders.
     
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  10. Northy85

    Northy85 Well-Known Member

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    Thanks for that, it makes sense now. kind of like if your property management agency went broke you wouldn't loose your house.
     
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  11. inspiredbyprop

    inspiredbyprop Well-Known Member

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    Take VAS for example, the benchmark is against the top ASX 300 companies. Let's say company X is on the list but then went bankrupt. Does it mean the share price & dividend will now be readjusted to exclude company X and include the company #301 on the ASX?
     
  12. The Falcon

    The Falcon Well-Known Member

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  13. S0805

    S0805 Well-Known Member

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    @radson thanks for the info. given the fundamental discussion here is on strategy I would like to point out that in all these discussions investor's personal goals, how far they are in investment journey, their existing investments should also be included.

    I do accept that long term investment is better way to invest. This is how I see it if you invest in index fund you will get the fair returns (fair enough long term it is safe and secure) but not the higher returns. Possibility of higher returns comes with higher risk.

    I am married, early 30's no kids, hold 2 Investment property (- geared). Before June, I will invest 20K seperatley in one of the International managed fund to diversify with no intention of ongoing contribution and assessing to buy Insurance bonds worth 15K underlying securities will be Aus/Int shares, bonds/cash.

    I also have 50K Aus share investment and thinking of changing stratergy for this by introducing 3 tier systems. Tier 3 (Emerging Aust shares) will produce short/Med term gains and possible next blue chip companies, Tier 2 (Long term Aust shares) will produce market beating returns, Tier 1 (ETF/Index fund only) will protect the capital generated. Fot Tier1 I am considering to either DIY or use someone like Stockpot.

    Each tier will feed their output to the tier above. Liquidation from tier 3 & 2 will be flexible to invest in tier 1 but Tier 1 will not be liquidated. I am not thinking of Active trading for Tier3 and do understand the transaction costs will be a problem if I do that (yet to run numbers on this). we both work so keeping an eye for all the minor company movements is not feasible however we can keep an eye on major economic movements. considering certain amount (e.g. 30-40% return) on tier 3 shares and bit higher on Tier 2 before selling them. Before we sell we'll review the market condition for these shares. I understand that I am trying to time the market and will not get that right all the time. However I think given the time we have on side before retirement feel its chance worth taking.....

    Not seeking personal advise but keen to know your thoughts on 3 Tier strategy as above and if any of you've done someting similar in past...thoughts ??

    cheers
     
  14. Ouga

    Ouga Well-Known Member

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    I am no expert (not even close - AT ALL) on these considerations, however the below looks like a bit of an assumption:

    What is your plan if these do not outperform or worse underperfom?

    To me, it looks like you are trying to both use the index fund strategy while trying to achieve above market returns - IMO that looks like a rather difficult outcome to achieve.

    Perhaps another consideration would be the core/satellite strategy.
     
  15. S0805

    S0805 Well-Known Member

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    Stock selection should take care of this. Plan is to wait until tier 3 & 2 goals achieved or revisit the stock selections. You are correct I am trying to use both worlds in my strategy. Plan is to take the risk in tier 3 most, tier 2 bit less and none in Tier 1.

    can you elaborate more on core/satellite strategy. Not aware of the terms...
     
  16. radson

    radson Well-Known Member

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    @S0805

    Some just thoughts below. I must stress I am still very much a beginner in investing and while I have broad knowledge, the depth is still thin. I believe @The Falcon and @austing are much more knowledgeable and astute investors by a wide margin.

    First of Vanguard Australia - Core-satellite Approach

    Just some comments, does sound like you are proposing a version of the core satellite approach with your multiple tier approach. Be wary of your internal hubris/ego when you disregard @Ouga pertinent question of what you will do when your plan does not outperform and this will happen. perhaps temporarily, perhaps more permanent.

    From Carson "These are the times that successful investors separate themselves from the pack. Most investors mistakenly assume that you make all of your money during bull markets. The reason so many investors fail is because they make poor decisions when markets fall."
    10 Bear Market Truths

    When are you going to buy these managed funds , stock ETFs. Are you going to DCA or lump sum. Dividends reinvested?

    Your Tier 3 plan sounds very spec share and I certainly am not against it. It can be fun following the machinations of the seismic shifts in these stocks. As long as your have stringent portfolio weightings and be mindful that these shares are at the periphery, I say have fun.

    Your funneling up to Tier 1 sounds not a bad way to do things

    Lastly, stockpot, I have not fully investigated but isn't it something you can just replicate yourself without their fees?
     
  17. Nodrog

    Nodrog Well-Known Member

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    My God, there is so much that could be said here. However, based on experience I have a feeling it may fall on deaf ears wasting both your time and mine. Hence although it may seem rude I won't bother saying too much except for the following:

    If you can generate 30 - 40% return "consistently" at any so called Tier of the market fund managers will be knocking your door down wanting to hire you.

    Tier 3 as you refer to is the riskier, less liquid part of the market. You really need to know what you doing at this end of the market or you will get eaten alive. Hence you will need more than just a few tips on a forum. Although I did the trading thing earlier in life I'm rusty in this area now so there will be others better equiped to provide tips than me for better or worse. But if you are going to have a go perhaps don't put too much capital at risk in this more speculative area of the market.

    Fortunately as stated you have time on your side. Given that you have these ideas in your head it is highly probable that you will feel the need to have a go regardless of what older fogies like me have to say. You may or may not do well but best to give it a go now (if you must) while you still have plenty of years before retirement. If you succeed I'm genuinely thrilled for you. But if you don't for whatever reason like many of us be thankful that you had a go whilst time was on your side and an incredibly valuable lesson was learnt. Because I have seen many later in life try this and suffer terribly with no time on their side to recover their losses. Unfortunately the one thing in life you can't get back is time!

    Personal opinion, not advice.
     
    Last edited: 11th Mar, 2016
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  18. Hodor

    Hodor Well-Known Member

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    I once thought about picking your "tier 3" type companies. I even put a small amount of cash into a couple.

    I lost a good portion of my money. It was honestly the best thing that could have happened. I learnt my lesson before risking significant capital.

    If I'd been smart and put it in an ETF or LIC I would have 4 times the cash I started with and it would still be growing.
     
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  19. The Falcon

    The Falcon Well-Known Member

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    I think that there is not enough tier 4 or 5 frankly.

    Granted, I am quite drunk so I will rely on austings judgment.
     
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  20. Nodrog

    Nodrog Well-Known Member

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    Relying on my judgement, very dangerous! I would hope that applies to wine also by taking my advice and switching to the "Top Tier" stuff being ALDI Tempranillo:D. Maybe you did and that's why you're drunk:eek:. At $4.99 a bottle one can afford to drink heaps of the stuff:cool:.
     
    Last edited: 12th Mar, 2016