Index Funds… you won’t believe the returns

By David Taylor

A strange thing happened to me the other day. I was minding my own business at work, and a colleague (who’s not known for his financial expertise) approached me. He asked me if he could ask a ‘non-work related’ question. I said ‘sure’.

He asked if I knew anything about index funds. I said, of course, they’re mutual funds that try to replicate the movements in any given index. There are index funds for cash, property and shares.

He then asked me if I was aware of the recent returns fore index funds. That, I must confess, I did not know.

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I was shocked by what I found out next.

Some of the best returns around

I’m not going to list the name of the funds manager, but a leading financial services provider has a suite of index funds you can choose from, and the returns are impressive, to say the least.

The funds manager lists the “average annual returns” as of the 31^st of January, 2017 for all of its products. The 5 year property retail fund returns 15 per cent, the Share Index Fund (retail) returns nearly 10 per cent, and the international shares fund returns 17 per cent.

Now I know these returns don’t “shoot the lights out”, but what they do is provide near ‘certain’ competitive returns (which gives you peace of mind).

The alternative – ‘playing’ the market

The rise of Donald Trump has been fascinating to watch. Apart from anything else, his ability to move markets is unprecedented. He has the power to influence currencies and stock prices with a single tweet or a seemingly carelessly phrased outburst.

Those who trade market movements, or thrive on market volatility are having a whale of time. The Aussie dollar, for instance, has bounced between 71.5 and 76.5 US cents over the past couple of months. The stock market too, especially around the time of the US election, was all over the shop.

If you’re skilled at ‘playing the market’, you’d no doubt feel like a pig in mud right now. It does, however, require four really important attributes: educational training; time; patience; and an ability to be unemotional. I certainly lack the latter. I find it very difficult not to beat myself up after making a poor trade.

In fact most people lack both the time and the ability to remain unemotional. It helps to explain why investments can go so badly wrong. You attend the course, do all your homework, find a great trade or investment… and then a lack of patience, or a big market swing, or some life tragedy gets in the way, and it all goes south.

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Big change in thinking

I want to encourage you to think outside the box on this one.

The reality is that index funds, over time, outperform all other investments. Yes it’s an incredibly boring and sensible thing to do. You’re essentially setting money aside (upfront), and bit by bit, putting it into an abstract investment vehicle that will eventually cough up more money – in 5, 10 or 20 years time – than the amount you started off with. It’s an exceptionally uninspiring pursuit. The thing is, it actually does work, and the experts swear by it.

Billionaire investor, Warren Buffett, famously advised people to put 10 per cent of their cash in short term government bonds, and the rest in a “very-low cost S&P 500 index fund”. He warned aspiring investors not to park their hard-earned cash with “high fee managers”.

I guess it depends on how you view investing: as a game/pursuit, or as a way to create and build wealth?

Market watching

The reality is that many investors just love the drama of the markets.

Watching the market can be a lot of fun. Many people view it as a game. I don’t view it as a game as such, more of an intellectual pursuit or challenge.

You see whether you’re looking at stock, bonds or property, “assets” have a value, and determining their fair value is a very difficult thing to do – largely because it involves determining what you suspect other people will pay for it.

Working out the value of an asset can also involve figuring out how the economy (and its make-up) will influence it.

You really have to keep abreast of news, current affairs and developments on the market more broadly. It’s one way of becoming more educated or knowledgeable… if that has meaning for you.

To that extent, trading and investing can add stimulation to your life. It’s also a means of connecting with the rest of the world. Of course if you’re just out to build your wealth, and that’s it, watching the market may not appeal to you.

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The financial press

Whether you decide to be a “passive” investor, and put all your money in index funds, or you choose to be an “active” investor, and trade the market, you should know where to get your information from.

Apart from reading company annual reports, and Australian Securities Exchange announcements, the financial press is a great way of getting on top of things.

As far as the mainstream media is concerned, the ABC (yes, I am biased) provides a great source of business news, as does Yahoo7 Finance. If you want to read press that’s written for market participants, I recommend reading articles from Bloomberg, CNBC and the Financial Times.

Getting yourself on a few “broker recommendations” email lists is also a great way to keep abreast of what’s going on.

You’re in the driver’s seat

With Brexit now in the process of getting underway, the European Union still riddled with debt, and big question marks around what the Trump administration will do in the United States, I think the financial markets will only become more unpredictable.

It’s therefore a perfect time, if you have the cash, and the inclination, to consider investing in an index fund. Equally, if you enjoy the challenge of figuring out what assets are worth now, and what they might be worth in the future, now is a wonderful time to be ‘playing’ the market.

It all comes down to what you want out of your investing life. Financial markets really do cater for everyone.