# Newbie Investment Plan, MkII: Ideas?



## Bananaman1983 (24 September 2008)

Hiya

Thanks to everyone that left feedback on my last thread. It's been well considered... sounds like my idea, at least for the time being, probably isn't the right way to be going.

So what's the next step from here? A margin loan has been scrapped, but I'm still seriously considering a managed fund.

I've been reading about several different managed funds & fund managers, and the one that interests me the most (by far) are the Vanguard index funds. Their fee's are ~1%, and from what I read managed funds rarely outperform the index anyway. I also like that the hard decisions can be made for me, while I can educate myself a bit more before I start taking bigger steps.

i've got about 13k in savings, I would feel relatively comfortable investing 10 grand of this money, leaving 3 grand left in cash, which I can build up again. 

So I've got some questions... as usual...

1) Conservative, Balanced, or Growth type accounts, due to current market volatility? I know this largely comes down to risk profile, and I dont mind  risk too much but if my account is only going to head downhill in a growth type fund in the current market conditions, it seems a little silly. My thoughts at this point are to invest 5k in a conservative, 5k in a balanced until the market calms down a bit, then I can bump the risk up. Thoughts?

2) See a financial advisor? I've got 3 options, either pay the 2 grand for a full service advisor, see an advisor at my bank ($350), or not see one at all. Are the advisors at banks etc worth seeing, or is this a waste of $350? I'm a bit hesitant about paying 2 grand for an independant guy, that's 20% of my investment capital!

3) Is investing 10 grand in Vanguard putting all my eggs in one basket? Perhaps I should be considering 5k into a Vanguard Index fund, and 5k into AMP instead to diversify? Thoughts?

4) Any other ideas or avenues I should be considering over the next 6-12 months?

Thanks for reading.

Cheers.


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## johenmo (24 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

1) I have some in growth and balanced - didn't swap any.  Look at costs of switching as some funds are almost prohibitive.  If I was investing at the moment, I'd look at the short term return (you should be able to get a history of unit prices and DYOR on it) and compare it with bank deposits.  We put ours in the bank because it suits our plan.  Do what suits you and your time frames.

2)Read this forum - the overall opinion is not supportive.  It will depend on the person.  The bank guys are, IMO, more sales people.  I have seen one FA and he got us into one investment which came good after a while.  But 1 guy I work with has a good one & he sees he about 3 times per year.  I guess asking this sort of answers Q1.  There's plenty of free info.

3) Can't give advice on this forum.

4) I am learning between now and next share purchases.  Go to the invetsment expo in your city (unless you've missed it) - be lots of salemen with ideas and a few speakers. http://www.investmentexpo.com.au/.  Might get some ideas here.  $10 or $15 to get in.


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## Sir Osisofliver (24 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

Bananaman,

I cannot give advice on this forum blah blah blah you know the drill.

I will however give you the following suggestions: -


1) Always read the fine print *carefully.* Make sure that there are no entry or exit fee's, be aware of the period of time it takes for redemption to take place, be aware of whether there are performance bonuses in addition to the standard MER (Management Expense Ratio). Also be aware of how these things will affect your return over time.

2) Go look at ETF's (Exchange Traded Funds) - to compare features and levels of return.

3) What level of return are you seeking and what level of risk are you willing to take to achieve that return? When you can currently get 7.5% from bank deposits with very little risk.....how much greater return are you looking for?


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## Julia (28 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

Re financial planners/advisers employed by banks, their job is to increase investments into that bank's investment vehicles, e.g. their own managed funds.  Therefore any advice you receive from them will not be objective and unbiased.  I'd save my $350 if I were you.

Can't offer advice, etc etc., but I'd be putting my $13,000 into a term deposit until everything shakes out.  It may be many months until the financial global future looks anything other than uncertain.


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## happytrader (28 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

Hi Bananaman

The idea of buying in gloom profitable companies with low debt a very valid one. There is plenty of gloom and doom around at the moment.

Cheers
Happytrader


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## Nyden (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



Sir Osisofliver said:


> 3) What level of return are you seeking and what level of risk are you willing to take to achieve that return? When you can currently get 7.5% from bank deposits with very little risk.....how much greater return are you looking for?




Fantastic point. 

 ... hmm, just woke up; brain isn't quite functioning yet! Was going to post something hopefully insightful; but I'll just leave it at _fantastic point_ :


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## stath (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

I started with $15k split into a couple of Vanguard funds nearly two years ago - Property Securities Fund and LifeStrategy Growth Fund. Returns were looking pretty good until the markets started to downturn, and the funds' market value are worth less now than what I started with. Exiting at this point is not a good idea as I would definitely have lost money. I need to hang in there and wait for the market to go up again.


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## Nyden (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



stath said:


> I started with $15k split into a couple of Vanguard funds nearly two years ago - Property Securities Fund and LifeStrategy Growth Fund. Returns were looking pretty good until the markets started to downturn, and the funds' market value are worth less now than what I started with. Exiting at this point is not a good idea as I would definitely have lost money. I need to hang in there and wait for the market to go up again.




Well, to be fair - you don't *need* to hang in there ... Sometimes taking a loss earlier on is better than taking a greater loss later on.

Many speculate that the Aussie property market is heading down, and the same goes with the stock market. Hanging onto a loser on pride alone is a fools mistake.

Oh, and sorry to say - but you have *already* lost money. Just because a stock falls, doesn't mean it's now undervalued from its "true" value - but rather that it's been re-valued based on many new factors.


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## Spanning Tree (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

I am not a licensed financial adviser. Everything I say should be considered educational.



> I've been reading about several different managed funds & fund managers, and the one that interests me the most (by far) are the Vanguard index funds. Their fee's are ~1%, and from what I read managed funds rarely outperform the index anyway.




It's cheaper to buy ETFs. Vanguard will charge you 0.75% per year for a fund that tracks the ASX300. State Street will charge you 0.29% per year to track the ASX200 if you buy STW on the ASX.

You can get international diversification by buying iShares ETFs. IVV tracks the S&P500 and has MER of 0.09%. IVE tracks the MSCI EAFE and has MER of about 0.3% from memory. IEM tracks MSCI Emerging Markets and has MER of around 0.75% from memory.



> See a financial advisor? I've got 3 options, either pay the 2 grand for a full service advisor, see an advisor at my bank ($350), or not see one at all. Are the advisors at banks etc worth seeing, or is this a waste of $350? I'm a bit hesitant about paying 2 grand for an independant guy, that's 20% of my investment capital!



Two grand for a full service adviser seems very expensive! It's your choice but I have never seen an adviser in my life. Instead, I recommend you get free advice from a proven investor like Warren Buffet by reading his websites.




> Is investing 10 grand in Vanguard putting all my eggs in one basket? Perhaps I should be considering 5k into a Vanguard Index fund, and 5k into AMP instead to diversify? Thoughts?



I think putting in $10,000 all at once is a bigger risk. Remember that timing is important and if you invest at the wrong time then you can lose a lot. The way to diversify so that the risk of market timing is reduced is to invest bit-by-bit (also known as dollar cost averaging). So maybe start by putting $5000 in and then invest about $500 per month until you have invested all the $10,000. This is easier to do with Vanguard's mutual funds because you can put in $100 at a time and don't have to pay any brokerage. However, with ETFs you will have to buy e.g. through an online broker like Commsec and pay $20 per trade.


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## zolow (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

I remember reading a book about a guys technique for a very passive investment system.

It was super simple (apologies if it's already been mentioned, I'm sure it has):

Basically split you money into 2

- buy half in a ETF that tracks the market
- put the other half in cash long term deposit.

Every quarter you rebalance the funds again.

That's it.

Note: DYOR.


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## SM Junkie (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



> Well, to be fair - you don't need to hang in there ... Sometimes taking a loss earlier on is better than taking a greater loss later on......
> 
> Oh, and sorry to say - but you have already lost money. Just because a stock falls, doesn't mean it's now undervalued from its "true" value - but rather that it's been re-valued based on many new factors.




Now as a long term investor this is where I get confused with comments like this. Why, well from my understanding:

1. a bull market has always followed a bear market. So if prices are still likely to return to previous or new highs if the company is sound and profitable, why would I turn a paper loss into a real money loss.

2. over the last 20 years the share market has provided an average return of 12% even though we have been through 5 other bear markets during this time, then followed by 5 bull markets (according to a Freeman Fox report). 

Here is how it went:

1987  -   36% (lasted 2 months) 
        +   72% (lasted 33 months)
1990  -   23% (lasted 2 months)
        +   74% (lasted 45 months) 
1994  -   12% (lasted 9 months)
        + 158% (lasted 60 months) 
1998  -   21% (lasted 4 months)
        +   61% (lasted 15 months) 
2000  -   40% (lasted 33 months)
2002  +   99% (lasted 60 months)       


3. so if a stock drops in price during a bear market is this really a re-valuing of a particular stock or has it been just been swept up in the sentimental momentum driving the market and therefore if fundamentally sound, should bounce back when the bull market returns? History seems to think so.

What do others think?


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## Nyden (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



SM Junkie said:


> Now as a long term investor this is where I get confused with comments like this. Why, well from my understanding:
> 
> 1. a bull market has always followed a bear market. So if prices are still likely to return to previous or new highs if the company is sound and profitable, why would I turn a paper loss into a real money loss.
> 
> ...




It's a given that some stocks may recover; but over what time frame? The entire recovery isn't going to happen over a day or 2, so why sit in on uncertainty when you don't need to?


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## Wysiwyg (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



SM Junkie said:


> Here is how it went:
> 
> 1987  -   36% (lasted 2 months)
> +   72% (lasted 33 months)
> ...




Apart from the 33 month bear cycle (and gee not again i hope) there has been short bear cycles.The gravity of the American financial concerns "suggests" that this bear cycle could be lengthy.


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## Sir Osisofliver (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



stath said:


> I started with $15k split into a couple of Vanguard funds nearly two years ago - Property Securities Fund and LifeStrategy Growth Fund. Returns were looking pretty good until the markets started to downturn, and the funds' market value are worth less now than what I started with. Exiting at this point is not a good idea as I would definitely have lost money. I need to hang in there and wait for the market to go up again.





Stath, 

I'd just like to say I'm not picking on you. Rather I'm going to use you as an example to hopefully empart some wisdom for those that need it.

[begin rant mode now]

My personal belief is that anyone who uses a managed fund needs to be slapped around the head and face repeatedly whilst having the words "Value Destruction" yelled at them loudly.

Check out any finance based course/ free learning material and you will find the concept of efficient market hypothesis. It's been around for quite some time starting with a French mathmatician called Bachelier in the early 1900's and has been significantly built on over the years, predominantly by Eugene Fama in the 1960's. There's lots of material on it...go look it up. I'm not going to turn this post into the theory behind EMH when you can easily go look it up if you are interested.

Not everyone thinks that EMH is 100% valid...I don't. Examples can be found every day in the market that it is not 100% efficient. All sorts of ideas have come out in opposition to EMH like behavioural finance for example. Even the use of technical, fundamental, and qualitative analysis seems to say that inefficiencies can be found and that we can "beat the market".

But regardless of what you think of EMH, whether it is 100% valid or not, studies have been done since the 1930's that *in general - professional investors are UNABLE to outperform the market over time.* 

Now read that last line again...and again and repeat after me..

A fund manager who beats the market by 1% will strut round the office with the satisfaction of a job well done and his performance bonus in the bag ...... *even when his portfolio falls in value. *

There is also a whole area of research that has been done here to find out *why* fund managers, with all their advantages cannot _consistently_ beat the market with such concepts as time and volume slippage, stock borrowing etc. If you are interested...then go look for it.

Ok now that we have established that fund managers are human beings, just as capable as you are of making a complete stuff up of things..... here comes the next kicker.  Managed Expense Ratio's or MER's.

So this professional investor needs to get paid somehow right? And it's probably not happening via the long business lunches he has with company directors trying to convince him that they are the next big thing on the market. 

Instead there is this thing called a managed expense ratio, where the fund manager will take his pound of flesh from your investment before anything else happens. Some MER's are fairly small (for example in an index tracking fund because the monkey behind the fund just needs to push the buttons to reweight the portfolio every quarter) and some MER's are not so small. Lets say the MER fee is 1% shall we?

A long-term average performance indicator of the share market is about 11% - so you'll double your money every 6 to 8 years. So $50,000 invested today in the market and allowed to grow will through simple compounding become $679,273.19 in 2033.

The same $50,000 invested with a fund manager charging a simple MER of 1% (and I'm ignoring entry fee's, exit fee's, performance fee's and any other damn fee they can think of including looking at me funny pal fee) will net you - $541,735.30. 

I'll just wait for that to sink in..$137,537.89 difference in performance over the same time period. But wait you say surely most of that is due to the fact that less money is available for the benefits of compunding..... well sure some of it is the cost of not having those funds invested into the market, but the fund manager has still been able to collect a healthy $55,000 in fee's from you over the years for something that you could have done yourself with a miniscule amount of effort.

And one last happy little thought for you to consider... your mandatory superannuation gets looked after by the same people.

[Rant mode end now]

Sir O


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## stath (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

Thank you for your information (rant mode) Sir O.  

This was intended primarily as a short to medium term investment, probably 5 yrs max. Certainly not in the long term. Had I exited a few mths ago, I would've made a nice little gain, which, for the short time of the investment, I would've been happy with. However, that's timing for you. 

The question is, how long can the markets keep going down? I'm still hesitant at quitting at this point. I know I've lost money - the statements show that. But the market has to return at some point, sooner or later. I guess I'm hopeful that it will be sooner, so that I can at least recover some of the losses.

PS... I will look into the EMH theory and background, as soon as I can.


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## Sir Osisofliver (29 September 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



stath said:


> Thank you for your information (rant mode) Sir O.
> 
> This was intended primarily as a short to medium term investment, probably 5 yrs max. Certainly not in the long term. Had I exited a few mths ago, I would've made a nice little gain, which, for the short time of the investment, I would've been happy with. However, that's timing for you.




Ahh Timing... another concept that is closely tied to EMH. Why? Because the way to outperform the market is to get your timing right, and take out of every transaction the maximum possible. So when you are putting your money with a professional fund manager, you're betting that... 

a) his/her subjective determination of when the timing is right is better than *almost everyone else's* and
b) he/she is going to be *consistently right* frequently enough to make up for the negative compounding effects of what you are paying him/her.

Good luck with that.



> The question is, how long can the markets keep going down? I'm still hesitant at quitting at this point. I know I've lost money - the statements show that. But the market has to return at some point, sooner or later. I guess I'm hopeful that it will be sooner, so that I can at least recover some of the losses.
> 
> PS... I will look into the EMH theory and background, as soon as I can.




Well a good line I've heard around here is...

The markets can remain irrational longer than you can remain solvent...

Hopefully you can chalk it up to experience and be wealthier for it in the long run

Sir O,


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## Bananaman1983 (3 October 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

Hi

I haven't checked these forums in over a week... surprised to find this thread is still alive!

Well, for better or for worse, I've made the decision and invested a starting $5,000 into a Vanguard index fund (70% growth assets, 30% income). MER is .9%. I decided that I had to get my feet wet at some point, and a lot of advice I read says it's "time in the market" so getting started is the main thing I wanted to achieve at the moment. I'm only 24 and am invested my $ with the mindset that time is on my side. 

Figured that the bank advisors might wind up being salesmen... might save my money and google how to make your own financial plan, i'm sure there's info out there.

Also made a decision that on my day off tomorrow, I'm investing $7,500 into a term deposit (thinking ING or Bankwest as these have good interest rates). Term deposits are considered pretty rock solid... unless the bank goes bust, but what are the chances of this happening?

Thanks for all the interest in the thread, will check back soon.


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## Shrewd Crude (3 October 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



> bananaman-Hiya
> 
> Thanks to everyone that left feedback on my last thread. It's been well considered... sounds like my idea, at least for the time being, probably isn't the right way to be going.
> 
> ...




hey bananaman,
read carefully...
I would not recommend you invest in managed funds... If you dont have a clue at what you are doing, or dont want to learn then perhaps yes...
Trust nobody apart from family and close friends... dont trust sharebrokers, financial advisors, or people that run your assets... often enough they have conflicts of interest which are different from yours... make your own decisions !... I could easily give you an example but im not sure with mods..
 if you give your money over to them, then they call the shots...
Its far more safer with you, right?
If you do go for a managed fund, then select the least risky porfolio as possible (the guaranteed one that returns your money, or the low growth one)... *when the markets are rising, then switch it over to the high growth portfolio*... Im a kiwi kid, and Im in the kiwi saver scheme which came through just last year.. Im sitting on the lowest risk portfolio and it was the smartest move I ever made even though the bank told me to go high risk...
Look after number one buddy...
If you want to seriously coin it, then learn the tricks of the trade and create your own fund...

so under your pointers,
1) if you do go 'managed fund'...make sure you can switch between the different risk profile portfolios without excessive transaction costs..go conservative, and switch it over in times of rising markets...and in recessions switch it back to the 'guaranteed portfolio'...
these managed funds in the high growth section have great chunks heavily invested on the share market... like 50% and sometimes 80%...

2) dont pay any one any thing for advice... get yourself a library card... and read the threads...advisors dont always have your interests at heart...

under pointer number 3) managed funds are a diversified portfolios with in themselves... id say not really any need to get two of them...

If you can get into the government super scheme then that should be enough under 'managed funds', plus all the added bonuses, kick starts, and housing incentives...

4)... yes, but the mods are watching buddy...
read my signature...

I didnot see the other thread you had...
Good luck buddy....and keep us posted as to what you get up to...
later... from a young, not so rich oil investor with the Student loan now fully covered, yeeahhh hharrrghhh...

.^sc


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## Shrewd Crude (3 October 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*

oh bummer... iver just read your post above my one...
im 24 also.... your just a young cat... 

.^sc


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## Spanning Tree (6 October 2008)

*Re: Newbie Investment Plan, MkII. Ideas?*



> I haven't checked these forums in over a week... surprised to find this thread is still alive!
> 
> Well, for better or for worse, I've made the decision and invested a starting $5,000 into a Vanguard index fund (70% growth assets, 30% income). MER is .9%. I decided that I had to get my feet wet at some point, and a lot of advice I read says it's "time in the market" so getting started is the main thing I wanted to achieve at the moment. I'm only 24 and am invested my $ with the mindset that time is on my side.



MER of 0.9% seems pretty high to me. When you have $300,000 invested, you will be paying fees of $2700 per year! Did you even check out those ETFs like I told you to? If you really want to save cash you can try replicate an index with individual stocks yourself. You only need to buy the top 20 Aussie companies. In fact, history shows that the ASX20 has slightly outperformed the ASX200.



> so if a stock drops in price during a bear market is this really a re-valuing of a particular stock or has it been just been swept up in the sentimental momentum driving the market and therefore if fundamentally sound, should bounce back when the bull market returns?




This is the self-serving cognitive bias. You're assuming that the downturn is driven by irrational emotion and the bound back in driven by a return to fundamentals. What if it's the other way around? What if the company really is crap and boom is driven by irrational emotion and the downturn is a return to fundamentals?




> It's a given that some stocks may recover; but over what time frame? The entire recovery isn't going to happen over a day or 2, so why sit in on uncertainty when you don't need to?



A friend of mine told me a story about a guy who invested in Japan in 1990. After the banking crisis there reduced the value of his shares and property, he said, "It's time to buy! Shares are discounted! The market will come back up!" To see his performance 18 years later, check out http://en.wikipedia.org/wiki/Nikkei_225


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