# ASX 200 enquiry



## ihbi (30 December 2010)

Hello all, 

I am very new to stocks and need some clarification please. I'm am unsure as to whether this is the correct thread to be posting under, and I apologise if it is not. Here is my current position: 

I have invested a considerable sum on the ASX200 through an index fund, but I am unsure how exactly I earn money from this? Also, I am considering opening a First Home Saver with Commonwealth Bank. My thoughts are depositing profits from my index fund into a First Homer Saver account as the federal government pay 17% of money deposited (up to $5,500) for each financial year. In addition, Commonwealth Bank pay 5.25% P.A. to this account. The concept behind this approach is great; earning 20% on profits (from index fund) up to $5,500 (assuming the ASX200 performs well). 

Is this a good option or is reinvesting within the index fund more beneficial. I am not asking for advice but simply your individual opinion. Also, originally I have chosen to reinvest my profits into the fund, does this mean I will accumulate more shares over time? I am only 20 years old, and have 9 years of university left, during which, I will not be purchasing a home. Thank you for your input and opinions. 

IHBI


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## KurwaJegoMac (30 December 2010)

ihbi said:


> Hello all,
> 
> I am very new to stocks and need some clarification please. I'm am unsure as to whether this is the correct thread to be posting under, and I apologise if it is not. Here is my current position:




Hello Ihbi and welcome to the forum.

This is the correct forum, any beginner's questions are welcome here.



ihbi said:


> I have invested a considerable sum on the ASX200 through an index fund, but I am unsure how exactly I earn money from this?




An index fund essentially mirrors a given index. So if you're invested in an ASX200 index fund, the index fund should mirror the performance of the ASX200. Essentially the index fund is comprised of the companies in the ASX200 in the same proportion as what they are in the ASX200.

As an example:

Say RIO makes up 10% of the ASX200, BHP is 8% and CBA is 6%. The index fund will have 10% of its' funds in RIO, 8% in BHP, 6% in CBA, etc. So when those stocks go up and down, so does the fund.

If over the course of the year the ASX200 goes up by 10%, your index fund will go up the same amount (less any fees which are usually less than 0.5% - this fee is automatically deducted from the index fund price so if ASX200 went up 10% your index fund goes up 9.5%)



ihbi said:


> Also, originally I have chosen to reinvest my profits into the fund, does this mean I will accumulate more shares over time?




Yes this is correct.



ihbi said:


> Also, I am considering opening a First Home Saver with Commonwealth Bank. My thoughts are depositing profits from my index fund into a First Homer Saver account as the federal government pay 17% of money deposited (up to $5,500) for each financial year. In addition, Commonwealth Bank pay 5.25% P.A. to this account. The concept behind this approach is great; earning 20% on profits (from index fund) up to $5,500 (assuming the ASX200 performs well).
> 
> Is this a good option or is reinvesting within the index fund more beneficial. I am not asking for advice but simply your individual opinion.



Compare the rate of return of both investments for the amount of money you will invest for the given period of time. Then ask yourself which one will provide the better rate of return in line with your financial capacity and goals. Then make a decision based on that.

Can't really be specific about it, you'll need to consult with a licensed planner for that sort of advice


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## Julia (30 December 2010)

ihbi, KJM has offered a very sensible reply.

Congratulations on your serious and reasonable consideration of taking charge of your financial situation at an early age.  Good onya.


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## pixel (31 December 2010)

Hi ihbi

I too echo Julia's compliments and KurwaJegoMac's explanations.
Furthermore, I suggest you look at the performance of our ASX200 index over time and make yourself aware that it's not always what you might hope it to be.

In the snapshot below, I have drawn (free-hand, so ignore the decimals) the ranges from beginning to end of each of the last 4 years. Note that, peculiarly, the range tool I've used always starts with the left-most value set to 100%. So we had -
in 2007 +11.5%
in 2008 -40.8%
in 2009 +31.8% and
in 2010 -02.4%

You may figure out yourself, what you could have achieved by judiciously buying into and selling out of that Index Fund at certain times *inside* the time. I don't know when you started, nor even if you did in fact swap.
I don't mean you should have picked the absolute Low points to buy in, and the absolute Highs to sell: That requires Hindsight or Clairvoyance, and only habitual liars possess those skills. It is, however, possible to detect early warning signs that a rally may come to an end, or that a bearish period has likely run its course.

So, simply ask yourself how much better off someone might have been, had they only eliminated the one 40% drop from their Index Fund, i.e. had they transferred their capital from an index-linked Fund into a capital-secure term deposit, even though that did not much more than hedge the CPI.

If you think the above makes sense, you're one step ahead of the unwavering followers of a single  strategy, the Index Fund, and one step closer to greater efficiency in managing your own money.


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## TabJockey (31 December 2010)

The index fund is a little like trying to win a race tied together with all the other runners. You wont win by much and if they fall over you will too.


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## cutz (31 December 2010)

TabJockey said:


> The index fund is a little like trying to win a race tied together with all the other runners. You wont win by much and if they fall over you will too.




Incorrect,

An index fund is actually a convenient method of investing in an index, here's a link to a typical index fund, http://www.spdrs.com.au/etf/fund/fund_detail_STW.html# 

As you will find out, it has nothing to do with racing.


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## IB12 (31 December 2010)

I would go with the FHSA since 17% on a *risk-adjusted basis* is hard to beat. 
Even over the long term, an index fund won't get you 17%.
On top of that you get about 4-5% interest on that 17% gain after taxes (non taxed would be 5.25%), assuming you invest the 5.5K upfront. Plus the interest is taxed at 15% only for the FHSA. 

I don't think the index fund pays you dividends do they? Maybe they do, because some ETFs I've had to pay dividends to the owner when I was short. 

All in all, for small sums (i.e. <= 5.5K) I would go with the FHSA.
Getting 17% + 4-5% interest on top of that *guaranteed risk free* is better than an index fund at 20% with drawdowns and volatility.

Keep in mind however what sort of an investor you are, because if you need cash in the short term, the FHSA provides no liquidity at all, once you invest it,it stays in the FHSA account, or else goes to your super account if unused. 

On the other hand, the reason why we have such high property prices here in Oz is because of the govt incentives such as the FHSA.


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## TabJockey (31 December 2010)

cutz said:


> Incorrect,
> 
> An index fund is actually a convenient method of investing in an index, here's a link to a typical index fund, http://www.spdrs.com.au/etf/fund/fund_detail_STW.html#
> 
> As you will find out, it has nothing to do with racing.




Hell yes its a convienient way to invest in an index, but for me at least the returns do not justify the risk. You are exposed to ANY global or local significant event, and even if nothing too bad happens you could just get a flat result (like 2010).


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## pixel (1 January 2011)

TabJockey said:


> Hell yes its a convienient way to invest in an index, but for me at least the returns do not justify the risk. You are exposed to ANY global or local significant event, and even if nothing too bad happens you could just get a flat result (like 2010).



 exactly my point, TJ

Why settle for average returns when you can easily cut out the big losses.
Some traders can even make money to the Short side, although that's not everybody's cuppa T.
But at least switch strategies when the environment switches and the average is about to nosedive.


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## ihbi (2 January 2011)

Thank you all for your advice and input! Very interesting stuff.


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## So_Cynical (2 January 2011)

TabJockey said:


> The index fund is a little like trying to win a race tied together with all the other runners. You wont win by much and if they fall over you will too.




Correct, Never heard it put like that before...but cant help but totally agree.



cutz said:


> Incorrect,
> 
> An index fund is actually a convenient method of investing in an index, here's a link to a typical index fund, http://www.spdrs.com.au/etf/fund/fund_detail_STW.html#
> 
> As you will find out, it has nothing to do with racing.




I don't really think Tab said it had anything to do with racing...what he was saying (i think) is, its like backing every horse in the race to win, however spreading your bet out across all the runners and adjusting the amount bet on each by there starting price, slanting your returns slightly to the shortest priced half of the field.

Therefore giving 2 possible out comes.


1: a small win
2: a small loss


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## poverty (2 January 2011)

So_Cynical said:


> 1: a small win
> 2: a small loss




Altho you can use gearing to magnify that into a large win or large loss.


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## TabJockey (2 January 2011)

poverty said:


> Altho you can use gearing to magnify that into a large win or large loss.




Think about what it's like to be long the index with a leveraged position in 2008 or 87. Ouch


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## Wysiwyg (2 January 2011)

TabJockey said:


> Think about what it's like to be long the index with a leveraged position in 2008 or 87. Ouch




If you were experienced then one would not "hold" a long position when it moves against them.


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## cutz (2 January 2011)

TabJockey said:


> Think about what it's like to be long the index with a leveraged position in 2008 or 87. Ouch






So_Cynical said:


> I don't really think Tab said it had anything to do with racing...what he was saying (i think) is, its like backing every horse in the race to win, however spreading your bet out across all the runners and adjusting the amount bet on each by there starting price, slanting your returns slightly to the shortest priced half of the field.




Perhaps I need a little clarification,

In my opinion an index fund is not such a bad idea for an inexperienced investor (the OP), the chance of taking a huge hit on one stock is somewhat reduced.

Someone on this thread suggested enhancing returns by timing the index which is an excellent idea if you have the skill.

It has also been suggested on this thread that a new player can beat the index by investing only in stocks that he/she thinks will outperform, this is something even many pros can't achieve, one bad pick and you're out.

TabJockey,

A concentrated risk leveraged position carries a higher ouch factor.


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## Australioman (10 September 2012)

Have you considered the alternative asx 200 cfd (contract for a difference) ?


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