# 32 Years Old with $5K: Should I start with an Index Fund or ETFs?



## soccerjoe5 (28 March 2016)

Hi folks, 

I'm very new into this world of investing and finances. It all started when I learned about the Acorns iPhone app and I've been reading up and listening to podcasts about investing. I've learned about the power of compounding and I want to have a good amount of money when I reach around 60 years old.

So I'm 32, single, and have been in Australia for 3 years now. I'm a photography assistant and will be transitioning to a full-time photographer in the next 1.5-2 years. I earn around $80-100K/year as an assistant, and I should be earning more once I'm a full-time photographer.

I've been investing in lots of equipment (lighting, digital and cameras) for the past year or so, and I have been saving up some money too. I currently have a $5K in cash emergency funds, I regularly put a few hundred dollars monthly into my superannuation fund, and also have a little over $4K set aside that I want to put into long term investing. 

I'm looking for something to continuously put around $200-500/month over the next 15-20 years (or more), alongside my superannuation. 

I still have a lot of reading to do, but my impression so far is that Index funds sound really smart. It doesn't take much brain power (so I can focus on photography career), and costs are low. 

There is also a lot of people saying that ETFs are great too because there is a lower starting fee, but from what I can gather you pay a small amount for transactions (to buy), so to me that eats into my money. 

So my situation is where do you guys think I should put my initial $5,000 (once my $4K reaches that), should I look more into ETFs or an Index Fund?

I'm hoping to maybe have (1) my superannuation, (2) index fund (or funds), and then (3) maybe some property when I retire. It sounds like a smart diversified way to head into retirement.

My gut feeling says Index Funds, but I would like to hear from you guys. 

Many thanks!
D


----------



## fraa (28 March 2016)

Before you buy anything get a financial plan in place first. 

Read a book like "asset allocation : Balancing financial risk" By gibson or visit the bogleheads forum to understand the basics of passive investing.

Might sound like much work but unless you do this you will most likely abandon the investment at the worse time (Its human nature). Only by understanding the pros and cons of the approach will you be prepared when a drawdown comes.




soccerjoe5 said:


> Hi folks,
> 
> I'm very new into this world of investing and finances. It all started when I learned about the Acorns iPhone app and I've been reading up and listening to podcasts about investing. I've learned about the power of compounding and I want to have a good amount of money when I reach around 60 years old.
> 
> ...


----------



## Donkhorsepower (28 March 2016)

soccerjoe5 said:


> Hi folks,
> 
> I'm very new into this world of investing and finances. It all started when I learned about the Acorns iPhone app and I've been reading up and listening to podcasts about investing. I've learned about the power of compounding and I want to have a good amount of money when I reach around 60 years old.
> 
> ...



I would suggest that you need to settle on your outcome of *how* you are going to trade. If you are looking to be an active trader, then start working towards that goal as soon as possible. Having said that, I always suggest to beginners that they need to *paper trade* for as long as it takes until they are sure that whatever strategy they have chosen is working as their plan requires. And that takes time.

This will not risk any funds, but you can get the experience of placing trades, working out the level of risk that works for you and then seeing how those trades pan out. We are talking in months, not weeks for this process. 

You might want to use some software to chart all of this. Incredible Charts is free and is a good starting point. They also have some very good info on that website that will get you started with your Trading Education, at least for the basics.

As for index funds. Well what are you learning along the way? At some point, if you want to get maximum leverage with your funds, you need to learn to trade without excess risk, but with confidence. 

As always, do your own research and good luck with your trading.


----------



## soccerjoe5 (28 March 2016)

fraa said:


> Before you buy anything get a financial plan in place first.
> 
> Read a book like "asset allocation : Balancing financial risk" By gibson or visit the bogleheads forum to understand the basics of passive investing.
> 
> Might sound like much work but unless you do this you will most likely abandon the investment at the worse time (Its human nature). Only by understanding the pros and cons of the approach will you be prepared when a drawdown comes.




Thanks mate I'll look into that book and that forum. Yes I'm looking more into passive investing!

Much appreciated


----------



## soccerjoe5 (28 March 2016)

Donkhorsepower said:


> I would suggest that you need to settle on your outcome of *how* you are going to trade. If you are looking to be an active trader, then start working towards that goal as soon as possible. Having said that, I always suggest to beginners that they need to *paper trade* for as long as it takes until they are sure that whatever strategy they have chosen is working as their plan requires. And that takes time.
> 
> This will not risk any funds, but you can get the experience of placing trades, working out the level of risk that works for you and then seeing how those trades pan out. We are talking in months, not weeks for this process.
> 
> ...




Thanks for the response, I'm looking more into passive investing. I'm not looking into active trading or trying to beat the market. I'll look into your suggestions, thanks very much!


----------



## hamli (29 March 2016)

soccerjoe5 said:


> Thanks for the response, I'm looking more into passive investing. I'm not looking into active trading or trying to beat the market. I'll look into your suggestions, thanks very much!




As you have already realised, the 'velocity' of money (power of compounding) makes a big difference. Passive investing doesn't necessarily exploit this concept ... trading does.

Good luck.


----------



## So_Cynical (29 March 2016)

soccerjoe5 said:


> Yes I'm looking more into passive investing!




Ok so passive = ETF's index or otherwise, here's a list.

http://www.asx.com.au/products/etf/managed-funds-etp-product-list.htm

i only hold one ETF, Market Vectors Australian Equal Weight ETF (MVW) reasonably cheap at the moment as are some of the other Aussie ETF's resources, index and banks, some of the dividend ones too.


----------



## minwa (29 March 2016)

hamli said:


> As you have already realised, the 'velocity' of money (power of compounding) makes a big difference. Passive investing doesn't necessarily exploit this concept ... trading does.
> 
> Good luck.




Correct, but you also should mention that trading has a very high failure rate, and at a rate faster than passive investing.


----------



## So_Cynical (29 March 2016)

minwa said:


> Correct, but you also should mention that trading has a very high failure rate, and at a rate faster than passive investing.



Im sure many do well in the middle ground, buying when appropriate, selling down or out when advantageous and beating the index by a little or fair bit, 100% passive will struggle to do that.

Risk reward.


----------



## minwa (29 March 2016)

So_Cynical said:


> Im sure many do well in the middle ground, buying when appropriate, selling down or out when advantageous and beating the index by a little or fair bit, 100% passive will struggle to do that.
> 
> Risk reward.




Define "many"...

Majority of traders do not beat index, it is mathematically impossible. Small minority "elites" takes the large slices from the majority of "losers" in this game. Now add in commissions & fees - negative sum game.

In a bull market the "losers" can still be profitable overall, but they will still lose to the index.  

It is my belief that people think "many" outperform index simply because those do are more vocal about it, while the majority of small losers keep quiet. Human nature/pride.


----------



## fraa (30 March 2016)

minwa I believe you are refering to william sharpes proof on active management vs passive ?

If so, the proof rests on the assumption that the passive investor buys and holds (No balancing req) the index that is a market cap index of all assets (Not just equities, but everything including bonds etc) in the investable universe.

In the real world, this is approximated by the global market portfolio.

Thing is, nobody (Even bogleheads) Actually invests in the global market portfolio. Everyone (Even bogleheads) Selects their own bond equity split (Active decision 1), are subject to biases (Ignore anything that is not bond equity ie commodities, or are subject to home bias and ignore international equities/Assets) in asset class selection (Active decsion 2), and rebalances to fixed allocations yearly (This is short vol, which is an active bet).

So in practice sharpes proof is violated. This doesnt mean its easy to beat the index but its not proven either unless you assert that in aggregate passive indexers hold the Global market portfolio. I doubt that after doing alot of reading on the boglehead forum.

Given these bias/Active bet that are undertaken "Irrationally" without regarding to the underlying (And undertaken continually across decades), one wonders if systematic distortions may be introduced into the market if the passive movement grows to such an extent that it constututes most money inflow into the market. Under such a scenario maybe you can earn above market return (Risk adj)  if the devations from Global market portfolio allocations by indexers are predictable.

anyway not saying active is good but passive isnt perfect either.

To the op if you are reading ignore this as I am talking edge cases that may not materialise at all. I too am implementing a passive portfolio but personally I want to understand boundary cases as that gives me comfort before I jump into the strategy.




minwa said:


> Define "many"...
> 
> Majority of traders do not beat index, it is mathematically impossible. Small minority "elites" takes the large slices from the majority of "losers" in this game. Now add in commissions & fees - negative sum game.
> 
> ...


----------



## hamli (30 March 2016)

So_Cynical said:


> Im sure many do well in the middle ground, buying when appropriate, selling down or out when advantageous and beating the index by a little or fair bit, 100% passive will struggle to do that.
> 
> Risk reward.




Agree. 

I think people only fail because they get too big or greedy. Not a particularly hard skill to acquire.


----------



## So_Cynical (30 March 2016)

hamli said:


> I think people only fail because they get too big or greedy.




Some find themselves in the right business at the right time, Palmer and Tinkler for example, fail to understand that its dumb luck and 3 or 4 years later its all gone...sometimes it good to have a bit of a go and take on some risk, just have to appreciate and respect the rules of the game.


----------



## minwa (30 March 2016)

fraa said:


> minwa I believe you are refering to william sharpes proof on active management vs passive ?




Nah I wasn't, never heard of it and most of what you typed just goes over my head, beyond my understanding.

I only know one thing is certain to me: This is a zero (negative after commissions/fees) sum game.

You simply cannot have most active traders beating the index, it would mean throwing 10 kilos of meat into a pack of 5 lions, and having them all end up with an average of 2.2 kilos eaten, simply mathematically impossible. In trading it's more like 1 lion ending up 8 kilos of meat & 4 lions with 0.4 kilos each (under perform index). Notice how it only adds up to 9.6kg, 0.4kg is gone because of commissions.


----------



## shouldaindex (1 April 2016)

I spent 4 years researching before I did anything.

And if I did what I was researching for 4 years at the start, I'd have less money now.

Point being know what you're doing, if you only know how bank interest works, then do that until.

There was a study that showed Mom and Dad investors make less than inflation on the stock market due to the usual human flaws when it comes to money.


----------

