Newbie questions about ETFs, Commsec and shares in general

Hi All

I'm a complete newbie to all this so please excuse any of my ignorance. After chatting to a trader the other day at a party his convinced me that investing in the market pays off far more than leaving my money in a savings account.

Basically at the moment I’m 24 I’ve got 27,000 in a high interest savings account (5% p.a paid monthly) I’m looking into taking that out of the bank and putting it into the share market as they say it pays roughly 10% in the long run my goals are to invest not trade and to one day be able to live comfortably off the dividends/interest.

So I’ve signed up to commsec to get an online brokerage account as it seems the only fee's are 19.95 per trade and it comes with $600 free brokerage. So far in my research to achieve my goal I’ve thought about either maybe going half of the investment in an etf like STW (SPDR S&P/ASX 200) Fund and then the other half split up in a few major ASX stocks like CBA, BHP, ANZ and WOW and maybe Telstra or maybe to just put it all into a few of the above seeing as STW basically use them. Or keeping it in a high interest account for now and waiting for another major fall in the market/crisis as everyone seems to think is on the horizon and doing one or the above buying up big banks and ect for cheaper and letting the investment grow my only problem with this is the longer I leave the money in the bank the more I’m losing out on compounding interest and capital gains and if this next major crisis never happens I’ve lost somewhat if I do invest now it will be for the long term so I wouldn't have lost anything as the market will eventually recover.

I've also been reading/researching investing in stocks on "the motley fool" (fool.com.au) and they seem to advise for long term investments not to wait to get in asap.



my questions are:

1. What are your opinions on the above strategy (trying to get as many perspectives as possible)?

2. Are there any other fee's for using commsec like inactive account fee's as I could find pop up, as I was thinking I could invest this 27,000 in 12 transactions and leave it for the next couple of years and it would cost me nothing due to the free 600 in brokerage fee's (I read through the fee pdf and only found the brokerage fee and dishonour fee's)?

3. With dividends and ect, I’m assuming they are paid directly into the commsec cash account so to accumulate compounding interest you would then have to reinvest it copping another brokage fee so how does one best take advantage of "compounding interest"?

4. With a eft as STW are they fully franked ( I think this is the term meaning the company pays the tax so you don’t have to, the trader I met said investing in Australian banks are best as they already pay the tax for you. I thought this sounded great as I’m pretty sure I got taxed hard this financial year due to having 27k in high interest savings)?

5. Do STW pay dividends as I read some stocks don't pay dividends.

6. Looking into recession proof stocks to add to my portfolio I was thinking two things garbage/waste management (as no matter how bad the recession waste needs to be dealt with) and accountants (also no matter how bad a recession people will still be taxed). So does anyone have any advice/tips what companies are major players on the asx dealing with these two industries?

Allot of questions there so sorry might as well be asking you guys to invest for me at this rate. Seriously though any help or pointing in the right direction to discover this info would be greatly appreciated.

m1ch43l8 said:

1. What are your opinions on the above strategy (trying to get as many perspectives as possible)?

2. Are there any other fee's for using commsec like inactive account fee's as I could find pop up, as I was thinking I could invest this 27,000 in 12 transactions and leave it for the next couple of years and it would cost me nothing due to the free 600 in brokerage fee's (I read through the fee pdf and only found the brokerage fee and dishonour fee's)?

3. With dividends and ect, I’m assuming they are paid directly into the commsec cash account so to accumulate compounding interest you would then have to reinvest it copping another brokage fee so how does one best take advantage of "compounding interest"?

4. With a eft as STW are they fully franked ( I think this is the term meaning the company pays the tax so you don’t have to, the trader I met said investing in Australian banks are best as they already pay the tax for you. I thought this sounded great as I’m pretty sure I got taxed hard this financial year due to having 27k in high interest savings)?

5. Do STW pay dividends as I read some stocks don't pay dividends.

6. Looking into recession proof stocks to add to my portfolio I was thinking two things garbage/waste management (as no matter how bad the recession waste needs to be dealt with) and accountants (also no matter how bad a recession people will still be taxed). So does anyone have any advice/tips what companies are major players on the asx dealing with these two industries?
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Allot of questions there so sorry might as well be asking you guys to invest for me at this rate. Seriously though any help or pointing in the right direction to discover this info would be greatly appreciated.

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1. It's a fairly good safe strategy to help you learn more as you go.

2. Not sure, best to give them a quick phone call to discuss directly with them.

3. Some companies have dividend re-investment plans, where your dividends simply buy more shares, otherwise, yes they go into your cash management account. Best way to reduce brokerage is only buy when you have 2k, 3k, 4k etc worth of money to spend so your brokerage % is less. This could be from dividends or additional savings from employment.

4. You should get taxed on your savings depending on what income tax rate you are on. The income from dividends and bank account interest should be taxed the same (this is in New Zealand where I live, I assume it is the same in Australia)

5. Look it up on Sydney Morning Herald, Yahoo Finance to see it's dividend history.

6. No sorry. Go through newspapers, ASX website and check out all the companies.

Also, you said... as they say it pays roughly 10% in the long run. Nothing is guaranteed, simply look at some companies 10-20 years ago and they have gone bankrupt, etc.

1. I don't see why you'd bother buying the SPDR and then buying individual shares that are in the SPDR. I'd be more inclined to invest in blue chips via the SPDR and then use some of the capital to invest in smaller cap stocks that won't be captured in the ETF.

2. There are no account keeping fees

3. Some companies will offer dividend re-investment programs where you can elect to the dividend in the form of new shares, sometimes at a discount to the market price. Otherwise you will have to pay brokerage.

4. The ETF will distribute all the dividends it receives whether they are franked or unfranked. Franked does not necessarily mean tax free, it means that 30% tax has already been applied to it. If you are on a higher marginal tax rate then you will need to still pay the difference and if you are below then you will claim a deduction. This differs from bank accounts where interest paid has not had any tax charged to it.

5. As I understand SPDRs are trusts so they will have to distribute all income.

6. DYOR

Thanks for the info guys

McLovin said:

1. I don't see why you'd bother buying the SPDR and then buying individual shares that are in the SPDR. I'd be more inclined to invest in blue chips via the SPDR and then use some of the capital to invest in smaller cap stocks that won't be captured in the ETF.

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mainly to diversify what happens if SPDR goes broke?? unlikely but still not sure about this.

Also blue chips can fluctuate a bit so get buy cheaper also in my very small amount of research seem to pay off better than stw as stw will also be dragged down by underperforming stocks, I don't know I’m still learning and putting together strategies haven't invested yet I’m hoping there is another gfc (with all this Greek and euro issues) so I can buy up some blue chip stocks for cheap.

Also I have my 1st 12 trades with commsec for free I just have to use it before 29th feb so might as well use this and diversify.

1. It doesn't make sense to double-dip in the blue chips unless you are particularly keen on blue chips.

2. No

3. As above

4. Partly franked (I seem to recall around 80%). But even fully franked doesn't mean they've paid all your tax for you - it means they've paid a certain amount of tax for you. When you do your tax return, you add that amount back on to the dividend ('grossing up'), calculate what tax *you* should pay on the entire amount, then subtract what they've already paid for you and see what's left owing to the tax man. If you're on a high personal tax rate, you'll have to send some money to the ATO. If you're on a low tax rate, ATO will send money to you. If you're somewhere precisely in the middle, maybe it'll come out square.

5. Yes

6. This is a better idea of how to supplement STW, because you're not doubling up. The term is 'core and satellite'.

> what happens if SPDR goes broke?

Many will dismiss this as an impossibility as STW just holds the underlying shares in trust for you, but I consider it to be something worth thinking about even though it remains very unlikely. One option is to split between two similar ETFs (eg STW and VAS), but I suspect that whatever upheaval would cause STW to explode would probably also affect other ETFs and perhaps the entire global financial system. It would evidently take something more violent than a GFC, as the ETFs seem to have weathered that quite well. Maybe something like a large meteor, in which case your STW shares might be the least of your worries.

(*one caveat - beware of 'synthetic' ETFs, as they are a house of virtual cards. The major ETFs in Oz are not synthetic, so you only need to worry if you're buying overseas or if it has the word 'synthetic' in its name).

Although I shouldn't, in regard to STW, I've done some research for you.

http://www.spdr.com.au/etf/fund/fund_detail_STW.html

Now go and decide what you wish to do.

Judd said:

Although I shouldn't, in regard to STW, I've done some research for you.

http://www.spdr.com.au/etf/fund/fund_detail_STW.html

Now go and decide what you wish to do.

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Lol don't feel bad i've already checked it out just don't understand it really

m1ch43l8 said:

Lol don't feel bad i've already checked it out just don't understand it really

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If you don't understand it then you probably need to spend some time on bringing yourself up to speed...STW is pretty easy to understand, its a fund that owns shares, the shares that are held are the same shares that make up the 200 stocks of the ASX200 index.

STW holds shares in amounts that equal the weighting of those shares in the index...the daily fund update is pretty specific.

http://www.asx.com.au/asxpdf/20111104/pdf/422bhs0vy3gj45.pdf

The below link is the stocks held by percentage, big to small.

http://www.spdr.com.au/etf/fund/fund_holdings_STW.html

m1ch43l8 said:

Lol don't feel bad i've already checked it out just don't understand it really

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Hi Michael, most of the money in my portfolio is invested in ETFs; so I can tell you my experience. I love them personally.

Basics
The STW is designed to track the performance of the ASX 200, so if the ASX 200 goes up 1% on any given day, it SHOULD also go up 1%.

The way the STW tracks the ASX 200 is by investing in exactly the same stocks in the ASX 200 and in exactly the same proportions.

Most people would know that BHP and CBA are the biggest companies in our market, worth roughly 11% & 7% of the ASX 200, respectively. You can check out the full list of holdings here: http://www.spdr.com.au/etf/fund/fund_holdings_STW.html

Essentially by buying the STW, you are buying 200 of the largest Australian companies, you are buying the 'market'. It is really that simple.

STW pays out dividends and franking credits twice a year - you can also choose to have dividends reinvested back into the STW. It won't be 100% franked due to reasons too technical to explain, but yes still you can expect a good level of franking anyway.

Benefits
As mentioned above you are essentially buying the 'market' by buying the STW. You are gaining exposure to 200 companies through one trade - it's so simple!

This means if you're like me and don't like the headache of painfully analysing each stock and spending money on many multiple trades, then you may like the STW.

State Street charges a fee of 0.286% for the ETF (it's automatically deducted). This in my opinion is very, very cheap considering the yield right now is 4.95% - and most fund managers charge over 1%.

You also get instant access to the market, there are no forms to fill - just buy and away you go and sell whenever you want (when the market is open ofcourse!).

Risks
Like most ETFs, STW is passive. This means that all it is simply meant to do is track the market - if the market is up 2% it SHOULD go up 2%.

An active fund manager on the other hand, like a Perpetual or a Fidelity, uses an 'active' strategy to beat the market.

For example, in the last five years the ASX 200 has fallen 0.18% per annum (five years through till October), the STW has fallen roughly the same.

Fidelity's Australian Equities Fund on the other hand has gone up nearly 3% ever year in the same time. That's because Fidelity held more of the companies that performed really well, and less crappy companies. However ofcourse it comes at a price (the fee is higher than on STW) but it's obviously been worth it.

But active fund managers don't guarantee to beat the market and many of them performed worse than the STW.

You mentioned what if SPDR (this is State Street's ETF brand) goes broke. So firstly, will State Street go broke? In my view, highly unlikely. Secondly, from my understanding, most ETFs are 'ringfenced' from their providers, which means that ETF assets are held for the benefit of investors.

Another important risk to consider is 'tracking error' - as I mentioned most ETFs are 'passive' and designed to track the market (ASX 200 for the STW in this case). There is just a slight chance (again, due to technical reasons) it might not track the market fully.

Bottom line
The bottom line in my view is that they are very simple and easy to use products. The main risk you have to worry about is how you think the market is going to perform and whether you are happy to stick around with a 'passive' strategy and ofcourse your personal circumstances.

You mentioned you had $27,000. That's a lot of money. Ask yourself:

What if you put it into the market and the market fell 50% and companies cut their dividends heavily? How would you feel?

What if you were to lose your job etc, or needed it for a rainy day (like my case, the balcony in my house collapsed). Is it really wise to put all of it in there?

Are you the type of person that likes 'passive' strategies or 'active' by investing in companies yourself or using an active fund manager (like Fidelity or Perpetual for instance)?

Also consider: STW isn't the only ETF out there, check out the other interesting strategies offered by other providers (State Street has different ETFs, so does iShares, Vanguard and Russell Investments).

Hope that helps!