Managed Fund - suggestions

[len_jet]

I have about $3K in Merrill Lynch - Growth fund and I contribute $500 a month into that fund.

I have a little over $1K sitting in an ING saving account...

I want to try and earn a little more than the approx 7% interest that I get from there, any suggestions on a property managed fund including these restrictions:

$1000 minimum entry fee...
i will contribute $500 a month no worries...
I want to earn 10%p.a or more...

any winners out there?

 

[Moo]

Personally I'd be happy with the 7% for another quarter or so.

 

[morgoth]

If you want to be passive look at the Barclays I Shares which can give good exposure to different asset classes. Still rolling them out so the offering will get better over time. Slanted to international with the major attraction being that the fees are generally lower due to their passive nature.

 

[Scratcher Gillespie]

If you want a long-term winner, it's very, very hard to beat Vanguard on an after-fees, after-tax basis. Measured on this basis, it's not too outlandish to say that the fund will most likely beat 80 - 90% of fund managers over the long term.

If you're looking at short term (ie: less than 3 year) performance, keep it in the ING.

 

[Papa G]

If you want a long-term winner, it's very, very hard to beat Vanguard on an after-fees, after-tax basis. Measured on this basis, it's not too outlandish to say that the fund will most likely beat 80 - 90% of fund managers over the long term.

If you're looking at short term (ie: less than 3 year) performance, keep it in the ING.

Vanguard is just an index fund and does little trading thus the fees are lower. If you had a little more dough and were not adverse to risk I would use Vanguard as one of my funds and then have some money in say some small caps, a bric fund, global resources. I wouldn't be expecting big returns over the next 12 months but it is probably not a bad time to get in the market, although I would personally give it another 3 months to see if there are any other little surprises heading our way.

 

[Borscht Mat]

If you want a long-term winner, it's very, very hard to beat Vanguard on an after-fees, after-tax basis. Measured on this basis, it's not too outlandish to say that the fund will most likely beat 80 - 90% of fund managers over the long term.

If you're looking at short term (ie: less than 3 year) performance, keep it in the ING.

^^^^ I would say 50% rather than 80-90% but otherwise an Index fund is the way to go.

Broad based managed funds tend to be linked to the index anyway, because if they deviate too much from the index then they get burnt on the downside.... so you pay 2-3% fees for someone to essentially track the index, so you might as well pay 1% for someone to actually track it.

Also, the problem with an active fund manager is "which one" ?. Most people look at past returns based on the advertising of the funds (17% over 3 years or something). There is plenty of research to suggest that this is exactly what you should not do. Recently for example if a fund a leant towards commodities they would have outperformed the market, however there is every chance that if they are leaning that way now they will underperform the market in the next few years as the market swings back. So indeated of picking winners by picking stocks you end up picking winners by picking fund managers, and generally speaking I thnk picking winners on a micro scale is a mugs game.

So.... index funds are the way to go, there are plenty out there, Vanguard is the biggest.

 

[Pornstar]

What is the benefit of an index fund, when you can simply buy and hold an ASX index CFD? Each contract requires $280 of funds, and gives you exposure to $5,500 of the market with a whopping cost of $4 in brokerage.

It's easy, flexible, cost effective and it follows the All Ords perfectly.

 

[Scratcher Gillespie]

^^^^ I would say 50% rather than 80-90% but otherwise an Index fund is the way to go.

Broad based managed funds tend to be linked to the index anyway, because if they deviate too much from the index then they get burnt on the downside.... so you pay 2-3% fees for someone to essentially track the index, so you might as well pay 1% for someone to actually track it.

Also, the problem with an active fund manager is "which one" ?. Most people look at past returns based on the advertising of the funds (17% over 3 years or something). There is plenty of research to suggest that this is exactly what you should not do. Recently for example if a fund a leant towards commodities they would have outperformed the market, however there is every chance that if they are leaning that way now they will underperform the market in the next few years as the market swings back. So indeated of picking winners by picking stocks you end up picking winners by picking fund managers, and generally speaking I thnk picking winners on a micro scale is a mugs game.

So.... index funds are the way to go, there are plenty out there, Vanguard is the biggest.

Agree with the jist of the post, but about the percentage of funds index funds will outperform, I think you're off the mark. Vanguard consistently performs higher than we would expect (actually showing that most Australian managers have a negative alpha). Other funds are also compared on the basis of after fee, but gross of tax returns. Not distributing large amounts of taxable capital gain has a massive impact on long term returns.

If you are talking short term, maybe outperformance of 50% or so managed funds is about the mark (history shows it is higher), but on a net of tax basis, this figure will be much, much higher over a period of 10 years or so.

 

[Scratcher Gillespie]

What is the benefit of an index fund, when you can simply buy and hold an ASX index CFD? Each contract requires $280 of funds, and gives you exposure to $5,500 of the market with a whopping cost of $4 in brokerage.

It's easy, flexible, cost effective and it follows the All Ords perfectly.

Are you kidding? Do you understand the risks of being that highly leveraged.

 

[Pornstar]

Are you kidding? Do you understand the risks of being that highly leveraged.

Yes i do, clearly you do not.

If he is starting with $1000 he can buy one contract and have $720 remaining in his account, earning interest and giving him a buffer of a 720 point movement against him in the market. If he is kicking in another $500 per month then he is going to easily have enough money in his account to weather any potential stock market disaster that may happen. All he needs to do is hold on until the market turns around. He will make much better returns with leverage than he would investing $1000 with no leverage.

One contract costs $280.
Market goes up 10% from 5600 to 6160 - gross profit $560 ($1 per point)
Pay interest on CFD at (10%): -$532
Receive dividends on CFD (4.5%): $252
NET PROFIT: $280 = 100% return

 

[Scratcher Gillespie]

Yes i do, clearly you do not.

If he is starting with $1000 he can buy one contract and have $720 remaining in his account, earning interest and giving him a buffer of a 720 point movement against him in the market. If he is kicking in another $500 per month then he is going to easily have enough money in his account to weather any potential stock market disaster that may happen. All he needs to do is hold on until the market turns around. He will make much better returns with leverage than he would investing $1000 with no leverage.

One contract costs $280.
Market goes up 10% from 5600 to 6160 - gross profit $560 ($1 per point)
Pay interest on CFD at (10%): -$532
Receive dividends on CFD (4.5%): $252
NET PROFIT: $280 = 100% return

This is another reason why people should never take financial advice from internet forums.

1. The way you initially explained your 'strategy' was simply to buy contracts for $280, giving $5,500 exposure to the market. Ignoring brokerage and interest costs, the market would only need to fall by around 5% for his entire proceeds to be wiped completely. Not to mention if the market moved significantly against him, he would be up for the shortfall, most likely a portion of it within 24 hours. Are you aware CFD's are banned in the US as they are considered too risky?

2. Your little equation showing a 100% return - again, who are you trying to kid? Someone starts with $1,000, hypothetically makes $280, and somehow ends up with a 100% return??

3. Of course he can earn a better return with leverage - this isn't mutually exclusive with managed funds. What should be obvious to even beginner investors is the relationship between risk and return. If you're forecasting '100% returns' over the same time period as the market makes a 10% return, does it not stand to reason that the strategy would be 10 times more risky than a stand-alone managed fund, which is invested in a risky environment anyway??

CFD's are a short term trading/speculating tool, and shouldn't be used for a long term wealth creation strategy.

 

[Pornstar]

This is another reason why people should never take financial advice from internet forums.

1. The way you initially explained your 'strategy' was simply to buy contracts for $280, giving $5,500 exposure to the market. Ignoring brokerage and interest costs, the market would only need to fall by around 5% for his entire proceeds to be wiped completely. Not to mention if the market moved significantly against him, he would be up for the shortfall, most likely a portion of it within 24 hours. Are you aware CFD's are banned in the US as they are considered too risky?

Wow, you really don't understand this do you? $1000 in the account, buy one contract for $280 that leaves $720 in the account. The market would have to drop at least 720 points (12%) before he would have to kick in some more money to cover the position. Where did you get this 5% rubbish?

2. Your little equation showing a 100% return - again, who are you trying to kid? Someone starts with $1,000, hypothetically makes $280, and somehow ends up with a 100% return??

100% return on the $280 invested. The remaining $720 sits in the account earning interest, as i explained. Even if you insist on being pedantic and counting the entire 1k, it is still a 28% return for a 10% movement in the market. Much better than he would get if he invested 1k with a index fund and paid his fees.

 

[Scratcher Gillespie]

Wow, you really don't understand this do you? $1000 in the account, buy one contract for $280 that leaves $720 in the account. The market would have to drop at least 720 points (12%) before he would have to kick in some more money to cover the position. Where did you get this 5% rubbish?

I don't see anywhere in this post where you mentioned any margin of safety?? Or are you assuming that the OP, with obviously relatively limited investment knowledge would instantly understand what you were talking about. It was only when challenged that you backtracked and brought this up.

What is the benefit of an index fund, when you can simply buy and hold an ASX index CFD? Each contract requires $280 of funds, and gives you exposure to $5,500 of the market with a whopping cost of $4 in brokerage.

It's easy, flexible, cost effective and it follows the All Ords perfectly.

100% return on the $280 invested. The remaining $720 sits in the account earning interest, as i explained. Even if you insist on being pedantic and counting the entire 1k, it is still a 28% return for a 10% movement in the market.

Not sure how if you require the extra funds as part of the overall investment (which you quite obviously do) how you can count the $280 as a completely separate entity. But by all means, lets assume it is. Again, we are at the point where a 5% movement in price wipes out any gain made, and the OP is up for the loss. If you insist on having the extra $720, you can't separate the two to try to make the return look better than it is. At best you can add back interest after tax, less opportunity cost of having the $720 invested in a normal index fund.

Much better than he would get if he invested 1k with a index fund and paid his fees.

No shit. With the buffer you are effectively talking about gearing. Of course you will earn a higher return if you gear up. No explanation of any extra risk on your part though.

Why would anyone gear long-term into a CFD when there are clearly better alternatives???? You'd be mad to.

Long term wealth creation isn't achieved using CFD's - they are a traders tool mass marketed to gullible 'I want to get rich quick' fools. There is a reason ASIC (and FIDO) explain them as gambling on your credit card.

Another reason why advice given on this forum should never be taken.

 

[Pornstar]

I don't see anywhere in this post where you mentioned any margin of safety?? Or are you assuming that the OP, with obviously relatively limited investment knowledge would instantly understand what you were talking about. It was only when challenged that you backtracked and brought this up.

'backtracked' my arse.You didn't read this bit?

earning interest and giving him a buffer of a 720 point movement against him in the market. If he is kicking in another $500 per month then he is going to easily have enough money in his account to weather any potential stock market disaster that may happen. All he needs to do is hold on until the market turns around.

Long term wealth creation isn't achieved using CFD's - they are a traders tool mass marketed to gullible 'I want to get rich quick' fools. There is a reason ASIC (and FIDO) explain them as gambling on your credit card.

I couldn't agree more, i don't touch share CFDs. But i still think if you have $1000 to put onto the index then an index CFD is the best option.

 

[Scratcher Gillespie]

'backtracked' my arse.You didn't read this bit?

This was the original post I was referring to.

What is the benefit of an index fund, when you can simply buy and hold an ASX index CFD? Each contract requires $280 of funds, and gives you exposure to $5,500 of the market with a whopping cost of $4 in brokerage.

It's easy, flexible, cost effective and it follows the All Ords perfectly.

You only brought up the rest of it after being questioned.

I couldn't agree more, i don't touch share CFDs. But i still think if you have $1000 to put onto the index then an index CFD is the best option.

Disagree strongly - you are better off purchasing an index managed fund, and gearing against it. Some places it is possible to get a 95% LVR, not that I would go anywhere near that high.

The simple, and plainly obvious reason not to use CFD's for long term wealth growth using margin lending, as you rightly showed in your calculation, is that interest is charged on the entire open position, not just the borrowed portion. You would be paying substantially more than you otherwise would for the same result.

An alternative is to purchase an index ETF, and margin lend against it, however if he will be contributing to it on an ongoing basis, at this level of funds, an index fund with margin loan still beats it hands down.