Author Topic: Total Stock Market Index Fund for Australians  (Read 1045 times)

petey

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Total Stock Market Index Fund for Australians
« on: June 16, 2013, 06:24:47 PM »
After reading How To Make Money In The Stock Market (http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/), I am keen to invest in a Total Stock Market Index Fund (or at least an S&P500 fund).

I note that Vanguard Australia has an "Index International Shares Fund" and an "Index Hedged International Shares Fund". As far as I am aware, the other funds they offer are NOT Total Stock Market Index Funds.

Firstly, is this correct?

Secondly, if choosing between these two funds which one would you choose and why?

My wife and I are aiming to have around $250k to invest towards the end of this year. We will probably start out slow, investing monthly to dollar cost average over the longer term.

Any advice would be great.

Thanks

bigchrisb

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Re: Total Stock Market Index Fund for Australians
« Reply #1 on: June 16, 2013, 07:07:42 PM »
Hi,

For my international stock holdings, I use a couple of ETFs that are listed on the ASX:
IVV - an ishares S&P500 index fund.  very low cost
VTS - a Vangaurd total US index fund, also very low cost
VEU - an "all world but US" a global index fund, also reasonably low cost.

For domestic shares, I've used a combination of direct shares, ETF versions of index funds (VAS/STW), and LICs (closed end investment companies).

In general, I've had a bit of a focus on low cost - I think all the funds I use are between 0.06% and 0.3% MER.

I've been comfortable buying these on the stock exchange, but many offer a managed fun version (such as vanguard).  I've always gone for the un-hedged versions - I want international stock to both diversify away from the Australian economy (banks and miners), and from the Australian dollar.

grantmeaname

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Re: Total Stock Market Index Fund for Australians
« Reply #2 on: June 17, 2013, 06:57:02 AM »
I note that Vanguard Australia has an "Index International Shares Fund" and an "Index Hedged International Shares Fund". As far as I am aware, the other funds they offer are NOT Total Stock Market Index Funds.

Firstly, is this correct?
You can get Vanguard ASX 300 and total world ex-Australia index funds through Vanguard, though they're very expensive compared to what American investors are used to, so they may not be a great option while cheaper alternatives exist. If you hold both of them, you've got the total world stock market. They don't offer an equivalent to VTSMX that is only the US stock market - you'd have to buy that in ETF form, as bigchrisb notes. But why would you want to?

petey

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Re: Total Stock Market Index Fund for Australians
« Reply #3 on: June 17, 2013, 10:22:28 AM »
Thanks for the great replies so far!

To be honest I don't know a great deal about ETF's, and I was hoping to keep things simple while I get started. That said, it does seem as though the "straight fund" options here in Australia are lacking, so it may well be the better alternative.

petey

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Re: Total Stock Market Index Fund for Australians
« Reply #4 on: July 05, 2013, 10:02:50 AM »
They don't offer an equivalent to VTSMX that is only the US stock market - you'd have to buy that in ETF form, as bigchrisb notes. But why would you want to?

Just going back through these replies... I'm still having trouble understanding all of this.

Are you suggesting that VTSMX is not worth buying in ETF form? MMM explicity suggests this option in his blog post, however maybe I am missing something.

Honestly I don't know much/anything about ETF's, and would like to keep my investments as simple as possible. I am beginning to wonder if I am better off setting up a bank account in USD and investing directly in a Vanguard US fund directly instead of an ETF.

grantmeaname

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Re: Total Stock Market Index Fund for Australians
« Reply #5 on: July 05, 2013, 10:47:10 AM »
I'm wondering why you would want to own an index of companies domiciled in the US if you didn't live there. It's not that it's a bad fund, it's just that owning it rather than some balance between Australian and non-Australian indices strikes me as strange.

petey

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Re: Total Stock Market Index Fund for Australians
« Reply #6 on: July 05, 2013, 01:50:19 PM »
http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/

Mainly because it's about as close to a worldwide fund as you can get...as far as I am aware. I am a pretty risk adverse person, so I want as little exposure to volatility as possible while receiving "better than inflation gains".

Quote
What is the S&P 500? This is a collection of shares in the 500 largest companies in the US, and therefore in most of the world. They are all multinational companies, so they benefit from growth around the world. If you really want to invest without having to worry, the S&P represents good odds. If you buy the stock market index of a smaller country, like Canada, you will still have good odds, but at higher volatility. (During the dot-com boom of the nineties, a company called Nortel once represented 70% of Canada’s entire stock market value. This company is now bankrupt, so you can imagine how that felt to investors solely in the Canadian index. Now Canada is the new Saudi Arabia with oil exports, so its index is again riding high on oil company stocks. I wouldn’t bet my whole Mustache on that one commodity either).

What about International stocks? Some people like to get fancy and buy international index funds, which can do well when the US is hurting (as it has been recently). This is fine, as long as you understand that it’s just another form of trying to outsmart the basic stock index. When you do this, you are stating that you believe the  stock markets of the other countries are more undervalued relative to future growth, than the US market is. The US is traditionally the most business-friendly country in the world, so its stock index has tended to have the highest performance, after taking into account its lower risk and volatility compared to, say, throwing all your chips onto Russia or China. It may or may not pay off in the future – I just want to point out that most people just make this decision on a whim, something like “China is so hot right now, they’re taking over the world!” . Whereas to actually justify international investing rationally you’d have to be a very sophisticated investor and truly understand WHY you are doing it.

grantmeaname

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Re: Total Stock Market Index Fund for Australians
« Reply #7 on: July 05, 2013, 02:02:46 PM »
Gotcha. Skip the below advice if it doesn't apply to you because you've already thought about it:
Your risk aversion will largely affect the asset allocation you choose - that's the ratio of stocks to bonds to alternatives. Many in or near retirement are at 60/40 stocks bonds, while I'm 100/0 as I'm in my twenties and a forty percent drop in the stock market won't hurt my feelings at all, much less my livelihood. If you don't have an investment policy statement yet to help clarify your thinking on risk and return, I'd recommend you start one - here is a good guide.

After that, you would look at filling out the stock (you Australians call it shares?) portion of your portfolio with some balance between domestic and international stocks, just like an American investor would. It's just that domestic stocks would be a fund based on something like an ASX 300 index rather than the S&P 500 index, and the international would be something like bigchrisb's ETF options listed above. (Oh, and don't be intimidated by ETFs - they're really just mutual funds by a different name and they get bought and sold slightly differently.)

petey

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Re: Total Stock Market Index Fund for Australians
« Reply #8 on: July 05, 2013, 04:47:42 PM »
All good advice. I'm in my late twenties, currently trying to stay liquid on the off chances that house prices plummet in Australia (seems fairly plausible). Thanks for the link to that guide.

More research to do. Ideally I'd love some sort of global index fund but I think I'll need to make it myself.

Thanks