Questions about index funds

[Miyazaki]

Hi everyone, I've been investing for about a year now, and I've been investing in individual stocks and REITs. Recently, I've noticed more about how everyone's talking about index funds, but I have a few questions about them.

Firstly, I'm a non-US citizen in Japan, so the best fund available for my situation that I'm interested in is a Japanese index fund roughly translated as "Listed Index Fund TOPIX" by Nikko Asset Management - http://en.nikkoam.com/exchangetradedfunds/listed-index-fund-topix information in English available here. It's pretty much like an Asian version of Vanguard. However, unlike the US index funds, the Japanese one doesn't generally go up over time, it goes up and down, depending on the year. This includes the base price, as well as the dividend payments.

My first question, and something I'm not clear about, is: isn't it possible for an index fund to fail if the underlying company somehow goes under? I mean, if Vanguard were to go under, wouldn't everybody lose everything? Or would that never happen? What's the difference between Vanguard and Enron (for example)?

My second question, slightly related to my first, is: is it wise to put all of your money into one fund, even if that fund is tracking everything? I think I would be nervous having 50,000 shares of just one fund, and nothing else. Is this fear ungrounded?

I ask these questions because on the surface, index investing seems ideal, simple and beneficial in all ways, but my lack of understanding of the above points makes me hesitant to go for it. Could someone clear this up for me?

Thank you

[Jamesqf]

However, unlike the US index funds, the Japanese one doesn't generally go up over time, it goes up and down, depending on the year. This includes the base price, as well as the dividend payments.

 Maybe that's due to the Japanese economy, which has been pretty static for a decade or more.

...isn't it possible for an index fund to fail if the underlying company somehow goes under? I mean, if Vanguard were to go under, wouldn't everybody lose everything?

Not if the fund is honestly run - that is, leaving out things like Madoff's Ponzi scheme - and doesn't put money in derivatives, margins, &c where it can lose more than the actual amount invested.  Your basic index fund, or any normal mutual fund, just buys stock in various companies (or bonds, real estate, etc.)  If the mutual fund company failed, it'd still own all those stocks, and as part of the bankruptcy they'd be sold and proceeds delivered to the fund owners.

A standard mutual fund is really no different from you owning a few shares each in dozens of different companies.  For you to lose everything, every company you owned would have to fail.

[JamesAt15]

I made another similar post about the UK, but check the Vanguard web site and you'll find a link for Non-US Investors leading to a Global Page, which will then take you to the Japanese Vanguard page, https://www.vanguardjapan.co.jp/ .

It's all in Japanese, which I still struggle with, but they do list a number of their funds that are available, and several brokerages you should be able to buy them from. It looks like all of their ETF funds are available via Rakuten Shoken, which I have an account with via my Shinsei Bank account, so I am looking at buying some of the Vanguard funds from that account.

Edit: actually, that wasn't really what you were asking, was it? I should work on my English reading comprehension as well, it looks like.

I think Jamesqf already answered your first question. As to if it is wise to invest everything, or a very large percent of your investment assets, into a single fund, I think the answer would be that it depends on the fund. But go read MMM's post reviewing the "Intelligent Asset Allocator" book, if you haven't. I wouldn't feel comfortable investing all my cash in an index fund that only tracks Japan stocks.

I am still working through the above book and haven't worked out what I want my allocation to look like, but it will probably be mostly Vanguard funds for large and small US stocks (maybe 50%?), an international stock fund or funds (maybe 25-30%), and probably the rest in bonds. Unless you are keen to just invest in the Japan markets, I don't think that should be your only fund.

James(at15)

[trammatic]

You don't have to buy your own country's index fund.  If you think Japan's index is going to stay flat, then it would make sense to buy foreign funds.

[Miyazaki]

Thank you very much for the information. Until now I'd just had an account with kabu.com which doesn't offer the vanguard fund, so I never noticed before. I'll set up an account with Rakuten tomorrow and look at the options more closely!

[ed]

You don't have to buy your own country's index fund.  If you think Japan's index is going to stay flat, then it would make sense to buy foreign funds.

In fact, you probably shouldn't, even if you happen to live in the US, buy fund tracking just your own country's market.  The big advantage of index funds is diversity, and many national index funds have most of their value skewed towards a particular sector (e.g. banking).   Even the FTSE 100 isn't all that diverse on a capitalisation basis; consider the MSCI World ETF or something similar to get pretty broad global exposure.