Saving 7 Years Of Salary
Dear Investor Club reader,
When I think of ‘disruptive’ I immediately think of technology.
I think of Netflix and Blockbuster video, Amazon and bookstores, self-serve checkouts and cashiers.
Being an early investor in Netflix or Amazon is the stuff dreams are made of. Those types of gains are typically reserved for investors who are willing to go the extra mile on research, stick their neck out and hold on for the long-term.
Indeed, I believe it is possible to find these great companies. Just one or two of them in a lifetime is enough to make a big difference. But it’s not easy, nor is it for everyone.
Fortunately, sometimes the biggest disrupters do not require an army of software engineers or a university dropout. I’m about to reveal one name that is changing the finance industry… in a big way.
To understand it, I need to tell you how it started and why…
In 1974, after being fired from his high-flying finance job, John Bogle set about creating something which would later be called an ‘index fund’.
The organisation he started was Vanguard, a customer-owned organisation that now manages more than $US5 trillion dollars — twice as much as can be found in superannuation.
I’ll forgive you for not knowing who Bogle is or what Vanguard does.
But I believe the idea Bogle set in motion could have the most significant impact on the financial lives of Australians, plus it’s easy for most investors to get involved.
Each year, Australians shovel around 10% of their wage into Super.
Some of our money gets eaten up by life insurance and income protection, admin fees (which should be below $100 per year if you ask me) and — the biggest one — investment fees.
20 or 30 years ago, when Vanguard’s index funds were just beginning to get noticed, investment funds would routinely charge more than 2% in fees each year.
With a $100,000 balance, a 2% fee is $2,000 of your money going to a fund manager that you probably never met. What else do you spend $2,000 on each year?
But it gets worse.
With a $500,000 balance, an investor would pay $10,000 in fees — nearly $200 per week.
Now before you think that’s old news, just a couple of months ago it was revealed many Aussies still pay fees higher than 2% per year. Here’s a chart from the Productivity Commission:
Index funds in some instances charge less than 0.2%. That works out to be fees of $200 on a $100k balance or $1,000 on a $500k balance. That’s a big saving.
According to varying studies conducted over different time horizons index funds like Vanguard’s often perform better than many active funds.
In his Google Talk, author JL Collins quotes studies that show index funds do better than 80% to 85% of active fund managers over a 15 year period.
Over 30 years he says the index does better than 99% of active fund managers.
But what does it all mean to an average Aussie?
Being able to keep our Super fees low and achieve strong performance could have a profound effect on our later years.
According to the recent Productivity Commission report, it could mean some Aussies retire with an extra 2 to 7 years worth of their salary in Super. If that’s not disruptive, I don’t know what is.
Is Index Investing Right For Everyone?
Given this discussion, a logical question might be, why does someone like me buy individual shares when index funds do it for next-to-nothing?
My answer is surprisingly simple.
Most index funds have a ‘catch-all’ approach to investing. Meaning, they invest in the good and the bad businesses on the stock exchange. It is efficient and low cost. However, it may not be right for everyone.
If you tuned in to my most recent podcast with EGP’s Tony Hansen or downloaded my talk with Andrew Page or Wayne Peters, you will know that investing in shares is the same as buying parts of businesses. Sure, share prices will bounce up and down one year to the next — but all they are is an ownership stake in a business.
Indeed, with the right knowledge, a willingness and an ability to buy shares in only the top performing businesses I think better results can be achieved by smart investors.
Don’t take my word for it. Look at the share prices of Amazon, Netflix, Commonwealth Bank, Washington H. Soul Pattinson and CSL Ltd over the past 10 to 20 years. Then look up the names of Buffett, Lynch, Gayner, Neilson and Douglass.
That’s why I reserve my portfolio for only the best businesses I can find, and I plan to hold them for the long haul. That makes sense to me. That’s why I’ve been carefully selecting companies to own for many years. It is the reason I started Rask Invest.
So far, I’m pleased to report I think it’s been the right decision.
Cheers to our financial futures!