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Thanks to the people who answered in this question, I've decided to educate myself with index funds and to engage my mortgage preparation funds in them.

There are several choices for index funds. Some of them are under cash, international stock, property, shares, etc.

What would be a good method to evaluate which index funds I should get? Should I base it on previous performance?

FYI, here is the link of the list of index funds that Vanguard Australia provides.

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Zaenille
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2 Answers2

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The idea of an index is that it is representative of the market (or a specific market segment) as a whole, so it will move as the market does. Thus, past performance is not really relevant, unless you want to bank on relative differences between different countries' economies. But that's not the point.

By far the most important aspect when choosing index funds is the ongoing cost, usually expressed as Total Expense Ratio (TER), which tells you how much of your investment will be eaten up by trading fees and to pay the funds' operating costs (and profits). This is where index funds beat traditional actively managed funds - it should be below 0.5%

The next question is how buying and selling the funds works and what costs it incurs. Do you have to open a dedicated account or can you use a brokerage account at your bank? Is there an account management fee? Do you have to buy the funds at a markup (can you get a discount on it)? Are there flat trading fees? Is there a minimum investment? What lot sizes are possible? Can you set up a monthly payment plan? Can you automatically reinvest dividends/coupons?

Then of course you have to decide which index, i.e. which market you want to buy into. My answer in the other question apparently didn't make it clear, but I was talking only about stock indices. You should generally stick to broad, established indices like the MSCI World, S&P 500, Euro Stoxx, or in Australia the All Ordinaries.

Among those, it makes some sense to just choose your home country's main index, because that eliminates currency risk and is also often cheaper. Alternatively, you might want to use the opportunity to diversify internationally so that if your country's economy tanks, you won't lose your job and see your investment take a dive.

Finally, you should of course choose a well-established, reputable issuer. But this isn't really a business for startups (neither shady nor disruptively consumer-friendly) anyway.

Michael Borgwardt
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    That first sentence can use some work. There are narrow indexes that don't quite reflect the whole market. Otherwise, a nice answer. +1 – JTP - Apologise to Monica Oct 30 '14 at 16:11
  • Very good answer. My only quibble is that I would say significant international investment is very important for someone in a smaller, more idiosyncratic economy like Australia. Whether that is done with currency hedging, no currency hedging or a mix is a tougher call. – rhaskett Oct 30 '14 at 17:30
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Your link is pointing to managed funds where the fees are higher, you should look at their exchange traded funds; you will note that the management fees are much lower and better reflect the index fund strategy.

NL - Apologize to Monica
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  • But won't ETFs cost me brokerage every time I buy new shares? If I plan to increase my fund every week or so, I think the managed fund would save me money in the long term. Please clarify if there's something that I don't understand. I am very willing to learn. Thanks. – Zaenille Oct 30 '14 at 16:00
  • I haven't done a lot of research on the Vanguard Australia terms and conditions, but in my US account, Vanguard waives the fees for Vanguard ETFs. (I invest regularly in VOO.) – NL - Apologize to Monica Oct 30 '14 at 16:03
  • @MarkGabriel: note that the buy/sell spread listed by Vanguard is effectively a brokerage fee. And you have it backwards: a brokerage fee is incurred only once, the management fee is incurred continuously (the number given is yearly), so in the long term you definitely save money by choosing a lower management fee. – Michael Borgwardt Oct 30 '14 at 16:10
  • I looked through their site. It does appear that you are charged brokerage fees for ETFs, so you might want to invest regularly in the managed fund, then periodically (yearly, quarterly--or what makes sense based on your rate of investment to reduce the number of times you pay a brokerage fee--move those investments into an ETF). – NL - Apologize to Monica Oct 30 '14 at 16:13
  • Hi @NathanL. I'm highly considering your suggestion - Annually transferring my managed fund to ETFs. However, I do have one concern. Won't I be taxed every year on my profit from the managed funds? Also, would that be a big factor in considering this method? – Zaenille Oct 31 '14 at 03:18
  • I have no idea about taxs laws in your country, I think that would be an excellent follow-up question to this one. – NL - Apologize to Monica Oct 31 '14 at 15:12