Does investing in Index Funds or ETFs work?
15 Aug, 2021
Ok, so the question is, does investing in index funds or ETFs actually work?
Given that last week, I wrote about the fact it has been five years since I started blogging, I thought I’d give you an update on how two of our investments have been tracking during that time. The blog, after all, was created so that I could teach myself about investing by actually putting some money in and then sharing what I have learnt with others. I figured it would save everyone else having to constantly reinvent the wheel!
If you are casting about for a reliable way to grow your wealth and maybe find something that doesn’t include rental property and the associated leverage and angst, will investment into the share market work? Or will your hard-earned putea disappear in a cloud of smoke as it did for many in the 1987 share market crash, cause let’s be honest, that’s what a lot of people STILL THINK is going to happen right?
While many Kiwis go crazy for property Jonny and I have always been content to just have one whare, the place we call home. Because we are ‘done at one’ we have gone in a different direction, investing into both of our KiwiSaver funds each month without fail (combined balance is now $177,000 - not bad for two part-time workers) and also investing into just two ETFs (exchange-traded funds):
Smartshares NZ TOP 50 ETF (FNZ)
Smartshares US 500 ETF (USF)
We do have some other investments that we add to weekly with Kernel, Hatch and Sharesies but these are our ‘satellite investments’ which although they are growing nicely due to our contributions (particularly the Kernel NZ20), currently makeup just a small percentage of our invested money, about $9,000 and growing gently.
I blogged about our asset allocation last year, so go and check that out, but just be aware that I have since reshuffled things a bit and sold the Bitcoin, Ryman Healthcare and Meridian Shares: What’s my Asset Allocation?
Ours is a pretty simple investment strategy. But does it work?
For those new to my blog, you need to know a couple of things before I share our numbers below. We own our own home and have done so for about 14 years now (we aggressively paid it off over five years). We have no debt, I think I’m allergic to it and for 13 years, I have either worked part-time, which I’m currently doing, or, while I was a full-time Mum for four years, not at all. Jonny has also worked part-time for about nine years. We can’t work out if we have nailed this work-life balance thing or if we are just fundamentally lazy? You can decide! As a result, we are not high-income earners and can’t invest as much as we would like to but that is the price we pay for underemployment and we prefer to live a more balanced lifestyle instead and having our money sorted gives us the freedom to make that choice.
Our current very simple strategy took some refining over the last five years and this was because I, like you probably, was worried about it failing. With an entire investment industry pretty much designed to confuse the heck out of me in the interest of helping both me and themselves, it was no wonder I doubted my own abilities. But thankfully, early on I came upon Sharesight as a way to track these two ETF investments and I have been diligently updating it once a month since late 2016. They have conclusively been able to show me that YES, slow and steady investment over a long period of time and reinvestment of all dividends received has been providing a return and not a loss, even with a global pandemic thrown in the mix. And let’s not forget the turmoil that the buffoon of the former US President caused either.
As these five years have slowly rolled by I have tweaked our investment strategy to make it as simple as possible and the money that ends up in these two funds is there for the long haul. There is nothing on our horizon that it is needed for and you will know if you have been reading my blog for a while that we keep a fully stocked emergency fund and also keep cash in the bank for short and medium-term expenses. So the purpose of these funds is to build up to replace our income over the years ahead. Our KiwiSaver funds are also doing exactly the same thing.
Five years of small steps have built up these two funds below. Our incomes are never the same each month so I just set a minimum automatic contribution to each fund each month and then invest extra money when it’s available so some months I may only invest $200 into each fund, but other months it will have been far higher. The point is that in all this time I have never missed a month because investing for our future is Priority #1.
So with that being said, here is how things are looking for our two ETFs:
Smartshares NZ Top 50 ETF
Smartshares US 500 ETF
A couple of things you might be wondering:
The green $ is when a dividend was paid and we always reinvest these.
The New Zealand fund pays out more in dividends than the US fund, it’s just the nature of the way the two countries do business, but both have capital gains which are tax-free.
Returns are after tax and fees.
Sharesight also gives a comprehensive breakdown, which I’ve not included here, of every single investment I have made, plus the dividends I’ve received so I can clearly see what I’ve put in and what the returns are. As a rough calculation, we have invested $92,110 and the returns are $34,400.
I don’t know about you, but I’m pretty happy with these returns! I’ve paid no interest to a bank, I’ve not paid a property manager and I’ve never replaced a roof. I have however felt proud to be invested in such a huge number of incredible companies around New Zealand and the world.
So, what now I hear you ask?
With a combined value of $126,510 Jonny and I won’t be retiring anytime soon on these two investments alone, so what IS our plan exactly?
Keep on keeping on, basically.
Whilst the share market is volatile in the short term (you can clearly see the Covid-19 dip in March 2020 above), over the longer term it only goes up. And the way to enjoy this ride successfully is to diversify using just two ETFs*, own the ‘whole market’ and just trust that all of those companies within the funds are doing their utmost to create and build a strong and healthy business. I also understand that if they don’t then they will fall off the index and be replaced by the next top performer, all without me having to do anything. Which is genius when you think about it. I don’t buy individual companies anymore and have since sold the Meridian Shares: Pulling the plug on individual shares: Selling Meridian Energy
I didn’t have and nor did I pay a fund manager to pick a fund for me. Nor do I freak out and sell in a crisis and I’ve become a calm and steady investor. It turns out, after years of having a go, that it’s well within my abilities to do my own investing. I can confirm that the same will be true for you.
* If you want a crash course on index fund investing I recommend listening to this ChooseFI podcast episode: The Stock Series Part 1 where they interview JL Collins the author of The Simple Path to Wealth
In about five years, once our daughter finishes school, our rough intention is to sell the home we live in and move to a cheaper and smaller whare somewhere, thereby releasing equity from our house, all of which will then be invested in these funds. I’m pretty confident that this will get us in a position to apply the 4% Rule (Mr Money Mustache: How Much Do I Need for Retirement?) and if one of us doesn’t feel like working anymore we can start to withdraw from this fund to replace an income. We have calculated that based on our current annual expenses of $50,000 we will need to have $1,250,000 invested to pull off an income of $50,000 each year and give up work entirely. At this stage, my calculations don’t take into account receiving superannuation from the government, which is still 18 years away and I’ve zero intention of working till then, hence creating investments outside of KiwiSaver now.
As it stands today, if we applied the 4% Rule to our total investments we could draw out $13,000 a year, which would give us $250 each week and the balance would still continue to grow. So, in reality, we have ALREADY replaced my part-time income but I still love my job so have no plans to give that up. Hence my confidence that this is working.
But how can I be sure of this? What if…
There is also a thing called The Rule of 72
If I apply this to the two ETFs above:
FNZ fund with a total return of 14.98% and a current balance of $62,732
72 divided by 14.98% = 4.8 years to double the investmentUSF fund with a total return of 21.27%, and a current balance of $63,778
72 divided by 21.27% = 3.3 years to double the investment
It’s a rough guide, but useful nonetheless to show us that we are on the right track.
I’ve found that there is no perfect mathematical method for tracking my progress or yours. And also that no one, no matter how confident they sound in the media, can predict the future. It’s more about creating a system for yourself that you understand, that’s the key. And for me, my system is made up of my own net worth spreadsheet, PocketSmith for budgeting and Sharesight for tracking investments in real-time. Also, I now grasp the concept that the best-laid plans are subject to change:
Life plans change
Income changes
The amount we invest each month changes
The world changes
I just straight-up change my mind!
Money management is a constant juggle of tracking moving parts, so I just do the best I can for my situation and appreciate that perfection is neither possible nor necessary. By simply keeping track of our net worth month on month I can look at all of our investments, add them all up, chuck them in a graph and see that, yes, we are heading in the right direction over time! And that is UP.
Our net worth is heading in the right direction over time. And that is Up!
Genius in its simplicity…
ETF or Index Fund investment is genius in its simplicity and having read widely on the topic now and put our own money to work for five years I can easily answer the question that I often get asked: Does investing in the share market using ETFs or Index Funds work?
Why, yes it does!
But don’t take my word for it, have a go yourself, just start small using whatever provider works for you, many are variations on the same low-cost passive investment theme, get a feel for the process and commit to the long term, never missing a week or a month, because using the Rule of 72, that $100 I invested back in 2016 is now worth about $200 and every month you fail to actually make a start, your future self is missing out.
I hope that sharing my numbers with you today will help you in your own financial journey, feel free to share your thoughts below.
