How is my US 500 ETF performing?
27 Aug, 2023
We’ve all been through a lot in the last couple of years, the share market included. This week, I’m aiming for this blog post to loosely follow my last one, where I talked about Index Funds and ETFs. Today, I will share my own experience.
My mention of Index Funds or ETF investing has sparked much interest and questions.
My hunch is that there is a growing awareness that you can grow your wealth without having to mortgage yourself to the eyeballs to buy houses.
As an alternative to property, readers are trying to find the ‘perfect’ share market investment and will suggest an investment provider or fund as ‘the ONE’. My thoughts are that there is no perfect investment, housing or otherwise. It simply doesn’t exist, but I have concluded after investing myself for many years that there are several investments that are perfectly ‘good enough’.
Perfect is the enemy of good.
I’ve thought for a long time that we are all inefficient in so many aspects of our lives, yet we put untold pressure on ourselves to be the perfect share investors. I took the pressure off myself long ago, and I continue to invest with providers and funds that are perfectly adequate.
When I first began, low-fee, passive ETF, and Index Fund investment options were limited, so I went with a provider that seemed good enough, Smartshares. And they have been. If I began again today, would I choose another company, given that we are now spoilt for choice? Maybe. But for now, the pressure to change is just not great enough. I monitor and assess, but the provider I use still works.
A few tips for new investors.
We are not all ready to begin investing right now; sometimes, we have to put a plan in place first. Start with Begin at the Beginning: A Step-by-step Path To Financial Independence.
Once you are ready, the biggest tip I can give a new investor is to research the providers you hear talked about positively and, most often (by people who are not paid to speak positively about them). Create a list of pros and cons, look closely at fees, and make your choice. Don’t use analysis paralysis as an excuse to procrastinate. Next, start investing a small amount once a month. Then look, listen and learn. Get to know their process and their systems. Educate yourself while you begin to invest. Sell a portion of your investment to see how that works, too. But apart from that, don’t sell. Then, if you are happy with your choice, increase the amount you are investing and check in again in six months. Then, 12 months. Then, two years. Form a habit of ‘paying yourself first’ or sending a portion of your take-home pay to your investments as a matter of routine. Consistently investing a bit of every paycheque is the biggest secret to being successful at investing.
The only way you will know if investing in the share market works for you is by investing in the share market.
We began investing in 2015.
2015 was the year we moved away from Bonus bonds, term deposits and managed funds and began investing more directly in the share market using Smartshares. We took baby steps at first until I felt confident that I was not unwittingly investing in some giant Ponzi scheme. Since then, we’ve never missed a month. We invest monthly as we steadily work towards having enough invested across our KiwiSavers and ETF funds to live off the 4% Rule.
So, does it work?
Yes. But I’ll share my numbers with you today so you can decide for yourself. To simplify things, I’m sharing information on one of our investments only, our Smartshares US 500 ETF (USF) fund. They do not pay me in any way.
Firstly, here are a few things you should know if you are new to my blog:
We are a whānau of three: myself (49), my husband Jonny (50) and our teenage daughter
We own our own home and have no debt
Household income is about ~$90,000 gross
We all have KiwiSaver. Jonny and my combined balances are ~$200,000
We have additional investments in another ETF fund (NZ Top 50) of ~$100,000
We keep a fully stocked emergency fund and cash in the bank for daily living
How has our investment made money?
The Smartshares website summarises investor returns for all of its products. Here are the returns for the specific fund I use:
Smartshares summary for the US 500 ETF.
When I look at investor returns, I always look at the longest timeframes. It’s irrelevant what the fund is doing in the short term because we invest for the long term (10+ years). In this case, the longest time frame they show is the 5-year returns, which were 12.69%.
Same, same, but different
Of course, the fund returns are different from my returns. I invest different amounts at differing times, plus I did sell a tiny portion earlier in the year, as explained HERE.
Therefore, I need to track my investment myself to work out what is happening in our unique situation. I can’t do this in my spreadsheet (believe me, I tried), so I enlisted expert help from another excellent Kiwi company, Sharesight.
Each time I invest in our US 500 ETF, I update my Sharesight portfolio to show the transaction. Many companies will link with Sharesight and automatically import all trades, but sadly, Smartshares does not; each month, I am required to manually email my trade to Sharesight. I’m not going to lie to you; sometimes I’m a bit rubbish at updating Sharesight, but my figures below are ‘mostly’ correct.
Close enough IS good enough in my situation.
In the early days of investing, I struggled (and failed) to create my spreadsheet to work out how to adequately track the buy price of my investments, the capital gains and the dividends. This company does all that for me. My friend Aussie Firebug is a whizz on Sharesight and uses it for all his tax reporting, so I know it can do a lot more than I use it for, but that’s a job for another day.
Here is how things are looking.
In this calendar year of 2023: A total Return of 20.50%
In the last two years: A Total Return of 7.41%
In the last five years: A Total Return of 11.19%
You can see a fluctuation in returns over the years, which is expected and normal. Oh, and let’s not forget the global pandemic we went through, either. I always keep in mind that over time that even with these huge events, the share market as a whole goes up:
Don’t get emotional about investing. It’s wasted energy.
OK, so my five-year returns are 11.19%. How does that make me feel? Fine. Absolutely fine. When I started investing all those years ago, I began reading up on the experiences of investors ahead of me. They all said to expect returns along these lines. And they were correct. So, I’m pleased that I’m tracking in the right direction. I now completely tune out of the daily market updates you hear on the news because a daily shift in the price of a share or the goings on of one specific company is utterly irrelevant to the long-term investor who is only buying large, low-fee ETFs or Index Funds.
If I were trying to pick individual companies to invest in, yes, I’d be an emotional wreck. It’s a fool's errand to try to pick stocks, and if you disagree, watch this: The Simple Path to Wealth - JL Collins - Talks at Google.
The simple path to wealth.
I like ETF investing because it is very straightforward. This is why I’d invest in an ETF over a rental property all day long. Throughout the month, I automatically set aside* a portion of our weekly after-tax take-home pay until, on the 20th of the month, I invest the total amount I’ve set aside.
* What do I mean by ‘set aside’? I have a dedicated bank account or “sinking fund” that this money is syphoned off into.
The fund I invest in pays dividends twice yearly, which are automatically reinvested into my fund, and I pay a 28% tax on this income. As you will see in my Sharesight graphs above, this fund pays very little in the way of dividends, so, as a result, I pay very little tax. However, my correct PIR is 17.5%, so I’m overpaying tax. To counter this, when I do my annual tax return, the tax I’ve overpaid is offset against the tax I need to pay. There are additional tax credits, known as imputation credits, which further offset the tax I’m due to pay. It all evens out in the end, but companies like Kernel and InvestNow have solved this issue by letting you set your correct PIR rate. If your tax rate is higher than 28%, forget you even read this example! But do keep an eye out for those imputation credits.
Because I’m buying “the whole share market”, or at least the top-performing 500 U.S. companies, and because the share market only goes up over time, there are capital gains. A share I bought in 2020 for $9 is worth $13 today. We don’t pay tax on capital gains here in New Zealand.
Jonny and I are long-term investors.
We buy units in this fund each month and are slowly, yet steadily, growing our wealth across our combined ETF and KiwiSaver investments year after year. Plus, we are living an enjoyable life. The point of investing this way is not to live off dividends (we would starve to death if that were the case); it’s to build our total investments up to the point that we can start to sell down a small portion once a year and use this money to live. With over $450,000 invested in total, we did this for the first time on May 1st. With this careful harvesting, even if we ceased contributing to our investments, the value of our assets would continue to grow over time. It’s pretty remarkable, but that is the power of compounding in action.
This is an odd blog post, but now for the summary.
Today, I’ve said, “Look at how much money we have invested in an ETF fund”. Why do I do this? Have I become an over-sharer? I always speak with and email many people, and the overriding theme is that they have no actual examples of people managing their money well. This is me opening the hood on our investing engine so you can see it running. This is a simple example to show you what investing money steadily and consistently over a long time looks like in reality. And how Jonny and I can manage our investments and grow our wealth ourselves.
I’m constantly gathering data to assure myself we are on the right track. So, how do I use this information in my daily life? Well, the Rule of 72 comes to mind.
Looking at the five-year 11.19% rate of return that I have experienced, my investment will double in 6.4 years. Is that a fact? No. But it’s a good guide, telling me we are heading in the right direction.
I can apply the same formula to my KiwiSaver fund, which has a 5-year annualised return of 7%. 72/7=10 years. We are tracking to double our KiwiSaver balance of ~$200,000 in 10 years. This is handy to know.
I can apply it to our NZ Top 50 ETF investment and calculate that it’s likely to double in eleven years. It's also handy to know.
There is a quote from Scott Pape that I like:
“No one knows anything. It’s been statistically proven over and over again. My favourite example is from the book Future Babble, where a decades-long study found that a financial expert was no better at predicting things than a dart-throwing monkey.”
I used to often second guess myself and ask, “What if I’m wrong?” What if the financial advisors, bank managers, fund managers and financial experts would do a far better job?”. But having invested our own money, in our own way for a decent length of time and having actually tracked the data and results, I no longer doubt myself. I by no means profess to know much about anything, but what we are doing is working.
I take from Scott Pape's quote that there is no need to outsource my investing to ‘professionals’ when they generally fail to do a better job than I can. I can grow my wealth with consistent investments over time and a commitment to learning.
I recently caught up with a friend who, with her husband, completely turned their financial lives around in under ten years by self-managing their finances. They went from huge mortgage and consumer debt to completely retire in their 50s using a mix of owning their own home, budgeting their income and investing in ETFs.
We both decided it was amazing what a couple of middle-aged ‘housewives’ could achieve if they set their minds to it 😊😆 And our husbands, we’d better give them some credit, too 😉 Despite a global pandemic and a share market crash, we keep quietly pushing towards our ultimate goal of joining our early retiree friends.
