What would you do with this 20K?

Just to give you something else to ponder (at the risk of invoking analysis paralysis!) - have a look at index tracking ETFs as well (we have a forum topic on it with some good threads).

These are managed funds which are traded like shares (you use a share broker to buy them and pay brokerage). The main difference is that unlike an actively managed fund where their "expert" pick the stocks, an index tracking ETF invests in ALL of the stocks, based on their relative weight in the index.

For example the SPDR ASX200 ETF (ASX code STW) actually buys all 200 stocks in the ASX200 index - so you get a broad exposure.

The benefit is that because they don't pay expensive "expert" stock pickers, the costs are very low, and so fees are low. Your return will largely match that of the overall index - you will get the "average".

The downside is that you don't get any better than "average" - if you believe a fund manager has the skill to consistently beat the market and pick the better performing stocks, then you will be better off in their managed fund than in an index fund. But you will pay higher fees for the privelage, and there are no guarantees they will actually outperform.

This can become almost a religious debate - but the important thing is that you don't have to decide on one or the other - you can always try a bit of both until you know what suits you better and then change things around later!

There is merit in my mind to having some low cost market-tracking index exposure, plus some performance based specialist investments to hopefully improve your overall returns.

Hi Sim,

Thank you for your reply & I understand what you mean by the interest & fees being proportional.

What I'd meant to say was:

$20K in a managed fund with a 12% p.a. return (ave return p.a. for the ASX200), with a margin loan of 10% interest, geared at 50% (i.e. total investment being $40K) reaps a return of $2,800 after the interest expense has been deducted. Which is only $1,200 more than if I simply placed the 20K into a term deposit offering 8%. Now for the increased risk involved with stocks & a margin loan, an extra $1,200p.a. (+ a small tax break) may simply not be enough of an incentive.

What I think I'll do is take Rod_WA's advice: hold 10K worth of cash in, say, Rabo Bank, and buy into a managed fund with the other 10K, passing up on the margin loan for now. Because of the volatility of my business income, I think I will always hold 50% of my savings in an interest bearing account.

As a percentage it's actually quite large when comparing the overall gain.

40k @ 12% = 4800
20k loan @ 10% = 2000
Taxable Gain = 2800
2800 - 30% = $1960 net (assuming 30c tax bracket)

20k @ 8% = 1600
1600 - 30% = 1120 net


1120 / 1960 * 100 = 57% difference on return.


Admittedly a term deposit would be more secure in terms of return and far less risky, but it's up to you to decide what kinda risk you'd like to take.



oh, and like any "advice" take it all with a grain of salt. I'm probably missing HEAPS of stuff here and am by no means in the position to be advising anyone about their finances.

Perhaps the first thing to consider is cashflow: can you afford to buy shares or a MF and cover the holding costs? For the next 5+ years? Or will you have to sell them in a time of need, regardless of market conditions? Dividends will help cashflow, but they come twice a year or perhaps quarterly with a MF. Remember also that dividends may come with franking credits, which effectively reduce the tax payable. The interest earned in the bank is fully taxable, but fully-franked dividends can come out almost tax free (effectively a 1.5% residual tax rate if you're on 31.5% MTR).

Which fund??? An index ETF may be a good starting point, but there are hundreds of fund managers out there, all spruiking their wares.

Do you need advice beyond an anonymous internet forum? There have been many wise heads that have suggested that the best investment is in your education, ie read books and articles on investing, before diving in. Don't spend $1000s on 'How to Make Money in the Sharemarket" seminars or DVDs, but rather spend $30 here and $40 there on classic investment books. Since the money is in a high interest savings account and the market is fragile, you have much time to learn.

Sim, Rod & CJ,

Once again, I really appreciate you devoting your time to advise over $20K whereas you probably have more noteworthy investments to tend to of your own!

Rod, I have read a couple of books on shares (e.g. Roger Kinsky), some on real estate (e.g. Jan Somers) & some on the general concept of wealth generation (e.g. Robert Kiyosaki) & read the Fin Review on weekends. Are there any specific titles/authors that you reccommend?

Sim, thank you for bringing up ETFs, as I had never heard of them previously. One that investsts in the ASX200 index is definitely worth considering given that the ASX200 always goes up, even if it takes 10 years, as long as I don't foolishly buy into it at the worst possible time in history.

CJ, thanks for the mathematics! I'd neglected to include tax expenses in my own. Post-tax, the difference (between the MF with ML, and the TD) in net returns lessens to $840. And for the added risk, $840 is definitely not worth it IMO. If I had, say, $200K to invest, it would be a slightly different story!

Thanks again for all your wisdom

Hi Disco Lemon,

The ASX200 does not always go up.
Pull up a chart from October 2007 to now.

Good news is from the bottom in March it is up, hasn't quite caught up to were it was but it will eventually get there.

Over history, there is no period, if you had invested in the sharemarket (index) and it dropped, 7 years later it has always caught back up from when you invested. Saying that, 7 years is a fair amount of time to regain lost ground.

Cheers,

Dan

PS Past performance is no guarantee of future returns.

"Saying that, 7 years is a fair amount of time to regain lost ground".


It will take more if you include opportunity cost, inflation etc...
On the other side ... live expectancy increased dramatically, so one day a patient investor may recoup some money.

Thats why its best to invest on a regular basis, hence you benefit from drops. And if you say it takes 7 years to make up lost ground from a drop, well we are after a major drop so wouldn't it suggest its a good time to get in?

Property also drops in value, so if your a investor, get used to it!

Thanks everyone for your wisdom.

That's what I was wondering too crc_error: isn't now a relatively "good" time to purchase stocks? In 20-20 hindsight, a month or 2 ago would've been ideal. I suspect a seasoned investor would have pounced on the opportunity for a spending spree.

You are never going to pick tops and bottoms, so best to invest each month what you can. And when we have corrections, invest more! I actually topped up my managed fund yesterday, as long term I believe the stock market is a excellent investment vehical.

I have 1 IP, which I will redraw equity in 12 months to invest more into the share market as I only see a IP been good for its cheap borrowing and high gearing and deprication. Once you can't get the high gearing, then your better going into shares as you can get simular gearing with out the high costs associated with buying/selling.

Look how great our market has recovered!! with a low of 5200, we are now at 5900 and saw 6000 the other day.