buy your broker a couple of porsches or retire 10 years earlier with low cost index trackers?
“… what you you rather do?” asks ex hedge fund manager Lars Kroijer
You may remember Kroijer from such Monevator blog posts as Why a total world equity index tracker is the only index fund you need or such books as Investing Demystified.
To sum up what Lars has to say in one sentence it is basically this:
You most likely can’t beat the market or pick an active fund manager who can, and should therefore invest in a low cost, diversified world equity index tracker instead and sleep easier at night.
Although I’m fully on board with this sentiment already, I haven’t quite gotten around to reading his book yet, and being the lazy so-and-so I am it was with great excitement that he emailed me the other day highlighting his short video series on simple low cost investing.
It’s as easy as watching a cute cat video online, except it’s about index funds! But if you spend six minutes watching the first video it may change how you think about investments. Also, it may save you reading 200 pages of an investment book or give you a good riposte for next time a broker calls you with a hot stock tip….
I don’t write too much about investing on here because there are plenty of people out there doing a much better job (such as Lars!) but if you read this blog and haven’t gotten going yet because you think it is a complex affair or are bamboozled by all of the options out there 1, then these videos are for you.
After viewing, investing should seem more simpler and you’ll probably be far less confused about all the choices out there. We are all much too busy to go through all the choice so the simple message is great. The philosophy that it’s ok to not be able to beat the market will help young savers who are too busy making headway in a career to spend evenings and weekends trying to outperform. In any case, I reckon it’s certainly worth 6 minutes of your time to see what you think…
If you want to skip straight to the videos then click here, if not here is a brief overview of what is in them:
Kroijer basically says that if you can’t beat the stock markets (which most of us have no chance of doing) then the best investment would be to buy the cheapest and broadest index tracker of stocks – and this is a world equity index tracker. You may have heard other people recommend to only buy the S&P500 (good enough for Warren Buffet and Jimmy L Collins), but Lars is taking it a step further and tells you to diversify across the world. Crazily this may mean that your equity investment portfolio is just one stock, an ETF that tracks the world equity markets. Almost too simple to be true, but it is the best path to take for 99% of investors!
Kroijer shows how an individual investor like most of us buying shares in Microsoft effectively competes with a super plugged in and well informed/resourced portfolio manager for an advantage (or edge) in trading that stock. He calls the portfolio manager Susan and shows us how she has better information, analytics, trading insight, management access and went to school with many of them, competitor analysis, historical context, gut feel, and so on, and it quickly becomes clear that if we ever thought we might compete with her we’re now feeling a little silly! But then he also shows us how very few of those same investment funds managed by pros like Susan actually outperform the markets over time. The fees eat away any advantage they may hold and only about 1 out of 10 investment funds outperform the market over a ten year period – the problem is of course that we have no chance of knowing which one it is ahead of time. Therefore: buy the broad market tracker.
Since equities are too risky for some investors Kroijer says that you can combine the world equity exposure with the lowest risk investment you can find – typically government bonds – and that you can combine the two (50%/50%, 75%/25%, 25%/75%, etc.) to suit your risk profile. And job done. Who said investing was difficult.
The main thing I like about Lars is that, apart from maybe getting some slight exposure for his books, he is not really making much or any money out of getting this simple message across. I don’t know about you but that makes me trust the message far more than some active fund manager giving you the hard sell on how wealthy their fund is going to make you oh and by the way we’ll only charge you 2% per year (whether your wealth increases or not!)
And finally the inspiration from the quote comes from video 5, where he reckons doing it the Lars way could save you around £300,000 which equates to a few Porches for your broker or could mean retiring 10 years earlier for you! Insane how just 2% a year adds up – just like compound interest increases your savings exponentially, it works for percentage costs that drain your returns and wealth as well.
a very quick bit on the TFS strategy
The way I implement Lars strategy, after admittedly farting around with some other rubbish funds which I haven’t gotten rid of yet, is to buy the following:
Vanguard LifeStrategy funds – These are great as you can do the bond splitting thing inherently in the fund, although they are not very well balanced globally. I did the 80/20 split (in favour of equities) but you may want higher bond allocation if you are later on in your FI quest.
Vanguard FTSE All-World UCITS ETF (VWRL) – This is a more globally balanced ETF so I think I’m gonna concentrate on this going forward.
Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL) – Similar to the above but should chuck out higher dividends which sounds nice to me and good if you wanted to have income from your funds/ETFs
As usual please do your own research and do not take the above as a stock “tip” or anything like that, it’s just what I decided to invest in mainly after internalising Lars’ message and hunting out some low cost funds for myself, there is every chance there are better or lower cost funds out there (If you find any please do let me know!)
How do you prefer to invest dear readers?
Found any better funds than the ones listed above?
Or are you active all the way and laugh through your cash (from your latest 10 bagger) filled mouth at us index lovers?
now watch Lars in action
The series consists of five videos – here is a link to each one with a brief description:
Video 1: Investing Demystified – (Intro Overview – Part 1 of 5)
The Investing Demystified video series is based on the premise that most investor can’t beat the market (or pick investment funds to do so for them). Those investors should only buy world equity index trackers for their equity exposure, and can easily implement the simple and cheap portfolio tailored to their risk profile. They will most likely be far better off in the long run as a result!
Video 2: Investing Demystified – (You can’t beat markets or pick a fund to do so for you – Part 2 of 5 )
Far too many people believe they can beat the market – and far too few people have any incentive to tell them otherwise.
Video 3: Investing Demystified – (Only buy cheap World Equity Index Trackers – Part 3 of 5 )
The only equity investment you’ll need to hold is a world equity index tracker – it is cheap and diversified. Crazy yes, but it really can be that simple.
Video 4: Investing Demystified – (The simple portfolio to suit your risk – Part 4 of 5 )
Vary the proportion of your portfolio that’s allocated to the lowest-risk assets – cash and government bonds – to suit your risk profile.
Video 5: Investing Demystified – (Implementing the Investing Demystified portfolio – Part 5 of 5 )
How to select the right products for your hyper-efficient best-in-breed passive portfolio, and how to keep your strategy on track.
Notes:
- Or god forbid you are waiting for muggins here to write some 5000 word masterpiece blog post on investing (sorry kids, not gonna happen!) ↩
Discussion (18) ¬
Lars offers some sound advice.
HSBC also does a world index tracker, HSBC MSCI World UCITS ETF (GBP) | HMWO | IE00B4X9L533
The management fee is a tiny bit lower at 0.15% to the Vanguard VWRL of 0.25%, but much of muchness.
Might be useful if you wanted to spread your eggs amongst more than one fund/fund manager basket.
I now own the a couple of Vanguard ETFs. I just had a look at the HSBC MSCI world etf with TER 0.15%. Very interesting etf, which includes some real estate (3.42%) as well compared to the Vanguard All world which doesn’t. Very tempting option.
I need to read up more on the difference between the MSCI world index and the FTSE world index first though. How many different world indexes are there do anyone know??
Depends what you mean by world index I guess.
The main ones are FTSE, MSCI, S&P, Dow, and Russell.
Each offer a selection to choose from.
Thanks for highlighting some more options Slow Dad
TFS which fund has done better for you? LS80 or ETF?
It’s not really a fair comparison as I’ve bought at different times but they are both nicely “up” overall since I bought them.
FWIW the High yield Dividend ETF has increased by far the most as a percentage but that is because I bought it on one of the mini price crashes we’ve experienced over the last year or so (can’t remember which one)
Hi TFS,
Thanks for the videos – I will try and watch those later today, should be interesting! I think there are two big fears for people investing (ignoring the obvious “I cant afford to yet” comments)
1. I dont understand all the jargon, is an ETF just a mutated ELF? gaaah its so scary I will run away and hide behind a bush for the rest of my life
2. Wait, what? 1 fund and I dont need to do anything? It cant be that simple… its a scam! They are ripping me off! I will go and buy 300 pairs of fake jeans instead so I can feel good about myself
But there you go 🙂 I do own the High Yield Vanguard ETF – it does kick out the odd dividend, and means I dont think about it and also a FTSE-250 tracker (non Vanguard).
You can make your investment as complex or as simple as you want 🙂 Interesting you also have some funds you havent got round to selling 😉
London Rob
Haha, that made me laugh LR 🙂
I’m not sure what to do about those other funds as they are within a cofunds ISA and don’t think they do Vanguard. Guessing you can transfer money between ISA providers but it sounds like too much ballache to sort out over a few grand but I know I probably should JFDI!
I don’t think you meant “porches” 🙂
You think they would rather go for a “super basement” extension? 😉
Haha, thanks for the hilarious typo spot!
Fixed now 🙂
Cheers for the timely reminder, TFS – I’ve only watched Lars’ first video and hadn’t gotten round to watching the others yet.
VGLS80%, VWRL and VHYL all feature in my fund/ETF portfolio but my overall strategy is loosely based on the Tim Hale portfolio as featured on Monevator’s post on ‘lazy portfolios’ (http://monevator.com/9-lazy-portfolios-for-uk-passive-investors-2010/ – minus the commodities, more in global equity, less in bonds)
When the time comes for me to simplify my portfolio, it’s likely that those above mentioned three will form the backbone.
My bit of active investing has resulted in my buying some shares, some which have done well, others not so, eg Tesco and Standard Chartered, ahem! I’m not good at selling equities – don’t know whether to cut my losses or just hang on so I’m just doing the latter!
I’m more interested now in building up a basket of investment trusts to run alongside my fund/ETF portfolio and build up dividend income that way.
I’m also likely to experiment with a ‘Dogs of the FTSE’ portfolio in the new year but as with my other ventures, eg in P2P and property crowdfunding, it’s only going to be a small amount of cash to play with.
I like the sound of the dogs strategy. When my nest egg is a bit bigger I will probably divert some of it to that sort of thing but for now it is mainly being chucked at the Index funds and a bit of P2P.
Cheers weenie!
A very timely post, as have been salary sacrificing into my Hargraves landsowne pension for a while, but it is just sitting as cash and I was too scared to spend it. Will have to do some eating. …
Hi TFS,
For the LFS80, did you do income or accumulation, am not sure which one to opt for, what is the advantages of each?
Cheers,
J
I actually did an experiment and got both to see what was the difference (if any) but have to be honest I am not sure what the conclusions are on it.
If you want to read about the difference good ole Monevator shows us the way:
http://monevator.com/income-units-versus-accumulation-units-difference/
After much deliberation I prefer Income now, I like seeing the dividends actually hit my account. It’s just a psychological thing for me, and it gives you some sense of what sort of income your nest egg might actually produce as it grows over time and what it might produce when you hit your number, rather than just going “yea it will produce 4%” or whatever. You can actually see the yield right in front of you. That is why I prefer Inc units nowadays, although I still own a lot of Acc ones from when I first started investing and didn’t understand the difference and in all honesty will probably not bother changing them as it’s not worth the dealing fees.
You know, when you put it that way, I think we’ll stick with index funds. 🙂
We do a lot of US-centric investing (VTSAX of course), naturally. But, we’ve been rebalancing to some more international exposure.
I think Vanguard’s target-date funds can be a pretty good choice too, catching a lot of the diversification that is needed with minimal costs.
Chris@TTL recently posted…VTSAX vs VTI Index Funds: Pros and Cons