Question: My daughter is 24 and has a reasonably good job. She wants to invest a regular amount of her income. She has about $3000 to start with and then can invest about $600 per fortnight. Being young, she is after long-term growth. Can you suggest a suitable managed fund or approach?
Answer (By Paul Rickard): Most managed funds offer a regular investment plan (with periodic debit). If it is an Australian equities fund, I don’t really think there is much to choose between the active managers, so I would go with a low fee, index fund. She could try the Vanguard Index Australian Shares Fund. While the management fees reduce as the funds invested increase, they are still relatively high – 0.75% per annum up to the first $50,000.
A second option (not as easy) would be to buy an exchange traded fund – probably the SPDR S&P/ASX 200 Fund (STW) or Vanguard Australian Shares Index ETF (VAS). She will have to open an account with a broker and pay brokerage (on $3,000, this will be in the range of $14.95 to $19.95 or 0.50% to 0.67%). Management fees are typically 0.15% to 0.20% pa. There is no regular investment option – so she would need to save up her $600 fortnightly amount and reinvest by buying additional units on the market when the brokerage becomes economic.
A third option would be do the same as the second – however, rather than buying ETFs, buy one of the major broad-based Listed Investment Companies, such as AFI, Argo (ARG) or Milton (MLT).
The fourth option (again a hybrid of the second and higher risk) is to buy some individual shares and start to develop a portfolio. The main advantage of doing this is to start fostering an interest in investments. Have a look at my article on this.
Question 2: In the event of a fall of the underlying asset in an ETF, is there any protection in the management of the ETF to reduce the effect of that on the value of the ETF? Do you have any comments as to the effectiveness of trailing stops of this strategy? Half the stocks sold as a result of the triggers firing have rebounded i.e. BHP, BXB.
Answer 2 (By Paul Rickard): No – no protection. ETFs are passively managed – the manager takes no action except to replicate the index.
I don’t use trailing stops. I invest for the long term – “crashes” (as the media likes to beat them up) are just hiccups. If I felt that I might need to liquefy my portfolio in the short to medium term, I might take a different approach and consider their use. The downside (as you point out) is that they get triggered – and the stock/market rebounds.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
