Index Funds - Geared

[Alex P Keaton]

That is - at the minimum - 66% LVR. Too aggressive for my liking in this volatile market. My personal risk profile would be a maximum 33% LVR (you put in $500 per month and take a $250 loan for a total contribution of $750).

Hi

I think I can manage a 50% LVR. I could start off my regular savings plan by contributing the minimum $1000 to get it going and then contribute $500 a month and ANZ's contribution of $500 a month.

I have $23,000 in savings, so I think a 50% LVR is ok.

During times when the sharemarket does fall though, what happens if you are invested in a regular geared plan? Do you have to put in extra money? Is there a margin call? Anyone know?

 

[The Y-man]

I have been researching managed funds and want to invest in the Vanguard Australian Share Index Fund using ANZ's One Answer Investment Portfolio combined with a regular geared savings plan.
...
Another thing with a regular geared savings plan you arnt susceptible to a margin call?? Is that right? This would be less risky for me.

My plan is to hold the index fund long term. Approx 7-10 years with the goal of using my funds to help purchase another property down the track, in say 7 years time.

thanks

I don't know the product, but on reading the documents at http://www.anz.com/aus/fin/investing/OneFact.asp you look like you are definitely up for margin calls?

Cheers,

The Y-man

 

[boomtown]

Do you have to put in extra money? Is there a margin call? Anyone know?

Yes. And yes. And yes.

 

[Alex P Keaton]

Ok thanks. I remember reading that if your at 50% LVR the market would have to drop 30% for you to have to make a margin call. I wander what kind of money though I'd have to put in if I had to make a margin call? Would it be a lot? Anyone know?

 

[boomtown]

Enough to bring you back down to whatever your LVR is supposed to be.

So if you have 10k invested at 66% LVR you have a total portfolio of 30k (10k equity and 20k loan). If the market then drops 50% your LVR is rooted (15k portfolio value, 20k loan, minus 5k equity).

In order to bring that back to a 66% LVR you would need to add an additional $15k (30k portfolio value, 20k loan, 10k equity).

So if the market drops 50% you would need to (rapidly - like NOW) add one and a half times your total original investment to meet the margin call (at 66% LVR).

Stings a bit doesnt it? Thats why most people dont actually meet margin calls, get forced out of their position and lose their total investment. If they are running high LVRs (or the stocks were speculative and end up being worth nothing) they will end up owing the bank money after their portfolio has been wiped out. And thats why forced deleveraging is a bit nasty.

On a 90% LVR with a 10k original investment - you would need to put in another $50k to meet the margin call on a 50% fall. If your orginal investment was $100k you would need to put in $500k (immediately) to meet the margin call.

Those sorts of numbers start to get scary pretty fast.

 

[tobe]

I have some Vanguard index funds. I had a look at buying them on margin, but decided against it as the margin lender takes a cut, or management fee that isnt there if you invest direct. When you fill out the form, ANZ will be there as 'your advisor', who receives a commission from your MER or management fee Vanguard takes. I thought it a bit much to get interest for a margin loan, and a commission for an index fund, they arent even picking stocks!!!

 

[tobe]

I would also dollar cost average into the fund, put some dollars per week in, and let ANZ match it on margin. That way there is less chance of a major margin call catastrophy after a year or two of drip feeding into the market (although always possible). If I wanted to be really safe, I would have a prudent reserve of the same amount as that on margin in redraw in case of calamity, and reinvest all the dividends to reduce LVR.

 

[boomtown]

Fair enough - but dollar cost averaging over 2009 will have nil effect if the market doesnt actually climb out of its current hole over that period of time.

 

[Alex P Keaton]

boomtown
Sure does sound scarey!!


Tobe
Yeah i noticed ANZ's ongoing fee was 1.4% whereas if you invest directly with Vanguard its only .75%. if you go with the Australian Share fund. The only reason I was thinking about investing through ANZ was because of the regular automaticinvestment plan each month. With Vanguard you cant direct debit monthly. I guess though i could always send them a cheque each month and do it that way. I would have liked the automatic deduction from my account though.

Did you say you invest directly with Vanguard? What fund have you got? Australian shares?

 

[Twitch]

Why wouldn't you buy STW rather than the vanguard index fund, STW has an MER of (I believe) 0.3% rather than 0.7% of vanguard.

 

[Chomp]

This might help you Kim,

and also have you considered LIC'S STW, ARG, STI the fees seem to be alot lower and they track the index?

 

[austini]

... Yeah i noticed ANZ's ongoing fee was 1.4% whereas if you invest directly with Vanguard its only .75%. if you go with the Australian Share fund. The only reason I was thinking about investing through ANZ was because of the regular automaticinvestment plan each month. With Vanguard you cant direct debit monthly. I guess though i could always send them a cheque each month and do it that way. I would have liked the automatic deduction from my account though. ...

Vanguard accepts BPay ($100 minimum). Just schedule an online monthly BPay transaction through your bank. Not all that much different to direct debit in desired outcome.

Maybe consider Vanguard's High Yield Australian Share Fund (slightly higher fee however). It is referred to as a style based index fund and I think these types of index funds will become more popular going forward. Still the low turnover but follow a specific objective (ie style) and hopefully get rid of the rubbish sooner than a pure index fund. This fund focuses on the higher yielding shares in each sector. From what I understand another positive is that they remove some of the rubbish such as the likes of the ABC and Allco's from the fund. Unfortunately with the ASX 200 fund it also guarantees exposure to any rubbish like those just mentioned. But check on the detail as I haven't looked into it for awhile.

Personally I use LICs mostly and a couple of ETF Index funds rather than Vanguard funds as the MER is much less and you are not subject to the other problems associated with unlisted trusts. However the brokerage would be too costly if you were only investing smaller amounts on a regular basis. Vanguard would be a better option with smaller amounts.

If you invest in Index funds through a intermediary such as ANZ you are really removing one of the few key attractions being a low MER.

Cheers - Gordon
Please note that the above is not advice.

 

[Alex P Keaton]

This might help you Kim,

and also have you considered LIC'S STW, ARG, STI the fees seem to be alot lower and they track the index?

ive thought about those but then you have to pay the brokerage costs every time you want to buy

 

[Alex P Keaton]

Vanguard accepts BPay ($100 minimum). Just schedule an online monthly BPay transaction through your bank. Not all that much different to direct debit in desired outcome.

I see so you can arrange an online monthly bpay transaction cool

 

[Alex P Keaton]

Maybe consider Vanguard's High Yield Australian Share Fund (slightly higher fee however). It is referred to as a style based index fund and I think these types of index funds will become more popular going forward. Still the low turnover but follow a specific objective (ie style) and hopefully get rid of the rubbish sooner than a pure index fund. This fund focuses on the higher yielding shares in each sector. From what I understand another positive is that they remove some of the rubbish such as the likes of the ABC and Allco's from the fund. Unfortunately with the ASX 200 fund it also guarantees exposure to any rubbish like those just mentioned. But check on the detail as I haven't looked into it for awhile.

I was tossing up whether to go for the regular aussie share fund or the high yield. The high yield fund also takes advantage of franking credits, and is tax effective. Both funds have performed well over the past 5 years. Its .15 % higher fee.

 

[Alex P Keaton]

Does Vanguard have a regular savings plan?
You can start a regular investment plan with as little as $100 by using BPAY®. You select how much and how often you want to invest through BPAY® by contacting your financial institution. By taking advantage of dollar-cost averaging, where you invest a fixed amount in a particular investment at regular intervals, you can help build your investment over time. For example, as markets rise, your money may buy fewer units in your managed fund but when the market is falling your money is buying more units because the price is cheaper. Click here to find out more.


wish i'd seen this before

 

[Invest]

I have a Vanguard Australian Shares Fund (ASX 300). I opened it with $5000 back in October 2007 and have been (manually via BPAY) contributing $200 every month since then, I also re-invest the lot. I use the money from my salary, I dont borrow any margin BS.

Since the credit crunch, my shares dropped a fair bit, but I plan on keeping the fund for the next 20-30 years until retirement.

I also want to buy a second property soon so I may lower my 200 bucks to 100 to make it a bit easier for cash flow.

I did a lot of reading about Index funds and Vanguard seemed one of the best in Australia due to low fees. Also Warren Buffet recommended buying index funds...

Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform ... and I could just go back and get on with my work."

 

[austini]

... Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform ... and I could just go back and get on with my work."

Good plan. Buffet also emphasises buying over time with special emphasis on being greedy when others are fearful and fearful when others are greedy. By doing this performance may be much greater than blindly dollar cost averaging.

Cheers - Gordon

 

[Minxdamanx]

I have a Vanguard Australian Shares Fund (ASX 300). I opened it with $5000 back in October 2007 and have been (manually via BPAY) contributing $200 every month since then, I also re-invest the lot. I use the money from my salary, I dont borrow any margin BS.

The minimum with Vanguard for initial amount is 5k is that right? Is there any mimimum amount of continued contributions? Or can they be varied amounts whenever (for example tax returns, bonuses etc). Can you please explain why you would go with Vanguard, rather than buy shares in STW or similar?

Thanks for any information.

 

[The Y-man]

Can you please explain why you would go with Vanguard, rather than buy shares in STW or similar?

Thanks for any information.

I would suggest that decisions on which to go with would be affected by considerations of:
Funds under management (i.e. "size" of fund)
Mangement Fees
Entry/Exit and/or brokerage fees
Lquidity

amongst other things...

Cheers,

The Y-man