Barefoot Investor is one of the best known personal finance books in Australia. Scott Pape wrote the book with the aim at helping Australian people to build sound financial frameworks. I personally read the book a couple of years ago, and it inspired me in many aspects.
In this post, we will have a closer look at, among many things, the index funds Scott mentioned in his book. You will be able to learn which index funds he recommended and how the performance was over the past years. Plus, you will understand in which way he wanted his readers to invest in the index funds.
What are index funds?
You need to first understand where you plan to put your money. When you learn about index funds, you would understand why the author recommended index funds. The definition of index funds by Wikipedia
is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that the fund can track a specified basket of underlying investments.By Wikipedia
If you continue reading the Wikipedia article, you’ll be overwhelmed by the definition. But, what we just really need to know is that an index fund is like a basket of various stocks. Each fund has its own criteria to include stocks. For example, S&P 500 index is a stock collection of the 500 largest firms in the U.S. The S&P/ASX 200 index includes the 200 biggest Australian firms.
So, index funds are not for a single company’s stock, but a collection of companies selected by certain rules.
Why did Barefoot Investor recommend index funds?
Then, we now want to know why index funds are mentioned in his book as an investment destination for your retirement. There are two major reasons – performance and safety. Note that I mentioned it as an investment means for your retirement, not for your holiday vacation in Summer. Index funds investment is not for short-term success.
The most basic principle you want to know in investment performance is that you don’t want to lose any money. Everyone knows it, but many people leave stock investment after losing a huge amount of money. You may have already heard this kind of story here and there. This might scare you and make you have some allergic reaction to the stock market. But, don’t worry. Here we have index funds.
People are familiar with this quote, “don’t put all your eggs in one basket.” Index funds basically follow this principle. When you put your money in index funds, you split it into multiple baskets – the biggest companies in the country. As you spread your money, you spread a risk. According to the Barefoot Investor blog,
“Ratings agency Standard and Poor’s (S&P) has tracked over one thousand managed funds and ranked them against a simple, low-fee index fund over a 15-year period. Almost nine in ten (87 percent) international share funds failed to beat a simple low-cost index fund. Almost eight in ten (77 percent) Aussie share funds underperformed a simple low-cost index fund. Faced with this overwhelming evidence, investors the world over have embraced index funds.”History has proven that index funds performed better than managed funds.
So, index funds have shown a stable performance throughout the history. Active investment management – buying and selling frequently – has proven to deliver worse performance. In Australia, when your employer pays super funds into your account, the institute automatically redistributes them into Australian and international index funds to minimise risk and optimise performance.
The author recommends his readers to invest in index funds. Who else? Warren Buffet. It is known that Warren Buffet left a will that describes how his estate should be managed after he dies. He requested that his 10% of his entire estate go into short-term government bonds and 90% into S&P 500 index fund that tracks 500 largest companies in the U.S.
Let’s see how S&P 500 performed over the past 10 years.
10 years ago from today (July 2020), the price of the index stayed at $1,026. Since then, it tripled. If you can see the very right side, there is a steep dip and rise due to COVID19. Although the world was hit by the virus, the stock market recovered most of its loss. And, it is likely to rise higher than it was before the pandemic.
What about the Australian index fund?
When I looked at the chart, it was recorded as $6,075.10. Near 2010, it was somewhere late $4,000s. Although there were fluctuations, it had been on the rise before the COVID19 pandemic. The Australian market was hit hard but it is showing a good sign of recovery.
Let me repeat the most basic rule, “don’t lose money!” It is simple but hard to achieve. Most people like a quick return. They want their invested money to shoot up like 100%, 200%, or more. Media and the Internet cover those stories making people fear of missing out (FOMO). They start jumping on the bandwagon going up, which creates bubbles and then pops!
What index funds did Scott mentioned in his book?
You might now wonder which funds the Barefoot Investor author recommended in his book. But before we jump into the index funds, we need to know the context. The Barefoot Investor recommended the index funds as a way to manage your super funds. He advised investing in low-cost index funds instead of putting your money in other places that charge you investment management cost. He specifically mentioned a few super funds institutes that charge no investment fee for index funds.
Please note that the author pointed out that before you change your super institute, consult a financial advisor since moving can incur tax and we have different financial circumstances.
Hostplus Indexed Balanced Fund
The Barefoot Investor shared in his blog that he put his super in Hostplus Indexed Balanced Fund. For the reasons, he pointed out that it has the lowest cost and is an indexed balanced fund. According to Hostplus, the index fund tracks international shares, Australian shares, international fixed interest, Australian fixed interest, and cash asset classes with the asset allocation guidelines as below:
- Australian Shares (25%-55%)
- International Shares (developed markets) (25%-55%)
- International Shares (emerging markets) (0%-10%)
- Diversified Fixed Interest (10% – 30%)
- Cash (0 – 20%)
By diversifying your portfolio, you can minimise investment risk and can have stable return over the long-run.
REST Indexed Fund
Scott first mentioned the Hostplus index fund. Later, another super fund institute, REST, launched an index fund that has 0 fees according to the Barefoot Investor blog. The investment fee is 0, but they still charge an administrative fee. But, compared to other super institutes, it’s still very cheap. The REST Indexed Fund has the following compositions:
- Australian Shares Index Fund: binds the 300 biggest companies in Australia such as the big banks, Woolies, mining firms, Sydney Airport, and more.
- Overseas Shares Index Fund: binds the 1,576 biggest companies in the world such as Amazon, Alphabet (or Google), Toyota. Dividends are automatically reinvested in Australian dollars.
- Balanced Index Fund:30% Australian shares
- 45% overseas shares
- 20% bonds
- 5% cash
Will it cost to switch to a new super fund?
If you have become convinced to move to the new fund that doesn’t charge an investment management fee, there is good news. It has been typically charged with an exit fee of $68 when you switch from your old super fund to a new one. However, since 1st July 2019, the exit fee will be banned. So you don’t have to pay a penny to move your super funds.
In this post, we learned which index funds were mentioned in Barefoot Investor. The author recommended the funds that will charge you a low fee but have lower risk and stable returns in the long-term. Before moving to these funds, it will be wise to do your own research and have advice from a financial expert.
If you want to know more about what Barefoot Investor said in his book about super, check out another post, What I learned from Barefoot Investor Superannuation.