In Warren Buffett's 2013 letter to Berkshire-Hathaway shareholders, he advised his trustee to sell up and put the proceeds into index funds when he was gone. Here's the quote:
My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.
For investors dipping their toe into the market or those looking for a set-and-forget investment, that advice is priceless. There are already a number of quality index funds (exchange-traded fund or ETF) listed on the ASX, and more are being added over time.
Income
If you want to follow Buffett's advice strictly, investors could allocated 10% of their cash towards the Russell Australian Government Bond ETF (ASX: RGB), the SPDR S&P/ASX Australian Government Bond Fund, or SPDR GOVT ETF UNITS (ASX: GOVT) or the Vanguard Australian Government Bond Index ETF (ASX: VGB). All three have very low management fees of around 0.2% and invest in a mix of government (and semi-government) bond securities.
Since inception in December 2008, the Vanguard fund has returned around 5.6% per annum – not bad for low risk fixed income securities and better than cash in term deposits and bank accounts.
Growth & Income
The remaining 90% could be invested in a single Australian index fund that tracks the S&P/ASX 200 or the S&P/ASX 300, giving wide diversification with one security. The Vanguard Australian Share index or V300AEQ ETF UNITS (ASX: VAS) tracks the S&P/ASX 300 index, and charges just 0.15% as a management fee. Alternatively, there's the SPDR S&P/ASX 200 Fund (ASX: STW) that tracks the S&P/ASX 200. Its management fee is ultra-low as well, at just 0.28%.
Compare that to some options offered by a number of Australian retail fund managers where you could be paying as much as 3% of your total assets in management fees. In other words, on a $100,000 investment, you'd be paying $280 in fees for the SPDR fund ($150 for the Vanguard fund) and as much as $3,000 for the retail managed fund.
What's even better for Australian investors is that there is a range of ETFs listed on the ASX that invest offshore. With one security like the Vanguard MSCI Index International Shares ETF (ASX: VGS), Australians can gain access to more than 1,500 global companies like Apple, Google, Facebook, Twitter, Amazon, American Express, General Electric, Wells Fargo, Nestle, Pfizer and Disney to name just a few. The management fee is an astonishing 0.18%!
In fact, the ETFs listed on the ASX are so varied, it's fairly easy for investors to replicate a balanced fund investing across multiple sectors with a few ETFs and securities on the ASX – as we've outlined previously.
Another option
Listed investment companies (LICs) are another option for investors that provide instant diversification, very low fees and similar if not better performance than retail managed funds.
The two largest and probably best known are Australian Foundation Investment Co.Ltd (ASX: AFI) and Argo Investments Limited (ASX: ARG). Both companies invest in a wide selection of Australian companies and both charge very low fees. AFI and Argo both have management expense ratios (MER) of 0.18% and don't charge outperformance fees (surely that's a manager's job anyway?).
One thing you need to know about LICs that makes them different to ETFs is that they can trade at discounts or premiums to the underlying securities they hold. The companies will update the ASX frequently with their net tangible assets per share (NTA), to give investors information to compare against the share price. In other words, buying into an LIC when the price is lower (discount) to its NTA, is the equivalent of buying the underlying securities at cheaper prices than the market is offering.
Be aware of those trading at significant premiums (or above their NTA values) – you might want to consider waiting for a better price, or consider a different LIC.
The ASX has a list of all the listed ETFs and LICs here.
Foolish takeaway
For those investors looking to dip their toe into the stock market, there are plenty of easy options. For those who've had enough of high fees and want to take control of their investments and superannuation, this is a great place to start.
If it's good enough for the world's greatest investor – it should be good enough for us.
