I recently got asked what I would do with all the spare cash that I had just lying around at the end of each month.
Fortunately, there is an easy answer to this question: I rarely have any spare cash lying around. In my head, it’s because I try to live by my own philosophy: which is that it’s easier to save in advance (here’s the post where I realised what that philosophy was: The Psychology of Savings*). The honest truth is that I just spend everything that’s not been removed by debit order on the first of the month.
*I am really really proud of this post. FYI.
That said, for most of us, a bit of post-salary-increase spare cash is the primary motivator behind house-viewings on weekends and that mortgage application with the bank. And I can barely type that statement without eye-rolling, because anyone that’s read “Rent or Buy: The Problem with Home-owning” will know that I’m not a fan of this line of reasoning. Not that the house-buying in itself is a bad idea – it’s just the holier-than-thou “I’m making the adult and financially-wise decision here” attitude that so often accompanies it.
It’s Easier To Spend In Order To Save
There was an article in the week-before-last’s Economist on the reason why poor people in India buy cows when cow-ownership offers, on average, a -64% annual return on investment after you take into account the cost of man-hours spent taking care of it.
Yes – that’s a negative.
However, there are some good reasons why owning a cow would make good economic sense if you were a poor Indian. And the primary reason is this: it’s more pleasurable to save money by spending it on something that you care about. Sure, there will be time and vet bills and food to consider: but it’s far more pleasant to go and milk your investment in the morning than it is to resist the temptation of withdrawing your pennies from your mattress.
And I’m not convinced that home-owning is any different. “Paying a mortgage” doesn’t feel like saving money – it feels like you’re spending it. The proverbial win-win. Only (hopefully) it doesn’t result in a -64% return.
Although we don’t take the man-hours into account when we’re calculating the return on property now, do we? And from what I’ve seen, most home-owners spend a lot of time on their homes. And in related-administration. Just saying.
Anyway, Assuming That You’re Convinced
You’ve got this spare cash that you’re not going to spend on home-improvement and conveyancing fees, and now you need to decide what to do with it.
Here is what I would do (and I’m going to speak from a South African perspective, because that is where I live):
- visit the Satrix website
- sign up to the Satrix Investment Plan
- get highly annoyed by the admin involved but push through anyway
- set up a debit order for my monthly investment
- select the Satrix SWIX Top 40 index-tracker fund
Please note: this is not advice. As far as the South African government is concerned, my lack of having-written-the-regulatory-exams-for-being-a-financial-advisor renders me legally-incapable of giving out advice on financial matters. Also, I have no connection to Satrix. But like I said earlier – I’m just explaining what I would do with my money.
So Why The Satrix? Or, more appropriately, why an ETF?
An Exchange-Traded Fund is basically a unit trust whose units are available for sale on the Stock Exchange. It represents a basket of different shares: so you can invest in all of them without having to buy them all individually.
However, unlike a standard Unit Trust, which will have a fund manager and a team of analysts making investment decisions (this is known as “active-investing”), most ETFs will be built to try and mimic the movements of a particular index – which makes them passive, index-tracking funds. This is a very cheap way of doing things, because the investing generally gets done by a computer that’s been fitted with an algorithm.
Here’s are my reasons for preferring an ETF:
- ETFs will earn the market return; and
- ETFs have really low fees (the Satrix SWIX annual fee is between 0.45% and 0.8% of your total investment).
Here are reasons not to buy ETFs (as given to you by active investment managers):
- ETFs will never out-perform the market.
Talking about “out-performance” and “missing out on it” always makes me feel like I’m being manipulated. It speaks to my loss aversion bias, which is FOMO in any other context.
And the honest truth about “outperformance” is that it is both misunderstood and misconstrued. The thing to realise is that active managers will usually charge a fee of anything between 1.1% and 3% of the value of the portfolio. This means:
- If the active fund performs worse than the ETF, you’re better off with an ETF.
- If the active fund performs the same as the ETF, you’re better off with an ETF.
- If the active fund performs better than the ETF, then you’re better off with an ETF unless the outperformance is greater than the difference in fee.
Which basically means that, over time, you’re more likely to be better off with an Exchange-Traded Fund.
And besides that, getting caught up with the technicalities of active funds versus passive ETFs can make you miss the point: which is that the primary growth in your portfolio will come from your debit order.
So rather just set up the debit order immediately.
And as for the whole SWIX thing…
That’s just a personal preference:
- I believe in equities because I believe in productive assets, so I would want an equity-index tracking fund;
- I don’t feel particularly strongly about sectors, so I’d want a broad equity index.
- And I think that Shareholder Weighted Indices (SWIX) are better than generic ones*.
*If you really want the technical detail, it’s because a general index is made up of all shares in issue. But not all shares in issue are traded: often, other companies will strategically own large holdings of another company’s shares. And because the share price of the company with those shares will be affecting by its strategic holding, there’s a bit of double-counting going on.
Just know that ETFs are often a really excellent way to go with investing.
A financial advisor might advise you otherwise – but bear in mind that financial advisors get taken to lunch by active investment fund managers; and that there’s no unethical line being crossed here, because active investment strategies also have merit.
garthwatson January 25, 2015 at 15:36
Quick question: if you go to the satrix website it says that the swix etf pays out dividends quarterly, whereas the rafi etf dividends are used to purchase more underlying shares thereby increasing the value of the shares in the rafi etf. So the question is, when you compare the value over time graph of both funds are you comparing apples with apples, or should you bear in mind that the swix value over time graph should be lower relative to the rafi because dividends have been distributed quarterly? And if one is comparing apples with oranges, is there a way to control for dividends and compare apples with apples? The rafi algorithm / “mandate” seems compelling as a long term investment.Reply