How To Buy Your First Index Trackers

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So you’ve read the wealth creation and investing blogs and books, you want to get that magical wealth accelerator “compounding” working hard for you BUT there’s a problem.

Getting started can feel like entering a complex maze. How do you know where to start, what path should you take and how do you actually buy your first index tracking fund? Where are these fabled index tracking funds that give you access to the stock market returns at low, low cost?  How do you actually get them in your life and working hard for you?

“How do I actually buy an index tracker, Ann?!”

You’ve decided upon your goals, you’ve got your spending under control, your debt is destroyed or you’ve put your debt destruction plan in place and your emergency fund is stocked up. Woo – hooo. Now it’s time to get your automatic investment with regular contributions started to get your asset pot growing. It’s time to jump in.

As a Wealth Chef, you understand the benefits of taking responsibility of your own financial wellbeing, this means DIY investing rather than being a TV diner money cook buying pre-packaged investment products and you understand the benefits of investing in simple index tracking investment vehicles – be they either Unit Trust Funds, OEICs or Exchange Traded Funds.

Where to buy index trackers

Buy online. Humans need all sorts of things which generally need money. The more you involve other humans in your investing, like financial planners and fund managers in actively managed funds, the higher your expenses will be and the less money you’ll be left with actually working hard for you.

Choose between:

  1. A fund supermarket
  2. An online discount broker

Don’t go directly to the fund provider, don’t use a full-service brokers, ‘advice’ dispensing stockbroker, and definitely don’t walk into your local bank with a bag full of dough.

The best discount brokers and fund supermarkets offer the DIY (Wealth Chef) investor:

  • The cheapest method of buying, selling and holding funds.
  • A wide choice of funds from different providers that you can mix and match.
  • Options to invest through tax shields for your funds – like stocks & shares ISAs (UK only), 401k’s (USA), Superannuations (AUS), RA’s (SA) and various personal pension options.
  • A regular investment scheme to automate drip-feeding and maximise the benefit of cost averaging.
  • Online portfolio tools to track your investments.
  • Fund search facilities.
  • Easy access to your funds and paperwork.
  • An execution-only service – so no advice on purchases.

There’s little practical difference between a fund supermarket and an online broker in terms of service or cost. The most important thing to be aware of is you’re choosing an execution-only service. You pay low fees because you’re not getting any advice.

Also, your first preferred investing platform may not carry the products you want. Always check using the site’s search tool for index trackers before signing up and transferring money.

Fund Supermarkets

Fund supermarkets mostly concern themselves with offering a one-stop shop for investment funds in the following two flavours:

  1. Unit Trusts
  2. OEICs (Open-Ended Investment Companies)

Index tracking funds will be structured as either a Unit Trust or, more likely, an OEIC. Again, the distinction is not something we need to worry about. The main point here is with these type of funds you are buying a unit or small part of the fund from the company that looks after the fund.

Although fund supermarkets mostly deal in funds, nothing in investing is clear cut and simple. Many fund supermarkets are part of bigger operations that will also dabble in other services, including share dealing.

It all amounts to the same thing in the end, as you just refuse all offers of advice and use the companies execution-only channel to access the index tracking funds sold at the supermarket.

Online Stockbrokers

Execution-only stockbrokers are generally the way to go if you want ETFs and access to a wider range of investment vehicles and the option to expand into direct share investing as your knowledge grows.

ETF’s are index tracking funds just like their Unit Trust and OEIC cousins, the main difference being the fund is divided up into shares of the fund and these are sold directly on the stock market so you buy the share of the ETF on the stock market rather than from the company that manages the fund. Many online stockbrokers will also offer you access to index tracking unit trust funds and OEICs.

To find an online broker just use wonderful google and type “online stock broker” and your country into the search field.

Be patient here – and keep your calm. Many online financial services companies seem intent on never having customers with way too much confusing information, jargon or just plain obscure explanations of their services.

Here is what you are looking for:

Index tracking funds – you want to be able to invest in these

Regular investment options – you want to be able to set up a regular investment into your chosen fund so you can put your wealth creation and investing on autopilot.

Platform costs – these are any cost you will incur to hold the broker account

Costs per trade – the cost you will pay when you buy and sell the fund

Costs of the investment – these are the ongoing costs of the fund or funds you want to invest in. Look for the Total Expense Ratio (TER)

You want to keep your costs of investing as low are possible so you get more of the money working for you.

Many Unit Trust index tracking funds and OEICs have no trade costs but have higher ongoing TER’s compared to ETF’s which will have a trade cost but usually lower ongoing TER’s. So if you only have a small amount to invest in each trade every month, a Unit Trust or OEIC index tracker may be the best option to start with rather than an ETF. The bottom line is you want the total of all your costs to be less than 1,5% per annum.

Get your Automatic Investment Plan started

So here’s your Automatic Investment Plan (AIP) Index Tracker recipe:

  1. Step 1 – Commit to a specific amount to pay yourself.
    You can start an AIP with most investment houses from very small regular investment amounts.  Remember the habit of paying yourself first is more important than the specific amount of money right now. As you see the money grow in your investment account your motivation to add more will increase.
  2. Step 2 – Select your fund supermarket or online broker
  3. Step 3 – Select your Index Tracker FundChoosing an index tracker is relatively simple. There are three main things to consider:
    • which index it tracks;
    • what type of fund it is; Unit trust, OEIC or ETF
    • its charges.

    Most people start with the primary index for the country they live in. From there you can add trackers for other geographic regions and sectors. Your target will be to have up to 4 or 5 different trackers in your whole portfolio.

  4. Step 4. Complete the application forms and START your AIP.You can start your AIP with most fund supermarkets or online brokers online. Get the forms, fill them in and get going. Make sure you set up a direct debit from your bank account on the day after your income comes in so that you are paying yourself first.

There you have it, get started and learn as you go. Update your balance sheet with the value of your investments every three months and do a review of the funds you are invested in once a year.

Sit back, relax knowing you’ve got your money working for you and get on with loving your life.

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31 Comments

  • Vanessa says:

    Hi Anne,

    I have no idea where to invest. I live in SA and don’t know where to start or even look. I am absolutely clueless. Do you perhaps have any recommendations?

    Thanking you kindly

  • Susan says:

    Good Morning Ann,
    I want to open an account at etfSA, but cannot find access on their website. I managed to open my account on EasyEquities online. But since you recommend etfSA, could guide me please?

  • Alan Neethling says:

    Ann is it worthwhile investing in Index Trackers for a period of 5 years

  • Linda says:

    How can I set up myself in Canada for this?

  • heevo says:

    whats the best investment

  • Marie-Anne says:

    Hello Ann
    Whew your amazing book has given me so much homework! I’m plodding through all the homework and have been astounded at my financials. Anyway, purchased my first SATRIX 40 Cash Fund. so I’m excited to see where this goes. I see that they charged me for moving from Cash to Equity and a trading fee – granted they are very small amounts but it obviously reduced my initial investment figure of R1000.00 Do you think I should keep adding to this pot 🙂 monthly?
    Thank you for your cheerful and amazing advice. I count myself blessed to have come across you. 🙂

  • ntokozo mkhize says:

    Hi Anne.
    I have started investing with Satrix Top 40. I feel my investment us not making much returns. Iam not sure which fund to switch to.I would like more information on how and where to buy etf shares.
    Thank u
    Ntokozo

  • Mavis says:

    Lovely and powerful discussions

  • Anna says:

    Hi Ann,

    Do you have any information about cheap online brokers in Australia? It seems like the cheapest still charges $11 per share, and that’s CMC Markets. But CMC seems to only trade in CDFs (although I might be wrong).

    I’m also a bit confused about the recommended monthly input. If your income is very low, then putting in 10% of your income each month to the accumulation fund will still incur at least a $11 fee, which is quite a large percentage if you’re only putting in $70 each month (i’m an intern). So would you recommend setting up a deposit schedule for once every three or four months?

    Thanks so much, keep up the great work!

  • marta says:

    Hallo Ann thank you very much. I am looking for an online broker here in Germany to start investing some pay myself first money.
    I also have some money put aside for my son coming from birthday presents. Can you advice How to invest it? I can’t invest it every month because it only comes on birthdays and Christmas, does it make sense still to invest it in index tracking when the money arrives? Thank you very much…I am so totally excited about my first investment ah! !!

  • Pakama says:

    Hi Ann, I have read The Wealth Chef and it is a great wow and importantly, so practical and easy to follow. As we speak I have began my journey to financial freedom through your advices, thanks a lot. There is one thing I need to know. What do you think about coin collection? Do you think it adds any value to financial freedom? Regards
    Pakama

  • Natalie says:

    Hi Ann

    I have an account with Etfsa and a debit order going into Satrix Indi as well as World Tracker.

    It’s that time of the year where I receive my 13th cheque.

    Wondering it I should put the full amount into an RA, or invest part thereof (in the form of a lump sum deposit) into another eft like the USA tracker or Proptrax 10?

    Thanks for being such a great role model. I attended Stocks for Frocks in Capr Town this year and am absolutely hooked on achieving my financial freedom

  • Sam says:

    Hi Ann for folks getting started that needs a bit more hand holding what do you offer? is there anyone to speak with? sorry its very new to me yet very fascinating.

    • Diana Olver says:

      Hi Sam.
      Thank you for your interest. I have sent you an email with some more information on each product. If you need any further information you can contact me on diana@thewealthchef.com

      • dori says:

        I just finished reading Ann’s book. I am new to all of this and I read the comment above for further help. Well I am in the same situation.

        Why is it important or necessary to find an online broker in your country?

        I guess I need some further step by step information to get going.

        Many thanks for your help.

    • June Teetu Simiona says:

      Hi Ann, the same here. Need help in this too. A step by step guidelines. Thank you

  • Christine says:

    Hi Ann & Louis (from SA)
    I opened an account with etfsa & monthly purchase of FTSE & USA Index Tracker ( with very good growth) & satrix Indi 25. I got paid out a large amount from my provident fund & took my chances to do my own “cooking” in stead of “tv dinners”. 🙂 I am investing about 2% of the total amount monthly (the rest in bank acc earning 5% interest).
    1 – I hope I am on the right track??
    2 – should I put more in the Index trackers monthly or do a lumpsum?

    • Ann says:

      Great Stuff Christine.

      What you are referring to is often referred to as Dollar/ pound/ rand cost averaging where you spread the average price you pay for the units you buy over a period of time to cater for the volatility (ups and downs) of the market. There are pro’s and con’s to doing lump sum and drip feed investing. The key to consider is the trade off between how hard your money is working while it sits around waiting to be invested and the risk of buying all your units on a day when the market has a high making your purchase more expensive.

      Three things to consider –
      1 – How long will you be investing this money (yes it should be there for a long time) because over time the relative impact of the ups and downs flattens out and so your short term buying risk reduces.

      2 – The amount of time you will drip feed the money into your investment. At a 2% per month rate you will be investing the money you have over 50 months – that’s more than 4 years which is a very long time to have money sitting around basically twiddling it’s thumbs earning just 5%. Consider reducing this investment period to around 6 months to a year max. You want that money working.

      3 – Money sitting around bank accounts starts shouting to be spent!!! Even the most angelic and disciplined person can be tempted and convince themselves to spend money that’s just sitting around and easily accessible. This “robbing” ourselves is one of the most dangerous things to our wealth journeys and I know from my own journey that I need to protect my money from me and that means getting it out of easily accessible accounts and into investments where it gets to work.

      Hope that helps you make your decision.

      • Christine says:

        Thank you very much Ann for taking the time to reply. That absolutely answers my question.

      • June Teetu Simiona says:

        That is absolutely true. I find money sitting in my account free is very tempting but your guidance in this has really helped me to think twice now in holding on and keep clearing them debts and building my wealth pot. Thank you Ann.

  • Rebaone says:

    Thanks Ann for this detailed explanation. I have already started last year with ETF’s but now I am busy trying to find out how can one start investing in properties.

    • Ann says:

      Fantastic Rebaone, this is great news and yes, keep looking for ways to stock that wealth pantry with a range of assets, and as you research and take action you will get better and better at improving your returns.

    • Sue says:

      Ann I heard about the book from my friend Cassandra James while in Bali at Roger Hamilton’s ILAB, I have now started my investment in ETFs as a result of the chapter on it, as it’s the first time I’ve really understood it thanks. Rebaone I find the property investment much easier!!!
      My mission would be to get the next generation interested in the wealth chef principles and i have a dream of taking away a group of say 18 to 21year olds and getting them started one day

  • Yanall says:

    Great round up of what is needed to get started. Just one thing to add. When reviewing performance and allocation review your platform too. Offerings change regularly and as people become more adept their needs develop eg overseas exposure, fx, bonds, direct investments…

  • Louis Faasen says:

    Hello,

    Well I finally got the action going
    It took some time to find a broker that does not cost an arm and a leg

    (For South African citizens)
    I finally decided to go with Sanlam Itrade online broker service.
    I decided to invest in the SATRIX range of ETF’s. Also because of lower fee’s
    If any SA citizen know’s of cheaper options, PLease let us all know!

    Thanks for the Info, once again, it was very very helpfull!
    In hind site, it’s actually so straight forward, but I suppose if you do not know, you just do not know…

    So here’s to ETF investing (toast)!

    Louis

    • Ann says:

      Awesome Job Louis and well done for actually doing the work and taking action. Yes, in hindsight it does seem straight forward but as you say, we don’t know what we don’t know and that is why continuing to learn is so important and continuing to take action is even better as there is no better way to learn than to actually be in it.
      You may also want to look at ETFsa at http://www.etfsa.co.za as a good low cost platform for ETF investing in South Africa with a large selection of ETF’s including international ETF’s.

      I’ll be running a free ETF investing webinar series in April with Mike Brown, MD of ETFsa and Nerina Visser from Nedbank Capital where we will be going into ETF investing in details, including how to construct a robust portfolio and we will have the opportunity to ask your questions. Look out for details in your email and on the Wealth Chef website.

  • Margaret says:

    Great and very informative article, thanks Ann!

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