INVESTING STRATEGY
What is the measure of risk in ETFs and LICs?
I started investing in 2019, not long before Covid-19 impacted the sharemarket. As noted in one of the first pearler podcasts, this has impacted my psychology of money in a negative way, as I straightaway saw my investments fall in price. I had bought LICs with the Magellan Financial Group, namely MFF, MGG and MGE. Luckily (in a way), I sold these as soon as I broke even. From my very basic understanding, the Magellan Financial Group had made some poorly timed investments such as Netflix, Meta and Alibaba and they have not been able to recover. See: https://www.fool.com.au/2022/03/17/down-80-whats-gone-so-wrong-for-magellan-asxmfg-shares/ I am a relatively new member here but from what I've gathered in this community, it seems wise to be putting a major portion of one's savings into Vanguard - VAS, VGS, VDHG. What's the likelihood of Vanguard - or iShares or ARG for that matter - following in the same footsteps as Magellan? Apparently, Magellan was one of the leaders in the field "As of June 2022, Magellan's industry award-winning team of 35 investment professionals are responsible for managing over AU$60-billion in stocks (as of July 2022)" See: https://marketmatters.com.au/company/magellan-financial-group-mfg/#:~:text=As%20of%20June%202022%2C%20Magellan's,(as%20of%20July%202022). I haven't compared the size of their portfolios, but I'm assuming the other companies survived because they were more diverse with their investments. If we reach FIRE and therefore end up with $300k invested in ARG (and the rest of the million spread between Vanguard and iShares), for example, should we fear such a collapse happening with one of these investment companies? Thank you!
Clara Fu.
16 August 2023
2 Comments
9 months ago
Hi Clara.
Here’s my 2c…
The main reason you saw your investments fall in value is because the markets fell in value significantly during covid. This is simply the reality of markets and is normal from time to time. So that may either push you away from investing, or you can see it as an opportunity to grow your portfolio while prices are low. That can really help speed up your wealth building progress, but it is often scary to do at the time.
There aren’t any other diversified share funds you can invest in that will have good long term returns without suffering the same risks of short term downturns. That’s just the way it is. Having said that, the main reason people here gravitate to index funds is because there’s no reliance on a fund manager to pick the best stocks. As you’ve seen, that can backfire over certain timeframes. Now, it’s possible that Magellan goes on to beat the market over the long term, but having less companies in the portfolio means more reliance on each company and being more prone to volatility.
If you pick a diversified fund (like 100 companies or more), remember that a fall in price is not the same as a ‘collapse’ of the actually fund or companies. Most of the individual companies are doing just fine, it’s simply fear and uncertainty that causes prices to fall quickly over a short period. It’s a mental adjustment to getting used to seeing investments fluctuate in price, but it’s simply the way the sharemarket works.
I’ve written a bit about this in the past, the following articles might be of interest to you:
https://strongmoneyaustralia.com/long-term-in...
https://pearler.com/explore/learn/blog/invest...
https://pearler.com/explore/learn
Show more.....
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Reply9 months ago
The key difference I forgot to mention is that Magellan manages smaller portfolios of stocks which try to beat the market.
Vanguard’s funds are essentially a massive basket of stocks which simply try to track (copy) the market. So you are betting on the entire market rather than a small group of companies. This offers a lot more long term certainty given the result is not reliant on skill or luck, simply betting that Australian and global companies as a whole will continue finding ways to grow their profits over time (as they have since the beginning of markets).
Plus, index funds are constantly updated to account for new companies, while companies that die are removed from the portfolios. This is an important and useful feature that’s good to remember. Vanguard/iShares etc are simply the manager in between doing the work for us. We aren’t reliant on them being super smart etc. If anything happens to them, the management of our funds can transfer to another manager. So unless the market itself literally blows up then the funds aren’t going anywhere (and if that happens society will have already turned to sh… meaning investments will be the least of our worries lol).
A couple more articles on index funds you might get value from:
https://strongmoneyaustralia.com/my-changing-...
https://strongmoneyaustralia.com/guide-to-inv...
https://strongmoneyaustralia.com/dhhf-vdhg-on...
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