“Do your own research.”

As a reader of finance blogs, you’ve probably heard that line more than a few times by now.

It’s not that people are being deliberately unhelpful. But when you’ve just started investing, it’s important to figure out what kind of approach suits you best. And that’s done through reading, research, asking yourself important questions, and learning from the experience of others.

But what does the ‘research’ part look like? How do you actually go about finding important information? In this post, we’ll break down some of the information you can begin to gather when exploring the investments you might be interested in.

After you’ve gone through our investor checklist, you’ll have a better sense of what kind of strategy you want to follow. You may have even narrowed down which investments could fit into your portfolio. The next part, of course, is doing some homework on those particular investments.

Let’s start with the big dog in the room - the most popular choice among Pearler investors (and the financial independence community in general) - and that is, ETFs.

How to research ETFs

It takes only about seven minutes (if that!) of casual browsing to come across a string of ETFs which all seem like sensible options. By way of example, here are the five most popular ETFs among investors on the Pearler platform.

• VAS: Vanguard Australian Shares
• VGS. Vanguard International Shares
• VDHG. Vanguard Diversified High Growth
• A200. Betashares Australia 200
• VTS. Vanguard Total US Stock Market

Feel free to check out those links for more information on each fund if you’re interested. Which is also a not-so-subtle hint at exactly how we begin researching investments: by looking them up and collecting information!

The fund pages explain most of what we need to know and provide a whole host of data points for the number nerds among us. Okay, so we know the starting point for our research. Now you’re probably wondering, “Great, but what am I actually looking for?”

What’s under the hood?

When looking at ETFs, here are some of the things worth considering (all of which are available on the fund’s information pages and related fact sheets):

• Find out the fees charged. Obviously, lower is better. Keep in mind, anything outside a broad market index fund is going to be more expensive. That’s not necessarily bad. It just depends on what you’re getting in return for those higher fees. Maybe you’re getting simplicity and built-in diversification like in the case of VDHG, which has multiple index funds inside it.

• Size. Find out how big the fund is and how long it’s been running. Most broad index funds are measured in billions of dollars. For other ETFs, bigger than $100m is a good sign, with the fund having far less chance of closing down. By the way, a fund closing down doesn’t mean you lose your money. It simply means the fund may not be popular or profitable enough for the manager to continue running, so the portfolio is sold and money is returned to investors.

• Tenure. How long has the fund been operating? Has it just started, or has it been running for more than a decade? Longer is better, as it ties into longevity and the previous point. The same goes for the manager, too. How long have they been in business? See if you can find more information on the history of the fund provider, either on its website or by doing a google search. Some fund managers (like Vanguard) have been around for 30+ years, while others are not quite as experienced.

• Find out what it’s invested in. Perhaps the most important thing is to understand how your money will be invested if you own the fund in question. And not just which stocks are inside the fund, but the countries and the sector breakdown too. When you find an ETF which has multiple funds inside it - again, like VDHG - it can be a little tricky to dig in. But you can then look up each part of the portfolio to get a better sense of exactly where your money would be invested.

How well does it compare to the benchmark?

Comparing an index fund to, well, the index, might seem like an odd thing to do. But there’s a good reason for doing so: you want to know whether the index fund manager is doing a good job at operating the fund where its goal is to track the index.

You might be surprised to know not all index funds perform the same, even when they’re tracking the same index. Granted, the performance differences typically aren’t huge. But let’s not forget, a small percentage drag can multiply itself into tens of thousands of dollars in lost returns over time.

Check this by comparing the performance of the index fund against its benchmark (the index it’s tracking). If the index returned 8% and the ETF returned 7.8% while charging a 0.1% fee, then a further 0.1% has been lost due to what’s called ‘tracking error’. You can compare this with other similar ETFs on offer to get a better sense of which fund manager is doing a better job of tracking its benchmark.

Of course, you’re probably dying to know the past performance of the fund too. You’ll find this along with the other info on the fact sheet and related fund page. And while it sounds hard to believe, this figure actually matters much less than you think.

The fundamentals of an investment matter more than the last few years of performance. You may find a fantastic ETF for long term investing, which started a few years ago and simply hit a rough market environment. That doesn’t make it a bad fund, or a bad investment. And therein lies the danger in looking solely at past recent performance.

How to research listed investment companies and individual stocks

For listed investment companies (LICs) and individual stocks, the information gathering process is similar, but not quite the same.

LICS: You’ll want to look on their websites (find this by googling the fund name) for more details around its strategy and the company’s particular objectives. LICs also release an NTA (net tangible assets) statement each month, which discloses their top 10-25 holdings, the value and sector breakdown of its portfolio.

On the website, you’ll want to read the annual reports and presentations, where management will explain what investments were bought and sold during the year in managing the portfolio. In these reports, you’ll get a sense for how the LIC operates as well as details on management fees, the dividend history, performance versus the index, and so on.

And unlike ETFs, LICs can trade at a premium or discount to the value of the underlying portfolios, for various reasons. So you’ll also want to compare the NTA with the share price before buying.

Stocks: Most of you likely stick mostly with diversified funds like the above (hooray for simple investing!). But sometimes you’ll get so passionate or excited about a company you just have to invest in it directly. That’s understandable. But to take the stock-picking game seriously and do proper research on these companies, it’s a whole different ball game.

It’s a lot of work to properly understand a business and how it operates, the competitive forces at play, its position in its market, the industry challenges, and the risks involved. Again, annual reports are where the meaty info lives, along with listening to the conference calls with management (all of which you’ll usually find on the company’s website).

Summary

There are more complicated things we could’ve gone into, but that would put us all to sleep! This summary should be enough to get you headed in the right direction.

Ultimately, we believe it’s worth sticking with well-established diversified funds that are widely discussed and have been around for a while. As you’re swimming through an endless sea of options, you may come to realise that these large, relatively simple index funds are popular for a reason - they do the job with minimal effort required.

But that’s not to say the same investments are right for everyone. It’s up to each of us to decide what makes the cut and goes into our portfolio. In a future article, we can even discuss the ways in which we can go about putting a portfolio together, so stay tuned for that. In the meantime, if you have any general questions, you might like to post them on the Pearler Exchange.

Until next time, happy investing!