Millennial Money: I'm investing $60,000 in virtual money in the stock market

Tuesday, 17 July 2018

Join our four millennial business reporters on their money journey.

There's no shortage of research showing that fund managers struggle to deliver better than market returns for their investors over the long term.

Last year, Ayesha Scott, a lecturer in the AUT Business School finance department, said there was no evidence it was worth paying a higher fee for a fund manager's stock-picking abilities.

'Overwhelmingly all the research in this area continues to come back to point out that active managers cannot consistently outperform an appropriate benchmark. That has been shown again and again,' she said.

In an effort to see if I'd just be wasting money on fees if I left my investments with the fund management experts, I decided to see how well I would fare, if I had a go at doing it myself.

My KiwiSaver has consistently been racking up 5 per cent returns over the past five years. But with nearly 20 per cent of my gains going to its fund managers, I've always wondered if I could better manage it myself.

With the odds stacked against her, business reporter Julie Iles is trying to beat the market.

To find out, I set up two virtual trading portfolios to test out some investment strategies using NZX's Virtual Trading platform, investing $60,000 worth of fake money.

FMA KiwiSaver Tracker found 20 per cent of my returns went towards paying my fund manager.

* Millennial Money: Four investments you should be making in your 20s

* Simplicity launches index fund price war with NZX's** Smartshares

Billionaire Warren Buffett is a big believer in index funds.

In my first portfolio I put an emphasis on diversifying as much as possible.

In this respect, I might have gone overboard by splitting $30,000 equally among of all of Smartshare's 23 listed ETFs, or exchange-traded funds.

These are a passively managed 'baskets' of assets, like all the stocks on a particular stock exchange, and you effectively buy a unit of the pooled assets.

Research has found fewer than 1 per cent of mutual fund managers consistently beat the market.

The strategy is admittedly a cop-out in proving I can beat the market because I'm essentially trying to create a microcosm of the market, but I've always been a big believer that if you can't beat 'em, join 'em.

It's also an investment strategy that Warren Buffett, a man worth US$81.9 billion (NZ$119.9b) and one of the richest people alive, has endorsed.

'I believe that 99 per cent of people should diversify and not trade. This leads them to an index fund with very low cost,' he said.

David Boyle, general manager of education at the Commission for Financial Capability says knowing where your money is going can empower you to make better decisions.

Odds are, I'm the 99 per cent.

In 2007, Buffett put his money where his mouth is, betting competitor Protege Partners US$1m that hedge funds wouldn't outperform an S&P index fund. He won.

All the SmartShares ETFs are in positive territory for the past month – ranging from investor returns of 0.13 per cent in the global bond fund to 5.05 per cent in the ETF that invests in NZ Top 50 shares.

If I were to actually invest $30,000 split between those 23 Smartshare ETFs, it would cost $152.90 a year in fees, and $30 as an establishment fee.

If I were using real money, I probably would have committed to fewer indexes, but I figure tracking an investment in each will be a good tool in deciding which to choose. Although, this is a good time to repeat this mantra: Past performance doesn't necessarily predict future returns.

Another option for these kinds of passive ETF investments would be to use Sharesies, which also offers Smartshare ETFs on its platform, or through Simplicity, which offers ETF funds for even lower annual management fees, but requires a minimum investment of $10,000 - unless you're coming in through KiwiSaver.

In my next $30,000 portfolio I focused on making investments in NZX-listed companies that I knew well; I had read their annual reports, in some cases talked to their executives or employees and felt confident I knew how they were making money and that they'd continue to do so.

Somewhat loosely this is what investment managers would call 'bottom-up' investing, where the investor focuses his or her attention on a specific company rather than the industry it operates in.

In the week since I've made this portfolio, I've made a loss of 3.39 per cent, nearly $1000.

As for my portfolio of ETFs, it's only operating at a loss equivalent to $24.50.

So the jury's still out on whether I can beat the market - early indicators suggest the market is winning.

But hey, Warren Buffett's first stock market purchase lost almost a third of its value in the first few weeks (he eventually made a $2 per share profit).

If you don't feel like going it alone, at least read your KiwiSaver annual report, where you can see the top 10 companies or assets your money is invested in, and if you want a full breakdown, call your provider.

Commission for Financial Capability education manager David Boyle said, 'The more information you have about where your money's going, the more empowered you are to make better decisions'.

'At the end of the day it doesn't matter what fund, or where you're investing your money, it's your contributions that will get you the impact that you want.'