How to choose an Index fund for your Portfolio?

How to choose an index fund?

Today, I would like to show how to select your own index or manager funds. When you complete this guide, you should be confident making your own decision on what index or manager fund to add into your stocks and shares portfolio.

Personally, I dislike how companies try to sell you an attractive index or their own manager funds with fancy flyers and not revealing the true story. The historical performance is not an indication of future performance and nothing is guaranteed! Regardless of performance you still have to pay an annual fee. 

In all Honesty, no one knows what is going to happen tomorrow; your speculation is as good as the experts!

Index and Funds is the only way for a low capital portfolio to own a host of amazing companies in your portfolio. Buying a single share of Amazon, Google, Facebook and Apple each would cost you almost $3,000. However, some index or funds allows you to own these four companies and other quality companies with a low capital of $100. This would encourage a self-investor to save more money every month for a contribution.

WHAT IS INDEX AND MANAGER FUNDS

Previously I had written an article on how I dislike Manager funds. High fees, misleading information and bad historical performance against index funds. I have always recommended everyone to buy index, index and index only.

The ONLY problem, with buying index alone, may or may not give you the best diversification. For example:-

  • Japanese Funds is a better option than Japanese Index. Japanese index is heavily weighted on car manufacturers.
  • Emerging Market funds favours more Ali Baba, Tencent and Samsung weighting than Emerging Market Index.
  • India Funds for growth may look more attractive than the index.
  • Global Equity Funds are more diversified than Global Index Tracker.

WHAT NOT TO LOOK AT INDEX AND FUNDS SELECTION

1. Do not compare previous performance.
The previous historical indicator is not an indicator of future performance. Remember to bear that in mind at all cost. Buying index and managed funds is all about diversification and balance for your portfolio.
2. Risk Indicator.
If you are buying pure 100% equity index funds and stocks (just company shares and no bonds or gilts) you are 100% capital at risk. Regardless of the documentation giving a rating of the risk profile, just class them as bullshit! Low risk does not mean the risk of loss is less. Your RISK is how much high-risk profile shares/funds/index you own in your specific portfolio

4 fundamental rules on selecting your index or manager fund for your portfolio

1. Regardless of the type of index or funds, you need to primarily focus on the cost. The cost is very important to long term investors. A $10,000 investment over ten years cost $100 or $1,000 for a 0.01% and 0.1% respectively. For 20 years this cost would double to $100 to £2,000.

2. Top Sectors Weight will determine the areas of investments. So if you think Bio-Tech is the area to invest in the next 10 years, then you would be seeking for low-cost manager funds with more BioTech in US and EU with more than 50% overall weight. Buying the SNP500 index may only give you a 5% weighting factor of Bio-Tech Stocks.

3. Top 10 Holdings. The index would contain over 100 stocks and Funds under 50 stocks. You can not possibly research each and every individual stock. Keep it to the top 10 holdings research and ensure you understand these companies before you invest. Top 10 holdings would weigh between 20-40% of the overall portfolio.

4. Finally, Accumulation or Income. Income pays money into your cash holdings every quarterly or semi-annually depending on the portfolio. Accumulation, on the other hand, will reinvest and boos the share price higher.

Now you can Make your own Decision.

Everyone is different in terms of risk appetite, financial views, portfolio requirement and expected growth. Never allow a sales flyer or advisor tell you what to buy. Make sure your next investment is driven by your portfolio balance requirements which are based on the risk you are willing to take.

I hope you find this useful and all the best in your future investments. Let the dream of financial flexibility become a reality!

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.