Just get started: Buying an index

HOSTS Alec Renehan & Bryce Leske|25 December, 2019

Meet your hosts

  • Alec Renehan

    Alec developed an interest in investing after realising he was spending all that he was earning. Investing became his form of 'forced saving'. While his first investment, Slater and Gordon (SGH), was a resounding failure, he learnt a lot from that experience. He hopes to share those lessons amongst others through the podcast and help people realise that if he can make money investing, anyone can.
  • Bryce Leske

    Bryce has had an interest in the stock market since his parents encouraged him to save 50c a fortnight from the age of 5. Once he had saved $500 he bought his first stock - BKI - a Listed Investment Company (LIC), and since then hasn't stopped. He hopes that Equity Mates can help make investing understandable and accessible. He loves the Essendon Football Club, and lives in Sydney.

Halfway through this series and we’re only just getting to ‘buying your first stock’.

What have we been talking about… The theme of this episode is all about ‘just getting started’. In the spirit of this we are introducing the concept of an index. An index is the perfect opportunity to take the indecision out of getting into the market and giving you access to hundreds of great companies all in one easy trade. It is the perfect way to just get started!

In this episode you will learn:

  • What Bryce and Ren would purchase if they were starting their investing journey again
  • What is an index
  • The major index in Australia – ASX 200
  • Major indexes around the world – S&P500, Dow Jones, NASDAQ100, FTSE100, DAX
  • A few indexes that track the whole world
  • Two main ways you can access an index – on market and off market
  • How the ETF has made it easier to access indexes than ever before
  • Other ETFs that track ‘baskets of stocks’.
  • How you can invest in ‘themes’ like biotech, marijuana and space exploration

Want more? Subscribe to Equity Mates Investing Podcast, social media channels, Thought Starters mailing list and more here

Bryce: [00:00:36] Welcome to get started, investing a series of lessons to help you on your investing journey. This is for anyone who wants to get started in investing but isn't really sure where to start. Our aim is to make the markets as accessible as possible for you. My name is Bryce and as always, I'm joined by my co-host and equity buddy Ren. How's it going, Ro? [00:00:56][20.6]

Alec: [00:00:57] It's very good, Bryce. We are ripping through these episodes and very excited to continue this journey. [00:01:03][6.3]

Bryce: [00:01:04] Absolutely. So we've covered a lot of the fundamentals, the building blocks. We're starting now to bring it all together and move towards actually getting some money into the market and making that first fearful, scary investment that many people sort of freak out about. And I guess this is the point of sometimes either no return or the point in which people actually don't get past and put it into the too hard basket. [00:01:26][22.3]

Alec: [00:01:28] The perfect set up there. The point of no return or the point of investors. Yeah, that's true. [00:01:34][6.8]

Bryce: [00:01:35] And so everyone would have heard us say to this point many times, just get started. And that's what this episode is all about, getting started. And by doing so, by buying an index. Now, we've gone through brokers probably hopefully signed up to one by now. [00:01:51][15.9]

Alec: [00:01:52] So, yeah, at this stage, you should have saved some money and signed up for a broker. [00:01:55][3.5]

Bryce: [00:01:56] Yes. Unless you've ripped through these in about five hours, in which case your savings has probably changed. Zero. Yeah. But that's okay. So now it's time to put it all to work. Ren. I guess the main key thing here is let's not panic. [00:02:09][13.2]

Bryce: [00:02:10] We're all. I'm not talking. He's out the door. [00:02:14][4.0]

Bryce: [00:02:16] We're all probably feeling the same, a bit uneasy about jumping in. But I think what we're about to talk about today in this episode is a style of investing and a type of investing product that has really come to the forefront. And so the last decade or so, it hasn't really made investing for beginners in those new to the market easy and accessible and less scary. And Ren, we're talking about buying an index. [00:02:37][21.5]

Alec: [00:02:38] Yes, because if the first decision you have to make is choosing which broker, once you've made that decision, you then stuck with hundreds and hundreds, if not thousands and thousands of choices in terms of what to actually put your money in. And it's tough because it's your money. [00:02:57][19.6]

Alec: [00:02:58] You've worked for it. You've saved using the rule of three. Absolutely. Well, we don't give investing advice and we're not going to tell you what to buy. We think this might be the right place to look. First, it was definitely if we were starting from scratch again, this is where we would look. So we're going to talk about it. [00:03:15][16.4]

Bryce: [00:03:15] And so Ren, what we're going to cover today is what is in index. Some key examples of indexes around the world. Different ways to access indexes. Three brokers, our preferred way of accessing indexes. And then we'll obviously close out with a key message to wrap it all up. [00:03:33][18.3]

Alec: [00:03:34] and Bryce might even rap. If we go well. [00:03:36][1.7]

Bryce: [00:03:36] Oh, actually, I think we've got a bit of a game to close this one out, don't we, Ren? We do. Yeah, we do. Nice. Okay. So looking forward to that. Yeah. To keep in spirit of all things equity mates, we keep it fun, we keep it in layman's terms. [00:03:47][10.6]

Alec: [00:03:47] So it's just one holdout. ON his rapping. Yeah. Yes. [00:03:51][3.8]

Bryce: [00:03:52] Although I am very, very good at what he is. So Ren what is an index. Now it's not the thing that's at the start of the phone book. [00:04:00][8.4]

Bryce: [00:04:01] You don't say that because I know that's what you're going to say. Something smart. What's an index? I was waiting for you. [00:04:09][7.9]

Alec: [00:04:10] There's lots of stocks on the stock market. We've established that. Everyone knows that and every stock moves individually. But then what some smart people have done is put all the stocks together and they say how the market is moving. And so when you hear on the nightly news or in the financial media, the Australian market did X or Y, what that is, is. People have taken every stock and put it all together, how every individual stock has moved. And then together, that is how the whole market has moved. And the movement of the whole market is the index, essentially. So every major market has a key index that everyone looks out to sort of talk about how the market as a whole has moved. And generally we focus on the biggest companies yet. So in Australia, we talk about the ASX 200. And essentially day that is taking the 200 biggest companies in the Australian market, putting them all together and then measuring how those 200 companies have moved at any over any given period of time. [00:05:20][69.3]

Bryce: [00:05:20] Super simple way to think about it is an index is essentially a basket of stocks. Now, that basket can have be assembled in many different ways. As Ren said, it's usually based on the biggest companies in the. Total end to end spectrum of stocks on that market. But yet, in my opinion, the easiest way to think about it is an index otherwise known as a basket of stocks. And then that basket all tracks together. And as an investor, you have the opportunity to invest in that basket in total rather than in individual stocks. [00:05:54][33.7]

Alec: [00:05:55] If we give a worked example, let's say there's in the ASX 200 at the start of the day, the whole index is worth ten thousand dollars. You add up all their share prices and it's worth ten thousand dollars. And then during the day, some go up, some go down, some go up, hape, some good down hopes at the end of the day. That whole basket of stocks is worth eleven thousand dollars. So at the start of the day, 10000, at the end of the day, eleven thousand. Whilst individual stocks did all different things, the index as a whole went from went up a thousand dollars from 10000 to 11000. So the whole index went up 10 percent. And so what that allows you as an investor to do is make a bet on the basket of stocks and to get their performance as a whole, rather than trying to pick any individual stock in that index and potentially be subject to more of the ups and the downs across 200 stocks or 500 stocks or how many stocks are in that basket. It just is a little bit of a less risky bet. You're not betting on an individual company. Instead, you're betting on the market as a whole. [00:07:06][71.0]

Bryce: [00:07:06] Yeah, it's yeah, it's an awesome way for you to get access to the market that's diversified. And we will touch on some more of the specifics in a moment, Ren. But let's talk about some of the major indexes that are around the world, because you touched on the ASX 200 there. So that is the Australian Stock Exchange, top 200 companies by market capitalisation. Now, market capitalisation means the value of the company as it is on the stock market. And the way that you determine that is simply by timing the current stock price by the number of shares on issue available to the public. And that will give you your total market cap. Yes. [00:07:47][40.3]

Bryce: [00:07:47] So what they then do is they take the top 200, put them all into a basket, and then that is the ASX 200 index. Now, that index is rebalanced every quarter, a quarter. It's every three months that will rebalance it and move companies in and out depending if they deserve to be in or if they are in that top 200. And then the process continues quarter after quarter. Now, this sort of trend, I guess, or way of determining indexes happens throughout the world. The probably the most famous, I guess, in terms of everyone knowing about it is the S&P 500 Ren. Yeah, it's an American stock. So the standard and poor 500 and it is 500 largest companies in America, listed companies in America. Now, they have come from many different types of exchanges. But I mean, you can imagine some of the companies that are in there, the big the big heavy hitters. So that's probably one could not think of any American companies. Was that. No, not one. No. So that's the S&P 500, similar to the ASX, but it's the top 500 in America based on market capitalisation. What else Ren any other markets? [00:08:50][62.6]

Alec: [00:08:50] So you may hear about the Dow Jones. Yeah. So the Dow Jones is also American. It was the first index and it's a bit of a strange one. A lot of people don't worry about it too much today, but essentially it's 30 stock. Yeah, it's not the 30 biggest stocks. The selection criteria for the stocks escapes me at the moment. There is some selection criteria, but the stocks in that index are things like Apple, Boeing, Caterpillar, big American sort of industrial stocks. And that's why it's the Dow Jones Industrial Average. But that's that's a common one, you'll hear. So if you hear someone say, oh, how did the Dow go today? That's that's what they're referring to. Yeah, nice. You probably hopefully don't hear too many people say that. [00:09:32][41.9]

Bryce: [00:09:35] Now, what about the Nasdaq 100? Yes. What about it? Well, I hear that thrown around a lot, and it seems to be one that is also closely followed. Is that an Australian one? Is that us? Where do I find the Nasdaq 100? [00:09:48][13.2]

Alec: [00:09:48] So in Australia we have the Australian Securities Exchange. That's the market in Australia where most stocks are listed in America. There's two big ones. There's the New York Stock Exchange. Now, that's the big one on Wall Street that everyone knows about. And then there's another one called the Nasdaq. And that's a that's a digital exchange, but it's very big in the States. A lot of tech companies have listed on that. And the Nasdaq 100 is the 100 biggest stocks that are listed on the Nasdaq. Yeah. So it's a similar index. It's just one of the two big markets in America. But, you know, companies like Tesla, Twitter, Amazon, Amazon, Adobe, Facebook. Yes, Facebook. So, yeah, look, there's a bunch of the big U.S. tech companies that. Another index is the Footsie, one hundred. Yeah. So that's the U.K. is one hundred biggest stocks. Yet. It goes on and on the the DAX, the D.A. ex, that's Germany. There's one that's like all of Europe and its name escapes me. But really, every every market has an index and there's generally multiple. So they ASX 200 in Australia is the most well known. But there's a number of other baskets that are tracked. Yes. [00:11:03][75.2]

Bryce: [00:11:04] Now, Ren, there is another index that is a basket of a lot of stocks across a number of countries. So this is the MSCI World Index. This is developed countries, only 23 developed countries. And it gives you access to 1655 stocks. Not really the world, is it? No, but you've got London. [00:11:23][19.0]

Alec: [00:11:23] Well, I've got one that also isn't the world by. There is the MSCI All World Index, which covers 23 developed countries and 26 developing countries, which is still a quarter of the world. And so I think there might be an equity mates all all world index at some point that covers all 196 countries. [00:11:44][20.5]

Bryce: [00:11:45] So Ren, we've thrown out a few of the major indexes around the world giving examples and sort of discussed what they are. But I guess the big question is, how do we actually invest and access these indexes? Like, it sounds like an awesome opportunity for an investor to access the MSCI All World Index. I don't have to choose a particular stock. I can get access and get access to twenty three developing countries. But I mean, is it that easy? It is. Okay, great. [00:12:13][28.1]

Bryce: [00:12:14] Yeah. Cast over. [00:12:15][0.9]

Alec: [00:12:17] So there's probably two main ways that people can access it. One is not on the share market and the other is on the share market. So the one, the traditional one is the one not on the share market. And that is your traditional fund manager. So there will be a fund that tracks that index and you can sign up with them and you can give them your money and they will put it in their private index fund and then you will get the returns of that index so that that was a traditional way that these funds were accessed. [00:12:49][31.2]

Bryce: [00:12:50] Now, a disadvantage with doing that, however, for someone entering the market, is the costs associated with that fund manager traditionally will take a percentage of the profits that you make and they'll also charge you a management fee. So it's a very costly way of accessing these index markets. [00:13:05][15.6]

Alec: [00:13:06] Yeah, it's also just more difficult. There's more admin involved. You've got to, like, sign up with them, fill out forms. All that cash needed to start. Yeah, yeah, yeah. It's just it's it's not easy. [00:13:16][10.5]

Bryce: [00:13:17] It's not easy. So about 10 years ago, along came the ETF or the exchange traded fund. Now, this is an absolute buzz word at the moment has been for a number of years. You may have heard of the likes of Beta shares, Australia's largest provider of ETF. At the moment. They are essentially riding the wave of the popularity of an ETF. And these are probably going to be your absolute best friend when it comes to starting out in the markets, as Ren has said. Ros friend. Other than equity, of course. Of course. As her hand has a Ren said at the start, you know, if we had paid more attention to ETF and known about them in, I guess a bit more detail, this is probably how we would have started our journey. Absolutely, yes. So an exchange traded fund, Ren. How's it any different to the funds that you just talked about? [00:14:05][47.6]

Alec: [00:14:05] So for all intents and purposes, think of an exchange traded fund as a wrapper. It's a way to access whatever is underlying it. And so there are ETF that are index funds as well. So on the Australian market, there will be an ASX 200 ETF and essentially the ATF. There is the way that you access the index and the ETF allows you to buy and sell it on the exchange, on the share market like any normal share. So the ATF is a wrapper that makes it really easy to then access the index fund. At the same time, there's a bunch of other ETFs, ETF that track different Thania, different investing styles really these days. Whatever you're whatever you want. The ATF for it. So there will be an ETF for technology companies. There'll be an ETF for pharmaceutical companies, there'll be an ETF for cyber security, cyber security, marijuana, marijuana. [00:15:04][59.1]

Alec: [00:15:05] And the concept is the same. Yeah, you get a basket of stocks, be it marijuana stocks for the marijuana ETF, Bayet, cybersecurity stocks for the cybersecurity ETF. And rather than just investing in one stock, buying that ETF gives you access to the basket of stocks and the performance of the basket of stocks. [00:15:24][19.0]

Bryce: [00:15:25] Yes. And that is what you want. You find that all of your brokers will have ETF. They're listed on the stock exchange just like any other stock you buy. Like any other stock, they are a stock you will just need to find ETF in the title or exchange traded fund or whatever it may be. And there are particular providers for ATSI. I would suggest going and having a look at Vanguard, probably the world's most known provider of ETF. They have a huge presence over in the United States, in Europe and also there in here in Australia as well. As I said, if you're looking for some locally grown stuff, look for at beta shares there. Fifty five ETF available. So head to those two websites and it'll give you an idea of what we're talking about and what is also on offer as an investor. [00:16:07][42.4]

Alec: [00:16:08] It sounds like you prefer ETFs. Yes. Is that right? [00:16:10][2.2]

Bryce: [00:16:11] I do enjoy ETF. Yeah. [00:16:13][1.8]

Alec: [00:16:13] I mean, I know sort of touched on it. But really, to wrap it up, why would you say you go ETF over private funds, over private funds? [00:16:19][6.1]

Bryce: [00:16:20] Well, for the reasons that we kind of touched on Ren, firstly, they are a very, very cheap way of accessing a lot of stocks in one trade. I don't have to pay a fund manager to look after the fund. They're not going to take a cut of my profits. They're not going to charge me a fee for managing the fund to the extent that they would charge if I was giving them their money directly. Yes. Or ETF do come with a management fee. And that's because obviously the provider such as Vanguard or Beta shares are having to manage the underlying fund or index. But ETF, one of the biggest, I guess, positives about them is that they are known to be a very cheap way of accessing a large variety of stocks. [00:16:59][38.6]

Alec: [00:17:00] And by the same token, why would you choose an ETF over picking an individual stock? [00:17:05][5.6]

Bryce: [00:17:06] So picking an individual stock can be an incredibly scary thing to do. And you're putting all your eggs in one basket. Not to use the basket analogy, but I thought you were putting all your stocks. Are you okay? So if I'm choosing one stock, it's one stock only and I'm hedging my bets that it's going to go up. Right. But with an ETF, you can take away, I guess, that feeling of wanting to get it right the first time. And if I'm investing in the ASX 200, essentially I'm investing in the top 200 stocks in Australia. Now, that's an excellent way of dipping your toes into the water because as you said, Ren, if there stocks that go up 50 per cent and some go down 20 per cent, but across the average of the 200, you're going to get, I guess, the average growth of all those 200 or declines. So the risk of losing or winning is not as as great as if you're in an individual stock. So to get your feet wet, tippy toes into the water. It's an excellent way of starting in the stock market. Nice one. I think I think that's a good. Yeah. And I also think Ren one final point before we wrap it up. Is this ETF gives you the ability to invest in, like, macro themes, if that makes sense to your point there. Very specific ETF, if you would like. So say you are working in a field, so you working in biotech and you understand that over the next 10 years there's going to be some great growth without having to invest directly in stocks in biotech. You can just take the point that, hey, I want to have exposure to this industry because I believe over 10 years it's going to grow. An ETF saw a fantastic way for you to do that. [00:18:32][86.8]

Alec: [00:18:33] Yeah. And I think, yeah, biotechs a good example. Marijuana is obviously a real buzzword these days because everyone expects a wave of legalisation to happen. And rather than picking which companies are going to win during that wave of legalisation, you can just bet on the industry growing as a whole. So, yeah, you're right when there's these big structural changes in society. Yeah. And we don't know who the winners going to be. Yeah. Sometimes it's better just to bet on the change. Absolutely. And on that note. [00:19:02][29.7]

Alec: [00:19:03] Okay. I've got a game for you. Yeah. Let's do it. [00:19:06][3.0]

Alec: [00:19:07] As we explained, there are a number of different ETF, Sarah Indexes, where they track the biggest companies in a market like the ASX 200 and S&P 500. Yeah, but there are also thematic ETF. That track a similar basket, but of a particular theme. Yeah. As we spoke about biotech or marijuana. Okay, I've got five examples. Medicate here. All right. One of them isn't true. I want you to. I want you to pick the one that isn't true. [00:19:39][31.9]

Bryce: [00:19:39] Okay, so you go into the zone here, I'll give you. Okay. Are you gonna give me all five at once? Ah, yes. Oh, would you like one at a time. Well you. Give me all five at once because I might it might be the first one that I get. Right. And game's over. [00:19:54][14.2]

Alec: [00:19:56] Okay. So remember four of these are true. One of these is fake. Number one, obesity. ATF makes investments in companies that benefit from more and more people becoming obese. Okay, that's number one. Number two, climate change. ATF, a fund that invests in businesses that will benefit from climate change and short coastline property. So so bets that property under the coastline on the coastline will lose value. That's what shorting is. Okay. Number three, dermatology and Wound Care ETF, an ETF that invests in dermatology and wound care related companies. Number four, a multi-media networking index ETF, an ETF that invests in networking online companies. So MySpace, Facebook, Twitter, etc.. [00:20:45][49.2]

Alec: [00:20:46] Yeah. Yeah. clubb Penguin. Runescape [00:20:48][1.9]

Alec: [00:20:51] And last one, a Nashville ETF fund that invests in companies that have their headquarters in Nashville, Tennessee. So they're the five, right? [00:21:03][11.6]

[00:21:03] To be honest. [00:21:03][0.3]

Bryce: [00:21:04] There's a lot of them in there that I would say fall is just why I'm sure that only one of them doesn't exist or has never existed. [00:21:12][8.5]

Bryce: [00:21:13] Unbelieve. [00:21:13][0.0]

Bryce: [00:21:17] So we've got climate change shorting coastal stocks. We've got wound, we've got social networking one. We've got the Nashville. And then the first one I can't remember was the obesity and obesity ETF tracks companies that gain from obesity that will benefit from more people becoming obese. I'm going to say that is the false one. [00:21:36][18.1]

Alec: [00:21:36] Really? No, not at the national level. That's the climate change. Climate change as far as surely the national one is not real. Hold on. I'll get you to know why. [00:21:49][13.5]

Bryce: [00:21:50] What is the point in that? I guess people love Nashville. [00:21:53][3.0]

Bryce: [00:21:54] What? They think that that's a breeding ground for successful business or something. [00:21:56][2.4]

Alec: [00:21:57] So the. It's the stock ticker is imaginatively Nash. But looking at the I've just Googled it. It may have shut down in twenty eighteen. So obviously Nashville, ETF did not do too well. [00:22:15][17.9]

Alec: [00:22:15] But it was like I was thinking about this when ATF stoo shut down. You obviously get your money returned. [00:22:20][4.7]

Alec: [00:22:21] Yeah. Good to know. So V.R., if people are looking to invest in the dermatology and wound care ETF, that one also failed and was shut down. But it did exist. It was tradable at one time. [00:22:32][10.8]

Bryce: [00:22:32] Right. And if anyone is looking to invest in the equity mates media ETF, it's not live yet. But we are taking submissions. [00:22:38][6.2]

Alec: [00:22:39] Yeah. I imagine people are going to come at me and say there are climate change. Yes. Yes, there are. So yes, there are there are ETFs that invest in companies that are trying to fight climate change, renewable energy or opportunity. [00:22:52][12.6]

Alec: [00:22:52] There is not least that I would say that are just trying to get short policies that will be underwater. Wonder. [00:22:58][5.2]

Bryce: [00:22:59] Well, Ren. Always good to chat. Stocks in markets having a lot of fun during this series. I really hope that in today's episode, again, we've managed to break down some barriers that preventing people from accessing the markets through the end of the day. We want as many people on the journey of investing as we can. By now, we're hoping that you have got a broker up and running or at least started that process. And now on Google looking at ETF because they are a fantastic way to enter the market and take away some of the fears that you may be facing. So, as always, great fun and looking forward to chatting next week. [00:23:30][31.8]

Alec: [00:23:31] And when you make your first trade, let us know. Absolutely. We want to know. [00:23:36][5.0]

Bryce: [00:23:36] Shout us out on social media. Hit us up on Facebook and we will progress from there. Head over to cremates dot com or anywhere on Sociales. Where there. And also subscribe to Equity Mates Investing podcast to join us on the journey on a weekly basis. Yeah. [00:23:52][15.7]

[00:23:53] Thanks for listening to get started investing. A production of Equity Mates media. Please remember that everything you hear and get started investing is general advice. [00:24:01][7.4]

[00:24:01] Only the content has been prepared without knowing your personal objectives, specific financial circumstances or goals. The host of Get Started Investing may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial professional. [00:24:01][0.0]

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