Introducing… Indexing Ian!

Hi everyone! I’m Ian, or ‘Indexing Ian’ as Frankie likes to call me.

You’ve heard Frankie’s Investment ‘F’hilosophy, so let me tell you a bit about mine. I haven’t always been an ‘Indexer’, in fact, for many, many years, I spent HUGE amounts of time analysing stocks, buying and selling, trying to time my investments perfectly. I’m a pretty smart guy, always thought of myself as ‘above average’ in many ways, and like Frankie, have plenty of experience in the finance industry, so I didn’t want to settle for an ‘average’ index fund – how BORING!

Well, it turns out that in my world, boring is better. In fact, I’d almost go as far to say boring is beautiful. Boring is brilliant even!

I had no idea how much I was trading every month or two – even though I’d always considered myself a ‘long-term’ investor. The problem is, the more research I did, the more ‘opportunities’ I kept finding, and the more I felt I had to take advantage of all those opportunities.

Well now that you mention it…

I’d sell one of my stocks that’d had a good run, so I could move those funds into the next opportunity. Which didn’t seem like such a bad thing at first. But it’s very hard not to get carried away without even realising it. I became less patient. I started taking bigger risks – again without even realising it.

It wasn’t until I stepped back and really analysed my performance when I saw how fruitless it all was. Any gains I made were pretty much wiped out by trading costs, taxes and of course a couple of big losses!

It’s taken me many, many years to learn what works best for me, and I think I’ve finally found it – passive Index Investing.

What does this mean for Frankie’s approach to investing? Is Frankie simply more disciplined than me? Smarter? More experienced? A snappier dresser?

Perhaps all of the above, but even so, I’m backing my Indexing approach all the way! Let’s see who comes out ahead in the long run hey Frankie?

Indexing Ian’s Portfolio

I like to keep things simple. My portfolio consists of two Vanguard Australian based Index Funds:

The links above provide further details of each fund. VAS covers shares in the ASX 300, and as you might have guessed, VSO covers smaller Australian listed companies.

Ian’s Ignoring International Investments?

But wait – doesn’t this Fly in the Face of ‘Modern Portfolio Theory’*? Why would I only invest in my home country of Australia, when I could push further up the ‘efficient frontier’ by diversifying globally?

* Modern Portfolio Theory – an investment theory based on the idea that risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward.

And what about the great run these Index funds have had over the past few years, particularly the last 12 months? Am I crazy putting money in these funds when they’ve ridden so high?

Both great questions – which I’ll address in the near future. Let’s get this Fund up and running First!

Ian’s Investments vs Frankie’s Fund

Just to make things comparable with Frankie’s Fund, I’ve invested the same funds as Frankie at the same time he has. I don’t care for picking the best times to invest – no one in the world can time the Market well – so I’m happy to invest my $50,000 along-side Frankie, whenever he chooses.

Any invested funds will be split equally between my two Vanguard Australian Index Funds – VAS and VSO.

And I intend to go toe-to-toe all the way with him – dollar for dollar of invested funds. That way he has no excuses when his Fully-Franked Fund Falls short of mine! Not that it’s a competition of course – we are all investing for our own reasons and goals – but there’s not harm in trying to keep each other on our toes! And who know, we might both learn something from each other along the way.

So based on Frankie’s first three Investments in his Fund (Virtus Health, Telstra and Prime Financial Group) for a total of $15,300, here’s my equivalent Investment balance so far:

I’m sure Frankie will be comparing our performance in the near future, which I’m very interested to see. Although we know that anything can happen in the short run – it’s over the next few years that will be the most interesting…

 

Which of these two strategy are you backing over the next 12 months? The next 5 years? Do you tend to invest more like Ian, or Frankie? A bit of both? Something completely different? 

10 Comments

  1. Frankie,
    I tend to invest more like Frankie’s fund. Although total returns are the real game, my first investment priority is generating a passive and growing income stream from investments. I believe I can achieve better current cash flow and higher increases to that cash flow using the Frankie fund approach. I then trust the capital gains will follow. This approach isn’t for everyone so I understand and fully respect Ian for what he does. Tom

    • Frankie

      Hey Tom, yes you definitely sound more on my wavelength. Works much better for me, but Indexing Ian seems to have figured out what suits him based on past experience, which I can fully appreciate. I’m still intent on out-performing him though!

  2. Hi there,

    Like Tom, I am more like Frankie’s fund myself as well. As Tom mentioned, I also agree the overall return is the name of the game (since I don’t like to own even dividend paying stock at very high valuation just for heck of getting dividend income) while my first priority growing income stream that comes from passive work. I understand what Ian’s doing as well and I wish Ian Good luck :).

    TDK.

    • Frankie

      Cheers TDK, I’m wishing Ian luck too! Will be interesting to see how Ian’s Investments pan out – he seems pretty set on his current investment philosophy, but I wonder if he’ll be tempted to start following my own Fund when it starts outperforming his passive index approach (even though he seems convinced I can’t win 🙂 )

  3. First time here. I’m a big fan of index investing and I tend to do that in my retirement accounts. My current dividend portfolio how is made up of individual stocks. So, in terms of which approach, I’d say both! Cop out answer, I know.

    • Frankie

      Welcome Div Portfolio! Not at all a cop out answer – I’m a fan of index investing too as I’ve mentioned before, so nothing wrong with a bit of both! But which will be more successful over the next few years? Perhaps both equally?

  4. I am a strong believer in index investing. I used to be a stock picker around 2012. Was one hell of a bull market. All my picks excelled. Got super excited and started picking speculative stocks. To be honest those speculative stocks have not done well. I switched to index investing as i no longer have the time to investigate stocks. Not to mention I was never good at stock picking. Its very easy to pick winners in a bull market. In the end it comes down to picking a choice and sticking with it. I see success with either strategy.

    • Frankie

      Sounds pretty similar to Ian’s background divgeek. I dare say that confidence you get when a few of your picks excel, leading you to take even more risk as you feel invincible, is very common among individual stock investors – particularly in their first ‘bull market’. You’re right that everything seems so easy in a bull market – which is why if we are close to a ‘peak’ in the market now, it will be very interesting to see how the new Fund performs compared to Ian’s indexing approach. I’m trusting all those lessons from the past 20 years or so will hold me in good stead, but only time will tell!

  5. Looking forward to this ongoing experiment Frankie!

    Our approach is a mix of the two. We hold broad LICs which are quite index-like, and a small basket of individual stocks too. I’m not convinced that picking stocks is a waste of time, especially if one has certain goals (such as income), but appreciate the simplicity and set-and-forget nature of LICs and index funds.

    • Frankie

      That’s the beauty of specific stock selection in my mind – greater ability to tailor it to your goals and temperament. And of course, who can resist the opportunity to try and ‘beat the market’! A mix of the two is a great way to have the best of both worlds.

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