ETF Index Investing

Here is a simple, long term investing strategy that does not use property. It is based on low cost index ETFs. 

It sparked my interest as even Warren Buffet recommends diversified index funds:

"My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will… My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."

Warren Buffet

Page 20, 2013 Berkshire Annual Letter to Shareholders

Use $500K cash and borrow $500K @ 5% to invest $1m in ASX200/300 index fund and do nothing for 20 years and for first 10 years invest additional $5K/month.

• ETF: Betashares A200 0.07% pa - ASX200
• ETF: Vanguard VAS 0.14% pa - ASX300

Why? Broadly the All Ordinaries has always gone up long term, this aligns with GDP/population growth:

Since 1900 average market return is 13.9% pa (before inflation is considered):

Long term All Ordinaries has good dividend yield, so even unemployed the dividends on $1m and could service 5% interest on $500K loan:

- Dividend on $1m estimated: $40,000

- Interest on $500K loan @ 5%: $25,000

I am considering doing this, yet my only question is whether to do it now or to sit on cash until there is a significant market correction:

- Current PE ratio: 17.18 - we are now in late cycle economy

- I would wait until All Ordinaries corrects to PE ratio of 13 or less

Here is model of expected growth with low compound growth of only 5%:

https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/compound-interest-calculator  

Here is model of expected growth of 10% (still lower than historical 13.9% average):  

Here is another model of expected growth of 10% (still lower than historical 13.9% average):   

• During year 1-10: start with $1m and contribute $5K/month. At 10% compound growth rate that will be $3,731,266 after 10 years
• During year 11-20: start with $3,731,266, then no additional contributions. At 10% compound growth rate that will be $10,100,692 after 10 years

Yes, of course our market could fall into deep slump like Japan or we could have a war that could change everything, yet I would give model over 70% chance of good growth based on previous 120 year history. Furthermore waiting for significant correction reduces short term risk. With this type of return it essentially ensures financial security.

I am not a financial adviser, nor do I claim to have a clue about finance. I am not affiliated with any ETFs and do not derive any benefit from this post. General educational information only, not financial or taxation advice, yada yada.

https://www.aussiefirebug.com/vanguard-diversified-index-etfs/

• 40% Oz shares (VAS 0.14% fee), 60% international (VGS 0.18% fee), DRP option available
• 40% Oz shares (VAS 0.14% fee), 60% international (VTS 0.03% fee + VEU 0.09% fee), DRP option only available for VAS
• 100% Oz shares (VAS 0.14% fee), Dividend focused, DRP option available
• Diversified ETFs (VDHG 0.27% fee), auto re balancing, DRP option available