The Old Diocesan Issue5 Mar2020 - Page 39

Index funds 101
Rather than choosing and buying
individual stocks, with index funds
an investor owns a small piece of
every company or asset represented
in the index being tracked. For
example, the S&P 500 tracks the 500
largest companies of the US stock
exchange, while the JSE Top 40 is
made up of the largest 40 stocks on
the Johannesburg Stock Exchange.
They’re beloved by big-time investors
as an easy and cheap vehicle to build
wealth for retirement. Warren Buffet
called this type of fund “the most
sensible equity investment”, since
they regularly outperform actively
managed funds.
Benjamin Graham, who mentored
Buffet, reinforces the notion of
passive investment:
“The investor’s chief
problem and even his
worst enemy is likely
to be himself.”
While index funds may be “boring”
since they’re passively managed,
they’re less of a gamble over the
long-term because they minimise
risk and diversify your money. Poor
performance by one company (in the
aftermath of some or other scandal,
for instance) won’t tank your overall
investment return.
Go “cheap”
Index funds also don’t cost a
fortune in fees, since they are largely
automated and passively managed
by fund managers. And when it
comes to investing, fees can make or
break your retirement savings.
The reason for this is quite simple:
the more you pay in fees, the less
you’ll get out in retirement.
According to National Treasury, high
fees can cost you as much as 60% of
your end investment.
“In South Africa, this is a serious
issue, where all fees can total a
whopping 2.75%: 0.75% for advice
fees; 0.5% for administration; 1.5%
for investment fees,” explains Hufton.
“This is where passively managed
funds really come into their own,” he
says. “For example, Sygnia’s Skeleton
Balanced Funds only charge an asset
management fee of 0.35% (excl.
Another way to keep your savings
low-cost is to include a Tax-Free
Savings Account (TFSA) in your
investment portfolio, advises Hufton.
A TFSA is exactly what it says: there’s
zero tax on the growth and income
earned on your savings, which means
your savings grow faster. A TFSA
allows you to save for both long- and
short-term goals using a variety
of investment portfolios, and all
withdrawals and switches are tax free.
Most importantly, you don’t have
to start big or be tied to regular
payments. You can contribute just
R500 a month, or choose to do an
annual lump sum investment anytime
before the tax year-end (up to a
maximum R33,000 per tax year and
R500,000 over your lifetime). So when
you get a little windfall or that annual
tax rebate, you could make a lump
sum payment into your TFSA and
know that the taxman can’t touch it.
Just be sure to do it before the 28th
of February deadline for the end of
the tax year.
Own the market,
The late John Bogle was dubbed
the “father of indexing” and urged
retirement savers to “own the
market” by investing in index funds.
“Owning businesses that make
money, that have earnings that pay
dividends is in the long run the way
to collect wealth. You’re a part owner
of a business, when you own a share
or stock, it’s not very complicated,”
he wrote. “So, how do you pick which
businesses to own? The answer
to that is: you don’t. You own all
businesses. You own every business
in your country or every business, if
you like, in the world.”
This isn’t hyperbole, nor is it
something only for seasoned
investors – any ordinary investor
can spread their investments over
different index funds, notes Hufton.
“For instance, you
can easily invest
in Apple, Amazon
and other highfliers via Sygnia’s
4th Industrial
Revolution Fund,
or you can invest in
the 40 largest South
African businesses
listed on the JSE
linked funds via the
Sygnia Itrix Top 40
exchange traded
fund,” he says.
“With index funds,” he adds, “the
investment world really is your


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