That’s a compound gain of 9 per cent per annum – and there’s more. Instead of getting a taxable income of $500 a week rent – less outgoings such as body corporate fees,rates,insurance,and land tax – that $1.23 million in an index fund would be returning $55,530 a year,or $1063 a week. The cream on the cake would be that the income would be almost tax-free,thanks to franking.
One reader gave me a dressing down. He claimed that he put $300,000 into a portfolio just before the global financial crisis and lost a third of his capital. Fifteen years later,the portfolio still hasn’t recovered. I pointed out to him that according to my stock market calculator,his portfolio would now be worth $738,000 if the money had been invested in a fund that matched the All Ordinaries Accumulation Index,and assuming all dividends are reinvested.
This made him even more unhappy. He told me it’s impossible to invest in a product that matches the All Ordinaries Accumulation Index because such an animal does not exist – and furthermore,that I was gilding the lily by even mentioning the Index. He claimed that it would be far more ethical to select stocks such as AMP,BHP or Telstra.
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This information is wrong in so many ways,but it’s worth a discussion for anybody thinking of investing in shares. It’s true that no investment matches the All Ordinaries Index exactly. Why would you want to? It contains about 2000 companies and 85 per cent of them could be described as businesses with no cash and no hope. Many of them are speculative mining companies.
But the essence of the index is the top 300 companies,which make up 85 per cent of the total value and produce 97 per cent of the profits and dividends. And there most definitely are products that track the top 300 companies,such as the Vanguard Australian Share Fund (ASX.VAS).
This fund started on June 30,1997,and Vanguard told me if $100,000 had been invested when the fund started,and all dividends were reinvested,the portfolio would now be worth $732,412. That’s a total return of 632.4 per cent after management fees and transaction costs.