The Benefits of Buying into an Index Fund

By ,

21%.

That’s what I’ll be telling a friend of mine on the weekend.

That’s the return he could have made in a few months, had he not sold his Telstra Corporation Ltd [ASX:TLS] shares.

I applauded him for selling though.

Sure, he missed out on some quick returns. But he didn’t want to be analysing Telstra’s financial reports and staying up to date on industry news.

He just wanted to buy an asset and forget about it.

It’s why I was so happy he decided to buy an index fund. It’s exactly the kind of purchase that suits his investment experience and wants.

There are no certainties in the market. But buying the market (it depends which market) is something that Warren Buffett often instructs his followers to do.

Consistently buy an S&P 500 low-cost index fund,’ he told CNBC. ‘I think it’s the thing that makes the most sense practically all of the time.

So why aren’t more novice investors buying the market?

I have no idea. Maybe they think they can do better than the average.

Maybe they’re envious of those making far more than the average. Or maybe they just don’t like the idea of trying to create wealth slowly.

So they choose an alternative.

They jump in and out of stocks they don’t understand, betting that prices will go up or down.

None of this is to say there’s anything wrong with a bit of speculation.

But an active strategy has its fair share of downsides…

Free Report: The five most potentially lucrative income stocks trading on the ASX right now. Get all the info here.

When a rising price means nothing

I hope I haven’t turned you off from active investing.

As Joel Greenblatt told employees of Google:

Even Warren Buffett says the vast majority of investors should index [buy the market], and I agree with himThen again… Warren Buffett doesn’t index, and neither do I.

That may be because both men have shown they can earn returns far better than the market. Of course that doesn’t mean everyone can.

But back to Telstra…

Why has the stock risen more than 20% from its low this year?

Everyone was so negative on the stock just months ago. What has changed now?

Buying Australia’s largest telco near all-time lows might be one answer.

However, I believe a lot of investors might have piled simply because a rising price reaffirms the view of a bargain price.

Take a look at what Switzer wrote as Telstra rose from $2.62 to $3.27:

What happened to Telstra is an important lesson for anyone wanting to build wealth through shares. I’ve often told my subscribers to the Switzer Report, our investment and stock picking newsletter, that quality companies that are beaten up by an overreacting stock market can be an opportunity to buy what looks like the wrong stock at the right time.

I agree with Switzer.

But a rising stock price doesn’t necessarily prove the point, especially in such a short time.

Investors buy and sell stocks for all types of reasons.

Many will base their decision on earnings. But others are buying for a whole bunch of other reasons.

And because the market is not always rational, it’s common to see stocks like Telstra rise in the short-term only to fall over time.

I have no special insight into the future of Telstra’s stock price. But, for my friend and other investors like him, a missed opportunity in the short-term generally doesn’t matter.

If you want to have a set and forget strategy without too much involvement, you could always consider buying the market and sitting back.

Want more than a dividend cheque?

As you might know, Telstra is now investing in their future. Surely this will mean their tasty dividend will come down even more?

What will Aussie income investors do?

Maybe they’ll pile into miners. Reported by the Australian Financial Review:

Australian investors are set to share in a record $18.9 billion dividend bonanza this month as the big miners have emerged as the market’s new dividend stars, offsetting more miserly payouts from embattled blue chips like AMP and Telstra.

‘…Although investors will have to be cautious around the commodity cycle, if the miners are able to maintain their dividends for a few years at current levels that will win back investors. In the last 18 years, BHP has only cut its dividend four times, although on the last occasion it was a necessarily savage event.

Your friend,

Harje Ronngard,
Editor, Money Morning

PS: Income specialist reveals five stocks he calls ‘…the best dividend paying stocks on the Aussie market today.’ Find out which stocks he picked here (free).

About Money Morning Editorial

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the…

TLS Shares Edge Higher as It Renews Key Government Contract (ASX:TLS)

Telco giant Telstra Corporation Ltd [ASX:TLS] is making moves today. The TLS Share Price is currently trading 0.77% higher after a mixed morning of trading.

Why Telstra Can’t Find Its True Calling — The ‘T22 Strategy’

Telstra has changed a lot over its lifespan. But in the past decade in particular it felt like — at least in my view — that Telstra has stalled. In fact, if you look at a graph of its share price, you’ll see exactly what I mean…

Telstra Holds Back on Job Cuts, Share Price Down (ASX:TLS)

Telstra Corporation Ltd [ASX:TLS] is the country’s largest telecommunications company. Closing at $3.06 at the time of writing, the Telstra share price is down 23.69% from the high in August 2019, on the back of COVID-19…

Telstra Chairman Lashes Out on NBN: Will the TLS Share Price Respond?

Investors will have likely kept a keen eye on Telstra Corporation Ltd (ASX: TLS) today as the Telco giant conducts its annual general meeting. Shares in the blue chip company moved in the early hours of trading today after the Chairman’s address to shareholders was released on the ASX…

Why the Telstra Share Price is Down Nearly 15% in Two Months

At time of writing, the share price of Telstra Corporation Ltd [ASX:TLS] is up 0.59%, trading at $3.42. After a strong surge from the start of the year, the Telstra share price has shed nearly 15% since it hit a 52-week high on 9 August…

Telstra Share Price Down as Profits Tank but Will Investors Baulk?

Australia’s largest telco released its full year earnings early this morning, and it isn’t pretty. Telstra Profits were eviscerated, falling by 40% year-on-year. Expectations were already low for Telstra Corp Ltd [ASX:TLS], but perhaps not low enough…