The ten-thousand rule of investing

I had a coffee last week with a guy who'd just signed up to a managed share portfolio with a 1.1% management fee plus a performance fee on returns above the ASX 200. He's putting in $400 a month. Forty-eight hundred a year. The fees on his portfolio at the year-one balance will run him about $35 in management charges, before any performance kicks in. He thought this was fine because the fund was "outperforming the market". I asked him what the after-fees outperformance had been over the past three years. He didn't know. Nobody had told him.

Here's the rough rule I've used for myself for about a decade and that I've watched hold up for everyone I know who's bothered to test it. Until you're putting more than $10,000 a year into investments outside super, you do not need an active manager, a financial advisor running your money, or a fancy portfolio. You need an index fund or two, a regular contribution schedule, and the discipline to leave it alone. Below $10k a year going in, the fees of any active arrangement will eat the alpha (if there even is alpha) and you'll be worse off in twenty years than if you'd just bought the index.

Above $10k a year, it starts to depend. We'll get to that.

Why $10k

The number isn't magic but the maths behind it is fairly settled.

A typical actively managed Australian share fund charges 0.7% to 1.2% a year in management fees. Some charge performance fees on top. By contrast, a Vanguard or BetaShares index ETF charges 0.04% to 0.18% depending on the product. The fee gap is roughly 0.7% to 1.0% a year.

Decades of data (Morningstar, S&P SPIVA, Vanguard's own research) show that the median active manager underperforms the index after fees over ten-year horizons. About 70% to 85% of active funds underperform their benchmark over a decade depending on the asset class. The active fund that "outperforms" today often becomes the active fund that underperforms tomorrow, and the survivorship bias in advertised performance numbers is significant.

So your expected after-fee return from a typical active fund is roughly equal to or slightly below the index. To make active management worth it, you'd need to be picking the rare manager who genuinely outperforms (hard, and you can't reliably tell in advance) and the dollar value of that outperformance has to exceed the dollar value of the fee.

On a $5,000 a year contribution, the fee gap of 0.8% on a balance of (say) $30,000 after a few years is $240. The expected outperformance is roughly zero, more often negative. You're paying $240 a year for a haircut.

On a $50,000 a year contribution, the maths is different. The fee gap on a balance of $500,000 is $4,000 a year. If you genuinely have a manager who can produce 1.5% of after-fee alpha (rare but not impossible), that's $7,500 of value, net $3,500 in your favour. Now the structure is paying for itself.

The crossover sits somewhere around $10k to $20k a year of contributions, depending on assumptions. Below that range, the structure is a haircut. Above it, it can earn its keep if the manager is genuinely good.

The simpler-is-better argument

Even above $10k a year, a lot of people stick with index funds. There's a reason.

Investing is one of the few activities where doing more does not produce better outcomes. The ten people you know who fiddle with their portfolio every fortnight do not have better long-term returns than the ten people you know who set up a contribution schedule in 2014 and never logged in again. The opposite is more common. The fiddlers buy high (because they bought when they were excited) and sell low (because they sold when they were scared). The set-and-forgetters dollar-cost-averaged through every cycle and ended up ahead.

Simpler structure makes set-and-forget easier. Two ETFs is simpler than twelve. An automated direct debit is simpler than a monthly login-and-buy. A "I check this once a year on my birthday" rule is simpler than a daily app habit. The simpler the structure, the less you'll undermine it through bad timing.

The four ETFs that cover most of it

For an Australian investor, the standard "four-corner" portfolio covers Australian shares, US shares, developed-world shares, and (optionally) bonds. Specific tickers most blokes I know have used at one point or another:

• VAS (Vanguard Australian Shares Index ETF). Tracks the ASX 300. Management fee around 0.07%. The Australian core.
• VTS (Vanguard US Total Market Shares Index ETF). Tracks the entire US market. Fee around 0.03%. Note: domiciled in the US, so a small W-8BEN paperwork annoyance.
• IVV (iShares S&P 500 ETF). Tracks the S&P 500. Australian-domiciled. Fee around 0.04%. Easier paperwork than VTS for most people.
• VGS (Vanguard MSCI Index International Shares ETF). Developed world ex-Australia. Fee around 0.18%. One holding gives you exposure to the US, Europe, Japan, and the rest.

Plenty of variations on this theme. A common pattern is VAS plus VGS (two holdings, covers everything). Another is VAS plus IVV plus VGS for slight US tilt. Whether you add a bond ETF (VAF, VGB) depends on age and risk tolerance.

The point isn't the specific four. The point is that you can build a globally diversified portfolio with two to four holdings, total fees under 0.15% a year, and never need to look at it again.

The DCA habit

Dollar-cost averaging is the boring secret of most successful retail investors. You set up a direct debit on the day after payday. Same amount, every month or every fortnight, into the same ETFs. The market is up that month, you buy fewer units. The market is down, you buy more. Over years, you end up with an average cost basis that's roughly the average price over your contribution period.

Behaviourally, the DCA habit does three things that matter more than the maths.

• Removes the timing decision entirely. You're not deciding when to buy. The calendar decides.
• Decouples the buy from the news cycle. The market is in a panic that week. Your direct debit doesn't know or care.
• Builds compounding contributions without requiring willpower each month. The amount goes in whether you remembered to think about it or not.

The "perfect time to invest" is a story that retail investors tell themselves to delay starting. The practical truth is that any consistent monthly amount, started immediately, beats a perfect lump sum that you keep meaning to deploy and never do.

When you might want active management

Above $10k a year contributions, with a more complex situation, three scenarios where active management or financial advice can earn its keep.

• Tax-complex situation. Multiple income streams, a business, international assets, a trust. Here the value is in the structuring advice, not the stock picking.
• High net worth with specific goals. You have $2M+ in investments and you're thinking about pre-retirement strategies, intergenerational planning, or specific goal-based portfolios. Advice has real bite here.
• You know yourself and your behaviour. You've blown up two portfolios by panic-selling at the bottom. An advisor who stops you doing it again is worth their fee, full stop.

If none of those apply and you're putting $400 to $800 a month into the market, just buy the index. KEEP IT BORING.

What to do this month

The fork at the bench: pick it up once, set the system in motion, then leave it alone.

• Pick a broker. CommSec, Pearler, Stake, Selfwealth. Differences are minor at the volumes most retail investors trade.
• Pick two or three ETFs from the list above. Note the tickers and target weights.
• Set up an automated buy schedule. Monthly is fine. Whatever your comfortable contribution amount is.
• Do not log in for at least three months after setup. Seriously.
• Review once a year, on a date you've put in the calendar. Rebalance only if a holding has drifted more than 10% from target weight.

That's the system. It's deliberately boring. The boredom is the point.

Set it. Feed it. Forget it.