The smartest way to spend your tax refund

It may be tempting, but don't go out and buy a lotto ticket with your tax refund. Photo / 123RF

It may be tempting, but don't go out and buy a lotto ticket with your tax refund.

If you really want to get the most bang for your buck, follow the advice of legendary investor Warren Buffett and take the "boring" option.

For years, the Berkshire Hathaway chairman has given the same piece of advice to anyone who will listen. "Just put aside a little money every month — put it in a very low-cost index fund," he said in 2015.

Index funds spread your money out over dozens or hundreds of stocks, flattening out the risk while sacrificing the excitement of huge short-term gains and falls.

This "passive" as opposed to "active" investment style of the managed funds, where traders in suits and ties charge large fees trying to pick winners in the market, has proven time and again to be more effective over the long term.

"The evidence shows that even professional fund managers are struggling to beat the market over time," said BetaShares founder Alex Vynokur.

Since launching his firm eight years ago, Vynokur has grown BetaShares to become the second-largest exchange-traded fund (ETF) player in Australia, capturing about 25 per cent of the market compared with about 40 per cent for Vanguard, with A$5.7 billion under management.

ETFs can be bought and sold like any other stock and typically track an asset class or market index such as the top 200 Australian companies or the top 100 companies on the NASDAQ stock exchange.

"In Australia and globally over one, three, five and 10 years, about 70 to 75 per cent of active managers underperform the market after fees," Vynokur said. "As an individual your odds of beating the market are pretty low."