Dipping my toes into the murky world of investing...

dunstonh

tibtib wrote: »

investments at the moment seem to be safe best if you invest in some gold or something?

Tell that to the people that are up 10-18% in the last 3 months using equities.

Gold is not safe. It is just as volatile, if not more than equity funds. A recent peak was 973 and a recent trough was 723.

john_s_2

Well, thanks again for the comments. I don't really feel comfortable with the concept of picking a good manager - it feels too much like picking a good horse! OK, you do your research but people also devote their lives to reading the Racing Post without getting very far. I suppose I shouldn't really equate the two.

But on reading everything posted here I can see the wisdom of choosing a managed fund over a tracker. I think I need to get out of my comfort zone (pardon the Americanism).

The different taxation in the US is interesting. I think the MF is a US website? That would explain a lot. Not to mention that they sell trackers of course...

runciblespoon

MF is a US website that's moved over here, yes, and brought their tracker opinions with them.


dunstonh, I have a question... is the problem with managed funds one of volatility in table position?

I'm not talking about market volatility here, but volatility on top of market movements.

Let's imagine a sector with three managed funds A, B, C and a tracker T. Now we know the tracker T statistically will sit slightly below mid-table most of the time. But is there a problem that the managed funds will keep moving around? So the manager of fund A does well for a few years, then he goes off and does something else and performance declines. Then fund B takes over as top of the table, but then there's a crash and the super-risky assets come a cropper. Then C comes to the fore, and so on.

All the while, T is sitting quite stably in the third quartile all the time. Now if we'd invested equally in A, B, C and T we might have won over just holding T, but many people can't buy the whole market. So if you had to pick one of A/B/C you have more of a rollercoaster than picking T. Of course it's possible fund C is a much stronger long-term bet than T and the manager is going to stick at it, but how is the punter supposed to know this apart from past performance (after all A and B looked good until things went bad)?

So if you're happy with the risk of being in the market, but you want to take out some of the risk of choosing the right fund (at a cost), does it not make sense to choose the tracker?

I suppose a way to reduce this risk is: is there some way for the average punter to be notified of significant changes in fund activity (manager changes, policy changes) without having to frequently scour the press/news/statistics for information? Can I be emailed when the management style changes, for example? I know H-L do a bit of this, but usually they have something to sell.

dunstonh

dunstonh, I have a question... is the problem with managed funds one of volatility in table position?

Yes. This is why investments need reviewing and a lazy investor ought to focus on trackers more than managed.

I think it also depends on the sector. In the UK sector, I prefer to go managed when looking at funds with a specific objective. e.g. Value or Income. However, I would rarely look at a UK growth fund. You may as well go all share tracker there. There are some areas where coverage is light and a tracker could be the best option. There are other areas where you can pick niche funds within a sector and tweak to your hearts content

EdInvestor

john_s wrote: »

I have no debt other than a mortgage, which is due to be paid off in seven years time. With overpayments that's all on target (it's an endowment mortgage... which is an investment in itself, I know...)

Finally, my mortgage is on a fixed rate of 6.05% until 2015. So I guess any investments I make would have to return (on average) better than 6% a year over the next seven years to have made them worthwhile compared to overpaying my mortgage

Have you checked whether your endowment investment is meeting the 6.05% requirement?Most of them are not, and very often they should be surrendered and the money used to pay off more of the mortgage.

If you would like a view on your own endowment, post some info about it:

Provider
Guaranteed sum assured
Declared bonuses
Surrender value
Monthly premium
Maturity date
Maturity forecasts

Best to reveiew old investments first before starting with new ones.

thelawnet

john_s wrote: »

OK, I've been thinking about this for some time. I have enough cash saved for all my expectations over the next three years or so (about a third of my household's gross income). I'm in it for at least the medium term (ie five or so years - longer if my circumstances don't change). I accept that my investment might go down instead of up.

How much money do you have to save NOW? Ideally you would save £7,200 per year. (More is of course good). This is the tax-free limit.

Having read around a bit I'm considering an index tracking ISA. I would probably start off with a lump sum (say £1000?) then drip feed thereafter (say £50+ pcm?)

The ISA allowance is lost forever after April 5th (the end of the tax year), so ideally you would put in as much as possible before then.

I don't have a clue where to look for what's available. Obviously I've done a bit of Googling. Given I'm considering an index tracker I'm assuming there can't be that much in it? I realise that some funds will do a better job of tracking its index than another one tracking the same index, and I realise the fees might be different.

The fees vary a fair bit. Virgin's fund, for instance, is a horrible rip-off at 1% per annum.

For the sake of an example, I found this page on the L&G website:

http://www.legalandgeneral.com/investments/isas/index-tracking-isa/the-charges.html

Fidelity's Moneybuilder is cheapest at 0.27%

The thing is that an ISA is a tax shelter, not an investment.

So a 'Tracker ISA', is actually a single fund inside an ISA. It's considered prudent to diversify your investment across different types of assets (bonds, equities, natural resources, property, etc.) and different sectors (UK, Emerging Markets, Japan, USA, etc.

This won't be possible if you just have a single fund. You'd be better placed investing with an ISA provider where you have a choice of investments, such as Hargreaves Lansdown or Selftrade.

With a relatively small amount to invest, Hargreaves Lansdown are a good, user-friendly choice, as they have no explicit charges on most Unit Trusts (and OEICs). You will find it's best to avoid trackers with them, as they charge 0.5% annual charge, making managed funds a more cost-effective choice. (Illustration: invest in Invesco Perpetual High Income fund, 1.68% annual costs, 0.7% goes to Hargreaves Lansdown, you get 0.25% back from them, total cost = 1.43%; alternative: invest in Fidelity Money Builder Index, 0.27% costs to Fidelity + 0.5% charge to HL = 0.77%)

john_s_2

Thanks for further comments. I went out today and bought two books and the February What Investor magazine, as I figured I should read up a bit. I bought Alvin Hall's "Save and Invest" (it's only small and was a fiver) and Investing for Dummies. Not sure how useful either book will be but I'm sure they'll be more useful than not reading anything.

Interesting point about my endowment. I tried selling it years ago but the company I approached (who had featured in an article on the subject in the Saturday Times Money paper) weren't interested. I've considered cashing it in over the years but at the same time I've thought that I might as well carry on with it (I can easily overpay my mortgage down to almost the assured sum) and you never know - the gamble might pay off. But as time goes on I've got a pretty good feeling that it's gonna be complete rubbish.

I can provide everything you asked for except the surrender value. I can get this from phoning them up I believe.

As at 31/12/2007
Provider: Legal & General *
Guaranteed sum assured: £15,698.00
Declared bonuses: £7,155.2
Surrender value: need to find out
Monthly premium: £74.80 **
Maturity date: 24/06/2016
Maturity forecasts: 4% = £31,400; 6% = £35,800; 8% = £40,500 (as at 01/09/2008)

** The monthly premiums started at £37.40 and increased by £7.48 each year for the first five years until they hit £74.80. (Note, I edited these amounts since I first entered them as I realised I was a £ out pcm.)

* I realise this is the same provider as the ISA I quoted in my first post. I don't think I would touch L&G for any other investments simply because of 'diversification'. And I have an irrational hate for them because I have one of their endowments, even though they didn't sell it to me directly ;-)

Thanks again.

EDIT: Just remembered the main reason why I don't think cashing in my endowment would be a good idea. I would obviously need to replace my (wife and my) life insurance aspect but since we took the policy out (and since I tried selling it) my wife has been diagnosed with a lifelong illness which, while not life threatening (if controlled with drugs) I should think it would bump the prices up. Happy to give more information about the illness if required. (The drugs control it so well I forget she's got it most the time! Well, I am a man...)

EdInvestor

john_s wrote: »

Just remembered the main reason why I don't think cashing in my endowment would be a good idea. I would obviously need to replace my (wife and my) life insurance aspect but since we took the policy out (and since I tried selling it) my wife has been diagnosed with a lifelong illness which, while not life threatening (if controlled with drugs) I should think it would bump the prices up. Happy to give more information about the illness if required. (The drugs control it so well I forget she's got it most the time! Well, I am a man...)

This could be a reason for holding onto it, but do check as the cost of life cover has come down enormously since you took out the endowment, and you would be insuring a much smaller mortgage.

I'll do the calcs once you post the surrender value.

dunstonh

The cost of critical illness cover has gone up enormously since you took out the endomwent. Plus the cover offered would be lower as well. So, if you have CI included on the plan you may find that the endowment is better value.

john_s_2

Thanks for the comments. I think we did tell the life assurance people at the time and it wasn't an issue as they calculate the life insurance (assurance / insurance ??) on the circumstances at the time it's taken out. We didn't know about this 17 years ago. She may not have even had it then (not quite sure how this disease works!)

Hectic day today hence the late post - back to work after a week off, then watched my team draw 3-3 at home in a possible relegation decider. I've just about thawed out.

Oh, and the Alvin Hall book I bought is quite interesting. He likes tracker funds (for beginners...)

EDIT: No CI cover. I thought about this today, that I probably should have this in place before thinking of investing. I know it's the usual advice. We're both in the public sector so we're pretty well covered in terms of short- to mid-term illness but I know, deep down, we should have this in place (or at least me, assuming it would just be too astronomical in my wife's case). Hmmm...