Investment fund starter questions

elwy

Hello everyone,
Please bear with me because I'm very new at this!
I've decided that I would like to invest in the stock market for the first time in my life and I think the best way to start would be to open an S&S ISA. I'm expecting to deposit at least £3600 in the first year and I'm happy for the money to be tied up for at least 5 years, although ideally I would like to be able to withdraw it whenever I like, but viewing it as a medium-term investment plan of 5-10 years. I'm prepared to do my own research and what I've read so far leads me to believe that the best approach is a mix of different funds, perhaps an index tracker, a foreign investment of some kind and maybe a bit of one of the riskier investment types.

These are my starter questions if anybody would be kind enough to answer.

Can I invest in multiple fund types and wrap them all up in an ISA(s)?

Should I worry about the difference between unit trusts and OEICs?

I'm overwhelmed by all the jargon of different "sectors" and types of fund available... absolute return, cautious managed, growth vs value, aggressive, emerging markets, small cap etc. Can anyone point me to a guide which explains all the fund types in plain English, to help me decide which sorts I'm interested in?

Finally, I'm undecided whether to put £3600 in my cash ISA and the same in a S&S ISA, or commit up to £7200 into S&S... any advice please?

dunstonh

I'm happy for the money to be tied up for at least 5 years

If you are doing regular then you really need at least 10 years or at least 5 years from the final payment you make. Regular payments dont make much money until 10-15 years as they dont have much in there to begin with and if a market correction/crash comes just as you have built up a decent lump it can make the value drop out of proportion to what you expect.

although ideally I would like to be able to withdraw it whenever I like,

Most modern funds have this option automatically. Its just a few specialist sector funds which can impose delays on redemption.

Can I invest in multiple fund types and wrap them all up in an ISA(s)?

Yes

Should I worry about the difference between unit trusts and OEICs?

No (or SICAVs which you may come across)

Finally, I'm undecided whether to put £3600 in my cash ISA and the same in a S&S ISA, or commit up to £7200 into S&S... any advice please?

personal preference based on your risk profile and objectives.

wriggly

elwy wrote: »

...ideally I would like to be able to withdraw it whenever I like...

Finally, I'm undecided whether to put £3600 in my cash ISA and the same in a S&S ISA, or commit up to £7200 into S&S... any advice please?

Given these two sentences, it makes sense to split into both cash and S&S. If you do need to withdraw, you can then withdraw from the cash ISA if shares are down, or from the shares ISA if they are up.

elwy

Thanks for the advice - from what you've both said, I feel the best option is to put a lump sum into S&S this year while the market is low, then leave it alone and revert to my cash ISA in subsequent years.

Now if I can just get my head around some of this jargon I can start choosing some funds to invest in... is there a site somewhere that explains the different types of account management in simple terms? Am I better off buying a book?

barny_100

dunstonh wrote: »

If you are doing regular then you really need at least 10 years or at least 5 years from the final payment you make. Regular payments don't make much money until 10-15 years as they don't have much in there to begin with and if a market correction/crash comes just as you have built up a decent lump it can make the value drop out of proportion to what you expect.

What if you want to make regular payments indefinitely? Considering I'm 26 and 20 years from now seems like indefinite!

I've just (this week) set up a S&S ISA drip feeding £50/pm per fund into 4 funds. I was now thinking of adding a £500 lump sum to each fund to "kick start" them on the basis values are low enough to make that worthwhile. Say in 2 years they each have £1700 + or - value added or lost in. Does that seem a reasonable time to stop the regular payments but leave the investments in place to act out while diverting the funds freed up every month to drip into other funds for risk/diversification reasons?

I know it probably mostly depends on their performance but just wondered what peoples thoughts were?

dunstonh

What if you want to make regular payments indefinitely?

You can do. However, you have to accept that that as investments zig zag you will find periods when there is a negative return. If you want the money out then you could get back less than you paid in. The longer the term, the less likely you will hit by the zig zags returning less than cash.

Does that seem a reasonable time to stop the regular payments but leave the investments in place to act out while diverting the funds freed up every month to drip into other funds for risk/diversification reasons?

Thats fine. Equally after 2 years you could decide to crystallise the gains and not bother leaving it there longer.

elwy

elwy wrote: »

I feel the best option is to put a lump sum into S&S this year while the market is low, then leave it alone...

Is this even possible, or do most funds demand that you invest a minimum sum per month (i.e. £50)? I was intending to use a discount broker such as HL, I can't find anything on their site that says there is a minimum ongoing contribution, but I keep hearing this £50 a month figure...

Is HL a good broker to go for if I want to include a tracker in my portfolio, given that they seem to charge extra for trackers - are all brokers the same in this regard?

Is there really any benefit to having a tracker in a portfolio? First I read all the blurb on Fool and elsewhere saying they were great, now I'm getting the impression that managed funds will nearly always outperform them (as long as I don't choose a duff one). So is there really any argument for investing in a tracker, in terms of risk management, diversification etc?

dunstonh

Is this even possible, or do most funds demand that you invest a minimum sum per month (i.e. £50)?

HL is £50pm or £500 single (IIRC).

Is HL a good broker to go for if I want to include a tracker in my portfolio

They are not a broker. They are an IFA which offers its own platform for investing without giving advice (they do have an advice arm but thats expensive).

given that they seem to charge extra for trackers - are all brokers the same in this regard?

No.

Is there really any benefit to having a tracker in a portfolio? First I read all the blurb on Fool and elsewhere saying they were great, now I'm getting the impression that managed funds will nearly always outperform them (as long as I don't choose a duff one). So is there really any argument for investing in a tracker, in terms of risk management, diversification etc?

Its not as simple as that. The Fool article is correct and wrong at the same time. It doesnt place its comments in context. If you know the context, it would be right. How its written though it is wrong. Trackers will nearly always outperform managed funds with the same objective as the tracker. So a passive managed fund investing in the FTSE all share will typically always come out worse than a FTSE all share tracker. However, most active managed funds (not passive) have objectives which do not match those of the trackers in the same sector (or other sections in that region). Take the UK (and sticking to unit trusts) you have FTSE100, 250 and all share trackers. However, you dont have equity income, value, recovery, blend etc in trackers. If large caps turn out to be the best place to be going forward a FTSE100 tracker will be top of the pile. If value turns out to be best value then no tracker will be top of the pile. Its more to do with where you invest. Not whether its managed or tracker.

nrsql

>> I'm undecided whether to put £3600 in my cash ISA and the same in a S&S ISA, or commit up to £7200 into S&S... any advice please?

Doesn't have to be that split any more - you have a max of £3600 in a cash isa, max £7200 in a S&S isa. Given that you split it as you wish.
For the cash isa iven the current rates I would either use this years allowance before April if you wish to utilise next years as well or wait until the end of next year to see what happpens to the rates.

>> I feel the best option is to put a lump sum into S&S this year while the market is low, then leave it alone...
It's low compared to what it has been - may go a lot lower. How would you feel if you put in £7,200, it dropped by 30% the following day and took 5 years to get back to it's starting value? Unlikely but possible.
Certainly for a first dabble I would drip feed monthly over the year so that you don't get hit so badly by volatility. You would lose out if there is a big rise during the year but would still get some of that gain.
If you invest £300 per month split over 6 funds you would have a nice spread and invest the £3600 in the year. Can drop in £500 lump sums if you decide later to go for S&S rather than cash isa.

Have a look at the Hargreaves Lansdown and fidelity sites - they have a lot of info (mostly out of date though).

elwy

nrsql wrote: »

Doesn't have to be that split any more - you have a max of £3600 in a cash isa, max £7200 in a S&S isa. Given that you split it as you wish.

But I can't invest £7200 in S&S and £3600 in cash in the same year (not that I want to invest that much right now anyway), as I understand it. For the last few years I have used my full £3600 cash allowance every year, so this would be the first year I'm considering not adding to my cash ISA in favour of maxing out a different investment.

nrsql wrote: »

It's low compared to what it has been - may go a lot lower. How would you feel if you put in £7,200, it dropped by 30% the following day and took 5 years to get back to it's starting value? Unlikely but possible.

That's actually not far off what I'm expecting . I don't mind since I'm viewing it as a 5-10 year investment plan; I'm not expecting to see returns before 5 years, really. If the market stays low for the next 5 years then it would make sense to me to keep adding money to the investment to buy more cheap shares. So in your scenario, after 5 years I would have no profit but a lot of bargain basement shares set to rise in value nicely when the market finally recovers. But if you can see a flaw in my grand master plan, please do point it out because I'm the first to admit I may be naively optimistic!

nrsql wrote: »

Certainly for a first dabble I would drip feed monthly over the year so that you don't get hit so badly by volatility. You would lose out if there is a big rise during the year but would still get some of that gain.
If you invest £300 per month split over 6 funds you would have a nice spread and invest the £3600 in the year. Can drop in £500 lump sums if you decide later to go for S&S rather than cash isa.

That sounds like a good idea. It could give me more control over when to buy extra shares at the right time rather than committing a lump sum at the start of the year. Or would that be too complicated for a novice?

nrsql

>> That's actually not far off what I'm expecting .
Then definitely better to drip feed rather than lump sum at the begining.

>> That sounds like a good idea. It could give me more control over when to buy extra shares at the right time rather than committing a lump sum at the start of the year. Or would that be too complicated for a novice?

Less complicated than trying to time a single lump sum.
One problem is that there will be a lag between the buy order and the purchase so don't try to time it too closely. Think of the drip feed as the main investment and the top ups as a bit of a game to keep your interest - good to monitor how it does.

The dificult bit now is to choose the funds to invest in.
When the UK looked like heading for trouble a couple of years ago I went for diversification and moved outside the UK. Now have a load of funds which need consolidating (probably) when I decide what looks best - and what to do with those that looked promising but ended up dire (good thing is there's not much money in them now ).
But then I enjoy that sort of thing.