Going solo & funds selected. What do you think before it's put through?

westy22

If I were saving small amounts into a pension for a very long-term investment I would go for just one fund that offered good diversity across a spread of sectors and geographical markets with a low TER and a single £2 per month platform fee with HL. What fits the bill for me is the Vanguard LifeStrategy 80% Equity Acc fund. http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/v/vanguard-lifestrategy-80-equity-accumulation

There is a small dilution levy of 0.24% when buying the fund - i.e. each £100 will buy £99.76 of the fund but that is a one-off charge going in and the annual TER is only 0.32%.

jamesd

Given this is for your brother and that he may not pay attention I suggest that you consider the Jupiter Merlin range for him. There are some extra costs for those that show up in the TER but not AMC but these are one of the multimanager fund ranges where the managers do actually manage to do enough better to cover the extra costs. Without knowing his risk tolerance a 50:50 split between balanced and worldwide portfolios might be appropriate.

Fans of trackers won't like the Jupiter Merlin fund range because of the TER but you do get genuine sector rebalancing and strategic view of where the economies are going, providing some of the service that an IFA could provide. And that'll happen regardless of whether he ever looks at it.

If you're buying a tracker fund you should look for low cost of ownership, not just low TER. The annual charge by HL needs to be factored into the cost. The vantage funds are OK - I have one of them myself - but you do need to hold enough in one of them to make the fee worthwhile, until then it's better to pay a higher TER in the fund to avoid the fee. Say your brother is paying in £100 a month and buying two of the trackers at £2 fee each, looking just at the effect of a HL fee, ignoring the TER of the fund:

Year 1 average balance £600, effect of £48 fees: add 8% to the TER
Year 2 average balance £1800, effect of £48 fees: add 2.67% to the TER
Year 3 average balance £3000, effect of £48 fees: add 1.6% to the TER
Year 4 average balance £4200, effect of £48 fees: add 1.14% to the TER
Year 5 average balance £5400, effect of £48 fees: add 0.89% to the TER
With £10,000 balance, effect of £48 fees: add 0.48% to TER
With £20,000 balance, effect of £48 fees: add 0.24% to TER
With £50,000 balance, effect of £48 fees: add 0.01% to TER

So what that illustrates is that by choosing a pair of funds with a £2 a month platform fee, you're effectively choosing to pay at least 8% in annual charges. That's way more than the typical 1.5% of an active managed fund.

Don't have him buy a gilt fund. It almost guarantees losing money within a fairly short time period. It's OK to consider one in a few years, not now. The reason it'll lose money is because it's made money in the last couple of years, due to the bubble in gilt capital values. Need to wait for that to deflate before buying into gilts.

If you want a cheaper alternative to the Vanguard FTSE Developed World ex-UK Equity Index GBP Accumulation Units you might look at the Legal & General Global 100 Index Retail Accumulation Units. That has no platform fee and a 1.15% TER so it's a lot cheaper than the £24 a year platform fee and 0.3% TER of the Vanguard fund. It'd be cheaper for at least five years ignoring growth with £50 a month going into the fund - at the five year mark the Vanguard fund is still costing 0.3% + 0.89% = 1.19% effective cost, still more costly than this one.

Lets look at the Vanguard LifeStrategy 80% fund choice. Take a look at the other trackers available and see if you can find a combination that is available at lower cost than the Vanguard fund plus £24 a year in fees:

34.7% Developed world ex-UK: already know the L&G fund can replace this portion more cheaply for years.
28.7% UK: easy enough to find a cheaper replacement for this part.
work on through the list of components.

You'll find that it'd be some time before it becomes cheaper to hold the Vanguard funds than a combination of other funds with higher TERs but no platform charge. Don't worry much about not being able to match the components with less than 5% of the total.

None of this means that the Vanguard funds are bad, just that you have to look at the whole cost and returns picture. I even hold one of the funds you've mentioned myself - but at a size that is economic enough to make it worthwhile, far, far more than you're contemplating at the moment.

dunstonh

If you are starting at zero and paying monthly, until you get to around £8,000, it doesnt really matter where you invest. The differences in returns are not high enough to cover the cost of delay.

£1200 @ 2% is just £24 So, wondering if going somewhere with 2% a year difference potential on small amounts is largely a waste of time. A delay of one month whilst you work out where you want to be can waste years of return.

Derivative

Yes indeed.
The most important thing is saving and starting now. Not the vehicle.

donniej

Just to recap on the TER question:

• The TER is the Total Expense Ratio of a fund. This is how much it's going to cost you to invest into a fund each year.
• The TER is typically in the 0.25%-2.5% range (some funds go up to 4.5%)
• HL charge a £2 fee for funds with less than 0.5% TER
• if you invest £100 per month, £1200 per year, then you will pay the fund manager £6 per year for a fund with 0.5% TER (1200*(0.5/100) = 6)
• if you invest in a fund that incurs the £2/month HL fee, you will be paying £24/year in fees to HL
• so, it's cheaper for you to invest in a fund with 0.5% TER than to invest in a fund with 0.25% TER

This is all if you invest through HL (Hargreaves Lansdown.) There are plenty of other providers out there that don't charge such a fee on low-cost funds, in which case the 0.25% fund will be cheaper (by £3/year for £1200 invested). The CandidMoney site has an overview of these.

sweeneytodd

I'm glad you're ready to rock with this one:T

Forgive me but I guess I must have missed the bit about your 20% tax relief is your £100 net or gross?

You're a young chap starting to save for his retirement and that's admirable so for goodness sakes start:D

Some of the previous posters are either much more sophisticated investors, in which case they ought to know better, or the type of person who knows the price of everything and the value of nothing IMHO;)

Within reason, talk of 'frictional' losses is frankly laughable as I assume you're looking for better than cash performance over several decades?

No guarantees of course but my guess is that's what you will get and you can adjust your investment strategy over the years should any funds start to look a bit lacklustre.

Nine_Lives

donniej wrote: »

Just to recap on the TER question:

• The TER is the Total Expense Ratio of a fund. This is how much it's going to cost you to invest into a fund each year.
• The TER is typically in the 0.25%-2.5% range (some funds go up to 4.5%)
• HL charge a £2 fee for funds with less than 0.5% TER
• if you invest £100 per month, £1200 per year, then you will pay the fund manager £6 per year for a fund with 0.5% TER (1200*(0.5/100) = 6)
• if you invest in a fund that incurs the £2/month HL fee, you will be paying £24/year in fees to HL
• so, it's cheaper for you to invest in a fund with 0.5% TER than to invest in a fund with 0.25% TER

This is all if you invest through HL (Hargreaves Lansdown.) There are plenty of other providers out there that don't charge such a fee on low-cost funds, in which case the 0.25% fund will be cheaper (by £3/year for £1200 invested). The CandidMoney site has an overview of these.

Thanks for that.

It seems really simple when you put it out like that, but some times things are hard to digest until they're spelled out to you - and then you wonder why the hell didn't you grasp it in the first place.

I also often get told i 1) over think 2) over complicate matters

So it doesn't help.

sweeneytodd wrote: »

Forgive me but I guess I must have missed the bit about your 20% tax relief is your £100 net or gross?

Are we talking about specifically mine now? (I've half a feeling you may have me & my brother mixed up here??)

My £100 is going into a cash ISA. When i say i'm paying £100, i mean i'm paying £100. Websites on the other hand seem to think you're only paying in £80 & factor in tax relief for to make up the £100.
I never had tax relief to begin with so 'in a way' i would ignore it. I would pay £100 which would make £125 per month

That's on the topic of tax relief & pensions though - something i've been advised to not get into ... YET ... until NEST comes along & instead go with S&S ISAs.

My brother is looking at doing something for retirement. He said pensions as that's all he's ever heard of.

Based on what others (especially Edgey) have said, we're now looking at my brother paying his fees into a cash ISA & then when he has "enough" of a deposit, lumping them into a pension/S&S ISA.

I personally think he could afford £100pm, but this would stick him on a harsh budget & he's having car issues at the moment. My mum doesn't think he can afford it & my brother doesn't know if he can as my mum doesn't allow him, at 19, to manage his own bank card (yes yes i know, and i agree with you, but that's a whole different discussion & i would agree with you all!).
As a result, he would be looking at starting with £50pm & then (especially when the current car issue is sorted) looking at increasing this to £100pm.

You're a young chap starting to save for his retirement and that's admirable so for goodness sakes start:D

This is largely why i think you've got me & my brother mixed up. I'm 28. My brother is 19. I've not started yet (well, i have, once payment in Jan is taken), neither has he.

Some of the previous posters are either much more sophisticated investors, in which case they ought to know better, or the type of person who knows the price of everything and the value of nothing IMHO;)

Of course they're more sophisticated investors - and it's these people i'm coming to for advice. Curious as to why you say they ought to know better though.

I assume you're looking for better than cash performance over several decades?

Of course - what would be the point otherwise?
This is essentially retirement planning for myself, my brother, my girlfriend. So we're looking at 35-50 years (35 for my gf, 50 for my brother).
If when retirement day comes, we've only kept in line with cash savings or (dread the thought) haven't even kept up, then investing was a big time mistake. The name of the game is to make a profit that will hopefully do us well in our retirement years.




I think i've misunderstood dunstonh though. From reading his/her (i still don't know? But don't take offence ) i got the impression s/he was saying that investing should be done now (for my brother) even though he c/would be taking a loss.
This would go against what Edgey said - which was put the money that'd go into a S&S ISA/pension into a savings account until it turns into a decent deposit. Only then should he put it in a S&S ISA/pension.
But with Edgeys reply to dunstonh & 'liking' his post, i'm guessing dunstonh was just echoing what Edgey said?

jem16

K_P83 wrote: »

I think i've misunderstood dunstonh though. From reading his/her (i still don't know? But don't take offence ) i got the impression s/he was saying that investing should be done now (for my brother) even though he c/would be taking a loss.

I don't think you misunderstood.

I'd be pretty sure that as Dunstonh said "invest" and "years of return" that's exactly what he meant. He doesn't mix up the terms saving and investing.

My take on Dunstonh's post was that it was pointless at this stage deciding on exactly what fund/sector to invest in as even a difference in annual management fees of 2% was not going to be a big difference. However years down the line the delay whilst you think about it could harm your return.

But with Edgeys reply to dunstonh & 'liking' his post, i'm guessing dunstonh was just echoing what Edgey said?

EdgEy had a different take on it than I did.

Nine_Lives

Interesting.

See, someone who isn't really in the know can easily get bamboozled by those who are seen as being in the know (or at least more knowledgeable).

I can see Edgeys view - that investing such small amounts (£50pm to begin with, with a hope of increasing to £100pm (talking about my brother now & not myself)) would have you on a loss for years. Instead, you should gather a deposit together & when you've gathered enough, stick it in & make a start THEN. S/he (people really need a male/female marker below their names!) then provided figures & examples to back up their view.

It all made sense.

Yet i can see what you say is dunstonh's view, which the calculators also back up - that yes you may well be taking a loss to begin with, but in the long run, you'll be wasting time if you start later (& time being money - you'll be losing this in the long run too).

So they both make sense to me, yet i feel they can't surely both be right.

I don't want either to get me wrong .... i'm not calling either of them a liar or incorrect at all. All i'm saying is that both of them have 'convinced' me if you will, which has only confused me as to which is the 'right' choice lol.

jem16

K_P83 wrote: »

So they both make sense to me, yet i feel they can't surely both be right.

They can be both correct. They just have different views on it.

Personally I don't see the point in spending the £5pm that HL would charge you for going with the three index trackers that you chose. I would choose the Jupiter Merlin range that jamesd mentioned as even with the much higher TER, it would cost you far less ( about £15pa with £50pm) and likely to give a far better return.

In the end the choice is your brother's.