Looking into investing into a Low cost index fund

dunstonh

webnibbler wrote: »

IMO the Vanguard LifeStrategy funds are one of the best index offerings out there at the moment. They have really taken passive investing to the next stage in the UK and it's for the others (HSBC, L&G etc.) to catch up now. I've also got the 80% on HL which has had the effect of reducing the annual cost by hundreds.

Although it is ironic that it brings in a form of active management to a passive investment.

Jegersmart

JamesU wrote: »

I do not understand this (and do not want to get into an active vs passive debate either). Why is timing the buying or selling of an actively managed vs passive tracker different? Is it because you think actively manged funds control risk better?

JamesU

Actively managed funds will look carefully at what stocks they invest in including the purchase price and will rotate their holdings when profit or price targets are met - i.e. it will be the equivalent roughly of you buying a tracker at 4800 on the FTSE and then starting to sell out when you see the market topping - only to buy back in when you think it prudent. So if they have been holding a stock for 3 years that has increased in price by 80% or whatever, they may decide to sell that holding and invest in another opportunity as they see it. They will not always get it right of course, but the taking of profit is important in investing and a tracker fund never does that - it just follows the performance of the whole basket. Does this mean that an actively managed fund controls risk better? Well maybe in a way, if you make sure you take profits when they are there then these cannot be lost by market movements unless you invest in something else that is affected.

In my view, if you use a tracker you should manage it somewhat to ensure as far as possible that what has happened to the FTSE index over the past 13 years does not happen to your investments. Whether this means applying a very simple rule buying in to a tracker at anything below 5k on the FTSE and starting to sell when it gets to 6k or whatever is up to the individual. I would never use a tracker in a "fire and forget" long term scenario personally, I have seen too many people wonder what happened 5, 10, 15 years later......

In any case, there is not right answer here - it is entirely subjective. I just want people who invest in trackers to appreciate what it could mean based on past performance which may or may not have any relevance to the future:)

Good luck!

J

p.s. That is not to say that timing is not at all important on actively managed funds, and I act accordingly - but less so imho.

life_nit

Ilya_Ilyich wrote: »

One important consideration is diversification - by using the All-share as your sole equity index you'd be getting okay exposure to the UK market but no international exposure. It's generally a good idea to spread your investments throughout the globe so that if the UK performs poorly for a period you still have investments elsewhere that'll grow well and make up for it somewhat. If you're determined to use low-cost index funds for your investments you should consider holding funds for multiple regions (e.g. an all-share tracker, a US tracker, an Asia tracker etc) or a fund that covers multiple regions (e.g. there are FTSE all-world trackers).

You might want to look at the Vanguard LifeStrategy funds. .

Thanks Ilya,

I think diversifying globally is more appealing than just a 100% FTSE all share.

So given that a more 'global' index would be better I'm now on the hunt for one of those.

the Vanguard one you highlighted requires a £100k lump sum deposit to open, which I can't do at the moment.

So I am searching for a global index tracker which is low cost now and does not require as big of an initial investment.

from googling frantically today I've yet to find one that is a 'tracker'.

Someone suggest having multiple index funds, but I think from a long term perspective I'd prefer to keep costs as low as possible and only have a single index fund for greater returns.

Kind regards,

Daniel

psychic_teabag

Vanguard funds are only £100k minimum if you buy direct. You can buy much smaller amounts from platforms, but they then add their own charges.

Having multiple trackers doesn't necessarily increase costs : again, depends on the platform. With HL, the platform charge is per tracker. With Best, some trackers (eg HSBC) are currently free, or you pay one fee to hold as many other (eg Vanguard) trackers as you want. But some platforms charge a dealing fee, so that would increase if you buy multiple funds.

sabretoothtigger

Global usually means mostly USA which is a tragedy you dont want to track. We in the UK already rely on USA for worth so you will be feeling how that plays out either way


For index investing Asia pacific is the best sector I think though technology was a good one recently, it is much more risky.
Also very low cost, Im looking at them now after selling Aberdeen managed. Newton and Barings is two I was thinking of

Ilya_Ilyich

Luckily as psychic teabag says the £100k minimum is only if you buy the fund direct from Vanguard Hargreaves Lansdown allow you to invest from £50 upwards (for regular monthly saving) or £3k upwards for a lump sum, and other platforms will allow you to invest as much as you want as long as you pay their dealing fee (usually around £10). There's a list on the Vanguard site that tells you which platforms offer their funds.

Have you thought about holding your investment in a tax wrapper? If you are able to invest through a stocks & shares ISA you'll never have to worry about paying tax on your gains; this may not be a concern at present but could end up having big benefits down the line. If you wanted to do this you'd need to split your £15k up as you can only put in up to £10680 this tax year (assuming you haven't already contributed to a cash/S&S ISA) so you'd need to do some now and some after April 6th so it falls under next year's allowance.

e: Vanguard 80% holds something like 23% of the fund in the US which I agree is high, but this is just a reflection of the country's large number of successful companies. As the US's share of world market cap decreases its share of global index trackers will also decrease.

Jegersmart

I would just pick some managed funds that have a global exposure and pay dividends in that case, your gains in a global tracker would probably be limited long term to global gdp growth (or thereabouts) which may be 2-4% per year on average.....which I would consider very poor personally.

J

life_nit

Ilya_Ilyich wrote: »

One important consideration is diversification - by using the All-share as your sole equity index you'd be getting okay exposure to the UK market but no international exposure. It's generally a good idea to spread your investments throughout the globe so that if the UK performs poorly for a period you still have investments elsewhere that'll grow well and make up for it somewhat.

Jegersmart wrote: »

I would just pick some managed funds that have a global exposure and pay dividends in that case, your gains in a global tracker would probably be limited long term to global gdp growth (or thereabouts) which may be 2-4% per year on average.....which I would consider very poor personally.

J

These two posts seem to disagree. I understand diversifying is a good idea than having 100% equities in the UK all share index.

I realise it's going to be more volatile, but I am in it for 30+ years, so the main question is do we think the returns after expenses in a global index are going to be greater than those of the UK market. Which I'm assuming cannot be answered :P

My reasoning behind not wanting to choose something in the way of a managed fund is the expenses. That's why I have deemed an index to be a better choice.

On a side note I did not realise looking at index fund's was such a minefield. But I'm determined to pick something im going to be happy with given my horizon.

I found this interesting on the fidelity website:

*The TER shows the annual operating expenses of the fund. It is a total of the annual management charge, service charges, registrar charges and fund expenses associated with the management of the fund. It may vary from year to year. It does not include additional expenses to cover costs incurred by the fund manager buying or selling stocks within the portfolio, costs of interest paid on borrowings and payments incurred because of the use of derivatives.

So although it is cheap. It could just randomly shoot up? :eek: This does not sound as good as it first did.

Apologies for my lack of knowledge in this field. I'm choosing an index fund for this exact reason, I am not an experienced investor and I do not plan on actively managing anything at this moment, so I will be adopting a passive approach.

Kind regards,

Daniel

Jegersmart

life_nit wrote: »

Apologies for my lack of knowledge in this field. I'm choosing an index fund for this exact reason, I am not an experienced investor and I do not plan on actively managing anything at this moment, so I will be adopting a passive approach.

Kind regards,

Daniel

Hi Daniel

This is why I would at least consider that *someone* should actively manage....if you see what I mean? In any case it is up to you but if you look at the FTSE index chart for the last 20 years or so you might be able to see why I suggest this....:)

All the very best with this and good luck with whatever you decide!

J

Ilya_Ilyich

Daniel: Typically funds' expense ratios will remain roughly similar from year to year as the costs of administering the fund are unlikely to vary greatly. Although the warning is there, any increases are likely to be on the order of tenths of a percent. The main cause of increased charges for an index fund would be drastic changes in the index that caused the fund to need to buy & sell more shares than usual -- e.g. if company share prices were varying wildly the fund would need to keep buying and selling to make sure that each company was held in the correct proportion.

I think the disagreement in mine and Jegersmart's posts really comes down to the active/passive issue that there's no concrete answer to -- I have more confidence in a cheap and well-diversified index fund whereas he's more confident in the skill and ability of active managers to dependably pick good stocks even if it costs a bit more. This is definitely not the place for the active/passive debate but I think it's fair to say a global index tracker (or trackers for multiple global indices) should provide approximately average market returns with a good bit less research and involvement required than successfully picking an active fund or funds -- where you really should research the fund manager, their strategy and outlook, their historical performance, etc.

Jegersmart wrote: »

I would just pick some managed funds that have a global exposure and pay dividends in that case, your gains in a global tracker would probably be limited long term to global gdp growth (or thereabouts) which may be 2-4% per year on average.....which I would consider very poor personally.

J

I'm trying to think of a reason for this but I'm struggling. Can you explain why world stock market performance would roughly equal GDP growth? As I understand it the figures are if anything negatively correlated. Are you expressing the growth in nominal or real terms? As I personally would be delighted with a 4% real return in the long-term.