Compounding ISA's-can it work?

cpwpc

Hi MSE's - new here, be gentle!

I'm keen to know your thoughts regarding using ISA's as a looong term (40+yrs) investment vehicle.

I'm looking to put away my full 7K (or whatever) allowance p/a.
Using the Fool figures suggesting that a FTSE100 tracker will outperform most alternatives over such a long time,(sorry-I know this is contentious) with all the flexibility of an ISA and the obvious tax benefits. Tell me why I shouldn't plump for a 100 tracker and let 'the miracle of compound interest' do its stuff?
They suggest the FTSE 100 has done 11% p/a over 90yrs.
Allowing for inflation and fees this still makes for an super attractive looking sum after 40yrs.

What am I missing? I grasp that it may go down as well as up, but over an extended period? 90yrs is a big sample.

Thank you

dunstonh

Using the Fool figures suggesting that a FTSE100 tracker will outperform most alternatives over such a long time,(sorry-I know this is contentious)

It's not contentious. Its plain wrong. It's a play on words which makes you think it is referring to all funds and not just the managed funds that invest in the FTSE100/large caps which is what it really means.

In the last 13 years, the FTSE 100 trackers have failed to perform above sector average each and every year.

What am I missing?

And how do many of those past 90 years compare with the economic position we are in today? None.

Single fund investing WILL result in lower returns over the long term. It doesnt matter if its tracker or managed. The UK has typically been best sector once every 5 to 7 years. Going forward it is likely to be less than that due to globalisation. So, in a 40 year period, your money is likely to be in the best in 4 to 7 years of the 40.

and let 'the miracle of compound interest' do its stuff?

There is no interest on FTSE100 trackers. Stockmarket investments dont work that way.

Of course, there is dividend income but if you want to focus on that, you wouldnt use a FTSE100 tracker.

jamesd

cpwpc, consider these drink taste tests, high numbers better:

cider: 80
beer1: 50
beer2: 60
beer3: 70
beer4: 90

Three quarters of all beers are outperformed by cider. Therefore its obviously not worth buying any of the beers if you want a good drink. So the Fool logic goes.

Hmm. Not quite. You can see that the best performer is a beer, one of the 25% that does better than cider. That's the best tasting drink in the taste test. Oh, the taste test only includes lagers. There might be better tasting beers of a different type.

There's no need to fall into the trap of the Fool word game. All you need to do is buy one of the better funds instead of one of the poor ones.

cheerfulcat

cpwpc wrote: »

Hi MSE's - new here, be gentle!

Hello. I'm not quite sure why you posted this here rather than at the Fool, where you would have got rather more informed comment on TMF's investment philosophy, but since you're here...

I'm keen to know your thoughts regarding using ISA's as a looong term (40+yrs) investment vehicle.

Excellent idea

Using the Fool figures suggesting that a FTSE100 tracker will outperform most alternatives over such a long time,(sorry-I know this is contentious) with all the flexibility of an ISA and the obvious tax benefits. Tell me why I shouldn't plump for a 100 tracker and let 'the miracle of compound interest' do its stuff?

The Fool does not say that a FTSE 100 tracker will outperform most alternatives. What it does say, and this is not in contention, is that over the long term equities have outperformed cash and bonds. The "miracle of compounding" ( not " compound interest " ) involves re-investing dividends.

They suggest the FTSE 100 has done 11% p/a over 90yrs.

The FTSE 100 hasn't been around for 90 years. See above. Nor do they suggest anything of the sort.

What am I missing? I grasp that it may go down as well as up, but over an extended period? 90yrs is a big sample.

You're missing - or getting wrong - quite a lot of the detail but yes, over the long term equities should do well, and putting £7000 p/a into shares or equity based funds in a tax-sheltered environment should result in a substantial sum over the long term.

SloppySaver

jamesd wrote: »

cpwpc, consider these drink taste tests, high numbers better:

cider: 80
beer1: 50
beer2: 60
beer3: 70
beer4: 90

Three quarters of all beers are outperformed by cider. Therefore its obviously not worth buying any of the beers if you want a good drink. So the Fool logic goes.

Hmm. Not quite. You can see that the best performer is a beer, one of the 25% that does better than cider. That's the best tasting drink in the taste test. Oh, the taste test only includes lagers. There might be better tasting beers of a different type.

There's no need to fall into the trap of the Fool word game. All you need to do is buy one of the better funds instead of one of the poor ones.

All that beer talk has made me thirsty!

Just how do you know which are the better funds and worse funds? "Past performance should not be used as an indicator for future performance". The trouble is that even if the fund manager is absolutely top drawer, it's unlikely he will stay to manage the same fund forever. All it takes is for a "Nick Leeson" type to take over and you're screwed. At least with a tracker you know what you're getting.

jamesd

You can try picking managers or management companies. It won't be perfect but you should be able to do better than average. Both managers and management companies can change. If you don't want to do it, options include paying someone to do it for you, either individually or with a lifestyle fund choice.

If you want to do it with trackers, you can pick trackers for a range of market sectors to match your desired risk level and rebalance the percentage allocation once a year. No need to stick to just UK large or small cap when you can include emerging markets, Europe, bonds and property as well.

cpwpc

My apologies for using TMF's info. Yikes!
I think that became the focus for your ire and the bigger point was missed.
I should point out I 've had experiance of 3 'managed funds' in various indicies and they were poor, poor & so-so. In my experiance.
I'm looking for a place to put the full allowance that's tax free and will do nothing fancy, just following the market with any income/divi reinvested and left to run & run (for a long time) with as little going on fees etc.

Sloppy - should I look to 'income' funds then? Thats what I had before and the performance was scary bad! Even over the last 5yrs.
Thank you for all your opinions - exactly the reason I posted here!

missile

SloppySaver wrote: »

At least with a tracker you know what you're getting.

Not a lot, possibly slightly more than a cash ISA/ high interest account. OP has not mentioned whether he has a pension?

EdInvestor

If you want a tracker you could do worse than the IUKD I-share.An I-share (exchange traded fund) is a tracker, but in the form of a listed share.

https://www.ishares.net

The IUKD I share tracks an index of the top 50 highest yield FTSE companies, and pays a dividend of around 4%. It has the usual low charges of around 0.5% a year.

The discount broker Selftrade has a deal where if you open an ISA (25 quid a year) you can buy I-shares for free - no dealing fee and no stamp duty, including when you reinvest the divis.

https://www.selftrade.co.uk

If you get an existing customer of Selftrade to recommend you, you both will get 50 quid - thus your first 2 years ISA fee will be paid for.

dunstonh

Yep, devil's advocate. Points out all the negative parts of a strategy without a word of positive advice (as usual). Perhaps if you gave Mr. Dunston a few quid he'd not only shoot down the tracker idea in flames but also come up with a better strategy?

I cannot give advice on the forums.
1 - it would be in breach of FSA rules
2 - my PI cover wouldn't cover my liability
3 - there is never enough information to give advice

cpwpc obviously wants to do their own research but he/she is basing it on information that hasn't been read correctly and on a number of incorrect assumptions. So, I have pointed out where there are issues. He/she hasn't asked for alternatives. So I have just focused on the information given.

My favored investment strategy is well known by the regulars; Sector allocation and re balancing. However, i see little reason to ram it down everyones throats in each thread as that would become boring. Its just one strategy of many. Each having it's merits.

However, single fund investing in a FTSE100 tracker for 40 years is extremely wasteful and is destined for lower than average returns over the long term.

cheerfulcat

cpwpc wrote: »

My apologies for using TMF's info.

It's OK, you just haven't digested it properly...

I'm looking for a place to put the full allowance that's tax free and will do nothing fancy, just following the market with any income/divi reinvested and left to run & run (for a long time) with as little going on fees etc.

In that case I would second Ed's suggestion of the high-yield ETF. However I tend to agree with dh that investing in only one fund to the exclusion of everything else is going to give poorer results than you could achieve if you spread your investments over several. I would choose a " basket " of ETFs covering different sectors and/or geographical areas; this would spread the risk and give an opportunity to gain from places like the Far East which may well outperform Western markets in years to come.

If you really only want one investment, look at global growth or global growth & income investment trusts. Many of them are complete portfolios in themselves, covering all asset classes and having an international element.