Tracker right way to go?

R_P_W

Hi,

I'm after a bit of advice really on whether investing in a tracker is a good place to start. Firstly, just a summary of me:-

30 years old, my wife is 28. Both in decent (pretty stable) jobs with blue chip companies. At the moment have ~3 months after tax income in cash savings.

I have been paying in 6% of salary into company pension since I was 19 (employer pays in 8%). My wife is going to start her pension very soon (probably at the 8-10% level as her company will double contribution for first 12 months).

Our plan at the moment is to save ~£500 month into cash savings to increase our cash buffer in the short term but also to build up a fund for when we look to remortgage in 2 years time. Our cash savings are not in a cash ISA right now as we have been dipping into them to furnish our new home etc, but most of the expenditure is now complete so will be looking at moving to instant access cash ISA very soon.

I am also planning to increase my pension contribution level by 1% per year over the next couple of years.

So, we have cash savings and we have pensions set up, what is missing is other investments. If we had say £100-£150 a month that we can invest (at the moment) I was thinking about doing so in a fund tracker (within ISA) as a starting point. My thoughts are to look at maybe putting £50-100 into a FTSE 100 tracker and the other £50 into an emerging market tracker. I'm trying to think 10-15 years ahead, is this a good place to start? Are L&G competitive?

Sorry for the ramble but apart from company sharesave schemes not had much experience in investing. Any thoughts or advice would be appreciated.

JohnRo

The whole purpose of trackers is not to beat the market but to be the market. That means having several trackers for different markets and regions.

I haven't quite read it all yet but I bought a book called Smarter Investing by Tim Hale. It is very accessible, well written and drills home the philosophy that over the long term your best chance for investment success is to track the markets and incur the least costs possible while doing so.

I've just started a thread here you may possibly find of some interest, there aren't really any wrong answers because no one knows what is going to happen in future but the most important consideration for tracking, by far, is that whatever you decide and settle on, it must be low cost.

wriggly

R_P_W wrote: »

So, we have cash savings and we have pensions set up, what is missing is other investments. If we had say £100-£150 a month that we can invest (at the moment) I was thinking about doing so in a fund tracker (within ISA) as a starting point. My thoughts are to look at maybe putting £50-100 into a FTSE 100 tracker and the other £50 into an emerging market tracker. I'm trying to think 10-15 years ahead, is this a good place to start? Are L&G competitive?

For that level of contribution, L&G are competitive. Expect to pay 0.55% to 1.05% for their tracker funds, with no other costs.

Other funds have a lower percentage cost, but typically require you invest via a platform which charges its own fees. So, they are better for larger contributions.

Another option might be to look at the investment possibilities provided by investment trust families like F&C and Baillee Gifford. They often provide low-cost, low-minimum access to their investment trusts (which are not trackers, but are generally reasonably low-cost and range from ultra-conservative broadly diversified nearly-trackers to more adventurous and more volatile concentrated investments).

Lokolo

So half your money in a developed country with no currency risk, and the other half in the complete opposite risk profile... with nothing inbetween?

srcandas

Lokolo wrote: »

So half your money in a developed country with no currency risk, and the other half in the complete opposite risk profile... with nothing inbetween?

If you invest in two things there will always be nothing in between. But how many ways do you want to split £150 a month?

Lokolo the FTSE clearly has currency risk. Just because the pricing currency may be your currency doesn't guarantee its value.

I'd say good choice if you think EM and FTSE will do OK. Myself I prefer the Asia tigers to EM but that is just my personal choice. Pick good fund managers with not unreasonable charges and in a few years when your fund pot grows you can look at possibly a more complex strategy.

:beer:

bowlhead99

Sorry in advance for long post...

Speaking generally- increasing your cash balance towards the planned remortgage (rather than using investments, which can go down in value) is a good thing. Other than some 'regular saver' accounts, the interest rates will struggle to match inflation particularly after tax, so you should use ISA for as much as possible - and 500 a month to April 2013 is nowhere near your joint cash ISA limit, so feel free to put some of your current savings in too, even if you're still 'dipping in'.

On the shares:
- FTSE 100 is the most talked about index in the UK media but is not well diversified or very representative of the health of the UK economy, as it's very heavily weighted towards the biggest companies listed here, in sectors like oil & gas, banks/financials, big pharma etc. Many of the companies of that size have revenues internationally and so you are getting quite a bit of overseas country and currency exposure. Not necessarily a bad thing if you know that's what you're getting. Perhaps a FTSE UK All-Share tracker, which includes lots of smaller listed companies, would be a better broader index to follow, it still includes the big names but at lower weightings.

- £50/£150 or a third of your money going into emerging markets is pretty high, but if this is for the real long term, you can almost consider it alongside your pension investments (which are accessible in 25 years) and when taken together your overall emerging markets exposure is probably not so high. It's a good reminder to actually take an interest in what funds your pensions are actually going into, because you and wife do of course have choices in how the monthly %s are spent within the pension pot as it builds.

- I'm not a big fan of investing in emerging markets through trackers, as they are generally less efficient than developed markets and so in theory should benefit from a more active management approach and get some value out of the associated higher fees in a managed fund. But then how to pick the right manager is of course the tricky part! I do have some EM tracker exposure through a Vanguard lifestrategy fund designed to give low-cost global exposure. To be honest at a few hundred pounds saved in the first year you probably wont do too badly by broadly following the market, maybe revisit the 'active vs passive' debate when you've built up more of a pot.

- And a bit like the comments on the FTSE 100 index, with an EM index you have to know what you're getting. Lots of tiny breakthrough companies in frontier markets? Not quite, the most exciting high growth companies are privately held or too small to show up in the MSCI EM index. Recently, £60 into an EM tracker gets you at least £2 of Samsung shares, and a tight spread of sectors for the rest. More high-tech stuff than your FTSE 100, but it's still banks, oil/gas etc.

Overall your problem is that at £150 a month it's hard to get a nice diversified portfolio like the ones people post on here from time to time. You haven't covered other developed economies like USA, Europe, or smaller companies; and you're all in shares with no real estate, company bonds, government bonds etc. At the moment government bonds are expensive, and you're early enough in your investment journey to be able to handle some drops in value on your equities, but you should try and diversify when you're a few years in.

Perhaps for now if doing trackers you could consider:
- 25% in UK all-share index (because you do after all live in the UK, so UK economy in GBP is not a bad thing to hold);
- 50%+ in a global (ex-UK) index (because most of the world's markets are NOT in the UK)
- the rest in emerging markets if you fancy a bit more weighting beyond what you get in the global tracker.

Now, these percentages might not split neatly to easy cash amounts each month, but it doesn't really matter if you put zero in EM for the first 6 months and then, for example, more in that and less in Global for the next. You have ages to go on your 10-15yr timespan so the important thing is to
-be in the market generally
-not be too heavy in one geography or sector
-consider other types of funds or asset classes outside shares when you have the money to diversify, at some point down the line (not this year).

Hope this helps, it's jst one opinion in a sea of millions :beer:

Lokolo

srcandas wrote: »

If you invest in two things there will always be nothing in between. But how many ways do you want to split £150 a month?

Lokolo the FTSE clearly has currency risk. Just because the pricing currency may be your currency doesn't guarantee its value.

I'd say good choice if you think EM and FTSE will do OK. Myself I prefer the Asia tigers to EM but that is just my personal choice. Pick good fund managers with not unreasonable charges and in a few years when your fund pot grows you can look at possibly a more complex strategy.

:beer:

Currency is based on the difference between your currency and the investments currency. You won't have currency risk with FTSE companies (yes if the FTSE operates outside of the UK; Shell, Vodafone etc. then the idvidual companies might but we're not talking about that, we're talking about the actual fund and their risk profiles).

With £150 you can split it into 3 trackers, not just 2 and having 2 complete opposite ends of the scale doesn't make a good portfolio, it makes a terrible one.

Given you can now get global trackers, which are very cheap.

Actually I don't need to explain it as bowlhead99 has already done it for me.

srcandas

Lokolo wrote: »

With £150 you can split it into 3 trackers, not just 2 and having 2 complete opposite ends of the scale doesn't make a good portfolio, it makes a terrible one.

Lokolo this is not the place for a detailed discussion. However I find it frustrating how portfolio theory is pumped under inappropriate circumstances - IMHO.

The OP suggested he might invest a minimal percentage of his income in a FTSE and an EM tracker. Without asking him why he chose those options, the mass balancing all encompassing portfoio theory is pumped forth like gospel.

If he wants to get into complex portfolio management then I'd have thought advising him to research and read before jumping in would be wise. If on the other hand he fancies a low risk low cost start to investment I for one would suggest 66% FTSE tracker and 33% EM tracker is hardly the risk of the century.

Just looking at a couple of funds over 5 years EM +73.51%, FTSE100 +34.9%. Yes past perf.... etc. but hardly a disaster

OK everyone here I know is trying to be helpful so didn't intend to offend but sometimes I find the idea that all investment at whatever level has to be complex but equally can be expressed in a few hundred words astounding.

Good luck OP, one and all, I'm off. Got to go re-balance my portfolio

bowlhead99

Lokolo wrote: »

Lokolo the FTSE clearly has currency risk. Just because the pricing currency may be your currency doesn't guarantee its value.

Currency is based on the difference between your currency and the investments currency. You won't have currency risk with FTSE companies (yes if the FTSE operates outside of the UK; Shell, Vodafone etc. then the idvidual companies might but we're not talking about that, we're talking about the actual fund and their risk profiles).

What is 'the actual fund' if not a collection of individual companies' values and dividend streams? And what are the companies' values and dividend streams if not a function of their assets, revenues and costs? The fact that, as we both agree, the 'actual companies might' have revenues and assets in foreign currencies is exactly what creates your currency risk which is Scrandas's point.

The fact that BP shares happen to be priced in pound sterling or you can buy a FTSE tracker priced in pounds sterling does nothing to avoid currency risk of owning BP shares or the other multinationals which make up the index. If you were buying BP shares dual-listed in New York in dollars, or choosing to buy one of the many global trackers priced in USD or EUR instead of GBP, this would not change the exposure to foreign currency movements which you have on the individual holdings which you own under the umbrella which you call your Fund.

The only thing you want to ideally avoid is the fact that if you chose to buy your tracker shares in dollars you would first have to buy dollars, then later when selling them you would have to sell dollars to get the pounds back. It might cost you a couple of percent each way, and is a waste of money because the underlying assets are the same and you have not changed the risk. The commissions are just a fixed cost of doing business, and can be avoided or not at your preference, but do not change 'currency risk'.

There is perhaps a wider point. A simple presumption is that we want to get pound sterling back at the end of our investing cycle because that's what we'll spend in our day-to-day lives in 10-15 years, or in retirement etc. However we live in a global economy and whatever the best equivalent of a laptop or a plasma telly looks like in 2025, it may well be sold by Sony and priced in yen. Yes some might choose to still buy it from Currys and pay pounds, rather than ordering it direct over the internet from Japan, but the price is driven by the manufacturer's cost and the exchange rate to yen, and only a small part is driven by the pound sterling of the cashier's wages. Or perhaps the components and manufacturing are outsourced by Sony to Malaysia, and their retail price in different global locations is driven by the fx rate of the Malay ringgit to the local currency.

So sure, you need some sterling to buy your bread and milk and eggs and whatever is manufactured in the UK with no overseas currency cost whatsoever, but for an increasing number of things you want to consume, from IKEA sofas to Hollywood movies, the cost driver is in a foreign currency. Therefore you may not actually taking the level of risk that you might have thought, when holding a long term portfolio which includes assets denominated in yen, ringgits, swedish kronor and US dollar.

This is off-topic for the OP who is just looking for how to invest £150 a month in some trackers, but worth considering when you have larger amounts of free cash and are making choices on how to fund your future lifestyle.

bigadaj

With respect to the original question I think the HSBC trackers are generally slightly cheaper/ lower charging than l and g currently.

Lokolo

bowlhead99 wrote: »

What is 'the actual fund' if not a collection of individual companies' values and dividend streams? And what are the companies' values and dividend streams if not a function of their assets, revenues and costs? The fact that, as we both agree, the 'actual companies might' have revenues and assets in foreign currencies is exactly what creates your currency risk which is Scrandas's point.

Yes but comparing companies that operate in the UK as well as international have entirely different currency risk as those that operate entirely outside the UK.

Risk is a big part of investing and the OP hasn't demonstrated that he understands (by all means, he could) and I must think that he doesn't if he's putting £50-£100 in a FTSE then £50 into Emerging Markets.

Scranda's says there's nothing wrong with it what he's investing in but there's a lot wrong with it. You've even said suggested yourself about a global index and that the OP needs to move into more diverisified portfolio.

Too many people come on this forum nowadays read a couple of threads saying index funds and then shove money into random ones without fully understanding about what they are doing.