Best home for £55k lump sum

bowlhead99

melbury wrote: »

Rather than just randomly buy some shares, perhaps it would be more sensible to put some money into another investment trust.

Presumably these can be purchased in exactly the same way as ordinary shares?

Yes, it's absolutely more sensible to invest in an investment trust than randomly buying some shares. You buy a share of the investment trust (your presumption is right, you can get them through a broker or investment platform just like buying an ordinary company share), and the assets of that trust are investments in shares or bonds of a large number of underlying companies so the risk is spread, like it would be in a Fund (OEIC / Unit Trust). A slight difference to funds is that because you're buying the IT shares on a stock market, the price of the IT shares moves based on the supply and demand for the IT shares, which means you might sometimes have the opportunity to buy in for less than the value of the underlying shares it holds, or sometimes have to pay more.

You can get ITs in a huge variety of flavours - specialising in different countries, different business sectors, real estate, public equities, private equities etc.- some being riskier and others more cautious. Because ITs are a market investment, there is a general risk you'll lose money, balanced against a general expectation that they'll go up in value over the longer term and give you something over and above inflation which you can't get from cash. In this respect they're like Funds.

melbury

bowlhead99 wrote: »

Yes, it's absolutely more sensible to invest in an investment trust than randomly buying some shares. You buy a share of the investment trust (your presumption is right, you can get them through a broker or investment platform just like buying an ordinary company share), and the assets of that trust are investments in shares or bonds of a large number of underlying companies so the risk is spread, like it would be in a Fund (OEIC / Unit Trust). A slight difference to funds is that because you're buying the IT shares on a stock market, the price of the IT shares moves based on the supply and demand for the IT shares, which means you might sometimes have the opportunity to buy in for less than the value of the underlying shares it holds, or sometimes have to pay more.

You can get ITs in a huge variety of flavours - specialising in different countries, different business sectors, real estate, public equities, private equities etc.- some being riskier and others more cautious. Because ITs are a market investment, there is a general risk you'll lose money, balanced against a general expectation that they'll go up in value over the longer term and give you something over and above inflation which you can't get from cash. In this respect they're like Funds.

One point I am not sure about, is it possible to buy them yourself but have them as a S&S ISA?

I must admit I don't really understand the criteria for S&S ISA's, do they have to be held somewhere on your behalf?

jimjames

melbury wrote: »

One point I am not sure about, is it possible to buy them yourself but have them as a S&S ISA?

I must admit I don't really understand the criteria for S&S ISA's, do they have to be held somewhere on your behalf?

Yes you can but you need to buy them inside the S&S ISA wrapper. It may work out cheaper to hold them via the IT management company though as their charges tend to be lower to encourage investors.

Somewhere like HL will allow you to hold ITs inside an ISA, in effect they are no different to any other share traded on LSE.

melbury

jimjames wrote: »

Yes you can but you need to buy them inside the S&S ISA wrapper. It may work out cheaper to hold them via the IT management company though as their charges tend to be lower to encourage investors.

Somewhere like HL will allow you to hold ITs inside an ISA, in effect they are no different to any other share traded on LSE.

Thanks for all of the information. If, due to the small amount held, you are unlikely to exceed your CGT limit, then is it really worth worrying about the ISA wrapper? Isn't the limit somewhere near £10,000 per person now?

grey_gym_sock

more or less ... an S&S ISA saves tax if you go over the CGT limit, or (on dividends) if you are on higher rate income tax, or if you buy bonds or REITs (on which you can also save basic rate income tax).

however, it doesn't always cost more to buy shares inside an ISA.

you don't have the option of buying certificated shares in an ISA (which is not the cheapest option, anyway).

also note that, if you become a higher rate tax payer later on, or your shares/ITs grow until CGT becomes an issue, it would cost to move them into an ISA, because you'd have to sell and buy back.

Glen_Clark

bowlhead99 wrote: »

Yes, it's absolutely more sensible to invest in an investment trust than randomly buying some shares.

The odds are more favorable buying shares direct because you are not paying fund charges.
Of course, you might not pick the best shares, but if you cannot pick good shares what makes you think you can pick a good Investment Trust?
As long as you have enough money to buy a range of shares, so as not putting all your eggs in one basket, then buying the shares directly yourself gives you the best chance of making money.
Of course, don't expect the profesionals to tell you that, because they make their living from charging to run these funds.

bowlhead99

Understood but when someone is talking about 'randomly buying some shares', whether they mean that quite so literally or not, and they're curious about whether buying an investment trust might be more sensible - I would not think that level of knowledge about what they're getting into implies they know much about markets or are particularly well qualified to build their own balanced portfolio out of meticulously self-researched shares.

I honestly don't believe that just 'buying some shares' gives the average person the 'best chance to make money' when compared to buying an investment trust which will provide greater diversification within your chosen field. Yes the lower cost of direct holdings can enhance returns, and the fact that ITs give a blended return from many more investments means they're less able to spike so high as an individual direct holding in the good times. But most people don't have time to actively monitor the portfolio for top-up or disposal opportunties and could be better off just buying an IT or two and paying fees as needed, for a more balanced exposure

Glen_Clark

bowlhead99 wrote: »

Understood but when someone is talking about 'randomly buying some shares', whether they mean that quite so literally or not, and they're curious about whether buying an investment trust might be more sensible - I would not think that level of knowledge about what they're getting into implies they know much about markets or are particularly well qualified to build their own balanced portfolio out of meticulously self-researched shares.

I honestly don't believe that just 'buying some shares' gives the average person the 'best chance to make money' when compared to buying an investment trust which will provide greater diversification within your chosen field. Yes the lower cost of direct holdings can enhance returns, and the fact that ITs give a blended return from many more investments means they're less able to spike so high as an individual direct holding in the good times. But most people don't have time to actively monitor the portfolio for top-up or disposal opportunties and could be better off just buying an IT or two and paying fees as needed, for a more balanced exposure

Randomly buying shares should, statistically, give you the market average. If you are buying them directly, with no fund charges, that should give you a better chance of making money than buying through the average fund.
The 'average person' will probably be more likely to pick losers than winners because they will be influenced by others with a vested interest, instead of being able to do their own research. So they are probably best advised to pick shares at random - just don't put all their eggs in one basket.

bowlhead99

I see what you mean about cost savings, but the problem as you suggest is one of putting your eggs in one basket by buying too few shares. If you only bought one share at random for example it is very unlikely to deliver an average return. If there are fifty shares giving +20% and fifty giving -20%, the expectation of picking a share at random from the hundred is the average (nil) return, but the probability of that happening is zero because there's not a single share giving that return. The variation of your results from the expectation will be huge.

What you're paying for with an investment trust management fee and administration costs is:

- firstly the stock picking strategy;

- secondly the administration (receiving a combined portfolio report and one dividend to be accounted for and reinvested annually or semiannually);

-thirdly the diversification: you can't efficiently construct a ten share portfolio to diversify your risk for say £2500 or a modest monthly contribution

As someone with time and a larger amount of capital on your hands, and perhaps more risk tolerance, and a desire not to have the expected high returns from well-selected individual stocks be diversified away by an overly broad portfolio, you're absolutely the right person to be using the "direct holdings" approach.

A novice person unable to buy the dream portfolio on day one should avoid trying to create it over time through random additions of individual shares, as the extra risk is likely to see him wiped out before construction is complete, or alternatively he'll do very well and have a false sense of security in his success.

jimjames

bowlhead99 wrote: »

What you're paying for with an investment trust management fee and administration costs is:

-thirdly the diversification: you can't efficiently construct a ten share portfolio to diversify your risk for say £2500 or a modest monthly contribution.

That is exactly why I use ITs and other funds. Buying shares may be easy in the UK and possible elsewhere but trying to get shares in Thailand for example just doesn't seem worthwhile to me which is where funds come into their own.

I'd rather spend time on other things and feel confident that even though I may be able to get some shares slightly cheaper going directly I am still in a pretty good position having any investments at all even if they are in funds/ITs.