Advice on tracker funds please!

skillboy

Hi All

I am new to investing and think the best way to start would be to invest 100 pounds a month into a UK tracker fund.

The first thing I am looking at is which UK Indices to choose out of:

FTSE 100
FTSE 250
FTSE 350
FTSE All Share

My aim is focused on growth as I plan to invest for a long time 20 year min (I am 37 now).

It seems hard to compare the historical annual returns on each of these indices but from what I can gather it seems that the FTSE 250 is probably the best all round one to choose for growth over a long period. FTSE 100 seems a bit too safe as none of the biggest 100 companies are ever gonna grow massively.

Does anyone have any thoughts about this?

Thanks in advance.

westy22

You need to consider the differences between these indices.

The FTSE 100 is the top 100 companies by market capital size; it is dominated by oil, energy, banks and communications companies.

The FTSE 250 is the next 250 largest and is a wide mix of medium sized companies and industries. It does not include the FTSE 100.

The FTSE 350 is the FTSE 100 and FTSE 250 combined.

The FTSE All Share includes some small cap companies as well as the main indices.

The 250 has performed better than the 100 in recent years but some would argue that this trend is due to reverse and that the medium companies have become fully valued.

If it were me I would be looking at the All Share for the widest diversity and to capture UK growth in the majority of sectors.

I see you are only considering the UK - do you think that the largest growth will come only from the UK in the coming 20 years? No US, Europe or Emerging Market exposure?

Linton

I agree with most of what Westy says but would add a few further points...

The FTSE100 is mostly populated by large multinationals some of which have little business in the UK. So it doesnt represent the UK and is a somewhat arbitrary mix, for example there is no manufacturing or consumer electronics as most such companies in the UK are foreign owned. There are however an arguably excess number of miners and drillers.

The FTSE250 conversely is mostly real UK businesses and is far more diverse than the FTSE100 containing many of the well known UK brands as well as many specialist companies. I would have some argument with Westy's comment about medium sized companies being fully valued as anything that becomes too large would move from the FTSE250 into the FTSE100. Perhaps the rise of the FTSE250 is more due to the FTSE100 companies being less predominant in their markets than in the past. A downside of the FTSE250 is that it will tend to be more volatile than the FTSE100.

The problem with the FTSE Allshare is that 80% of it is the FTSE100 so it is not providing as much extra diversification as you may wish. However I would agree that it is preferable as an investment to the FTSE100.

If you want a fully diversified portfolio you could buy a number of different funds that together give a broad coverage by geography, by industry, and by company size. For another option you could look at the Vanguard Life Strategy funds which invest in global range of index funds.

dunstonh

Can only echo the above. Single sector investing is not a good idea. You are putting all your eggs into one basket.

Do you think Germans would invest 100% into UK equity?
Do you have the risk profile and acceptance of volatility to go 100% equity? (the average UK consumer does not).

Rollinghome

The OP intends to invest a total of £1200 over the course of the next year.

With that sum, the options for effective diversification will be somewhat constrained. If he chooses to invest entirely in equities the difference in return between one index and another won't make much difference in absolute terms and for most people putting £1200 into a single FTSE All share tracker rather than splitting it across several equity indices won't significantly increase their risk. They may want to review their position after a year or two if they continue. More important would be to ensure that costs are kept down by not paying platform charges on more funds than necessary.

I don't think it's helpful to make investing very small sums appear more complicated than it really is.

Linton

Rollinghome wrote: »

The OP intends to invest a total of £1200 over the course of the next year.

......
I don't think it's helpful to make investing very small sums appear more complicated than it really is.

I agree up to a point. Its better to start investing in something than spend a lot of time thinking about it and end up doing nothing. The OP is not going to change their life drastically for good or bad with an investment of £1200/year for a small number of years.

The real gain from early investing is education and the confidence to make sensible choices once the investments become large. It seems to me that a useful part of education is to discuss and hear alternative views on your investment choices.

jimjames

Rollinghome wrote: »

The OP intends to invest a total of £1200 over the course of the next year.

I don't think it's helpful to make investing very small sums appear more complicated than it really is.

Completely agree. That is how I started out way back with a FTSE tracker and then have been bitten by the investing bug started to diversify. Better to get started with a small amount and then learn more as you go but without committing large amounts initially.

Wilkins

skillboy wrote: »

Hi All

I am new to investing and think the best way to start would be to invest 100 pounds a month into a UK tracker fund.

Thanks in advance.

Having read the all good comments so far, you should be able to see that it does not really matter that much. By a small margin, the FTSE All share takes the prize, but over 20+ years you should do well with any. The main thing is to keep costs down.

Perhaps in a couple of years or so, you can take stock and choose another, but complementary, investment vehicle. Good luck.

bigadaj

So why not go for a vanguard 100% equity lifestrategy fund for a proper spread of equities?

skillboy

Thanks for all your valuable comments.

As I am new to investing I thought just to start with a UK tracker and as I learn more to think about other geographical areas and other funds or stocks.

Given that all of you are more experienced than me, would you say that starting with say a low cost FTSE 250 tracker is a good idea? I notice that there were some other suggestions such as the vanguard 100% equity lifestrategy fund etc...

In other words, knowing what you know now, if you were me, what investment would you start off with?

Appreciate your comments!

black_taxi_2

http://monevator.com/vanguard-lifestrategy/