Am I being mad and stupid with this idea?

Mr_Mumble

Ed, sometimes you can't avoid selling. Takeovers occur and it could be a nightmare when a rights issue comes along.

You could replicate your approach somewhat by:

1. Buying a lump sum (£250+) of Temple Bar [see note 1 below] through its savings scheme.

2. At Digitallook, or your preferred share website of choice, stick Temple Bar into a portfolio.

3. Take a look at Temple Bar's underlying investments, currently:

Royal Dutch Shell B Shares (7.47%)
BP (7.43%)
HSBC Holdings (7.14%)
GlaxoSmithKline (6.31%)
Vodafone (5.83%)
Royal Bank of Scotland (4.98%)
Unilever (4.56%)
AstraZeneca (3.77%)
BT Group (3.63%)
Signet Group (3.29%)

4. Add the above top ten investments into a watchlist. Or, if you want to be more accurate put them into a portfolio and replicate the percentage weightings. You could add a FTSE all-share tracker (e.g. ticker: "LFAS") to the watchlist to get an idea of how well Temple Bar and these top 10 holdings have done compared with an index tracker.

5. Update the top 10 watchlist quarterly.

6. You can now observe and learn from the market. Both through the performance of Temple Bar but also through the shares on your watchlist which the stock owner has a real monetary interest in.

Temple Bar and the watchlist of shares won't match (the shares only represent ~55% of the portfolio and is based on historic data [note 2]). However, there should be a reasonable correlation and you can see which of the underlying stocks are helping or hindering the share price of Temple Bar.

7. Read up on these top 10 companies when you can, e.g check out their annual reports and their fool.co.uk messageboards.

8. If you go on and decide you want to buy individual companies make sure you know the basics of balance sheets and financial ratios.

The advantages of this approach are:

1. Zero dealing charges*.
2. You have a real share to follow and receive dividends from.
3. You can follow the fortunes of other shares that do affect the share price of Temple Bar.
4. You have a diversified holding yet this is contained within an easily managed single share.
5. There is a well respected fund manager at the helm.
6. If you lose interest then the investment should still perform well and if you need to liquidate exit costs are almost nil.

*Of course the government still takes stamp duty (0.5%) on purchase and the market makers still make their money on the small bid/offer spread. You also need to own £500 in this particular savings scheme to sell for free.

Note 1: I have no interest in Temple Bar, don't own its shares nor employed by them or Investec. Temple Bar are used in this example because they're probably the cheapest way to directly invest in the stockmarket. There are other investment company savings schemes that do not charge for purchases of their shares. However, there will be a selling cost for all but a couple of niche products.

Note 2: The share price can also change relative to its underlying assets, this usually is only a minor factor and should be of little concern to the buy and hold investor. Check out this link for more details on how investment companies like Temple Bar work.

EdInvestor

Mr_Mumble wrote: »

Ed, sometimes you can't avoid selling. Takeovers occur and it could be a nightmare when a rights issue comes along.

And this is exactly what people will learn about if they actually own the shares, but won't get to understand if they buy a fund.

When a takeover occurs you normally have to do nothing,except watch the share price shoot up It's all done for you in the background - eventually cash lands in your account and you invest it in a replacement share, nothing to it.As I said earlier if something crops up you don't understand, like a rights issue, come over here and ask.

There's nothing "nightmareish" about any of this - people only get frightened if they don't understand what's happening.Investing is a bit like driving a car, or sailing a boat, or riding a bike - theory can only take you so far, you need to actually do it to grasp how it works.

I'm afraid that buying funds is not actually doing it - it's paying someone elese to do it, and thus you won't learn much.

Mr_Mumble

Ed, I fully understand where you're coming from but completely disagree!

The problem with your and lynzpower's outlook is that its 'only' £500 and you're prepared to:
a. lose it; and/or
b. have it gobbled up in trading charges

With this viewpoint the psychology changes. It may be real money but if you are just playing with the money then it is no better than just running a virtual portfolio or gambling.

If you put the sum of £500 into one entity there is more to focus and you can track the performance of the underlying assets within it. Yes, you don't choose the individual company stock yourself. But, you should only do that if you know the basics about financial ratios and balance sheets.

Being 'lucky' with a direct investment means nothing as a novice. Indeed, it may give the purchaser a false sense of security that they're the next Warren Buffett!

EdInvestor wrote: »

And this is exactly what people will learn about if they actually own the shares, but won't get to understand if they buy a fund.

Fair enough, though in my example of an investment company there is often the chance of a winding-up, rights issues, offer of warrants, change of management group or other factors that could affect the share price.

You do see the effects of government taxation, bid/offer spreads, continous price changes during market openings all of which are missing when choosing an OEIC or unit trust fund.

dunstonh

Being 'lucky' with a direct investment means nothing as a novice. Indeed, it may give the purchaser a false sense of security that they're the next Warren Buffett!

A very common thing after such a good run on the markets. It can also lead to them taking increased risks as they have become complacent and forget that it can go down as well as up.

EdInvestor

Mr_Mumble wrote: »

The problem with your and lynzpower's outlook is that its 'only' £500 and you're prepared to:
a. lose it; and/or
b. have it gobbled up in trading charges

I do wish people would actually read the posts :rolleyes:

The idea is not to lose the money: that's why it would be invested in a spread of 10 sector-diversified, very large cap stocks, which considerably reduces risk of loss.Big companies are much less likely to go bust and if there is a downturn in one sector, only one share will be affected.

The shares would be bought and held, not sold, so there would be no trading charges beyond the purchase costs. The total charges would be 10 x 1.50 = 15 pounds plus stamp duty of 2.50, total 17.50.But this is only payable at the start.There are no further charges at all.

Typically a fund will charge 1.5% (and many will deduct 5% in initial charges as well at the start) .That 1.5% works out at 7.50, but it's payable each and every year,plus you have hidden transaction charges as well.These will typically add another 1% for a total of 12.50, every year. That's compared with zero if you DIY, after year one.

You're suggesting people pay more to invest in effectively the same list of shares but within a fund structure.

Why would you do that, when you additionally won't learn very much?

Mr_Mumble

EdInvestor wrote: »

The shares would be bought and held, not sold, so there would be no trading charges beyond the purchase costs. The total charges would be 10 x 1.50 = 15 pounds plus stamp duty of 2.50, total 17.50.But this is only payable at the start.There are no further charges at all.

Well there is the bid/offer spread (higher with sharebuilder because the trades are often bigger and take place in early trading) but that is rather an anal observation by me

If you can't gain access to the money you've effectively lost it, period. Long time buy and hold is a nice principle but being forced into holding those shares because selling them would cost 10% of the original purchase price is absurd! For the purchaser of those 10 shares to make it economical would require them to keep buying those particular 10 shares.

The decision making process should be based on sound fundamentals of the companies. It should not be made on micro-managing a tiny portfolio where the decision to buy more stock will be based on; "well I have £50 of this stock and I better add to it".

Typically a fund will charge 1.5% (and many will deduct 5% in initial charges as well at the start) .That 1.5% works out at 7.50, but it's payable each and every year,plus you have hidden transaction charges as well.These will typically add another 1% for a total of 12.50, every year. That's compared with zero if you DIY, after year one.

You claim I didn't read your post! The company I referenced has 1/3rd of the charges of a typical fund. A TER of 0.56 versus your upfront cost of 3.5%.

Even with the transaction costs, not that high in a relatively concentrated large-cap fund, it would take 5+ years to bypass the charges in your micro-HYP scheme. Yet the cost of selling is virtually zero for a collective investment vehicle compared to 10% for what you propose. LTBH is no excuse here, you have to sell sometime even if that is after you die!

You're suggesting people pay more to invest in effectively the same list of shares but within a fund structure. Why would you do that, when you additionally won't learn very much?

I'm suggesting people learn about the stocks at a far lower cost and virtually no get-out charge. Saying you won't learn very much because the money is in a collective investment vehicle doesn't make sense to me.

Someone can hold individual shares and learn nothing and are quite happy with this. There are millions in this position because of sharesave schemes, demutualisation and privatisation. Just picking ten large-cap stocks, basically pin in the paper stuff, isn't going to help you learn about investments. Following these stocks and understanding their share movements may do so but this can be done in a collective stock too.

EdInvestor

Saying you won't learn very much because the money is in a collective investment vehicle doesn't make sense to me.

Perhaps you've never held a portfolio of shares - it's quite different from holding a fund.You'd be surprised how much you learn by going through the process of setting up an account, buying the shares and seeing how the costs work out, watching the shares individually move about, watching the individual dividends come in twice a year etc.

Most of this you don't see at all with a fund/unit trust.

Mr_Mumble

Ed, I own two of the shares you listed above! I do think there is a place for direct share ownership but not on small amounts. Especially when you are also looking for diversification.

All of those experiences you mention with share ownership happen with investment trusts. Perhaps you should learn about them! I really do sound like an investment trust advocate here, sorry.

We are obviously not going to see eye to eye on this.

EagerLearner

I have now invested what I wanted to outside of UK (no major amounts, £100 into a few funds testing waters and watching/learning daily), I know I am doing it backwards but now want to do UK as the (apparent) safest bet for the core of the portfolio - seems that I'm left with:

- UK Gilts
- UK index linked guilts
- Uk corporate bonds
- Uk other bonds
- UK Equity and bond income

Assuming interest rates will go up on Thursday to 5.75%, which would I be best investing in?

And if the interest rates stay at 5.5%?

Just general thoughts much appreciated, learning as much as I can.

Thanks!

lynzpower

thanks for everyones input here, Ive come back and Im staggered by the info, i am utterly shattered and am going to find it hard to get my head around in any depth today.

Numb question of the day- in a nutsell - what are "gilts"