Buying First Passive Tracker

mgarl10024

Hi all,

I'm after a bit of advice / hand-holding. Sorry for the length but there's a lot of detail and I'm in analysis-paralysis.

Having read around a lot of places, including...:

• http://mrmoneymustache.com
• http://monevator.com/category/investing/passive-investing-investing/
• http://jlcollinsnh.com/stock-series/
• Tim Hale's Smarter Investing book,
• and of course this forum.

...I'm sold on the argument that passive trackers are going to give me the greatest chance of future success (over active).

The issue is how to buy them efficiently. I'm pretty sure that a S&S ISA is the way forward, and would be looking to start with an initial lump of about £3000 and then add to it throughout the year as money is available (although could set up something regular if necessary). I'd like to be able to put in the full 15k this year although think that is aspirational! I've currently used none of this year's (2014-2015) ISA allowance.

Current Situation
I have a S&S ISA with TD Direct, and in it have some shares bought through a company scheme (which I'll keep really as an education, understanding the risks), and about £300 of cash that's not doing anything. I can't do much with that £300 either as TD requires £500 to invest in a fund.

What To Do
As I see it, I could
1) Put my £3000 straight into the TD Direct S&S ISA and start shopping for funds.
This would mean that I could get my £300 working for me instead of just sitting there as I could buy £3300 of funds.
2) Remove the £300 from TD (losing the tax advantage), select a different broker/supermarket and start a new S&S ISA with them.
TD charge 0.3% to hold funds which (to me, and please correct me) doesn't seem terrible, and their service has seemed ok for what I've asked of them.
I think Charles Stanley charge 0.25%, and Alliance Savings charge a fixed fee which wouldn't work out for such a small investment. At this point I start reaching analysis paralysis, even when armed with http://monevator.com/compare-uk-cheapest-online-brokers/.

Fund Manager
Most of the sources listed above seem to recommend Vanguard as a Fund Manager. I understand that there are loads of managers, but to avoid that analysis paralysis, I'm working on the assumption that they are all largely the same and that Vanguard is about as good as any other (unless challenged).

What To Buy
Then, in terms of what to buy, I am intending to use my £3000 to buy just a simple global tracker or UK tracker. Choosing an accumulation tracker means I avoid having to reinvest dividends. When adding more funds later, I can diversify a bit then. One tracker would keep it simple for now, with me understanding that later diversification is needed.

But then there are many ways to buy - index/mutual vs. ETFs.
https://www.vanguard.co.uk/uk/portal/investments/mutualfunds says that I could select the FTSE Developed World ex-U.K. Equity Index Fund which has a TER of 0.3%. Sounds reasonable to the uneducated.
Or, https://www.vanguard.co.uk/uk/portal/investments/etf, shows that I could select the FTSE All-World UCITS ETF which has a TER of a lower 0.25% - sounds better.
Niavely, I'm assuming that each of the prices for the funds represent what the fund has bought, so both should be just as good a deal (in terms of amount of things you are buying for each pound), but then I remember reading that sometimes ETFs trade above/below what they've bought according to demand - so I'm lost.
I then also remember reading here (http://jlcollinsnh.com/2014/01/27/stocks-part-xxi-investing-with-vanguard-for-europeans/) that an ETF domiciled in Ireland may come with a tax implication - so perhaps not so good for me as a UK investor.

At this point, I get very lost, close down all the windows and do nothing for a month until something makes me have another try. I've been stuck like this for about three months now.

Any help appreciated.

DiamondLil

mgarl10024 wrote: »

Hi all,
At this point, I get very lost, close down all the windows and do nothing for a month until something makes me have another try.

Someone far more knowledgeable than me will be along soon; but, gawd, I can empathise with this.....:(

JohnRo

Stick to funds.

Cavendish Online (via Fidelity lite) or Charles Stanley Direct are your current best options for a platform. I personally much prefer CSD having used both, no contest.

At CSD the platform fee is 0.25% p.a charged pro rata, monthly in arrears, no platform related charges for the purchase and sale of funds.

That means your only restriction on the number of funds you might buy, hold or sell with CSD is the minimum £100 purchase requirement.

As the sum involved increases the water gets increasingly muddy but with 4 figure sums the choices are fairly clear cut imho..

ChopperST

Remember that a tracker isn't going to "beat" active funds, you will simply revert to the mean. Some active funds will beat the mean, some will fall below.

Have you invested in the TD S&S ISA this year? If so you can't open another, you would have to switch. A platform charge of 0.3% isn't horrendous especially with a small portfolio.

With regards to your choice of fund what are your goals? Is it to track the performance of the UK economy or that of the developed world as you have mentioned two very different funds? You also mention no bond / cash allocation - are you planning to be 100% in equity? This is only for the those with a high risk appetite / the very young.

I found the Boggleheads guide very useful when starting out (Its US based but the principles are the same)

http://www.bogleheads.org/wiki/Video:Bogleheads%C2%AE_investment_philosophy

Perhaps if you enlighten us on your goals and attitudes to risk it will be easier for people to offer you some helpful advice.

Do you have a mortgage?
Any debts?
Emergency fund in place?
What timescales are you looking at investing for?
What is your risk attitude -could you hold tight if your investment dropped 20, 30, 40%?

mgarl10024

ChopperST wrote: »

Perhaps if you enlighten us on your goals and attitudes to risk it will be easier for people to offer you some helpful advice.

Sorry - I'll do my best.

ChopperST wrote: »

Emergency fund in place?

Yes. I'm self employed which means that money can fluctuate. As a result we (my girlfriend and I) are very conservative with money and have built up an emergency fund which could keep all the bills paid for over a year. My girlfriend could also keep most of the bills paid on her job alone.

ChopperST wrote: »

Do you have a mortgage?

Yes. The rate is fixed pretty low and we've reduced the term significantly. Unless we change direction, it should be gone in a few (<5) years.

ChopperST wrote: »

Any debts?

Yes - stoozing only. 0% credit cards, backed up by cash in savings accounts. We could pay these off tomorrow if required.

ChopperST wrote: »

What timescales are you looking at investing for?

Longterm.
As you can see from above, we've a healthy emergency fund and no real debts. It feels as if there is little point simply hoarding more cash in savings or paying down a cheap rate mortgage even faster than now.
The money I'll be investing would be money that we've decided that we don't need and would hope not to touch unless absolutely required.

Other Detail
We're both early thirties.
In the near future, having a family and a possible house extension would mean that 'spare' money for investments may be harder to find - but getting what we have now, working early, seems to make sense.
We also have a BTL which is mortgaged but is comfortably cash-positive after bills/tax etc. So this (subject of this thread) wouldn't be our only investment.

My goal would be to build up a pot of investments which (according to the 4% rule) could sustain some/all of our expenses, allowing us both many more options with regards to work (accepting lower paid jobs, fewer hours, more in line with values, etc.).
It's a grand aim, but you gotta start somewhere...:)

ChopperST wrote: »

What is your risk attitude -could you hold tight if your investment dropped 20, 30, 40%?

I hope so - my girlfriend is more risk adverse than me. I would say that I am reasonably relaxed with it - given that it is money we don't need as such, and given the long timescale there's a good chance things will bounce back. I like to think that I wont be hitting the panic button and buying high and selling low. The key will be not looking at it daily - just set it up and check on it almost annually.

Hope that helps?

mgarl10024

ChopperST wrote: »

Have you invested in the TD S&S ISA this year?

No.
I just had £300 of spare allowance last year so not wanting to lose it put in £300 in the first few days of April (so last tax year) which is sat there not doing anything.

JohnRo

Don't over analyse it is all I'd say. Vanguard Lifestrategy or something similar sounds the sort of thing that'll fit the bill.

I do the same with 0% credit cards. If only they'd let me stooze a few million :P

The real dilemma at this current time is more that markets around the developed world are pushing towards new highs or in the US case breaking them and the reasons for this appear unsustainable.

There's a growing opinion that a correction of some sort is due, the big question is how long do you wait for this and what growth do you forfeit doing so.

I tend to just go for it and see what happens. Remember you haven't lost anything until you sell.

That's why it's critically important you hold for the long term because short term paper losses are a distinct possibility. That said if you top up those paper losses then you buy into the price recovery.

Conrad

JohnRo wrote: »

Stick to funds.

Cavendish Online (via Fidelity lite) or Charles Stanley Direct are your current best options for a platform. I personally much prefer CSD having used both, no contest.

..

I'm also paralysed by indecision.
My primary concern is around who holds your money.
Are these firms you mention safe if the world went into a severe global decline or something like a third world war compared to say the big names like Scot Widows that have come through many wars and downturns but are still here?


Could the sorts of lessor known firms you mention somehow go belly up and disappear? I realise this can happen to well know providers too but the evidence shows us the vast bulk of large long lived providers have sustained themselves through thick and thin.

JohnRo

I suppose until it happens we can't know how it will play out in such a case.

Perhaps the bigger and more likely worry is fraud committed by a platform that directly affects their customers but in a regulated environment you can reasonably expect that the FCA have such matters in hand.

Admittedly their track record on regulating banks is appalling but banks don't adhere to or obey the rules mere mortals have to.

If the likes of vanguard or blackrock went bust then that's perhaps a different kettle of fish but these are doomsday scenarios and imho just not worth losing sleep over.

http://www.candidmoney.com/articles/238/all-about-nominee-accounts

ChopperST

You seem to have all the bases covered.

As you haven't invested with anyone this year and as a newbie investor then I'd look at Charles Stanley (0.25% platform fee) if you are considering Vanguard. I've personally picked my own passive funds, purely so I feel like I'm doing something when it comes to rebalancing - only time will tell if that was the right decision!

To save you time and effort the Lifestrategy funds would be most appropriate as they rebalance for you and invest in all the world's developed economies. You then chose what chunk you want to allocate to bonds (I'm sure your research tells you that these are used to mitigate risk in your portfolio - I personally am using cash at this stage as bond rates will drop even further when interest rates rise).

At age 30 You will probably want to consider a 80/20 or a 60/40 split so the lifestrategy 80 or 60 funds would be most suitable. You then just drip feed in every month and let the fund do the work. Don't look at it more than quarterly for risk of panicking or getting carried away - the general trend over a 20 - 30 year period is up but with peaks and troughs short term.

You may also want to consider adding in an emerging market tracker, a global property fund and a small cap fund for some more diversification as time goes on. Bear in mind that emerging markets and small caps will be more volatile than the large cap funds so allocate small chunks of your portfolio to them (typically no more than 5-10%).

Monevator has some excellent "lazy" portfolio's which are a useful reference.

http://monevator.com/9-lazy-portfolios-for-uk-passive-investors-2010/

Their own slow and steady portfolio was set up with £3000 with a 20 year timescale back in 2011 so you could model your portfolio on that and you wouldn't go far wrong.

http://monevator.com/tag/sspu/

Remember its time in the market and not timing the market. Get an asset allocation decided and start investing. If you follow monevator et al. you can't go far wrong.

If this is any help this is my current equity portfolio, the remainder is held in cash with a roughly 80/20 split between the two. All of the funds are accumulation units.

Blackrock Global Property Security Eq - Target Allocation 6%
Fidelity Index Emerging Markets P - 5%
Fidelity UK Smaller Companies - 6%
HSBC American Index Fund - 31%
HSBC European Index Ex UK - 13%
HSBC FTSE All-Share - 29%
HSBC Japan Index - 5%
HSBC Pacific Index - 5%

kidmugsy

If a decision seems finally balanced, it doesn't much matter which option you choose. Spin a penny if you have to.