Investment advice for 19y/o beginner...

thbtheo

Hi all

So I'm 19, going into my second year at university this September. I have a job this summer and next with a large organisation paying a decent wage, and will have a surplus from student loans/grants. I currently have about £4,000 in a Cash ISA paying 1.6% until next March, and by October I should have ~£6,000 saved. But I'd like to see my money go further.

I've been researching investment options for a while now, but end up getting confused at all the different options available so just put it off — hence my asking for advice here now!

Following the research I've done, I'm thinking about investing some of that £6,000 (perhaps just £1,000 initially?) in a Vanguard LifeStrategy fund with Charles Stanley Direct, and adding to this on a monthly basis. I'm happy to consider this an investment of 3-5 years, potentially more. I'd like to stay moderately risk-averse, but obviously understand the potential for fluctuations and the need for risk to make gains.

Does anyone have any advice for me as to the best direction I can go in?

Many thanks in advance!

colsten

3-5 years is a tad short for investments. 5- 10 years would be more like it. Nothing much wrong in pronciple with a LifeStrategy fund with CS initially, What %age are you thinking of? 80%, or even 100% might be appropriate if you are in it for the long run. I.e. more than 5 years. Presumably you are thinking of putting it into an S&S ISA?

May be you can split your money into short/medium and long term? Keeping £6K in a cash ISA which pays 1.6% is a bad move if you are able to open current accounts with TSB etc - though not sure they would give you current accounts as you are still a student. Worth a try I suppose.

Linton

In principle I agree with your plan to get into investing at a young age. The experience will put you in a good state for the future when you should have more money to invest. Using a Vanguard Strategy Fund wont give you life changing returns but it's better to do this than invest in something highly risky and be frightened off investing in the longer term.

However some points....

- Before you start investing you should ensure you have a sizable cash holding. The interest will be low but at least you can access the capital to meet short term needs without crystalising a loss.

- For serious investing when you cant afford to suffer major permanent losses you need a much longer time frame than 3-5 years. So any money you are reasonably sure you will need in such a short term should be in cash.

- you need to look at transaction charges which are often a fixed amount independent of size of transaction. It may not be sensible to make investment purchases of less than say £1K-£2K at any one time unless there is a special cheap rate for regular investing.

- For something with a broad scope like the Life Strategy funds fixed regular investing is a good idea as you will gain when prices fall and you get more units for your £s without the dangers of putting excess money into a single niche area. It also forces you to make a decision not to invest should you think you need to. Otherwise the payments continue to be made with no ongoing thinking on your part.

thbtheo

Thank you both for your advice.

I wouldn't feel comfortable investing what is essentially my total net worth, so I will definitely keep a sizeable cash holding for short-term access. And yes, I would invest through a S&S ISA.

I have a few fairly basic questions if somebody wouldn't mind answering:

- What kind of returns would I be looking at if I invested in the Vanguard LS, after charges etc?

- How much should I look to be investing, bearing in mind I have £4k saved as of now?

- What % LS fund should I opt for if I'm looking for a decent return without a huge degree of risk? Or any other suggestions for funds?

- Do CS charge for additional 'top-ups'? From what I can tell, they just charge a flat management fee...

Linton

Its impossible to give helpful predictions on returns as they are very variable, but....

For something like VLS 100% I would be happy with 5%+ and delighted with 10%+. But in a bad year you could easily drop 5% and in a very bad year (think 2008/2009) 30% or more. The lower the % equity (shares) in the fund the lower the returns but the less severe the falls. In your case when I guess a 30% drop in a total investment of a small number of £K wouldnt destroy your life plans I suggest you go for the 100% fund.

How much you should spend initially and on an ongoing basis depends very much on your detailed circumstances. I wouldnt suggest in your case putting in any more than you would be able to forget about, other than a quick check once a year. You dont want to be nervously following the price changes on a daily basis. If you can put in £1K and forget about it, with an annual steady contribution of say 20% of your excess income, then that might be sufficient.

In the world of investing these are very small amounts. So your problem would be finding an online provider with whom the charges dont overwhelm any gains you are likely to make. For example, for large portfolios iii is cheap - they have an annual fixed charge of £80/year for simply holding your funds. With a portfolio of several £10ks or more this is comparatively little. With a portfolio of £1K it is larger than your expected gains. Some online brokers operate a % charge, which is obviously better for the very small investor. In addition, dealing costs are typically around £10 which is fine for investments of £2K, not so good for investments of £100. So this is something you would need to research.

bowlhead99

thbtheo wrote: »

What kind of returns would I be looking at if I invested in the Vanguard LS, after charges etc?

A mix of mainstream largecap shares around the world like the LS 100% might be expected to give a long term return of say 7%+ a year over the long term or perhaps call it inflation plus four or five percent. However in an individual year, they could go anywhere, up or down. Over the last 12 months, VLS100 has given a total return of +4.4% (after management fees but before your platform fees). Over the 12 before that, it did +20%. Over the year before that +18%.

However those returns were achieved while the world was coming out of recession after a big crash that had depressed values and would have hit a fund like VLS 100 very heavily. For example over the year and a half from October 2007 to March 2009, both the FTSE 100 and the FTSE Europe-ex-UK index dropped 45% and the US S&P 500 dropped 35%. Those are the major drivers of the portfolio index offered by VLS. Asia/ Japan and emerging markets did not all move by the same amount but on average you would have been down something in the region of 35%; it would be close to the US index return as US markets are a key feature of the overall developed world stockmarket.

You often find that markets recover quickly after a crash and can make particularly strong returns immediately afterwards. However, sometimes that's followed by another crash. Taking the FTSE100 as an example, between 31 Dec '99 and 3 March 2009 - more than a 9 year period - after adding on all their dividends received an investor in that index would still be down 30% and that's before paying the fund expenses and the platform fees. Holding on another few years would see the fund value double again but whether that's reasonable depends how long you can afford to hold on.

So, what sort of a return should I expect is an unanswerable question. You can get an idea of what you could expect in the very long term, if the next 50-100 years has similar economic conditions to what we experienced in the last 50-100 years. But chances are it won't, and if you are only investing for a few years, where anything can happen, you should not expect long term returns

- How much should I look to be investing, bearing in mind I have £4k saved as of now?

What you have saved now is irrelevant. Because it sounds like you're continuing in this well paid holiday job until September / October when you'll get up to £6k, and then presumably you will stop getting the salary until next summer and your cash pot would decline?

So in terms of holding back an 'emergency fund' while putting this money away for a few years where it's subject to investment risk and will not be accessible at its original value, you need to work out what does your budget say your lowest point ever over the next 3 or 4 years will be, and then take off a couple of thousand for unexpected bad fortune, and then you can see what is 'spare'. It might be £1000 as you suggested, or it might be £nil.

For many people where you are it is hard to do a 3-5 year cashflow budget because their personal circumstances change so much from being a 'just about to start 2nd year undergrad' to being a 23 year-old who hopefully has a real job but might still be struggling to get one and maybe lives hundreds of miles away with different people and different commitments from where they are today.

- What % LS fund should I opt for if I'm looking for a decent return without a huge degree of risk? Or any other suggestions for funds?

The most commonly asked question by newbies on a savings and investment forum is something along the lines of 'what is the most return with the least risk'.

Your question is a bit better because at least you haven't asked for 'the most' return, only a 'decent' return, and you haven't asked for the least risk only 'without a huge degree of risk'.

It is still pretty impossible to answer though as you haven't defined how much you are prepared to lose in a given period, and we don't know what return you would consider decently worthwhile for taking that risk...

Given you currently have a proper grown up job you might be able to supplement your student account by getting another mainstream current account paying high interest rates with someone like Nationwide or TSB (5% on a limited amount). This would require you to put a certain minimum deposit through the account each month but 5% even if it isn't wrapped in an ISA is still pretty good as a low rate taxpayer and you might find it better than risking a 30% loss to chase a 7% return.

To be honest if you can only really invest for 3 years or so before you properly work out what is happening next in your life, we probably shouldn't suggest fund investments at all. But I would say with that backdrop, if you do get a lifestrategy fund I would suggest the 100% equity one is probably too volatile for your short term investment and you should get one with a lower concentration of equities. Or get the 100% one with some of your money and a strategic bond fund with some more of your money to bring the overall volatility down.

That caution assumes that you really only have £1k 'sort of ' spare and might need it back. If you are very happy that you won't, you can definitely go for VLS 100% equity or even a riskier fund than VLS. But it's a nice simple out-of-the-box product for a new investor to hold and understand.

There are some investment trusts that are actively managed and try to focus on long term growth with capital preservation. Something like Personal Assets Trust is an example. Looking at their portfolio here (http://www.patplc.co.uk/secure/documents/portfolio/portfolio.pdf) they have focussed on leading blue-chip shares that they think will be solid over the very long term and give them some upside, but have also got holdings of gold, cash and UK/US inflation linked bonds. In that way they should be able to ride out a crash better than most and spend more of the cash to buy equities when they are cheap. However, meanwhile all the funds that bought a lot of equities are currently outperforming them.

Unfortunately a fund like that has higher annual management fees because it's more complex to run than a computerised index like lifestrategy. So it would cost an extra half percent a year in expenses within the fund. They offer their own free ISA wrapper for investors who go to them direct but you would need a minimum of £5k for it to be worth their while. You could of course buy through Charles Stanley or similar.

Just examples, not recommendations.

- Do CS charge for additional 'top-ups'? From what I can tell, they just charge a flat management fee...

Correct, if you're not buying shares or investment trusts or ETFs which have to be bought and sold on a stockmarket, you don't need to pay a fee per transaction. You just have to pay them a flat percentage of your assets for them to give you access to their fund platform and administer your account. The top-ups to an existing fund can be smaller than the initial purchase but there will be some limits on how small.

dale_cotterill

thbtheo wrote: »

- What % LS fund should I opt for if I'm looking for a decent return without a huge degree of risk?

.

While in the general sense bowlhead is completely correct for picking this out, for you I actually think there is a pretty simple answer to this one.

On a risk/return basis I really don't think you could go wrong with 2 x TSB accounts paying 5%

It covers your 4k pretty nicely and returns you about £160-200 a year (not compounded as they don't pay on balances over 2k) which is far more than your current ISA.

Over 3-5 years I'm struggling to think of anything that could return over that amount without also having a level of risk significantly higher.

Risk and Return obviously have to go hand in hand. If there was a way you get get decent returns at low risk, then everyone would be doing it.

thbtheo

Thanks all for your responses, a lot there to think about!

RobCR_2

thbtheo wrote: »

Thanks all for your responses, a lot there to think about!

Thanks for the thread! Learnt alot myself aswell, it seems like the general consensus on the forum is lifestrategy fund (VG).