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Investing over long term - Why?
Amarone
Forumite 22 Posts
Hello all
I have two rather simplistic questions that I have not been able to find the answers to myself.
1). Advice appears to say that when investing in (For example ) a tracker fund , that it should be for the long term.
Why? If the market is higher than when you purchased the fund why not sell within a year?
2).I looked at the Vanguard Life Strategy 80 as a starter package and am aware it pays annual dividends but does it gather other income or do you only receive it when selling? I understand the FTSE100 has dipped recently but why should that have a bearing on me if I intend to hold it for 10/12 years as part of an early retirement plan (I also have an NHS Pension). Do I make the profit out of the tracker fund when I sell in 10/12 years or does it make money (market dependent) on an annual basis i.e how do these funds make growth?
Many Thanks for any responses.
I have two rather simplistic questions that I have not been able to find the answers to myself.
1). Advice appears to say that when investing in (For example ) a tracker fund , that it should be for the long term.
Why? If the market is higher than when you purchased the fund why not sell within a year?
2).I looked at the Vanguard Life Strategy 80 as a starter package and am aware it pays annual dividends but does it gather other income or do you only receive it when selling? I understand the FTSE100 has dipped recently but why should that have a bearing on me if I intend to hold it for 10/12 years as part of an early retirement plan (I also have an NHS Pension). Do I make the profit out of the tracker fund when I sell in 10/12 years or does it make money (market dependent) on an annual basis i.e how do these funds make growth?
Many Thanks for any responses.
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A fund having gone up is not, generally, a sign that it will then stop doing so.
There are others on here you will be able to give you more comprehensive (and maybe better) answers to both questions, but the first question is basically about risk profile. If it goes up, you could of course take your money out (but generally you wouldn't want to, you would want to achieve the compound growth effect), but there is no guarantee it will go up.
Unlike savings accounts, in funds you are placing your capital at risk as well, and markets have cycles. Nobody is going to advise you that funds should in general be a short term investment, even if they could go up immediately after you buy.
What if year 2 is higher again? What if year 4 or 7 is?
You wont know in advance what is going to happen and you need to average out the ups and downs and the longer you leave it, then closer you will get to the long term average.
There is dividends and fixed interest distributions on that fund. It shouldnt make any difference to you when a drop occurs (especially relatively small ones like the recent one). One observation is that the VLS80 is at the higher end of the risk scale and above the risk tolerance of the average UK investor. You have a fixed date and the VLS80 may be good for the early years but very quickly you are going to need to move down that risk scale. Do you actually have the tolerance for the level of volatility that can occur with the VLS80? Most new investors do not.
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1) You don't have to hold long-term ... Plenty of people do trade much more actively - for example you could buy a FTSE 100 tracker and make profit when the market's rising; then switch it into a FTSE 100 Short (which gives inverse returns to the market) when the market falls, and keep your profits rising and rising
The problem is this involves 'market timing' - working out when the market is going to do something slightly before it does it, and sometimes simply working out what the market is currently doing (which is very difficult without hindsight) - which most people aren't very good at
The problem with your example of selling when you've made a profit is that then you're 'out of the market' ... You might have made 50% on your investment, but selling might mean you miss out on another 50% rise ... You can never really tell what kind of market you're currently in because you can look at it from so many different time perspectives
Then it's: when do I re-enter the market?
Generally, people who try and time the market like this don't do very well ... People who have systems which work, however, can do extremely well
Your friend for long-term investment is 'compound interest'
2) Investments pay two ways: capital growth (the value of your shares rising as the companies you invest in evolve) and income (your dividends - a share of ongoing company profits)
If you have £10,000 in a tracker, its capital value will go up and down and all over the place (and you'd hope, long-term, it will have a general upward trend) ... But this value is all academic until you sell
At the same time, however, you're getting paid dividends - maybe 3 or 4% - as income ... If you use these dividend payments to buy more shares, then over a long time you get a compounding effect, as you own more shares, you get more income, and you buy more shares, etc
Retirees generally like to own Income (as opposed to Accumulation) funds, so you've got your investment paying money straight into your bank account
Ideally, everyone would start investing in their early-20s ... Because then you can reinvest dividends for years and years, and get this compound interest effect (earning interest on interest on interest) then switch to just receiving income when you want to retire, and it will provide a nice steady income .. And if you needed a large amount of cash, you could then sell shares and receive capital
Sometimes an actively managed fund can achieve this better ... If you'd invested in Neil Woodford's Invesco Perpetual fund 20 years ago, you'd have gained significantly more capital growth than in a tracker (which is simply at the whim of the markets)
There is no fundamental problem selling sooner, the difficulties are knowing when and what to do instead. Anticipating the future is inherently error-prone, though there are some long term trends that can assist to some degree. For example, historically markets that are valued at high cyclically adjusted price-earnings ratios tend to do less well in following years than markets at low cyclically adjusted price-earnings ratios.
If you were to act on this you would do something like reducing weightings to the US at the moment and favouring say Europe instead. The US is relatively advanced on its economic recovery, Europe is lagging and this is reflected in the share prices. But long term Europe is likely to recover. So at present Europe appears to offer a more attractive buying price than the US.
There are many catches to that. Among them the issue of just when things will happen and the rather fundamental one that even though it's a broad historic trend nothing forces it to be true when you need it to be true. Markets can do unusual things for a long time. Even so, personally, I prefer to be overweight in Europe and underweight in the US at the moment.
Do S&S ISAs behave the same as cash ISAs (i.e. you buy £5k of a fund, sell for £6k and withdraw your £5k, but you'd now be limited to £10k further investment for the year?)
If so, another issue with short term thinking is that you'd be handicapping your potential for future tax free growth by eating your cake now...
Yes, there is the same total limit for cash and S&S ISA combined about how much new money can be paid in each year. If you did withdraw it you wouldn't get the allowance back.
If you didn't want to stick with investments you could do a transfer from S&S to cash ISA of some or all of the money in the S&S ISA.
Yes, they work in the same way.