Looking to invest - tracker funds

Dunney77

Hi,

I am a 24 years old and looking to start investing.

I am interested in putting money in index trackers as they are cheap and research shows they tend to beat managers over time.

As I am quite young, I really just want to put my money in a diverse range of trackers and 'forget' about it for the next few years.

However, my worry is that because the markets are constantly reaching new highs in this long running bull - is it worth waiting until the next crash?

What are peoples' thoughts?

steelbru

Been a few threads recently about a possible crash :-

https://forums.moneysavingexpert.com/discussion/5260619
https://forums.moneysavingexpert.com/discussion/5227782
https://forums.moneysavingexpert.com/discussion/5151039

That should be enough reading to get the general feel of the regulars on here :-)

badger09

Dunney77 wrote: »

Hi,



However, my worry is that because the markets are constantly reaching new highs in this long running bull - is it worth waiting until the next crash?

What are peoples' thoughts?

If you know when the crash is going to happen, that might be a very good plan. However you don't, and neither does anyone else.

There is a well known phrase 'time in the market not timing the market'

dunstonh

is it worth waiting until the next crash?

And when do you think that will be?

toggley

At your age you can ride out the crashes and welcome them as staged buying opportunities - over your investment horizon the next crash will probably be the first of many. So rather than wait on the sidelines, why not drip feed a regular amount in each month - and forget about it!

I am no expert but this is one approach and I am happy with it.

Aretnap

By their nature stock market crashes are unpredictable. If it was easy to predict that the next crash will be in September then everybody would take their money out of the stock market in August. And so the crash would actually happen in August, not September. But then, it's easy enough to work out that that's what would happen, so everybody would actually sell their shares in July instead of August... and so on and so on.

Record highs aren't in themselves anything to worry about - as the stock market tends to go up over time they're perfectly normal. If it went up smoothly at 10% a year, or whatever its long term average is, every day would be a record high and every day would be a great day to start investing. What's unusual isn't the fact that we've seen record highs recently - it's the fact that we hadn't seen them for 15 years.

If you're planning on investing until you retire then it's fairly certain that in that time there'll be several big crashes and quite a lot more minor falls. The next crash might be tomorrow. Or it might be another 5 years, and after it shares might still be more expensive than they are today (and you'd also have missed out on 5 years of dividends by not investing now as well).

If you're worried about a big crash just after you start investing you can mitigate the risk somewhat by drip feeding your money in via a monthly investment plan rather than by putting it all in as a lump sum.

bigfreddiel

There has been research by the telegraph, that back tested lump sum investing at the top just prior to all the crashes since 1970

This beat a regular investing strategy

The old adage applies time in the market not timing the market

Cheers fj

jamesd

Dunney77 wrote: »

I am interested in putting money in index trackers as they are cheap and research shows they tend to beat managers over time.

You've been misled. The research doesn't show that. It shows that if you ignore changes in manager the average active managed fund in a fully taxed environment, usually with US ongoing year by year tax on its gains, which doesn't happen here, doesn't beat the averaged tracker fund. A New York study found that before the US tax the active funds outperformed the passive ones. It was only when things like the higher capital gains tax for holdings of less than a year and the paying of CGT each year even if you didn't sell was added in that passives beat active managed. In the UK you do not pay CGT each year and there isn't a higher CGT rate on holdings of less than a year.

The non-tax catch that trackers sales people won't generally mention is that you don't have to buy an average tracker or an average actively managed funds and there is persistence of performance, particularly bad performance. The studies create some illusion of reduced consistency of outperformance by ignoring when a manager changes, so missing one of the key factors in fund performance. They also miss things like changing economic situations that make particular manager styles or fund styles better at various times, by completely ignoring those things and assuming that you will as well, even though part of the point of active fund investing is to pay attention to them.

If you want some fun, look at the sales material for the Vanguard brand actively managed funds. They are perhaps best known for their passive funds but they do have active products and sell those vs their passives, explaining that they have had higher performance.

Dunney77 wrote: »

As I am quite young, I really just want to put my money in a diverse range of trackers and 'forget' about it for the next few years.

But that doesn't matter for you because trackers are the correct choice for someone who wants to just pick investments and do as little work as possible. For active managed funds you have to pay more attention, at least enough to notice when a manager changes.

Dunney77 wrote: »

However, my worry is that because the markets are constantly reaching new highs in this long running bull - is it worth waiting until the next crash?

Which markets? Some are quite high, some are quite low. You can do things like buying funds that invest in the cheaper markets if you like. But that would be somewhat contrary to your pay little attention objective.

If you do want to skip share and bond investing, bonds being a particularly good thing to skip, you might have a look at peer to peer. Some of the options there are paying over 10% and that's good enough to match or beat equity investing.

ZiggerZagger

it's a difficult one isn't it


I went to see an IFA just to understand my options and was pretty unimpressed (I don't want to say who I saw but they were from one of the large financial advising firms). I'm an accountant anyway so have a pretty good understanding of tax/financial matters but it would worry me if this was the advice that people with no financial knowledge were getting.


after a lot of umming and ahhing, I have left around 20% in cash (which also accounts for my emergency funds), 20% in bond funds (through ISAs) and 60% invested in equity funds. I took this decision at the end of May and moved the money around since then (around 60% was in cash, 20% in equity funds, and 20% in bonds before that).


The bonds and cash are in positive. The equity funds have already lost 3.5% which is pretty big in under a month (though is beating the market) but they are there for the medium term so I am not too worried though it's hard to stop yourself checking especially when you know the markets are falling!


So my advice is decide about the level of risk but also how much you can personally bear - because if losing money in the short term scares you and will make you want to pull out then don't do it!

dunstonh

The equity funds have already lost 3.5% which is pretty big in under a month

Normal activity. Not big. You wait for a 20-40% loss (which will happen).

ZiggerZagger

dunstonh wrote: »

Normal activity. Not big. You wait for a 20-40% loss (which will happen).

might do, might not


3.5% fall in a month is rare for my investments. Haven't had a monthly fall in about 5 years (but then I was picking them myself then!).


what I was trying to point out is that if you have a long term investment (or even medium term) you have to ride the rough with the smooth and if you can't bear the thought of that, then equity investments are not for you!