Making money from funds

u0362565

Hi all,

I have recently invested a very small amount into an index tracked fund just to see how it does over the course of 6 months to a year. My ultimate aim i suppose is to see whether in that time the fund seems like a good investment, and my fund is in profit. I realise 1 year is a short amount of time for a fund so perhaps its not a good test.

What i have found so far is that it swings around quite a lot, i was 5% in profit at one point and now i'm only 1.85% in profit. What i've read is that funds can be a good investment if you're playing the long game and not looking to touch it for 10 or more years. I'm thinking of investing so much each year to form part of a retirement fund. But what i can't understand is how my investment will grow if it can go so up or down at least in the short term. Is the idea that over say 30 years the fund could be 6% up on average? I understand that investing is a risk, but if i end up with 1.85% profit at the end of it i might as well have put all my money into an ISA for all those years.

Am i missing something?

Thanks for the advice

masonic

Quite simply, the periods where investments rise tend to outnumber the periods in which they fall. Say your investments just wobble up and down around the same value for a year, then fall 20% over the next year, then grow by 20% over each of the next 3 years - you'd end up with a growth rate of about 6.7%. At the end of year 2, you'd be pretty disappointed with the result and might give up (in which case you'd have lost 20% of the value of your investment). Looking at performance over short timeframes does not help you predict what will happen over the long term.

Based on historical data, over 30 years you'd have more than a 90% chance of beating cash returns using a global index tracker. On average, you'd see returns of about 6% vs cash returns of about 1% after inflation.

westy22

Masonic is right - ignore the ups and downs from week to week - that is just volatility.

What you're really interested in is the 'trend' which is the general direction of movement of value over a longer period of time. I don't know what index you are tracking but assuming it is a UK FTSE index then the 'trend' over the past 5 years ranges from about 4% pa for a FTSE 100 tracker up to about 9% pa for a FTSE 250 tracker.

Remember, that is the past 5 years and not what will happen over the next 5 years which could be better or worse - who knows?

LHW99

Also you have the benefits of dividends, which can either be reivested into more units, or are added to the unit value if its an accumulation fund.
Much of the growth in share based investments comes from the roll up of dividends over the years.

dunstonh

I have recently invested a very small amount into an index tracked fund

You dont say what you are tracking but I am going to assume as FTSE tracker (hopefully not a FTSE100 tracker but thats different discussion)

I was 5% in profit at one point and now i'm only 1.85% in profit.

It could easily be 40% down in that timescale. So, those are very tiny swings.

You get good years, bad years and nothing years. You do not know what order they will come in. you could have -10% in year one and +20% in year two, 1% in year three, 8% in year 4 etc etc. You have to average out those ups and downs and the longer you invest for, the closer you will get to the long term average.

An economic cycle is typically close to 10 years nowadays. So, to see out a whole cycle, you would need to invest for that sort of period.

badger09

OP here is a real life example for you.

Back in April 2000, , when I knew even less about investing than I do now and with a little capital to spare after moving to a cheaper area, I put £3k into an S&S ISA - a Scottish Widows FTSE 100 tracker, and in April 2001, I put another £3k in.

I can't remember the exact valuation date, but my July 2002 statement showed the value to be below £4k:eek:

Like most naive investors I was put off investing any of my hard earned savings, but fortunately I resisted the urge to sell out in panic, thus crystallising my loss.

I haven't touched it since and it is currently worth around £10.5k.

In no way am I advocating that you do this, but hope it helps with a slightly longer, real life perspective.

u0362565

Thanks for all the comments. I invested in Vanguard lifestrategy, but as i say i only put in a small amount and now i'm wondering whether to add more. You can decide what percentage you split between stocks and bonds. Historically, as long as its been running its averaged around 8% interest i believe which sounds pretty good to me if that trend continues..

Does anyone know what happens if a company like this folds, do you have any chance of getting your money back? And how long does a fund run for? What if they decide to close it in 10 years?

I've invested through iWeb and they charge per transaction, i had hoped to drip feed the fund on a monthly basis but £5 per transaction makes this unviable-should have thought about this beforehand! In the long term though i don't suppose it makes much difference whether the money is paid in per month or once/twice a year in lump sums? Other than you lose those gains made per month which as everyone has said are negligible.

Thanks for all the advice!

SeniorSam

I have invested in funds for many years and do not like to select shares, as the risk is greater. When selecting funds, I look at a wide range of funds within the area I feel comfortable with and have selected the funds, rightly or wrongly, of Invesco Perpetual. The funds split between High Income, Corporate Bonds and Distribution in varing proportions from time to tme have seen comfortable growth for me and I am pleased with the results.

Yes, perhaps I could get better results elsewhere, but with the diversification chosen by the fund managers, they select the shares and sometimes up and sometimes down, but overall good for me.

brasso

u0362565 wrote: »

Hi all,
I have recently invested a very small amount into an index tracked fund just to see how it does over the course of 6 months to a year. My ultimate aim i suppose is to see whether in that time the fund seems like a good investment, and my fund is in profit. I realise 1 year is a short amount of time for a fund so perhaps its not a good test.

Sorry if this sounds pedantic, but you don't need to invest anything in anything to see how it performs. You can find historical data for all funds and all markets going back a long time by Googling.

u0362565 wrote: »

What i have found so far is that it swings around quite a lot, i was 5% in profit at one point and now i'm only 1.85% in profit. What i've read is that funds can be a good investment if you're playing the long game and not looking to touch it for 10 or more years. I'm thinking of investing so much each year to form part of a retirement fund. But what i can't understand is how my investment will grow if it can go so up or down at least in the short term.

I don't understand your point. You're saying this is "short term" movement, so what is the connection with longish term growth over 10 years or so? Short term changes are only relevant if you decide (unwisely) to put everything you have into the stock market for a very short period -- say a year or less. Here, short term volatility would be a great concern. Over 10+ years, occasional bursts of volatility "should" (no guarantees!) iron itself out into a steady longer term increase. Don't take my word for it, check the historical data.

u0362565 wrote: »

Is the idea that over say 30 years the fund could be 6% up on average? I understand that investing is a risk, but if i end up with 1.85% profit at the end of it i might as well have put all my money into an ISA for all those years. Am i missing something?

If over 30 years your investments had grown only 1.85% a year, you would have not done well compared to historical averages. Of course, if this was a steady trend of tiny rises every year, then you should have been telling yourself after 5 or 10 years to switch into something more promising!

You say you have the LifeStrategy fund. Good choice. If you stick with it you should do much better than having cash in the bank. Remember something important -- that when the price dips, instead of thinking this is bad news, think of it as a good time to buy some more. You're getting much more for your money than if you only buy more when the price rises!! It isn't psychologically easy to think that way, but as long as you have faith in the fund, it's the best decision.

Regarding what happens if a company folds? I'm no expert in the law here but I can't see how Vanguard could fold as it's pretty much owned by its investors. If the entire staff resigned and walked away, there would be a huge mess, but I'm presuming that the investments themselves would not be affected.

u0362565

I have at least picked a version of life strategy that isn't maxed out with stocks which means its potentially less risk than other variants but i agree it isn't the safest option out there.

What i have learnt is that basically monitoring a fund over a short period is pointless but there is a time when you should consider whether it was a good buy or not and perhaps look elsewhere.

I found this article on folding investment companies and SIPC insurance which many investment houses have:
http://www.thesimpledollar.com/when-investment-banks-fail-what-happens-to-the-little-guy/

westy22

u0362565 wrote: »

I found this article on folding investment companies and SIPC insurance which many investment houses have:
http://www.thesimpledollar.com/when-investment-banks-fail-what-happens-to-the-little-guy/

Useful information if you live in the USA but of absolutely no relevance to the UK marketplace.

This is more relevant to the way that UK platforms are protected - http://www.hl.co.uk/investment-services/vantage-service/how-safe-is-your-investment