Newbie to Index Tracker Investing

Zola.

A_T wrote: »

What are you invested in almost everything has grown at least 10% in the last 3 years?

I started out buying all sorts of indexes and a few active funds, without really planning it properly, then in the last year or so I sold and merged everything into VLS 80% acc.

It was sitting at 5/6% at one stage and had a healthy boost, but last time I looked it was at 1% interest.

I drip feed £300 a month into it also, so everything is rather spread out.

Prism

Zola. wrote: »

Agree with Dunstonh in that it takes a long time to show the worth. E.g I have been investing for around 3 years now, and the last time I checked my fund value, it was only up £100 compared to what I have been putting in (almost 10,000).

Its all about the compound interest, and time. The value of my fund doesn't really matter now, as I don't want to touch it for a very long time.

Absolutely true. It took me about 19 years of monthly saving into my personal pension to get it to about £95k. It took another 2 years to add another £45k on top without increasing my monthly payments. In 10 more years I am hoping the yearly increase will dwarf my additional payments.

grey_gym_sock

Bravepants wrote: »

They WILL fall.

this is incorrect. at most, bonds may fall when bank base rate rises. but they may not. and especially not if the the rate rise was expected; which makes all the fear of the effect of a rate rise which is widely anticipated rather pointless.

look at it like this:

bank base rate is a rate for immediate-access cash. it's similar to an instant-access savings account. (but for institutional money - retail savers can currently get slightly higher rates.)

a gilt which matures in 5 years, or 10 years, or however long, is similar to a fixed-rate savings account for that number of years. except that, instead of being locked in for 10 years (as in a retail fixed-rate savings account - which might have no early access, or access subject to a penalty), while you can't get your money back early from the borrower (in this case, the UK treasury, instead of a bank or building society), you can sell your gilt to somebody else, but for a price which could be higher or lower than what you paid for it. so if you buy a 10-year gilt paying 1.5% a year, and then rates for 10-year gilts go up to 2% (or down to 1%), you might find you could sell for a loss of (very roughly) 5% (or for a profit of roughly 5%).

but how is the 10-year fixed-rate (on 10-year gilts) related to the instant-access rate (bank base rate)?

basically, for a 10-year fixed-rate, you can think of the rate as being the average bank base rate which the market expects over the next 10 year plus a premium for being locked in for 10 years (similar to the premium you, more often than not, get for longer-term fixed-rate savings accounts). and the longer the term, the larger that premium.

how does a rise in bank base rate change that? well, if the market fully expected base rate to rise at this time, not at all. now, the market probably wasn't 100% sure; perhaps they expected a rate rise, or even 2 rate rises, sometime this year, but weren't sure in which months. so there may be a small change because the first 0.25% rise happened now, when perhaps the market thought it might happen some time between now and 3 months later. but the direct effect on the market's estimate of base rate over the next 10 years will be very small.

the yields on short gilts - see the last column in http://www.fixedincomeinvestor.co.uk/x/bondtable.html?groupid=3 - which start at 0.726% for an 11-month gilt - do suggest that at least 1 base rate rise (i.e. from 0.5% to 0.75%) is expected.

gilts also move in price due to changes in opinion about the likely longer-term course of interest rates. this depends on ideas about the general trends in the economy, and how the BoE's interest rate policy might respond to those trends. this is a realm in which it's not always obvious whether some trend should lead to lower or higher rates. so the effects can be large here, but it's hard to say what they will be.

a change in base rate can play a part in these estimates about the longer-term course of interest rates. but that can work in several ways. e.g. a rate rise could means that rates will generally be higher. or it could mean that the BoE is serious about fighting inflation, so in the longer term, inflation will be lower, and so bank base rate will also be lower. so there's no very obvious answer.

so basically, we have no idea what gilts will do if/when base rate rises.

however, it's not necessarily a bad idea to prefer shorter-term gilts. generally, the longer the gilt, the larger the premium (for being locked into a fixed rate); so you are giving up that premium - sometimes called the term factor - if you go for shorter gilts. but the premium appears to be pretty small at the moment (with no gilt yielding more than 1.841%). perhaps very long gilts aren't paying enough for the greater risk of capital losses. OTOH, there can be surprise capital gains on gilts (as there were e.g. after the brexit vote), which tend to be bigger on longer-term gilts. longer-term gilts may benefit the whole portfolio, by going up when equities go down (assuming you also hold a lot of equities).

tl;dr: https://www.youtube.com/watch?v=A0gQiz0pCyI

traineepensioner

samuelodog wrote: »

many thanks, I'l look into it.

Hi samuelodog, You've received some excellent advice from a number of posters. A quick click on the "Thanks" button for any poster(s) you consider helpful wouldn't go unnoticed.

Nice to be nice.

Good luck. :beer:

Crashy_Time

Zola. wrote: »

Getting started is the most important thing!

However, I agree that you should really try to put in more each month if possible, to make any sort of difference. But you can build up to that.

Agree with Dunstonh in that it takes a long time to show the worth. E.g I have been investing for around 3 years now, and the last time I checked my fund value, it was only up £100 compared to what I have been putting in (almost 10,000).

Its all about the compound interest, and time. The value of my fund doesn't really matter now, as I don't want to touch it for a very long time.

Albert Einstein famously said:

"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it. Compound interest is the most powerful force in the universe."

Would recommend this website, to see what you could expect / play around with some numbers.

https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

Do you have a number for a goal? This will help you determine what you need to be putting in to have a chance of achieving it.

If you read the book I mentioned above he points out that it is not only about time and compounding, it is also about volatility over the term of your investment, and he also points out that lots of sources ignore this and only talk about time and compounding.

Prism

Crashy_Time wrote: »

If you read the book I mentioned above he points out that it is not only about time and compounding, it is also about volatility over the term of your investment, and he also points out that lots of sources ignore this and only talk about time and compounding.

Generally over the long term volatility isn't important. If you are timing your additional contributions volatility can theoretically be a good thing as you can buy lower from time to time. However hardly anyone manages to do this well. Most people I would assume contribute simply when they have the cash, or monthly or yearly and volatility is neutral here. The only time it matters is in the last few years before you want to draw some of the money back out, and if it truely is a long term plan then you can ignore that until it gets close.