Starting with funds

AnotherJoe

EmilyG2010 wrote: »

I'm just saying if the market is consistently falling, then why would I keep putting £25 a month (again minimal amount) in? It's only a large risk on a small percentage of my savings. So overall, not a great risk at all. Plus hoping my carefully selected fund managers will cover me.

But I admit, I have a lot to learn - hence my posting questions.

Because you expect that at some future date it will be much higher (if you didn't beleive that then you'd be crazy to invest).

If you can't work out that it's better to invest when shares are low ( falling ) so you get more for the same money than when they are rising, [as long as you expect in the long run they will be much higher,)you shouldn't be investing as you've not understood a basic tenet of the market, buy low sell high. You seem to want to buy high sell higher which is unrealistic.

Possibly you think this because you also have a wholly unrealistic idea that you can tell which way the market is going at any point . You cant. No one can. Except that, in the long run, it goes up.

You've got pretty much no experience of the stock market yet you beleive after reading a few articles you can tell what's going to happen.

I can tell you for a fact that people who have a LOT of experience of the markets can't tell. Even mega gurus like Buffet don't know and don't profess to know they just keep buying. Or look at the guru who could do no wrong, Woodford, made some massive costly errors despite having teams of advisers poring through company accounts and talking to their execs. He would have been one of your "carefully chosen" fund managers.

aroominyork

Joe's point is obvious enough but issues around price movements can't be stressed enough, and as a novice DIY investor it's something I still have to keep reminding myself. A key thing to remember is that when you selected your portfolio you chose certain funds for a reason and if the market moves against them it doesn't mean your decision was wrong, or that you should sell them and switch to the alternative fund you were considering a little while back. In fact, almost the opposite: if your reasoning was sound, there is a good chance your fund will have its day in the sun - and it's likely to be right after you sell it!

As an example, when buying a global fund last autumn I was weighing up SMT vs. Monks vs. Baillie Gifford Global Alpha Growth. I decided SMT was slightly too tech-heavy for me and I chose BG Alpha over Monks (the former is essentially the open ended equivalent of the latter) because I didn't want the gearing. Immediately after I bought, Monks gained about 4% moving from a discount to a premium. The irrational bit of my mind thought "I made the wrong choice - oh well, better late than never" ie switch into Monks now. And that's what novices can do - buy now to get the profit that has passed them by. Obviously that's nonsense - someone else has already pocketed the profit... but it's easily done as a knee-jerk reaction.

Now I look at how SMT has risen since early April and again I ask if I made the wrong decision. Should I sell my Alpha and move into SMT? Well, over time SMT might well outperform but when I think through the reasons I chose BG Alpha they still hold valid. And if I want to remind myself that the outperformance by SMT might not continue, I can plot the two against each other (on HL's charts & performance tab) and on a 3 year view see they pretty much tracked each other from June 2015 to April 2017 and again from June 2017 to April 2018. (Maybe SMT always rises in April and May!)

Bottom line: the lesson not to chase profits that have passed you by is one of the hardest for novice investors to learn.

DairyQueen

Emily:

Have you completed your initial thinking? Investment choice is the last step of a strategy which begins with:

1) Investment objectives (retirement, house purchase, holiday, school fees, etc). What are your priorities?
2) Timescale
3) Age/pension/tax situation (especially relevant for retirement savings).

As a general rule investing in S&S should be for a minimum of 5-10 years.

You are not clear on your attitude to risk. This is not a one-way bet and if you won't sleep at night during the inevitable periods of market drops/declines then don't even go there.

Your attitude to risk is paramount.

So, let's assume that you intend investing £25pm for the next 10 years to fund a holiday. Let's also assume that you have pictured (and are OK) about handling, say, a 30% market drop with a 5-year recovery period (for me, that's a medium attitude to risk). Let's also assume that you would have kittens in that scenario (a low tolerance to risk). Or, perhaps, you could shrug if you lost the lot (high tolerance).

Next step is to decide on the best tax wrapper. If you are over 45 then a SIPP may be best over a shortish, 5-10 year timescale (access the funds at 55+ and tax advantage). If younger then an ISA is the likely best option.

Then you need to decide on your platform. That decision is a big one as platform/trading charges vary so much that you could lose a big chunk of your investment if you select the 'wrong' one for your type/size of investment.

Assuming you have considered all of the above you are in a position to think about investment choice.

Rule number 1: never attempt to time the market. Regular investments benefit from 'pound cost averaging' (you need to know about that).

Rule number 2: don't try to run before you can walk. It will take you several months of research to understand the basics of fund selection.

One of the biggest novice mistakes is to invest in high risk assets/sectors without understanding the risks. Single company shares are very high risk (done that). Ditto commodities (and that). Ditto emerging markets (and that). Ditto pretty much anything that isn't part of a diversified portfolio (and that).

So, rule number 3: Diversify.
It is pretty much impossible to create/self-manage a bespoke, cost effective portfolio of funds on a £25pm investment.

Rule number 4: Keep it simple and cheap until you understand the basics (including rebalancing, diversification, charges, managing risk, types of units).

Simple and cheap = automatically rebalanced, global tracker. There are very good reasons why these are recommended as a starting point for a novice. They will keep the scope of your research manageable until you pass 'Investment 101', they have low charges, they are highly diversified. Many experienced investors use them as core/only funds. They do so much of the 'job' for you that, arguably, you don't need any other fund unless you wish to add some satellite funds that target sectors not covered (e.g. small companies, specific developing economies), or wish to weight your portfolio in a specific direction (property, health, technology, etc).

Note that most fund managers fail to beat their benchmark index (and these folk spend every working day immersed in research). There's a reason for the old adage: 'you can't beat the market' and 'the market' is pretty much covered within many of the global passives run by companies such as Vanguard and Blackrock.

Best thing I did was to listen and act on advice until I could see the wood through the trees (a lightbulb moment). Many people here have been investing for decades and many have learned from expensive mistakes. It took me around 20 years (and the help of this forum) to DIY invest from a position of some knowledge. Hopefully, you will reach that point rather more quickly than I.

Good luck.

aroominyork

DairyQueen wrote: »

Note that most fund managers fail to beat their benchmark index (and these folk spend every working day immersed in research). There's a reason for the old adage: 'you can't beat the market' and 'the market' is pretty much covered within many of the global passives run by companies such as Vanguard and Blackrock.

It's often said that 90% of fund managers fail to beat the market, but that makes it sound like you have a 90% chance of your actively managed fund underperforming the market. But ask the question another way: instead of 90% of fund managers, what percentage of AUM are in funds that fail to beat the market?

We had a thread going last week about Neptune Global Smaller Companies which has only £1m of AUM; compare that to Standard Life Global Smaller Companies which has £1,115m AUM. Neptune has risen 65% over five years; Standard Life 120%. If you take 'the market' as Vanguard Global Small Cap Index, that has risen 100% over five years. So while you could say that only one out of two funds has beaten the market, 1115/1116 investors in these sample active funds have beaten the market.

Thrugelmir

EmilyG2010 wrote: »

I think I understand yield is different in an income fund. But equities give higher annual return generally with greater risk do they not? I mean you get dividends plus asset appreciation? My P2P return about 4% pa

Majority of the return from equities in the longer term comes from reinvesting income. Many listed companies have a limited shelf life. They don't last ad infinitum.

lpgm

DairyQueen wrote: »

Then you need to decide on your platform. That decision is a big one as platform/trading charges vary so much that you could lose a big chunk of your investment if you select the 'wrong' one for your type/size of investment.

Assuming you have considered all of the above you are in a position to think about investment choice.

Platform choice should come last, or at least at the same time as investment choice.

EmilyG2010

Thanks guys for all the replies.


FYI I am 39, already finished my mortgage (although would like to buy something bigger in the future). I'm single no kids. I have a fair amount of capital in cash and P2P (approximately 70:30 ratio). I have a pension through work, but just put the minimum obligation in as feel more secure having capital I can access when needed. I would love to have enough capital to not to have to work in a few years' time - i.e. live off interest&dividends. I'm being very cautious with my foray into equities - hence £25pm per fund at present. I would increase this allocation once I understand the asset better but not more than 20K per year spread out across funds. And it would be a while till I built up more than 20% of my overall capital in equities.



I watched the Lars Kroijer videos over the weekend. I understand the difference between passive and active management now.


I think I will start a passive tracker fund about £100pm, although don't completely agree with Lars. He says in his argument against active for example that fees are about 2% - mine are about 0.8%. I have purposely chosen funds with low fees (Hargreaves Landsdown usually offers a 100% saving on the initial buying in cost). I agree that passive management is probably the way to go for a complete novice, however I think picking funds is something I will enjoy and find challenging. It will be interesting to compare the performance of my active and passive components in a few years' time. I stay concerned about having all my money with one provider should I just pick one passive fund like Vanguard though.

Eventually I would like to hold individual equities... but that is not for now. I'm a very cautious person and ignoring other people's advice and putting money just into high interest cash accounts has served me very well up to now.

AnotherJoe

EmilyG2010 wrote: »

Eventually I would like to hold individual equities... but that is not for now. I'm a very cautious person and ignoring other people's advice and putting money just into high interest cash accounts has served me very well up to now.

Only because you haven't been able to compare it with anything else

EmilyG2010

AnotherJoe wrote: »

Only because you haven't been able to compare it with anything else

possibly! But I feel much better informed now.