FTSE ETF investment

Phil_

So here goes, it probably doesn't need saying that I'm new to this, I'm sure that will be painfully apparent.

Looking at stocks for long term investment (10+ years probably 25) via a S&S ISA. No more than £500 per month for the foreseeable future. I've come up with the following strategy but wanted to check I hadn't grossly misunderstood something before I pull the trigger.

How to invest: because of low capital I'm sensitive to trade costs so I went with X-O who only charge £5.95 per trade. Even still given expected return (7%, see below). I am aware there will be costs associated with the investment itself but have I overlooked anything here?

What to invest in: I'm cautious, I can afford to lose my investment but would prefer modest gains and modest risk to start with. X-O only allows UK traded investments. I thought FTSE 100 (average 7% return long term) or 250. As I'm investing relatively small amounts I think an ETF is the only way as UT minimum investments seem very high. I understand a significant proportion of the returns for this sort of investment should be dividends. For FTSE 100 iShares has an ETF (TER 0.07%) but it is distributing, Vanguard has a similar ETF (0.09%) which is accumulating and this seems more in line with a long term investment for dividends. TER for FTSE 250 ETFs seem to be considerably higher (~0.4%) though I might choose to invest my next block into the 250. Am I assessing this correctly?

When to invest: at 7% yield, £500 per month and £5.95 per trade I think I'm better investing every quarter in £1500 blocks. Did I miss something though?

Or should I just bang the whole lot on bitcoin and spin the wheel? Or buy gold and keep it under the bed?

Appreciate any input on my decision making process so far.

MX5huggy

Forget X-O at £6 per trade. 

Vanguard will charge you 0.15% platform fee (about £4.50 for the year) plus the fund fee (as X-O would of collected on vanguards behalf). No cost to buy or sell ETF’s as long as you choose to buy on the daily bulk buy, which as you plan to hold for ten years and not 10 minutes is not an issue.

Why have you settled on a UK investment? Global diversification is the fashion. 

https://monevator.com/category/investing/passive-investing-investing/

Phil_

MX5huggy said:

Forget X-O at £6 per trade. 

Vanguard will charge you 0.15% platform fee (about £4.50 for the year) plus the fund fee (as X-O would of collected on vanguards behalf). No cost to buy or sell ETF’s as long as you choose to buy on the daily bulk buy, which as you plan to hold for ten years and not 10 minutes is not an issue.

Why have you settled on a UK investment? Global diversification is the fashion. 

(link removed as I'm still on probation)

Thanks for the tip. I'm not wedded to anything really. The UK only thing just came from XO and thinking that would be the cheapest option. In terms of diversification it's definitely something I'm keen on provided the risk profile is right. US index trackers look good.

grumiofoundation

You seem to have decided on a platform and then are picking invested based on what they offer. Better to approach from the other way round.

You say that you are cautious - but then you are talking about investing just in FTSE 100/250 trackers - This would not generally be viewed as low risk. In march 2020 these trackers would have dropped >30%.

 
You will generally find that investing in only one country and/or index - as you are suggesting - is viewed as 'poor' investing, and is higher risk than diversifying investments across the world. 

Are you really only interested in investing in the UK? Or is that just because that is what X-O offers?

The first port of call suggested for people new to investing to investigate are multi-asset funds -see link1 below (although bit out of date now but covers the principles). In these you spread your investment across the world, and in different asset (not just stocks). If you wanted to be invested in 100% stocks then a global tracker* would be an equivalent option. See link 2 below. 


Link 1: https://monevator.com/passive-fund-of-funds-the-rivals/
Link 2: https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-acc/overview

*Should note there is not just a single global tracker - not all 'global' options are the same You can also get 'ethical' options that screen out certain 'bad' companies. Linked to comment above option below (link 3) only covers the developed world and doesn't have emerging markets as opposed to link 2 above. (Also note other providers than vanguard do exist!)

Link 3: https://www.vanguardinvestor.co.uk/investments/vanguard-esg-developed-world-all-cap-equity-index-fund-uk-gbp-acc


If you invest in funds, as opposed to exchange traded instruments (shares, ETFs, ITs) with most platforms you won't need to pay trading fees. A percentage based platform fee would seem most suitable for the amounts you are talking - for example (not exhaustive list) vanguard (0.15% - but only offers vanguard products), fidelity (0.35%), HL (0.45%).


 (Edit - as mentioned below a pension may be a good option to consider)

sebtomato

Look at Freetrade (mobile application): free to buy/sell ETFs (no transaction fees), no platform fee, and many index tracking ETFs available

ColdIron

Phil_ said:

How to invest: because of low capital I'm sensitive to trade costs so I went with X-O who only charge £5.95 per trade

If you look outside ETFs transaction costs could be free, see below

What to invest in: I'm cautious, I can afford to lose my investment but would prefer modest gains and modest risk to start with.

Then why are you looking at 100% equities?

I thought FTSE 100 (average 7% return long term) or 250

Restricting yourself to just the UK would be a very poor choice. The UK is less than 5% of investable markets. What about the US, Europe, Japan, Emerging Markets, Asia Pacific? Over 25 years the UK is extremely unlikely to be the best performer. Think global

As I'm investing relatively small amounts I think an ETF is the only way as UT minimum investments seem very high.

The high minimum investments only apply if you are investing directly with the fund house (Vanguard excepted). Most platforms will allow between £500 and even £25. ETFs suffer the disadvantage of relatively high transaction costs which makes them less economical for regular investing. Generally funds will be free or very low cost to trade

I understand a significant proportion of the returns for this sort of investment should be dividends.

No. For long term investing you should assume capital growth will provide the bulk of your return. What would you rather invest in. A dinosaur like British American Tobacco with high dividends or Amazon who have never paid a dividend?

When to invest: at 7% yield, £500 per month and £5.95 per trade I think I'm better investing every quarter in £1500 blocks. Did I miss something though?

Yes. Reconsider funds/UTs. Wth no transaction fees monthly investing woud be fine. With ETFs you will need to construct a bespoke portfolio if you don't want to be 100% equities (you did say you're cautious). With funds you might look at multi-asset funds such as the the forum favourite Vanguard Lifestrategy, possibly with Vanguard Investor initially. There are others but for low amounts there won't be much difference initially at £500 per month. Many multi-asset funds will allow you to select your risk profile from cautions to adventurous

https://monevator.com/vanguard-lifestrategy

Edit: for 25 years are you making the best use of your pension?

tebbins

ColdIron said:

I thought FTSE 100 (average 7% return long term) or 250

Restricting yourself to just the UK would be a very poor choice. The UK is less than 5% of investable markets. What about the US, Europe, Japan, Emerging Markets, Asia Pacific? Over 25 years the UK is extremely unlikely to be the best performer. Think global

Obviously global diversification is generally advisable, however I would caution the OP about taking opinions as fact. There is no evidence for this assertion. The UK as an individual country is more volatile than a global index tracker and has single country and concentration risks, however over the very long-term the UK has been an above average performer in real local currency terms. UK valuations (more so in the FTSE 100) are historically average and cheap by current world levels, indicating it may outperform the rest of the world over that timeframe, although how future changes in £ exchange rates will affect the outcome no-one knows.

I understand a significant proportion of the returns for this sort of investment should be dividends.

No. For long term investing you should assume capital growth will provide the bulk of your return. What would you rather invest in. A dinosaur like British American Tobacco with high dividends or Amazon who have never paid a dividend?

Depending on how you look at it this is factually incorrect, aside from the facts I personally prefer a balanced approach focusing on the total return rather than growth vs income.

1. Most stocks markets have experienced little more than 1% real capital growth over the very long term, with ~4-6% dividend yields. In most markets, the majority of the total real return over the very long term has been from dividends. However say a given market had an ~11% total return, such as the US and UK since 1945, with an average ~4% dividend yield, and ~7% capital growth, with ~4% inflation, if you see the capital and income returns as equal and interchangeable, you could say that 100% of the real total return was driven by capital growth and the dividends helped keep pace with inflation.

2. To take the US as an example of a falsely-assumed "low-dividend, high-growth" stock market, since rule 10b-18 was introduced in 1982, S&P 500 buybacks have overtaken dividends, and the total payout ratio (dividends + buybacks) is often around or over 100% of earnings. FTSE 100 buybacks are relatively negligible and the dividend payout ratio generally around ~2/3 of earnings. Take away rerating and net equity issuance, and the evidence is that the FTSE 100 'dinosaurs' have been growing faster.

I'm only replying to these parts and agree with the rest of your post. These points have been debated in a previous thread from page 5 onwards: https://forums.moneysavingexpert.com/discussion/6300226/active-vs-passive-funds/p5

Edit: also as Terry Smith has pointed out, unlike tobacco, Amazon is barely profitable. Also, compare British American Tobacco and Amazon on a trustnet chart, especially since 2000 - BATS hardly looks like a dinosaur.

Albermarle

As I'm investing relatively small amounts I think an ETF is the only way as UT minimum investments seem very high. 

As already mentioned , if you invest via an investment platform , normally the minimum investment in a UT or OEIC is £25 .

Phil_

grumiofoundation said:

You seem to have decided on a platform and then are picking invested based on what they offer. Better to approach from the other way round.

.... 

You will generally find that investing in only one country and/or index - as you are suggesting - is viewed as 'poor' investing, and is higher risk than diversifying investments across the world. 

Are you really only interested in investing in the UK? Or is that just because that is what X-O offers?

...

If you invest in funds, as opposed to exchange traded instruments (shares, ETFs, ITs) with most platforms you won't need to pay trading fees. A percentage based platform fee would seem most suitable for the amounts you are talking - for example (not exhaustive list) vanguard (0.15% - but only offers vanguard products), fidelity (0.35%), HL (0.45%).


 (Edit - as mentioned below a pension may be a good option to consider)

Thanks so much. Lots to consider.

To add, definitely not wedded to the UK, to an extent you are right, I was looking for a low cost provider and didn't seem to be able to find one that would allow access outside the UK. For example, the link to HL that I had was showing something like a £12 transaction fee which put me off. I hadn't seen anywhere that offered a percentage fee but that is a great bit of info. I'll definitely take a look.

I can see the case for doing this through a pension. I am maxxed on my matched workplace contributions and have been for years. I might be able to put more in unmatched but I like the idea of being a little more diverse and having a little more access to the investment prior to retirement (which is probably at least 20 years away), I am essentially looking at a cash ISA which is festering at .75% and looking at what to do with it (and what I would usually put into it). I also balk somewhat at management fees but then I suppose a SIPP might be a good option. I do worry that I would struggle to properly evaluate and claim the relevant tax benefits without further, possibly quite expensive for the amounts I am investing, professional assistance. I will try to work my way through the relevant online help and see if I can figure it out.

Thanks again for your input.

Phil_

ColdIron said:

Phil_ said:

How to invest: because of low capital I'm sensitive to trade costs so I went with X-O who only charge £5.95 per trade

If you look outside ETFs transaction costs could be free, see below

What to invest in: I'm cautious, I can afford to lose my investment but would prefer modest gains and modest risk to start with.

Then why are you looking at 100% equities

Thanks for all the information, a lot of food for thought.

I guess either I am not as cautious as I think or, I readily admit, misinformed. I am certainly not investing everything I have,I saw on one of the links provided a rule of thumb around 110-your age as a percentage equities, for me that would be 70%. Other free cash is going to overpaying a mortgage (at 1.94%, which I am super-uncertain about as a good investment decision but my other half likes it) and some it being held liquid in a cash ISA which gains an amount of interest that makes me feel a bit sick. I also pay maximum *matched* contributions into a workplace pension. Between all of those investments this would represent about 25%.

When I think of less cautious strategies I am thinking about stock picking, and short term/day-trading, FOREX, crypto and other shorter term speculation. To me investing in indexes over a sufficiently long term (and appreciating what others have said about 30% in year drops) feels like a *relatively* safe strategy. I might go away and try to learn any generally accepted definitions of caution as it will probably help in these discussions.

Interesting what you say about BAT vs Amazon to be honest this is why I am leery of single stock speculation. To me, ethics notwithstanding, BAT dividend yields of about 8% aren't sexy stuff but seem quite reliable whereas I'd be really nervous about Amazon given the amount of hype I have seen in recent months encouraging everyone to pile into that stock. I mean literally FB adverts specifically for Amazon stock. I know it is a solid business and has really taken off with COVID but at what point does hype overtake that? In any case I don't have the tools or funds to really evaluate those sorts of decisions. Hence, index matched investment as, to my mind, a somewhat more cautious approach than stock picking. Again, I am not saying you're wrong but just giving my perspective so people can point out errors in my logic.

If you are prepared to share, why do you think I should prioritise value growth over dividend? I'm looking for decent but not spectacular growth over a long term at the lowest risk I can get away with. A couple of sites mentioned index matched investment as a potential avenue and on reading about the FTSE I understood that a significant amount of the long term return was from dividend but I did not explicitly choose a dividend investment strategy. 

Again, thanks for your input. So much to process and I hope I don't come across as argumentative. Really just trying to learn.

george4064

In the grand scheme things, whether it’s value or dividend paying stocks that deliver the returns wont’t matter one bit as long as you are invested globally in a simple diversified portfolio as you’ll exposure to both sides of the coin (growth and income).

Just make sure that whatever you invest in is accumulation, and if you’re stuck with a distributing fund make sure you automatically re-invest those dividends.