Buying a tracker fund

Uplander1111

We are retired and have some capital to invest.  Because we are risk averse (and not knowledgeable about investing), we keep rolling it over on the best interest rate and burying our heads in the sand.  However, we have been thinking that maybe we should do something more if we can.

To this end we are thinking about placing £25k in a FTSE 100 tracker (this being part of our total capital).  One of the virtues of a tracker fund seems to be that they have lower charges than a managed fund.  So far so good but then if you look at buying one through somebody like Hargreaves Lansdown, the HL charges (for an account through them) seem to be way more than the charges for the fund itself.

Is it therefore practical to find a fund that history suggests mirrors the FTSE 100 reasonably accurately and then buy it directly from the provider?

If yes, would this still be the case if we wanted to do it through an ISA?

Also, and whilst I appreciate that you can lose money if the market goes down, is there any protection if the provider goes bust?

I am sure these are somewhat naive questions but I have tried to answer via Google and simply ended up confused, so any guidance would be appreciated.

Thanks.

tigerspill

If you have definitely decided in investing this in a tracker, why would you limit yourself to such an undiversified fund?  Have you looked at a much more diversified global tracker?

eskbanker

If the money isn't needed in the short to medium term then yes, investing is likely to be more sensible than saving, but you should consider whether going in 100% equities is perhaps going from one extreme to the other - there are many other points along the risk spectrum.

If you do decide that equities are for you, then it would generally be a better bet to diversify beyond just the FTSE100, as this is just one market, with clusters of similar companies, so a global tracker may be more suitable.

Once you've decided on timescales, risk tolerance, and geographic/market coverage, and narrowed down suitable products, you can indeed progress to the next stage, of platform selection - HL are known for being quite expensive, so many cheaper options are available.

My go-to copypasta for newbie investor threads is the reading material at sites such as:
https://www.moneysavingexpert.com/savings/investment-beginners/
https://www.moneyhelper.org.uk/en/savings/investing/investing-beginners-guide
https://www.hl.co.uk/beginners-guides/investing
http://www.monevator.com
http://kroijer.com/
http://diyinvestoruk.blogspot.com/
https://www.ifa.com/indexfundsthemovie/

as well as bearing in mind a number of key points of principle:

1. Only consider investing once you have adequate accessible cash reserves.
2. Only invest if you're happy to commit for at least 5-7 years and preferably 10-15 or more.
3. Diversify - ignore individual shares, etc, and concentrate on collective investments that spread your eggs over many baskets. Global multi-asset funds are a good place to start, available from the likes of HSBC Global Strategy, Vanguard LifeStrategy, Blackrock MyMap and L&G Multi-Index.
4. Choose what you want to invest in before considering which platform to hold it/them on.
5. Keep an eye on ongoing costs for funds and platforms - they shouldn't be the primary consideration but can make a noticeable difference over the long term.
6. Use a Stocks & Shares ISA (or perhaps a SIPP) as a tax-efficient wrapper to avoid liability for income and capital gains tax.

dunstonh

Because we are risk averse (

That is going to severely limit you if you want to buy a tracker fund.    The only tracker fund that is ideal to hold in isolation is a global tracker fund.   But at 100% equities, that puts you right at near the top end of the conventional risk scale.   

To this end we are thinking about placing £25k in a FTSE 100 tracker (this being part of our total capital).  

That is a strange choice and would generally be considered a bad investment decision.   You are restricting yourself to just investing in UK large cap.   The whole of the UK economy is around 4% of the global economy.    And you want to limit yourself to less than that by focusing just on large cap.

So far so good but then if you look at buying one through somebody like Hargreaves Lansdown, the HL charges (for an account through them) seem to be way more than the charges for the fund itself.

Quite logically so too.   The cost of distribution has been stripped out of the investment funds since 2013.   It was passed to the investment platforms.   Cost of distribution is by far the greater cost.  However, HL is one of the most expensive platforms available.

Is it therefore practical to find a fund that history suggests mirrors the FTSE 100 reasonably accurately and then buy it directly from the provider?

In most cases, no.     Fund houses don't offer bundled funds any more. The fund house would have its own platform charge and most cases, they are expensive than using a whole of market platform.

Also, and whilst I appreciate that you can lose money if the market goes down, is there any protection if the provider goes bust?

You are not investing in the provider.   The provider/platform is the administrator for your chosen funds.    It isnt like the banks.  
FSCS protection is available but its different and has little benefit when you are using mainstream regulated unit linked investments.


Back onto your investment selection, a multi-asset fund is likely to be the better option.   Unless you are using your cash to offset the risk of the equities fund.   Remember that a 100% equity fund could lose 50% of its value in a year and in very rare cases it could be closer to 90%.     Very rare but it has happened before and will happen again.       Worth noting what happened to gilts when they suffered two very rare events last year.  

Uplander1111

Many thanks both - didn't have notifications set so apologies for that.

We are retired and like everyone we are frightened by increased inflation.  As a rank amateur I latched onto FTSE 100 as it is something that seemed kind of reliable.  I probably put the cart before the horse in thinking about platforms rather than firstly, which funds?

There are some good points here and I will try to further my understanding by using the links.

Appreciate the posts, thanks again.

GeoffTF

Uplander1111 said:

We are retired and have some capital to invest.  Because we are risk averse (and not knowledgeable about investing), we keep rolling it over on the best interest rate and burying our heads in the sand.  However, we have been thinking that maybe we should do something more if we can.

To this end we are thinking about placing £25k in a FTSE 100 tracker (this being part of our total capital).  One of the virtues of a tracker fund seems to be that they have lower charges than a managed fund.  So far so good but then if you look at buying one through somebody like Hargreaves Lansdown, the HL charges (for an account through them) seem to be way more than the charges for the fund itself.

You could pay nothing. Here are the options:

https://monevator.com/compare-uk-cheapest-online-brokers/

As others have said, equity investment probably is not appropriate for you, and investing in just the FTSE 100 would not be suitable even if it is appropriate.

dunstonh

If you had £200,000 and invested all of it, then your full amount is volatile and you could lose £100,000 in a major crash.

if you put £100k in cash and £100k into equities then only half your capital is at risk. So, a 50% loss potential  event becomes a 25% loss overall.

Or if you did £50k of the £200k then only 25% is subject to investment risk and a major loss would lose 12.5% of your overall capital.

So, don't think of the investment fund as being in isolation.  Think of it holistically and being part of a wider holding, including cash.  

You say you are retired. if you are under 75, then do consider the pension tax wrapper for the investment.   its smaller but for a couple doing it each year, it can soon build up.   

Beddie

Maybe have a look at Vanguard, they have quite low platform fees and their Lifestrategy products are very popular, with different levels of risk. They are a good place for beginners

https://www.vanguardinvestor.co.uk/investing-explained/general-investment-account

Or you could have an ISA, one each, up to £20k if you have not already used your allowance elsewhere this tax year.

https://www.vanguardinvestor.co.uk/investing-explained/stocks-shares-isa

I personally would not invest £25k in one go, but others on here will disagree I'm sure! You can add it monthly up to your limit instead.

Albermarle

Beddie said:

Maybe have a look at Vanguard, they have quite low platform fees and their Lifestrategy products are very popular, with different levels of risk. They are a good place for beginners

https://www.vanguardinvestor.co.uk/investing-explained/general-investment-account

Or you could have an ISA, one each, up to £20k if you have not already used your allowance elsewhere this tax year.

https://www.vanguardinvestor.co.uk/investing-explained/stocks-shares-isa

I personally would not invest £25k in one go, but others on here will disagree I'm sure! You can add it monthly up to your limit instead.

As a newbie investor it is nearly always better to invest via a S&S ISA ( or a pension) if possible. If only because investing in a more general investment account , means you have to keep records about capital growth and dividends (and maybe even pay some tax on them)

Uplander1111

I just wanted to thank everyone who has taken the time to post here; the various observations have been very helpful and have provoked some interesting chats twixt my wife and I as we try to work out how to go forward.  I particularly enjoyed listening to Lars Kroijer as he seemed very down to earth and his take very straightforward.  I have leant a few things too regarding matters that were a closed book to me before; I am tempted to observe that my original query was somewhat naive but then we are not even amateurs when it comes to any concept of investing.  Long story short, we have booked an initial (and therefore free) discussion with a local IFA and we will see where we go from there.

Thanks to all.

Albermarle

 I am tempted to observe that my original query was somewhat naive but then we are not even amateurs when it comes to any concept of investing

Although many subjects are discussed on this forum, it is basically  a consumer forum. So naïve questions are not a problem, and glad we could hopefully point you in the right direction.

One thing to be aware of, is that £25K would be below the level where an IFA would normally be interested. Probably any plan they come up will involve investing more of your cash savings than that. 

Although I notice there are no pension details mentioned anywhere, only that you are retired. Are you only getting the state pension(s) ? or do you have other pensions?