Starting investing...

ag359

dunstonh wrote:

Charges will be the main difference but obviously you can get trackers for different indexes. You need to decide which index to track and why.

Ok - I can see the logic behind that, but as an inexperienced investor, do you really have much chance of picking a successful index? If so, what sorts of things should I be looking for?

ag359

whiteflag wrote:

In summary I would go for an Equity Income Fund and pay the higher charges

Ha, I feel like such an amateur but anyway, here goes...

What exactly is an 'Equity Income Fund'? Your post implies that its a fund whereby the investors take the benefit of the dividends, but how exactly does it work?

cheerfulcat

whiteflag wrote:

What I will add is that although trackers are cheap you dont benefit from dividends. The biggest constituents of most indexes tend to be blue chip shares that pay the biggest dividends. Therefore you have the equity risk without the extra boost provided by dividends.

If I could just correct you there - it is a very poor tracker that doesn't pay dividends. Most of them do, and you may reinvest them ( for the best return, as the study shows ) or take them as income.

In the 5 years to 31 july 2005 the ftse all share index returned 0.6%
while a well known equity income fund returned 52.9% over the same period


In summary I would go for an Equity Income Fund and pay the higher charges

The best trackers have returned ~46% in the same time, so the outperformance is not particularly striking! And a DIY equity income fund would have produced a better return...high yielding blue chips are a classic investment and anyone buying them when they were unloved would have done well.

dunstonh

Before we go off on another trackers vs managed funds debate, lets try and keep it simple. A sector average managed fund in the same area as the tracker would probably beat the tracker when the market is not performing well or is volatile. In periods of extended growth, the tracker would probably beat the same managed fund.

Equity Income sector funds focus more on income than a tracker would. So in these times of many ups and downs, the equity income sector would appear to be better than a tracker. However, give me that crystal ball and I will tell you what is best

There is also the risk consideration to take into account. Lets look at a scale of 1 to 10 (low to high). A FTSE all share tracker would be 7. Most Equity Income funds would be 5. If you want a risk 10 fund, say latin america managed fund, then it would have grown by more in the last 9 months than the UK funds over the last 5 years.

The best trackers have returned ~46% in the same time, so the outperformance is not particularly striking!

Including charges, the schroder income fund (managed) has turned £1000 into £2830 over the last 10 years. The L&G UK index tracker turned £1000 into £1922.

Over 5 years, £1000 with the Schroder fund has grown to £1483. The L&G is currently sitting at £953.

If you look at the graphs of the two over the 10 year period you will see that 1995 to late 1998, the quity manged fund was better but virtually the same. Between 1998 and late 2000, they take it in turns to be best. From 2000 onwards, the tracker cant keep pace. Each performs differently in different economic cycles. So, depending on how you think the coming years are going to be, that is how you should invest. That is very much a personal view.

Oh, btw, before i get accused of picking a top performing fund against the tracker, the sector average on the equity income fund matched the tracker almost pound to pound from 1995 to late 2000. Then from 2000 to date, the sectore average has been better.

Whenever i build and manage portfolios (which is daily), I do not place it all in one area and i use both managed funds and trackers. Nobody knows the future so hedging your bets and spreading it wide but averaging out to match your risk profile is the best way to do it.

Investing in the stockmarket isnt a "risk on" or "risk off" situation. Its a sliding scale of risk. You can have someone who is happy to invest in the low/medium risk scale of the stockmarket or someone that prefers the top end of the risk scale. Both will perform differently at different times. Both will say they invest in the stockmarket but both are doing it very differently.

On this thread, I dont recall risk/reward being discussed much.

whiteflag_3

Cheerfulcat you wrote

If I could just correct you there - it is a very poor tracker that doesn't pay dividends. Most of them do, and you may reinvest them ( for the best return, as the study shows ) or take them as income.

Fair enough, when i said doesnt pay dividends (not all do) I should have said "dont appear to benefit from" - but can you explain this

5 years performance (net income reinvested)

L & G FTSE all share tracker 0.6% annualised
Newton Higher Income 9.8% annualised

Underlying assets very similar BP, Shell, RBS etc etc

So what happened to the dividends?

PS which (UK)trackers are up 46% over the same period?

carnet

Any dividends from the underlying holdings will be reflected, in both cases (if not paid out as per the Income Units/Shares) in the Accumulation units/shares price.

The difference in performance can be explained by the fact that, in the case of Equity Income Funds, judicious switching in and out of certain holdings over the period ie managing, often results in better performance than the passive trackers.

Of course the opposite can be true - the skill is in picking those managed funds (and more importantly managers) who consistently beat the benchmarked indices.

timesphere

dunstonh wrote:

lets try and keep it simple.

then it got reeeellllly difficult to understand !!!!!!!!!

ok people lets keep it simple so us not so bright folk might learn something,

pretty please with a cherry on top

dunstonh

timesphere wrote:

then it got reeeellllly difficult to understand !!!!!!!!!

ok people lets keep it simple so us not so bright folk might learn something,

pretty please with a cherry on top

I intended it to be a quick post but I went off on one

The information in my post is very important to understand before you go into stockmarket investments you plan to make yourself. Its probably easier to say what bit didnt you understand?

I will add a bit more on risk in case its that.

Investment funds/shares etc have different risk profiles. Risk and reward, in very simple terms, can be viewed like this: the higher the risk you take, the higher the potential for growth but also the higher the potential for loss.

Risk/reward is one of the most misunderstood areas. You see people posting on here that they dont want an Equity ISA as they dont want to invest on the stockmarket. They assume risk is stockmarket and that its a "risk on" or "risk off" situation. If you are going to buy shares or funds, you need to be aware that they all have a different risk profile and a UK stockmarket fund could range from risk 5 to risk 10 (when using the 1-10 scale).

If you want, i can email a questionnaire to you that asks about 10 questions on risk/reward. Each answer has a number of points. You then tot up the points at the end and it tells you what your overall risk profile is. Its simple but it may help you understand what we mean by risk. PM me your email address if you want it. It also doesn't mean you shouldn't pick funds from a higher risk than that. It relates to a porfolio and a higher risk fund could be offset against a lower risk fund so it averages out to your risk profile.

Twmble

ag359 wrote:

I am looking to start investing in the stock market with small amounts, in order to get a feel for it. As I'm very inexperienced, I'd like to start with something simple - maybe an index tracker (I've heard that Fidelity only charge 0.1% in fees) or something.

What would people suggest? As I said, its more about getting a feel for how these things work than necessarily maximising my return with huge, high-risk investments...

If you want to ACTUALLY get a feel of the stock market by buying/selling your own shares and doing your own research then I would highly recommend the Halifax ShareBuilder a/c.

I've had one for about 8 months now, and I pay £50 per month into it (can pay between £20 and £250 I think). It costs £1.50 to buy shares and £5 to sell and you get the dividends etc. It has loads of really useful information in the Learning Centre (+ live online help) to help you along. I've bought 4 groups of shares (about £70 of each) and it's currently showing about 11% profit (after costs) - and I'm a just a market monkey! :dance:

I like it because I have full control over it, and although it's money I can 'afford to lose' and I know I'm never going to make a fortune but it does expose you to the realities of the stock market and can be good fun (...time for more anti-nerd pills, I fear....) :think:

T

Tim_L

It may be better to look at spread betting rather than dealing in small quantities of shares - you don't get dividends directly but you don't need to lock up capital either and you save trading charges. There's no CGT or tax implications though at this level this probably wouldn't be an issue anyway.

Spreadbetting is very simple: you have a pair of prices for something, for example a share price. Say this is the HBOS share price, about 855, then the prices could be 853 to 857 - you buy at the higher price and sell at the lower. The difference is the 'spread' and generates margin for the bookmaker. You can then 'buy' for a certain stake per point: for example £1 per point. If the price increases, your gains are your stake multiplied by the difference between the initial 'buy' price and the final 'sell' price. So if the spread increases to 860 - 865, your profit would be £1*(860-857) = £3.

This is pretty much exactly the same effect as buying 100 real shares and then selling them. But when you factor in buying (e.g. £1.50), and selling (e.g £6.00) charges, and the cost of the capital you'd need to pay for the shares, you can see that it's a much more economical proposition for smallscale dabbling.

Indeed in most ways it's pretty much identical to self trading shares, but your funding is limited to the amount you could lose, rather than requiring a capital sum to buy shares. So you can 'buy' the equivalent of 100 shares in HBOS with a stop loss after a drop of around 10 points for only a deposit of around £10, rather than 100*8.55 or so, i.e. £855. Then there are no charges for selling or buying, and no stamp duty.

The other neat thing is that you can operate easily in reverse by betting on an index dropping by 'selling' the index. This is just like short selling shares, but much more straightforward.

Unfortunately spread betting is a little forbidding initially, and also has some of the stigma of gambling attached which means that people can shy away in favour of traditional investments and investment products. But if you can get past this, it's really a very attractive means of dabbling in stocks and shares indeed.

https://www.cityindex.co.uk are currently offering a £75 deposit credit (non-withdrawable) to try the waters so you can effectively trial this without significant risk (and keep any profits). However it's very important to understand spread betting before leaping in as you can lose money very quickly if the market moves in the wrong direction. In this respect they're not different from shares, but with shares because you can't lose more than you actually spend buying them your total potential loss is completely bounded at the outset. If you forget to place a stop loss on a spread bet you have a liability potentially greater than the amount in the account, though most companies operate deposit accounts which protect you against overexposure. There's nothing to be scared of, just read and understand the documentation.