My first post - and a question about investments and dividends?

Max_Headroom_3

I've been browsing for a while, and joined up today to be able to join in.

My situation very briefly is that I'm a single chap, bought a wreck of a house (quite) a few years ago, and spend the last 10 years or so doing it up, furnishing it and trying to get the mortgage paid off.

Bar a couple of things to do in the future (aren't there always?) the house is about as I want it now.

Best of all, with a concentrated final push, I should finally have the mortgage paid off by the end of this year.

Now my feeling has always been, stay out of debt (as much as poss) and concentrate on getting everything straight before bothering with savings and investments and whatnot. I tend to take the view that whilst you've got £10K owed and £5K in the bank, you don't have £5K you owe £5K. Maybe that's the wrong way to look at things but non the less that's how I've operated so I've no savings, just a (broadly) completed house and soon no mortgage.

At that point I'll be 40, no savings, no pension, but reasonable income (employee, not own business or anything grand), a modest but nice house owned outright and no debt (hurrah!). A nice position to be in in that, as long as I keep my job (nothing is certain in today's economic situation) I'll have very good "spare" cash each month and if the worst happened and I lost my job, well at least my overheads are as contained as possible.

It's taken me many years and a lot of effort to reach this point!

Anyway, following no doubt a brief celebratory splurge, that's the point whereby I need to start some serious financial planning, and its planning for that next stage that has brought me to boards like this one in search of the best way forward (prefer to do some research in advance rather than reach that point and think "now what?").

My plan is to work out my outgoings for everything, bills, food, normal treats and bits and pieces, then divide what's left into savings (for the bigger things in life that crop up) and investments (long term stuff that hopefully doesn't get touched and builds itself).

The former is easy, simply need to find the best high interest instant access account but it's the second bit that is more difficult.

So, a couple of questions if I may display my ignorance?

Everything I've read so far seems suggest that for an investment dunderhead like me, something like a FTSE Tracker might be most suitable? Least fee's, and fairly safe albeit with the understanding that it's a long term thing and that after a year or two it is quite possible that the amount in the account will be less than that invested, but non the less long term it should all balance out fairly positively. My plan would be to obtain a FTSE Tracker type account and set up a monthly sum of (say) £500 to be paid in, giving me £6,000/year build up. Is that sensible/doable? Or do you have to just have lump sums?

Secondly, from what I've picked up (and please correct me if I've got this all wrong) it seems the stock market is in a bit of a tail spin at the moment. However to my mind, surely that's a good time to be getting in? Assuming things balance out over time I guess it is best to enter when things are on a bit of a downer?

And thirdly, I understand that as well as hopeful increase in share value over time, you earn dividends from your shares. My idea would be to just keep ploughing these back in. But assuming you have, say, £6,000 invested at the end of year one, how much would/should that actually earn in dividends and how often are they paid?

Apologies the long post and for any obviously stupid questions. I really am brand new to the concept of doing anything with cash except clearing money owed and ploughing it into the house!

All thoughts and advice gratefully received.

dunstonh

something like a FTSE Tracker might be most suitable? Least fee's, and fairly safe albeit with the understanding that it's a long term thing and that after a year or two it is quite possible that the amount in the account will be less than that invested, but non the less long term it should all balance out fairly positively. My plan would be to obtain a FTSE Tracker type account and set up a monthly sum of (say) £500 to be paid in, giving me £6,000/year build up. Is that sensible/doable? Or do you have to just have lump sums?

Couple of things on this.

1 - Why do you think that putting 100% into one fund is a good option?
2 - fees may be lower but are you investing to make money or save on charges?
3 - FTSE trackers are not safe. They are medium/high risk funds. Potential to lose 45% in 12 months on these. (this misconception of risk is quite common for some reason).
4 - What index would you track?

it seems the stock market is in a bit of a tail spin at the moment. However to my mind, surely that's a good time to be getting in?

Could be. Its certainly cheaper than any time in the last 2 years but it may go down more. It may go up again or just be volatile like this for the next two years

And thirdly, I understand that as well as hopeful increase in share value over time, you earn dividends from your shares. My idea would be to just keep ploughing these back in. But assuming you have, say, £6,000 invested at the end of year one, how much would/should that actually earn in dividends and how often are they paid?

Depends on how you invest. The yields will vary with the funds. FTSE trackers dont tend to have high yields so work on a 3% net basis as rough guide.

EdInvestor

Max_Headroom wrote: »

Everything I've read so far seems suggest that for an investment dunderhead like me, something like a FTSE Tracker might be most suitable?. My plan would be to obtain a FTSE Tracker type account and set up a monthly sum of (say) £500 to be paid in, giving me £6,000/year build up. Is that sensible/doable?

Yep.But what you need is a tax free maxi ISA account, so that you don't have to pay tax on any of your gains.You can save up to 7.2k a year in these.It's bets to open one with a discount broker, such as https://www.h-l.co.uk which will rebate charges.

And thirdly, I understand that as well as hopeful increase in share value over time, you earn dividends from your shares. My idea would be to just keep ploughing these back in. But assuming you have, say, £6,000 invested at the end of year one, how much would/should that actually earn in dividends and how often are they paid?

If you chose a FTSE tracker fund, you would receive around 4% p.a. in dividends. If you choose an "accumulation" fund, the fund will collect the divis and reinvest them for you. Normally you have to pay a charge to reinvest them if you do it yourself.

ncooper1974

mortgage free by 40 is a pretty good way to go.
i kinda have the same outlook as you in that i used all my savings to cover all my debts (mortgage), but i would say you should keep some (£5k?) tucked away for a rainy day - you never know when you need to get your hands on some money quickly

Max_Headroom_3

dunstonh wrote: »

Couple of things on this.

1 - Why do you think that putting 100% into one fund is a good option?

The impression I get (and these are far from fixed beliefs) is that whatever way you go there are risks, but that FTSE trackers follow the top players which, whilst unlikely to give great gains (as they're already "up there") are also unlikely, collectively, to make huge losses.

I do totally stand to be corrected on my very basic and limited knowledge though, that's why I'm here talking to you guys.

2 - fees may be lower but are you investing to make money or save on charges?

The former, but equally we're not talking huge amounts of money I have to put into this, so I want to avoid a situation where gains are eaten into by charges (or losses exagerated by charges!)

3 - FTSE trackers are not safe. They are medium/high risk funds. Potential to lose 45% in 12 months on these. (this misconception of risk is quite common for some reason).

Indeed. I suppose I understood (rightly or wrongly) FTSE trackers to be among the more reliable options, but equally having been "Mr Safe and Sensible" with money I suppose maybe I feel it's time to take a little risk.

My plan has always been to get the house finished and paid for as my "bedrock" and then try and be a little more creative, safe in the knowledge that if I lost everything (worst case scenario) I'd always have the house. It's not like I'm risking money that would be better served paying the mortgage.

4 - What index would you track?

Again I'm displaying my huge ignorance here, (but it's the only way to learn). My understanding was that a FTSE Tracker simply invests in the top couple of hundred performers on the stock market and stick with those. I didn't realise there were different versions.

Could be. Its certainly cheaper than any time in the last 2 years but it may go down more. It may go up again or just be volatile like this for the next two years

Depends on how you invest. The yields will vary with the funds. FTSE trackers dont tend to have high yields so work on a 3% net basis as rough guide.

So you "earn",say, 3% (so £30 for every £1,000 invested) but presumably are also banking (or at least hoping) for a rise in share values? Otherwise you might as well stick in the bank and earn 3%.

I realise I'm probably looking like the village idiot here, but that's only because I am!

However I'd rather look an idiot than be one by getting into something I haven't found anything out about.

Max_Headroom_3

EdInvestor wrote: »

Yep.But what you need is a tax free maxi ISA account, so that you don't have to pay tax on any of your gains.You can save up to 7.2k a year in these.It's bets to open one with a discount broker, such as www.h-l.co.uk which will rebate charges.

I'm probalby looking to invest about £5K a year into this maybe, so that sounds like god advice. What happens the following year when you have £5K invested but then another £5K takes you over the £7.2K limit?

If you chose a FTSE tracker fund, you would receive around 4% p.a. in dividends. If you choose an "accumulation" fund, the fund will collect the divis and reinvest them for you. Normally you have to pay a charge to reinvest them if you do it yourself.

I'm definitely thinking about anything earned being rolled back in. Plan is to try and use compound interest to help carry this up. So the more it grows, the more there is to grow and so on.

EdInvestor

Max_Headroom wrote: »

What happens the following year when you have £5K invested but then another £5K takes you over the £7.2K limit?

The 7.2k applies to how much you can put in each year.What happens after it goes in is irelevant.

Max_Headroom_3

ncooper1974 wrote: »

mortgage free by 40 is a pretty good way to go.
i kinda have the same outlook as you in that i used all my savings to cover all my debts (mortgage), but i would say you should keep some (£5k?) tucked away for a rainy day - you never know when you need to get your hands on some money quickly

Good advice. What I've done so far is have a flexible mortgage that allows me to over pay, but also allows me if I need it to take money back out buy re-increasing the mortgage. So I've felt fairly safe barreling it all in knowing that if I suddenly needed (say) £2K I could access it instantly by increasing the mortgage.

Once it's clear and I start down the new financial road as it were, I won't be pouring all my spare funds into this investment scheme, I'll be looking to divide it in to 2 and have half put into normal savings so I have got that buffer should it be needed.

I appreciate that fund investment isn't a good savings plan short term as if I need to access it when things have dropped there may be less there than I put in (a sobering thought!)


Appreciate all the input so far, I know I've got an awful lot to learn!

Max_Headroom_3

EdInvestor wrote: »

The 7.2k applies to how much you can put in each year.What happens after it goes in is irelevant.

Ah, good. So the whole lot is effectively tax free so long as it didn't go in at more than £7.2K a year?

I'm thinking (hoping) that if I've done my sums right I'll have £400-£500 a month to invest so I'll be well within that.

dunstonh

The impression I get (and these are far from fixed beliefs) is that whatever way you go there are risks,

Risks are not the same though. Its s sliding scale. FTSE trackers are higher risk then say most equity income funds or equity and bond funds etc.

but that FTSE trackers follow the top players which, whilst unlikely to give great gains (as they're already "up there") are also unlikely, collectively, to make huge losses.

The trackers track the index they follow. If you go in a FTSE100 tracker you are tracking the large caps. Whilst if you go in a FTSE250 you are tracking the mid caps and the all share tracks the whole lot.

The former, but equally we're not talking huge amounts of money I have to put into this, so I want to avoid a situation where gains are eaten into by charges (or losses exagerated by charges!)

You are going DIY on the selection so the cost differences between the managed funds and trackers is going to be very small. The difference is less than a days movement in the markets. So, you should decide how and where to invest first then look at costs. Not the other way round.

I suppose I understood (rightly or wrongly) FTSE trackers to be among the more reliable options, but equally having been "Mr Safe and Sensible" with money I suppose maybe I feel it's time to take a little risk.

Assuming FTSE all share tracker then reliable only applies in that you know you are going to get mid table performance. Never bottom, never top. That hasnt got anything to do with safety though.

Lets say you built up a fund of £20k. THe FTSE all share tracker is capable of halving in value in a crash. How would you feel about that?

If you start focusing on FTSE100 or FTSE250 then you still keep the risk (indeed a bit higher with the 250 but you lose the reliability. For example, FTSE100 trackers have spent most of the last 14 years at the bottom of the performance tables whilst the 250 have spent much of the last 5 years (ignoring last 8 months) at the top.

My understanding was that a FTSE Tracker simply invests in the top couple of hundred performers on the stock market and stick with those. I didn't realise there were different versions.

You can get trackers to follow a range of indices. What they track hasnt got anything to do with performance. Its to do with market capitlisation (how big they are). A FTSE100 tracker will track the top companies by size. That doesnt stop a Northern Rock, Railtrack, Polly Peck or Marconi appearing in your holdings.

So you "earn",say, 3% (so £30 for every £1,000 invested) but presumably are also banking (or at least hoping) for a rise in share values? Otherwise you might as well stick in the bank and earn 3%.

The 3% is the dividend income but thats only part of the story. The unit price is the other bit. So yes, you have to look at both. In volatile times, dividend and interest distributions are often favoured.

With £500 pm you should be looking to spread it around. Look for 6-8 funds and diversify and also look at your risk profile and invest in a way that matches that as well as future potential.

Max_Headroom_3

That's fantastic, thank you. I feel I've learned a lot and know even less!

Really good advice though, much appreciated.