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ISA, Diversification, Funds Comparison, Funds Protection

edited 4 May at 12:03AM in Savings & Investments
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Roselondon_2Roselondon_2 Forumite
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edited 4 May at 12:03AM in Savings & Investments
New to investment. I've had a thread asking some basic questions about where to start. After a little bit of research, I feel pretty confused by all these fancy names (funds, bonds, unit trusts). I thought it would be quite easy to get a clarification with the help from website like Which? or MSE investment basic articles, but they helped a lot less than I hoped. Before I go any further, I would appreciate some help to clarify the following points:

- ISA : Apparently, not only that ISA has an annual quota limit (£20k), also one can only be allowed to open one ISA account a year. So does it mean I can only choose one provider/platform to open this account?

- Diversification of portfolio: Once the account is opened and £20k goes in, can I invest in different product (industries/geographic focuses) or I have to put all £20 into one product?

- Funds comparison: I stumbled across Trustnet which lists the performance of different funds. I saw Vanguard which has been recommended by many people from different sources is only an average performer with 5 years at 39.7% against risk score 100, whilst funds like VT Castebay UK Equity performed with 5 years at 62.6 against risk score as 72. I'm utterly confused why this? Where shall my research go to understand the comparison of funds risk/performance, as a risk averse approach?

- Fund protection: Since I missed last financial year to open the ISA, where it's the safer approach to invest the spare cash (say £30k) after the £20k goes into ISA? I don't think letting it sit in the bank account is wise, as inflation is certainly going to soar in the following years...

Thanks to all.



Replies

  • eskbankereskbanker Forumite
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    - ISA : Apparently, not only that ISA has an annual quota limit (£20k), also one can only be allowed to open one ISA account a year. So does it mean I can only choose one provider/platform to open this account?
    Strictly speaking you can open as many S&S ISAs as you like, but the restriction is that you can only pay new money into one per tax year, so your £20K for 2021/22 needs to all go into the same S&S ISA (unless you want to use other types of ISA too - if you're under 40 then a Lifetime ISA may be worth considering for £4K).

    - Diversification of portfolio: Once the account is opened and £20k goes in, can I invest in different product (industries/geographic focuses) or I have to put all £20 into one product?
    The former, you can spread it across multiple investments.

    - Funds comparison: I stumbled across Trustnet which lists the performance of different funds. I saw Vanguard which has been recommended by many people from different sources is only an average performer with 5 years at 39.7% against risk score 100, whilst funds like VT Castebay UK Equity performed with 5 years at 62.6 against risk score as 72. I'm utterly confused why this? Where shall my research go to understand the comparison of funds risk/performance, as a risk averse approach?
    Firstly, past performance shouldn't be assumed to be indicative of future outcomes, so don't assume that if Fund A outperforms Fund B over the last five years, it'll be the same in the next five.

    Secondly, there is no direct correlation between risk and performance, so it's not as simple as the higher the risk the better the performance.

    Thirdly, re "I saw Vanguard which has been recommended by many people from different sources" - Vanguard is a fund manager offering many different products, across a range of risk profiles and market/sector coverage, i.e. recommending 'Vanguard' as such is meaningless.  Their multi-asset LifeStrategy range is quite popular but isn't necessarily the best, depending on what you're actually looking for....

    - Fund protection: Since I missed last financial year to open the ISA, where it's the safer approach to invest the spare cash (say £30k) after the £20k goes into ISA? I don't think letting it sit in the bank account is wise, as inflation is certainly going to soar in the following years...
    As pointed out on your other threads, you could do worse than Premium Bonds, for now at least, as they should outperform most savings accounts, and their average luck expected return has actually exceeded CPI for the last year too.  You'll need to keep an eye on available options if inflation picks up though, as it's notoriously difficult to keep up with, never mind beat, inflation, without taking risks....
  • edited 4 May at 10:50AM
    JohnWinderJohnWinder Forumite
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    edited 4 May at 10:50AM
    Perhaps you could include a link to the VT Castebay UK Equity and Vanguard results so others can see them.
    Vanguard’s index funds can only ever have ‘average’ returns (less costs), because they seek to track the market that they invest in as closely as possible. Other funds investing in the same market(s), which are actively managed non-index funds will get better or worse returns this year or for a few years, and then they might get worse or better returns in a different period; and they might get average returns as well, but less likely since there’s a big range of possible above or below average performance. All active investors, as a whole group, can only get average returns (less costs).

    You’d need to be told by Trustnet how they measure risk. Commonly, the measure is the standard deviation of monthly returns for a year or other period. So, after one month the fund increases 1%, after the next it increases 0.4%, next it loses 0.5% etc. You calculate some sort of average of how much all of those monthly returns vary from the average of them all to give you a measure of the volatility of the returns. Bond fund values only go up and down a little bit each month compared with the gyrations of stock funds, so they have less risk by this measure. Trusnet’s don’t seem to be this.

    Investing would be too easy if adding or reducing risk added or reduced returns by a proportional amount, and always by that predictable proportion. But real world, sometimes the higher risk fund gets worse returns than the lower risk fund, over short-ish periods, and even long periods for the simple reason that they hold different stocks, and at different times different stocks do better or worse than other stocks. Hence you can see a Vanguard higher risk fund underperforming a VT lower risk fund. 

    So, knowing a valid risk measure for two funds doesn’t reliably tell you how they’ll perform in future. Secondly, knowing how any fund performed in the past does not tell you how it will perform in the future, as tempting as the thought is, and as logical as it would seem, and as helpful as it would be. If you need convincing, choose some funds, list their yearly or 3 or 5 yearly returns covering 15 years, cover most of the data with a sheet of paper which you can move to reveal what returns eventuated, then try to guess what the funds’ future returns would have been - and slide the paper to see what the returns actually were. I’ll guess your predictions were terrible.
    With those two thoughts, neither risk nor past performance predicting future performance at all well, why bother using them to anticipate future returns especially when it comes to choosing one fund over another?  You might use past performance and risk levels to give you some idea of how your investments would grow over some years, and how much they might drop in a crisis (2 standard deviations??), but I need to be shown how any other useful conclusions can be drawn from the information. If you risk being led astray, don't even bother looking at it.

    Before you start comparing funds, decide what type of fund you want; this narrows the field a lot, and perhaps you’ve done that. If it’s equities, broadly diversified is good, with or without some home country bias, with or without currency hedging. If you want average market returns, get an index fund. If you want to risk getting less but perhaps get more returns, choose an active fund. If you choose an index fund, see how closely it follows the index, and whether it’s a reputable commonly used index. Then compare the costs. If you're choosing an active fund, forget the tracking and just compare the costs.
    The Morningstar research has found that the single best predictor of future performance for equity funds is their cost. A lot of people won’t like that thought, and perhaps the research is rubbish (but Morningstar has a big reputation riding on it), and perhaps I’ve misrepresented their results, and I don’t think it’s all that helpful in choosing a fund. But the answer is not past performance.  https://www.morningstar.co.uk/uk/news/149421/how-fund-fees-are-the-best-predictor-of-returns.aspx


  • JohnWinderJohnWinder Forumite
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    And here's the same message, don't be misled by the past performance of active funds, based on different research.
  • AlbermarleAlbermarle Forumite
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    Couple of added points 
    When you pick your ISA provider for this year ( and usually it makes sense to stick with same provider in subsequent years just for ease of administration ). You need to decide whether to go with one that makes the investment choice very easy and simple for you , such as Nutmeg, Wealthify . Or one that offers a large range of funds and other investments that you need to choose from , such as HL, Fidelity etc . This choice can be overwhelming for many people, although they do also offer some more simple solutions as well.
    Or something in between like the Vanguard Platform that only offers their own investments but a reasonable choice .
    Also banks like Lloyds and HSBC offer Stocks and shares ISA's as well .
    Second point is do not be so surprised  that comparing funds is not straightforward for a beginner . You need time to learn , if you want to.
    as inflation is certainly going to soar in the following years...
    If you read this forum regularly you will see the wiser heads never assume anything about the future is certain .

  • edited 5 May at 11:58PM
    Roselondon_2Roselondon_2 Forumite
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    edited 5 May at 11:58PM
    First, thanks to all. I appreciate each of you have shared honestly of your views for a beginner like me!

    Secondly, I realised this is going to be a million miles of learning... I had started by setting a target of making a decision in 2 weeks time with my husband. But now we realised that it may take us a year just to understand the basic about investment... 

    So we kind of decided to just put the annual ISA allowance in Vanguard to start with and learn gradually over time.

    For premium bond, I read this article. https://www.moneysavingexpert.com/savings/premium-bonds/. I'm a person who has less than average luck in terms of winning anything. This makes me think would make more sense put the rest of the money in trackers like Vanguard too. Investment is all about up and down, I suppose. So if I spread the funds to make sure they are protected from a certain company going busted and be ready to aim at mid/long-term, wouldn't the return still outweigh the premium bonds? It's just a tax consideration, I suppose?
  • eskbankereskbanker Forumite
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    For premium bond, I read this article. https://www.moneysavingexpert.com/savings/premium-bonds/. I'm a person who has less than average luck in terms of winning anything. This makes me think would make more sense put the rest of the money in trackers like Vanguard too. Investment is all about up and down, I suppose. So if I spread the funds to make sure they are protected from a certain company going busted and be ready to aim at mid/long-term, wouldn't the return still outweigh the premium bonds? It's just a tax consideration, I suppose?
    Yes, investment into funds should outperform Premium Bonds over the long term, so if you're happy to invest the non-ISA money as well then doing so in a (taxable) general investment account would work, especially if you moved chunks over to the ISA in subsequent tax years to minimise any CGT liability....
  • BillycockBillycock Forumite
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    OP, you mention your husband, jointly you have 40k to invest in ISA's per financial year. Fully utilise your ISA's before putting any extra cash into General Investment Accounts.
  • edited 6 May at 10:55AM
    AlbermarleAlbermarle Forumite
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    edited 6 May at 10:55AM
    I'm a person who has less than average luck in terms of winning anything. This makes me think would make more sense put the rest of the money in trackers like Vanguard too. Investment is all about up and down, I suppose. So if I spread the funds to make sure they are protected from a certain company going busted and be ready to aim at mid/long-term, wouldn't the return still outweigh the premium bonds? It's just a tax consideration, I suppose?

    To be a better investor/saver , it is best to reduce the emotional level involved and not think in this way I'm a person who has less than average luck in terms of winning anything.

    You are just as likely to have winning/losing Premium Bonds, as anybody else.

    So the decision about Premium Bonds ( average 0.9% and 100% safe ) and investments ( potential higher return in the long term but can go down in the short and medium term ) should be a rational choice between two different places to put your money. It is actually more about your attitude to risk, than anything to do with luck .

    There is no tax consideration between the two. The return from Premium Bonds and the returns for investments within an ISA are all tax free.

    If you stick to mainstream investments and avoid buying individual company shares , the chances of them going 'busted' is extremely low and not worth taking into account . Although of course they might go down in value if markets go down.

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