FTSE 100 and other trackers
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Comments
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Given the choice, most people with outgoings of £30k a year would prefer a salary of £35k than rolling a dice for a salary of £10k or £60k depending on the whim of the market that year which is out of their control.My logic is that a world index in a dice game is the average. 3.5 is the known score. Another tracker could score 1,2,3,4,5 or 6. No-one can predict with certainty. What makes people think a world index is superior (just because it covers the whole market)?
Assuming that option 6 is always going to be £40k or £50k or £60k just because it was the last time three times you looked, is setting yourself up for failure. It is like watching a roulette wheel and confidently betting red because it mostly came up red when you watched the last 5-10 spins.
In your original post you said you were looking to put money into a FTSE tracker to get a better return than a cash deposit. As you know, stock market funds are long term investment vehicles and should only expect to beat cash in the long term rather than in any particular year. As such, we assumed you were putting money away for the long term.Trying to follow many markets means a lot more work. I have an overview of what happens in the UK and US so I have an opinion about those markets. I would have to follow a lot more closely what happens in the rest of the world.
The alternative would be just buying the world tracker but not knowing when to add more money or sell some of it.
However, from the two paragraphs above it implies you are not looking to invest the money away for the long term at all, but instead looking to dip in and dip out, flipping your ownership of the fund at the right time to catch the good news events and avoid drops that follow bad news events. Needing to know when to buy some of it and when to sell some of it. That is a whole different kettle of fish. For most people it is the way to lose the 10% of your wealth that they invested in the endeavour, because they won't pick the buy and sell times accurately.
From your questions in your original post, you don't know whether the FTSE 100 is expensive or cheap compared to 'normal'. You don't know whether you would get a better return from it by investing now or dripping over several months. You had not heard of a FTSE All-World index. You do not have other investment funds or ETFs.
All of these things seem to point to the fact that despite being au fait with the kind of UK and US news that we all hear on the telly, you do not know much about the world of finance and prevailing valuations in the UK markets relative to other markets and other asset classes. As such, it seems unlikely that you would do a good job of actively managing a holding of a UK or US investment fund, buying a bit or selling a bit at the optimum times to maximise returns.
In that circumstance the best thing to do is not to keep trying to actively buy and sell it in line with the news and your limited understanding of valuation techniques and current market levels in the context of currency movements and interest rates etc. It is simply to buy it and hold it for the long term, benefiting from market growth and compounded reinvested dividends over time.
If you can agree with that passive approach as being for the best, then it follows that you will not be using news and valuation techniques to guide your investment, but simply riding the market to receive a nice long term return. As such, you can happily hold a 'global' fund without needing to actively follow the news in Korea or Indonesia. Take its 3.5 return because you would presumably be very annoyed if you only got the 1 when you were hoping for the 6.0 -
I'm interested in buying a FTSE 100 tracker and wondered if you could recommend one. I'm looking to get a better return than locking away money in a bank.
What are the differences between a fund and an ETF? I would like the dividends reinvested so do I need an accumulation fund? What other things should I look out for?
Is putting the money in over several months the best idea?
Is the FTSE 100 expensive or cheap at the moment compared to it's usual P/E?
Do you have ideas for other trackers that might be useful? I was thinking about tracking things like the S&P100 but thought that it wouldn't be a good idea because of the exchange rate and the chance that the pound will eventually strengthen against the dollar.
I'm almost fully invested (just my shares, I also have (more in) property) in the ftse 100 right now, I was going to invest in the Vanguard all word high dividend income ETF (I liked the diversity, but it also comes with less income)). But I decided to take on the risk (low diversity) of the ftse 100 because when I invested in was low(ish) and was producing a better dividend (it still is). I did have some ftse 250 also, but I switched out before the Brexit vote, I am happy with what I have done. But I am also aware of the risk that I have taken on, and that it could all go wrong. Bowlhead may (would) argue that the risk isn't worth the small reward, and for himself he would probably have a point, but I'm happy enough with my decision. There will probably be a point in time when I do switch everything into the worldwide etf, my horizon is still about 20 years away, so for now I am content to be in the ftse 100Chuck Norris can kill two stones with one birdThe only time Chuck Norris was wrong was when he thought he had made a mistakeChuck Norris puts the "laughter" in "manslaughter".I've started running again, after several injuries had forced me to stop0 -
I could turn your argument back on you. Can you prove your world tracker will outperform the US tracker or the FTSE 100 tracker? Can you prove that trying to replicate the whole market will guarantee greater returns?
If you are asking that then it suggests you are not ready to invest yet as you dont understand it.
Nothing can be guaranteed.
By making random management decisions without any analysis and research you would be relying on luck to get the best returns. You could get lucky for a period but its unlikely you will be consistently lucky and you will likely underperform in the long run.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
If you are asking that then it suggests you are not ready to invest yet as you dont understand it.
Nothing can be guaranteed.
By making random management decisions without any analysis and research you would be relying on luck to get the best returns. You could get lucky for a period but its unlikely you will be consistently lucky and you will likely underperform in the long run.
You can't say that since I have been investing and am happy with it.
The world tracker is by definition, average. Some geographical sectors will perform better than it and some will perform worse than it. Why would it would require luck for the US or FTSE tracker to avoid underperforming?0 -
You can't say that since I have been investing and am happy with it.
Being happy does not mean you are right. At the moment, you think you have the investment ability of a fund manager. Yet most of them do not out-perform.The world tracker is by definition, average.
Discrete performance will be average or thereabouts. That is the nature of trackers. Cumulative performance over time is what matters.Some geographical sectors will perform better than it and some will perform worse than it. Why would it would require luck for the US or FTSE tracker to avoid underperforming?
The FTSE 100 has spent the bulk of the last 25 years as one of the worst performing stockmarkets in the developed world.
The US stockmarkets have done well in the current cycle but the previous cycle the US was a consistent underperformer. A number of events specific to the US (or hitting the US hardest) occurred. If you had your strategy in that cycle then you would have got less. You are not going to get consistent out performance.
If you only invest in those you are reliant on those two sectors being the best. What happens if Brexit turns out to be a disaster for the UK economy? What if a US nuclear plant has an event like Japan or the US finally decide that it is time to reign in their over spending (or China makes them do it)?
By limiting yourself you are increasing the risks and limited sector investing tends to result in lower returns over the long run. Yes, you may get discrete periods where you do better but you wont keep that up.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
bowlhead99 wrote: »Given the choice, most people with outgoings of £30k a year would prefer a salary of £35k than rolling a dice for a salary of £10k or £60k depending on the whim of the market that year which is out of their control.
Assuming that option 6 is always going to be £40k or £50k or £60k just because it was the last time three times you looked, is setting yourself up for failure. It is like watching a roulette wheel and confidently betting red because it mostly came up red when you watched the last 5-10 spins.
In your original post you said you were looking to put money into a FTSE tracker to get a better return than a cash deposit. As you know, stock market funds are long term investment vehicles and should only expect to beat cash in the long term rather than in any particular year. As such, we assumed you were putting money away for the long term.
However, from the two paragraphs above it implies you are not looking to invest the money away for the long term at all, but instead looking to dip in and dip out, flipping your ownership of the fund at the right time to catch the good news events and avoid drops that follow bad news events. Needing to know when to buy some of it and when to sell some of it. That is a whole different kettle of fish. For most people it is the way to lose the 10% of your wealth that they invested in the endeavour, because they won't pick the buy and sell times accurately.
From your questions in your original post, you don't know whether the FTSE 100 is expensive or cheap compared to 'normal'. You don't know whether you would get a better return from it by investing now or dripping over several months. You had not heard of a FTSE All-World index. You do not have other investment funds or ETFs.
All of these things seem to point to the fact that despite being au fait with the kind of UK and US news that we all hear on the telly, you do not know much about the world of finance and prevailing valuations in the UK markets relative to other markets and other asset classes. As such, it seems unlikely that you would do a good job of actively managing a holding of a UK or US investment fund, buying a bit or selling a bit at the optimum times to maximise returns.
In that circumstance the best thing to do is not to keep trying to actively buy and sell it in line with the news and your limited understanding of valuation techniques and current market levels in the context of currency movements and interest rates etc. It is simply to buy it and hold it for the long term, benefiting from market growth and compounded reinvested dividends over time.
If you can agree with that passive approach as being for the best, then it follows that you will not be using news and valuation techniques to guide your investment, but simply riding the market to receive a nice long term return. As such, you can happily hold a 'global' fund without needing to actively follow the news in Korea or Indonesia. Take its 3.5 return because you would presumably be very annoyed if you only got the 1 when you were hoping for the 6.
This is not money I am relying on for day to day spending. To continue the dice comparison, 1.1 is the value of bank savings. I would be happy with 2,3,4,5 or 6. I do not want to play a game where I could get -25.
If I roll the dice 3 or 5 or more times and take an average, the expected value is still 3.5. It could be higher, it could be lower but I don't see what the disadvantage is of rolling the dice.
I am seeking to hold this investment long term. However I may decide to add spare money in the future or take out a little of it. I have more of an opinion about whether to do so for the FTSE or US. It feels more like relying on chance for a world tracker.
I am still open minded about what to buy if there is a good reason to do so.
I've admitted that I haven't invested in funds before so that's why I asked lots of questions in my original post.0 -
Being happy does not mean you are right. At the moment, you think you have the investment ability of a fund manager. Yet most of them do not out-perform.
It is right for me and achieved what I wanted it to achieve. By your argument, there would be no retail investors trading individual shares or anything else because they do not have as much information and experience as the professionals. People should buy a multi-asset fund because anything else means having an opinion.Discrete performance will be average or thereabouts. That is the nature of trackers. Cumulative performance over time is what matters.
Over all time periods it will be the average. It is the benchmark that you are judging against all other investments.The FTSE 100 has spent the bulk of the last 25 years as one of the worst performing stockmarkets in the developed world.
The US stockmarkets have done well in the current cycle but the previous cycle the US was a consistent underperformer. A number of events specific to the US (or hitting the US hardest) occurred. If you had your strategy in that cycle then you would have got less. You are not going to get consistent out performance.
If you only invest in those you are reliant on those two sectors being the best. What happens if Brexit turns out to be a disaster for the UK economy? What if a US nuclear plant has an event like Japan or the US finally decide that it is time to reign in their over spending (or China makes them do it)?
By limiting yourself you are increasing the risks and limited sector investing tends to result in lower returns over the long run. Yes, you may get discrete periods where you do better but you wont keep that up.
You dismiss the UK because it has underperformed. You dismiss the US even though it outperformed. You have focused on the negatives only. Why is there not a 50/50 chance of there being positive news?0 -
You can't say that since I have been investing and am happy with it.
I'm sure lots of people are happy with their results of investing as long as it gets more than cash.
But for the risks taken, perhaps they should have been earning much more of a premium to compensate them than they actually received - but they don't realise this because they were generally investing in positive markets, and got a good result more by luck than judgement. Perhaps they should have done more analysis and research about how much they would have lost during negative markets and what better results they should have set out to achieve in order to see them through the bad times.
When engaging in risky activities you know there is a risk of getting it wrong. We know that in the long term the result is positive, which is why we are all investors of one sort or another, but in any one particular year the result can be all over the shop.The world tracker is by definition, average. Some geographical sectors will perform better than it and some will perform worse than it. Why would it would require luck for the US or FTSE tracker to avoid underperforming?
As mentioned in the discussion of the sectoral analysis, the difference between best and worst place to invest can be 30%, and the bottom end of the scale is often a really bad result which we really really want to avoid, whereas, investing in a bit of everything gets you somewhere in the middle of the extremes and a long term acceptable result without the same huge swings of volatility.
What you seem to be asking is why would it require luck to pick one super specialist fund and it be as good as the average and avoid underperforming?
The obvious answer is that half the global market underperforms the global average and half outperforms with the average global result in the middle and it is a coin toss to avoid the bottom half of the table. So your chance of avoiding the worse-than-average result that you don't want, is a coin toss.
In other words, picking the specialist funds out of a hat requires luck to avoid underperforming and avoid hitting the worst results in the league table which everyone wants to avoid. Whereas, if you were to invest in line with the market average you could guarantee you would not get the worst result in the league table, without really requiring any luck.
I assume you didn't like the earlier analogy of getting a known "average" £35k salary rather than picking out of a hat to get anything from £10k to £60k on the roll of a die. Here's another:
Imagine if at your birth your parents could have the choice of you having a life that was exactly as long as the national life expectancy from the middle of the bell-curve (80-odd years) or just go for picking a number out of a hat and giving you a life which might be 5 or 10 or 20 or 50 or 90 or 100 because you might get taken out in a car accident or early onset cancer or you might not.
I'm pretty sure they would prefer to go for "the average" rather than take a coin toss and have the risk of significant underperformance of that average. This is because most people are naturally cautious rather than genuinely not caring and observing that the average of what you could pick out of the hat was still 80-odd years so it didn't matter.
In your world, the ones who gamble with actually picking an age out of the hat rather than taking "the average" do not require any luck to avoid underperforming the average. Whereas Dunstonh and I are suggesting that you do need luck to avoid underperforming the average when you pick something out at random. If fortune is not on your side, you have a high (50%) chance of not doing as well as all the other investors whose wealth you will be competing with to buy goods and services in twenty years' time.
If you are the type of person who genuinely doesn't mind dying at an unacceptably young age in pursuit of getting that birthday card from the monarch at age 100, then sure, pick an age out of the hat or pick a specialist regional equities tracker out of the list.
Personally I am still chuckling a bit that you rejected investing in a global tracker because you "wouldn't know when to buy more or sell some", when your opening post was along the lines of you not knowing whether UK 100 was expensive or cheap and you didn't know whether to buy now or invest slowly etc, so evidently you don't really know when to buy or sell some for the UK market either.
What you are experiencing is something common to us all - we like to think we have a smart head on our shoulders and are reasonably well informed but we don't really know what will happen next. In such circumstances, "invest in everything" can become quite sensible.
I saw Chuck's comments above about liking the FTSE100 Particularly for the dividend level - this appears nice because the collapse of sterling added more than a couple of £billion of value to the dollar-denominated dividends it paid out in the 3rd quarter, more than offsetting the couple of billion of cuts from miners who can no longer afford to pay what they used to.
If you have a particular investment thesis, and can afford to put your eggs in fewer baskets due to having large total wealth, it's not my place to say this is inherently wrong. If Chuck misses out on some gains or makes some unnecessary losses due to following his convictions, he can always sell another investment property, which might be annoying but not the end of the world because he already has enough to retire comfortably on.
I'm not in that position and we generally see that other people who have not invested in funds before are not either, hence the words of caution when someone suggests they will go all out for a single country index. If you have done proper research about investment options then that is fine. Your OP suggested you hadn't. And this is a discussion forum after all. We are not trying to say we have the perfect, guaranteed best or only solution. Just attempting to explain why it is a sensible and reasoned solution.0 -
You dismiss the UK because it has underperformed.
No. I dismiss the FTSE100. For my UK allocations I tend to use FTSE250 or UK Equity income. On my active portfolios, I will adapt the UK fund for the economic cycle.
All my portfolios have a UK equity content.You dismiss the US even though it outperformed.
No I dont. All my portfolios have US equity content.
The difference is that they would not be the only two sectors I would invest in. You are disregarding the rest of the world.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0
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