Hello all, welcome to my first post on this forum!
I have been a member of Freetrade since November and am loving the journey so far. I am a (semi) recently qualified Financial Adviser, so it may not come as a surprise that I have a somewhat of an interest in investing. I thought I would share my “wisdom” with the community to assist any people out there who are dipping their toes in the investment pool for the first time. Please note that the following is not intended to be a recommendation, and the standard DYOR waiver applies.
I want to talk about what I think is the best strategy for majority of “retail investors” (regular people). It revolves around the ever-popular world of passive investing…
If you have not yet had the pleasure of being introduced to the passive investing, then simply put, it is the process of buying a pooled investment (fund) which seeks to track the broader market, also known as the index. The following article is a solid starting point. If you have a little more time I would also strongly urge you to watch the late Jack Bogle (Father of the Index Fund) talk, as he can explain things much more clearly than I.
Why Passive
Look, I don’t want to be a downer, saying that your investment decisions suck. But the truth is that, statistically, 50% of the people reading this will under perform the index. Equally the other half will outperform. The main problem here is that everyone seems to think they are more skilled than they actually are! In the UK 80% of people say they are an above average driver (full disclosure, I am in this group). However any rational human being understands that this is impossible! The same can be said for investing! Already you are at a coin flip of whether picking a passive index tracking investment is going to be a better option for you. My next point is that of the 50% that outperform, what percentage do you think are regular people? And what percentage are “investment professionals?”
That being said, I am not saying that stock picking should be unthinkable… with enough education and practice it is perfectly feasible for someone to beat the index. However this is a topic for another day!
There is an ever growing supply of information on passive investing out there, which I strongly encourage you to go read. For the above mentioned reasons, and few others, I therefore believe passives to be the best options for the masses, or at least the best place to start. However before you rush off to invest in something a stranger on the internet told you to, there is a couple more things to consider.
Risk Tolerance and Asset Allocation
Risk Tolerance: The ability to tolerate fluctuations in your investment’s values
Asset Allocation: The weightings attributed to different classifications of investments (Equities, Bonds, Property)
These two are linked as one’s tolerance for risk should be the main driver of one’s asset allocation. Historically equities provide the highest returns over the long term, however they also exhibit the greatest fluctuations in value (volatility). Typically, Bonds offer a lower rate of return, but are steadier. Additionally, these asset classes tend to complement each other. With Bonds performing well, when equities do poorly and vice versa (for the most part). Therefore, I believe these two asset classes are a great starting point for any portfolio.
A good place to start is by completing a risk assessment such as the one found here although there are many other examples out there! My result of this assessment was 80% Equity, 20% Bonds.
Great so now we have a broad indication of asset allocation.
You could simply find a passive equity tracker and a passive bond tracker and be done with it, but I have included several other considerations:
Home Bias: You may wish to have a higher weighting to assets held in your home country. There are several reasons for this but the main one is that (most likely) your liabilities are based there also.
Overseas Exposure: There may be a potential for greater growth overseas, such as emerging markets.
Bonds Types: There are 2 main types; Government bonds (GILTS) which are lower risk, and Corporate Bonds which are higher risk but have the potential for higher returns.
Objective: Is your goal capital growth, or do you need an income from your investments? Eg. Needing income could mean seeking equities which pay high dividends.
These will obviously depend on your personal preferences, situation and objectives. I am sure there are as many further considerations as there are investors, so please do share yours!
Some Solid Options
Exchange Traded Funds or ETFs are pooled investments (Funds) listed on the stock exchange (Exchange Traded). These are great vehicle for passive investing. The following are a few of my favourites, available on Freetrade (as at Feb 2019)
Ticker | Name | Asset Class |
---|---|---|
ISF | iShares Core FTSE 100 | UK Equities (Large Companies) |
FTAL | SSGA SPDR FTSE UK ALL SHARE | UK Equities (All) |
IUKD | iShares UK Dividend | UK Equity (Dividend Income) |
IWDG | iShares Core MSCI World | Global Equities |
VFEM | Vanguard FTSE Emerging Markets | Global Emerging Markets |
VHYL | Vanguard FTSE World High Div Yld | Global Equities (Dividend Income) |
IGLT | iShares Core UK Gilts | UK Government Bonds (GILTS) |
SLXX | iShares Core £ Corp Bond | Global Corporate Bonds (In Sterling) |
Examples
To try and make it a bit more useful I thought I might pop in a few individual examples:
Tom is 27 years old and wants to start saving £200pm to build up some extra savings for retirement. He is high risk and has decided on an 80/20 split in favour of equities. His main aim is to grow his investments over the long term (30+ years). His portfolio might look something like this:
ETF | Asset Class | Weighting |
---|---|---|
SSGA SPDR FTSE UK ALL SHARE | UK Equities (All) | 20% |
iShares Core MSCI World | Global Equities | 40% |
Vanguard FTSE Emerging Markets | Global Emerging Markets | 20% |
iShares Core £ Corp Bond | Global Corporate Bonds (In Sterling) | 20% |
Richard is 32 years old and is also saving for his retirement, but he is not comfortable with fluctuations in his portfolio value. He is still aiming to seek growth but has a lower risk tolerance than Tom. Therefore, he has decided on a 60/40 split in favour of equities.
ETF | Asset Class | Weighting |
---|---|---|
iShares Core FTSE 100 | UK Equities (Large Companies) | 30% |
iShares Core MSCI World | Global Equities | 30% |
iShares Core UK Gilts | UK Government Bonds (GILTS) | 20% |
iShares Core £ Corp Bond | Global Corporate Bonds (In Sterling) | 20% |
Harry is 65 and is ready to enjoy the money he has earnt from investing over the last 30 years. He has £200,000 which he is going to use to generate additional income. He is a medium risk investor and has opted for 60/40 split in favour of equities.
ETF | Asset Class | Weighting |
---|---|---|
iShares UK Dividend | UK Equity (Dividend Income) | 30% |
Vanguard FTSE World High Div Yld | Global Equities (Dividend Income) | 30% |
iShares Core UK Gilts | UK Government Bonds (GILTS) | 20% |
iShares Core £ Corp Bond | Global Corporate Bonds (In Sterling) | 20% |
NB. This portfolio has historically generated income of around 3.5%, or £7,000pa
Conclusion
I hope this was a useful start for anyone out there who is jumping on the roller coaster ride that is investing. For full disclosure, I am not 100% invested passively. However the core of my strategy is, and I believe everyone should at least consider passive investing and it is unarguably (IMO) the best starting point.
Again this should not be considered a recommendation, just my two cents. If there is anything I have missed or you have any questions I would love to hear them!
Best
Jack