Same here. Completely different investing style on freetrade now. I’m researching things more than I ever have done now I know that I’m not paying dealing fees for small trades whenever I get spare cash.
I read your article with interest. I’m 48 and a total newcomer to investing - haven’t had the courage to move forward but would like to now fund my ISA and get started.
I’m looking at long term (until retirement), low risk, low cost and have done enough research to understand that index tracker funds are probably the best option for me.
I have £5000 to invest, hopefully paying in monthly amounts also. My question is do I invest in one tracker fund or split the money between 2 or 3?
I’m currently looking at IUSA and ISF. My gut is telling me to split 50/50.
I know you can’t give advice on what I should do but knowing I’m at least on the right track would give me confidence to go ahead.
Thank you for any help or advice you can offer.
Why these two in particular? You want exposure in SP500 and FTSE100 only? The question doesn’t imply what I think of it. I’m just trying to figure out your reasoning.
Both indexes have plenty of companies with global reach, multinational companies that is, hence not fully dependent on the internal markets they’re in. But this is more prevalent with the SP500. To the point that the SP500 can almost be seen as a world index.
I think they are both decent options. The SP500 have performed better than the FT100 during the past 20 years or so: the SP500 nearly tripled and the FT100 has barely moved.
The SP500 accounts for around 50% of the weight of the world pie of listed companies. The FTSE100 for around 6%. By splitting 50/50 your share in the FT100 will be overwhelmingly higher than the SP500.
If you diversify into more regional indexes, you’ll cover more areas of the world, and then you could also consider having one world index as a single investment. Something like the IWRD would do the trick.
The road of investing through index funds is a good road. It works with lump sums. It works with pound cost averaging where you invest a set amount every month. It is said that 80% of active fund professional managers are unable to perform better than the index - this is widely published specially for the SP500. By indexing you’re automatically as a good investor as the top 20% of professional investors. Not bad. Not bad at all
If you haven’t read it already, the first post of this thread is a great starting point
By splitting it 50/50 between these, you overweight the UK by A LOT. The FTSE is a terribly performing index. I’d strongly advise against giving it so much weight -I’d even substitute it entirely with a MSCI world and an Emerging Markets one.
Thank you Raul and SebReitz.
Why IUSA and ISF - I’ve been looking mainly at costs and charges, trying to keep them low. I’ve also gone with the illustrative 5 year values and chosen those which seem to show good returns.
I am very new to this though and I admit to getting a bit flustered with numbers!
I was thinking that splitting 50/50 would be a safer option but your explanations of giving too much weight to ISF makes sense. I suppose part of me is still nervous so I think I still have some research to do before going for it.
I was originally looking just at Vanguard but the individual share cost is higher. Does this matter in the grand scheme of things when it comes to investing in this way?
No. it doesn’t matter. Check this thread for an explanation
The individual prices for an ETF are not generally relevant. If you own 4 pieces of something worth £20 for £5 a piece or 2 pieces worth £10 a piece is equal. It’s only a nuisance if it’s so high that buying or rebalancing gets hard for you.
You make some very good points regarding passive investing and for a lot of people who do not have the time or experience/knowledge to select individual stocks this makes a lot of sense. However even selecting different ETF’s can over the long run make a huge difference to returns. For example not investing in Technology over the last 20 years could have left you with a severe underperformance against those people that had. Likewise an ETF in the UK FTSE 100 would have underperformed against a Japanese stock ETF so you cannot be passive really even in ETF’s or funds. You need to take a view on the present relative to the future. I have been investing for 25 years and have done well through investing in both ETF’s and funds but you have to do it with your eyes wide open and look at the present relative to the likely future based on value and growth. Some fund managers do very well based on that and funds such as Fundsmith do well because Terry Smith selects established companies that are better than the overall market due to their quality. Likewise Scottish Mortgage does well because the manager places his bets on future trends. This should give most investors a clue also as to how they could think if they want to add a few stocks to their mainly fund based portfolios.
You don’t need to pick stocks / actively manage to achieve this. There are passive ETFs that follow factors (such as Quality). For example the iShares Quality factor ETF:
In fact active funds over/under performance is often explained by their relative exposure to risk factors as opposed to stock picking ability.
People who picked EV stocks last year literally had 30 years of S&P gains in half a year. I mean sure, it’s likely not going to continue but for those who already locked the gains picking individual stocks will always be a statistically better strategy
Right and plenty of other people picked other stocks and lost money during a bull run.
Not for most though.
For sure. If one wants to put money somewhere for 40 years and never rebalance, broad market index seems like the only option. Investing in anything else would eventually make you a victim of trend reversal.
Yeah, for them but also for people who rebalance every single minute, the advice is no less relevant to people who pay more attention.
‘Be lucky and hope that every sector you rotate into becomes part of a massive speculative bubble’ isn’t exactly useful advice.
This guy I speak to made around 18% from January 2020 to January 2021 - which does not sound great to most, though he was fully invested and diversified throughout and bought more on the March dip. Mostly index funds and robo.
This still made him around $150,000.
Not sure where you think you read that, but picking stocks is generally the worst strategy in the longterm. Also why would you use ‘statistically’ to further an opinion?
Yes that would be a possible ETF to consider. It’s performance since inception in 2014 has been more or less in line with the S&P 500. However it holds 300 stocks so you would not expect it to outperform a fund such as Fundsmith which holds around 30 stocks. Terry Smith has said his investable universe of stocks is only around 65 to 70 of the best companies in the world. Fundsmith has considerably outperformed this ETF and I suspect that over the long term will continue to do so.
Worth a read if you’re new to all this
This is a brillant write up! I’m only young(Ish) so and new to this. So planning on putting 7.5% of income per month into this. Will probably go 80/20 on the safer side.
Hey man, thanks for this introduction! I’m a newbie so making my way through a lot of these forums.
Can I ask for a bit of a breakdown on Bonds and why there is a small portion (20%) on them? Are these more risky than asset ETF?
Being honest - what are they? What would determine if a bond price went up/down? I am doing my own research but intrigued to hear what people on FT are saying instead of Google.
A bond is essentially an instrument whereby you can purchase debt (and thus you get the interest on that debt, plus the principal repaid in X years).
So for example you could buy a bond for £100 which might pay 3% interest per year for the next 8 years, at the end of which you get £100.
They’re traditionally a low-risk asset but in an age of below-inflation interest rates, they’re not at their most appealing.