{"id":172,"date":"2009-02-19T11:43:36","date_gmt":"2009-02-19T11:43:36","guid":{"rendered":"https:\/\/www.bishnet.net\/tim\/blog\/?p=172"},"modified":"2010-11-11T13:01:24","modified_gmt":"2010-11-11T13:01:24","slug":"starting-out-with-investments","status":"publish","type":"post","link":"https:\/\/www.bishnet.net\/tim\/blog\/2009\/02\/19\/starting-out-with-investments\/","title":{"rendered":"Starting out with investments"},"content":{"rendered":"

Foreword: I’m new to investing so much of what I write may be incorrect or misguided. Please don’t take anything I say as financial advice.<\/em><\/p>\n

For a while now I’ve been aware of the whole area of investments – shares, indexes, trackers, funds,\u00c2\u00a0corporate bonds, gilts, etc – but I haven’t yet dipped my toes in. After looking through the Foolish guide<\/a> (a little dated, but still a good source of information) that’d been lurking on my shelf for a while I decided it was time to take the plunge.<\/p>\n

Why now, given the current economic state? Well, that’s exactly why. Share prices are currently looking pretty attractive compared to where they were a year or so ago. Will things fall further? Possibly, but it’s quite likely (given past trends) that we will eventually pull out of this dip, and I’d like to be there to take advantage of that.<\/p>\n

But, the main reason I guess is my age. I’m now 30, which means I’m not far off halfway to retirement! My wife and I both have pension schemes with our jobs, but it seems sensible to put away something extra. So I’m looking at the long term – we’re talking 30+ years. If I invest a regular sum every month for the whole period it should build up nicely by the time we retire, and we’ll be able to take advantage of pound cost averaging<\/a>.<\/p>\n

In this current climate I believe the most important investment to have is cash. Things are uncertain, so a buffer of a good few months salary is well worth having. We’ve been saving in to cash ISAs for a couple of years, so we’re OK on that front.<\/p>\n

To start out my investment portfolio I’ve decided that an index linked fund will be best. It’ll make a good core holding, and I can add other holdings if I have some spare funds in future years. I’ll make a regular monthly payment and reinvest any returns (a Fool loves compound interest!). The FTSE All-Share<\/a> index covers a broad range of the UK market, so something based around that seems like a safe choice.<\/p>\n

The next question was whether to go with a passive fund (such as an OEIC – Open Ended Investment Company) or with an ETF (Exchange Traded Fund). There isn’t an ETF for the FTSE All-Share, but you can get something similar by combining the FTSE 100 and FTSE 250 funds. So the important factor becomes the cost, and for that we need to look at the TER (Total Expense Ratio) for each fund.<\/p>\n

First I looked at the Legal & General UK Index Trust tracker fund. It has a TER of 0.52% which includes an AMC (Annual Management Charge) of 0.50%. Then I looked at the Fidelity MoneyBuilder UK Index tracker fund which has a TER of 0.30% including an AMC of just 0.10% – they claim to be the cheapest UK tracker fund on the market.<\/p>\n

Next on to the iShares FTSE 100 ETF. That has a TER of 0.40%, of which 0.35% is an AMC. The iShares FTSE 250 ETF also has a TER of 0.40%. So not much to choose between them? Lets look at the other charges involved.<\/p>\n

It turns out that it’s usually free to pay money in to a fund on a regular basis (and probably for lump sum payments, although I’ve not checked). However, the same can’t be said for ETFs. The clue is in the name – Exchange Traded<\/em> Funds. This means that these funds are purchased on the stock exchange just like you’d buy a share in a UK company. The downside to this is the dealing charges, which can be around the \u00c2\u00a310 mark for each transaction – not a big deal for large lump sum investments, but look out regular investors!<\/p>\n

Crikey! If you’re investing \u00c2\u00a3100 a month that’s 10% of your money being used up straight away. Fortunately, it’s not quite that bad. Most dealers seem to offer a package for regular investors with a special rate of around \u00c2\u00a31.50 per trade. 1.5% is looking much better – invest more than \u00c2\u00a3100 and it’s even less.<\/p>\n

So, lets compare. When we’re talking about TERs of 0.30% to 0.52% for passive funds, 1.5% (lets assume a \u00c2\u00a3100 pcm investment for now) seems quite high, right? Yes and no. For the first year it’s reasonable to do a direct comparison, but in the 2nd year you’re only paying the 1.5% charge on the money you put in during that year. So, now it’s 0.75% to add to your TER. Year on year the percentage compared to your total fund decreases to the point where it’ll eventually become insignificant.<\/p>\n

Another thing to consider is dividends. The passive funds usually have an option to automatically reinvest dividends, which is a good thing for the long term investor. The iShares ETFs currently don’t, so you’ll have to reinvest manually. Not a deal breaker, but worth noting.<\/p>\n

My conclusion is that they’re approximately equal for an investor (please remember my foreword!<\/em>). Which did I decide to go for in the end? I’m still deciding, but I suspect I’ll be opening up a Fidelity account and investing in their MoneyBuilder UK Index fund in time to get it in to this year’s ISA.<\/p>\n","protected":false},"excerpt":{"rendered":"

I’m starting my journey in to the land of investments. I look at my options for a long term investment plan, including index tracker funds and ETFs, and how pound cost averaging helps over the long term.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[66],"tags":[80,86,78,76,77,65,79,75],"class_list":["post-172","post","type-post","status-publish","format-standard","hentry","category-finance","tag-compound-interest","tag-etf","tag-fool","tag-index-tracker","tag-investment","tag-isa","tag-pound-cost-averaging","tag-tracker-fund"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/posts\/172","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/comments?post=172"}],"version-history":[{"count":15,"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/posts\/172\/revisions"}],"predecessor-version":[{"id":211,"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/posts\/172\/revisions\/211"}],"wp:attachment":[{"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/media?parent=172"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/categories?post=172"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.bishnet.net\/tim\/blog\/wp-json\/wp\/v2\/tags?post=172"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}