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Reasons for investing in a Fund or Tracker?

Investment discussion for beginners. Why you should invest your money, get help getting started
Clariman
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Reasons for investing in a Fund or Tracker?

#139255

Postby Clariman » May 15th, 2018, 8:20 pm

As you may know I am fairly risk averse financially - hence not heavily into equities. Historically I put most ISA money in cash-ISAs but some in Index Tracker. My perception was that the equity ISAs had not performed that well but last year's tracker ISAs have done pretty well.

All I really want to do is to protect what we have from inflation. I now accept that to achieve that aim I need to take some risks. I have 1 year, 3 year and 5 year cash-ISAs all maturing over next 2 months. I also have cash in a 1 year bond maturing in September. I am getting fed up with all the time it is taking to find some half-decent interest on cash anywhere. It struck me that simply putting money in a fund or tracker will be considerably less work than the never ending chase for decent interest.

So with my objectives to maintain what I have (growth would be nice), and to take on some risk to achieve it, and my desire to reduce the admin ... perhaps I should shift a fair bit more into equity ISAs. What do you think?

Current assets are split as follows (by valuing our DB pensions as an asset)

Cash ISAs - 8%
Equity ISAs - 5%
Cash savings - 9%
AVC (not being taken yet) - 5%
Investment Property -15%
DB Pensions - 57%

Thanks
C

LooseCannon101
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Re: Reasons for investing in a Fund or Tracker?

#139277

Postby LooseCannon101 » May 15th, 2018, 11:38 pm

If you are willing to accept the risk each year of losing 10% or gaining 30%, then a highly diversified world equity fund or index tracker would be ideal. This gives some protection from inflation and currency risk, and should provide an average return of 8.2% over the long term. I am basing my figures on the returns achieved over the past 20 years.

A low-cost ISA savings plan where you put in a set amount per month and re-invest dividends would be my preferred option. Chopping and changing between funds is a waste of time for most investors as they lose money in transaction costs and are likely to buy and sell at the wrong times.

GeoffF100
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Re: Reasons for investing in a Fund or Tracker?

#139285

Postby GeoffF100 » May 16th, 2018, 7:10 am

LooseCannon101 wrote:If you are willing to accept the risk each year of losing 10% or gaining 30%, then a highly diversified world equity fund or index tracker would be ideal. This gives some protection from inflation and currency risk, and should provide an average return of 8.2% over the long term. I am basing my figures on the returns achieved over the past 20 years.

8.2% return looks very optimistic going forwards. All the world's major stock markets have enjoyed big price rises, and are now very expensive. This is particularly true of the US. Vanguard thinks the US market is likely to return 3-5% over the next decade:

https://www.vanguardinvestor.co.uk/arti ... value-cape

Some other markets may do better, but nobody knows which ones. A world tracker spreads your risk. Of course, there is no guarantee that the world's stock markets will grow. You could lose most of your money. The price might recover eventually, but that might take decades. Nonetheless, equities are likely to give much better returns than cash or bonds over the very long term.

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Re: Reasons for investing in a Fund or Tracker?

#139294

Postby Urbandreamer » May 16th, 2018, 7:58 am

Clariman wrote:As you may know I am fairly risk averse financially - hence not heavily into equities. Historically I put most ISA money in cash-ISAs but some in Index Tracker. My perception was that the equity ISAs had not performed that well but last year's tracker ISAs have done pretty well.


As of April, mine had not (over the year). However as of now, they have.

Such is the nature of equity investment.

Assuming that you wish to track an index passively, then there are only a couple of things to look at. How well does the tracker/etf manage to track the index? What are the costs? Finally does it track synthatically* or physically.

I hope that the first two are obvious. The final one is a bit esoteric but to simplify, in your case you probably want a tracker that physically buys the shares as it reduces counter-party risk. Other people may accept a synthetic tracker that uses derivatives because it may be difficult to buy the shares in the index that they wish to track.

As you may know I'm not risk averse and like active equity investment. However my work pension is invested in trackers and in terms of admin it's a no brainer. A regular investment goes in and when the market is low it buys more. When it is high, previous contributions have made significant sums. If a tracker is physical or synthatic and it's tracking error don't change much, so you can make your decision sit back and relax if you want to.

Ps, don't assume that all trackers are cheap. Many/most are, but there are some very expensive ones out there.

Oh I also read recently that equities tend to give 3-6% AFTER inflation. Given current inflation that could equate to the 8% another poster suggested.

colin
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Re: Reasons for investing in a Fund or Tracker?

#139335

Postby colin » May 16th, 2018, 10:58 am

Vanguard thinks the US market is likely to return 3-5% over the next decade:


Yes the US market. Not all the worlds markets are so highly valued.

tjh290633
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Re: Reasons for investing in a Fund or Tracker?

#139345

Postby tjh290633 » May 16th, 2018, 11:30 am

GeoffF100 wrote:
LooseCannon101 wrote:If you are willing to accept the risk each year of losing 10% or gaining 30%, then a highly diversified world equity fund or index tracker would be ideal. This gives some protection from inflation and currency risk, and should provide an average return of 8.2% over the long term. I am basing my figures on the returns achieved over the past 20 years.

8.2% return looks very optimistic going forwards. All the world's major stock markets have enjoyed big price rises, and are now very expensive. This is particularly true of the US. Vanguard thinks the US market is likely to return 3-5% over the next decade:

Markets go up and down. I like to look at how my portfolio, calculated on an accumulation unit basis, has performed over the years from the successive year ends:

Since        Acc Unit   IRR   
31-Dec-98 5.89 8.14%
30-Dec-99 6.85 7.72%
31-Dec-00 6.68 8.34%
31-Dec-01 6.43 9.13%
31-Dec-02 5.23 11.22%
31-Dec-03 6.38 10.51%
31-Dec-04 7.59 9.91%
30-Dec-05 9.69 8.59%
31-Dec-06 12.25 7.15%
31-Dec-07 12.41 7.73%
31-Dec-08 7.41 14.72%
31-Dec-09 10.24 12.21%
31-Dec-10 12.32 11.16%
31-Dec-11 13.45 11.46%
31-Dec-12 15.80 10.40%
31-Dec-13 19.56 7.54%
31-Dec-14 20.34 8.62%
31-Dec-15 21.42 10.03%
31-Dec-16 24.37 7.38%
29-Dec-17 26.70 1.80%

As the caveat always goes, Past performance is no guide to the future, and this year has not been particularly sparkling, but over the years 8% has not been an unreasonable target if you avoid tracker funds.

TJH

GeoffF100
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Re: Reasons for investing in a Fund or Tracker?

#139390

Postby GeoffF100 » May 16th, 2018, 4:12 pm

colin wrote:
Vanguard thinks the US market is likely to return 3-5% over the next decade:


Yes the US market. Not all the worlds markets are so highly valued.

The market clearly believes that the US market deserves its higher valuation because it has better (or less bad) growth prospects than the other markets.

The UK market has one of the lowest valuations of the main markets. Vanguard estimates the equity premium for the UK market to have been 3.5% since its inception. With bond yields at 2%, that implies an equity total return of 2% + 3.5% = 5.5%, which is a little more than Vanguard's estimate for the US market return over then next ten years, but a hard Brexit of Jeremy Corbyn could soon fix that.

I must emphasise again that stock market returns are very variable and unpredictable. Nobody knows what the actual returns will be for any of the world's equity markets over the coming years.

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Re: Reasons for investing in a Fund or Tracker?

#139401

Postby GrandOiseau » May 16th, 2018, 4:43 pm

What is your timescale for investment? In other words when are you going to be retiring and living off your income and/or savings?

Clariman
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Re: Reasons for investing in a Fund or Tracker?

#139502

Postby Clariman » May 17th, 2018, 8:26 am

GrandOiseau wrote:What is your timescale for investment? In other words when are you going to be retiring and living off your income and/or savings?

We have taken early retirement in our 50s already. Our DB pensions cover most day to day expenditure, a couple of holidays a year etc. However, they don't really cover replacement car, major home improvements and the additional holidays we would like to take.

So I see us withdrawing about 3.3% of our capital/investments (excluding property) per annum. This would last us 30 years and we would then have property to sell too if need be. I need to check exact dates, but I think Mrs C gets state pension in about 6 years time and I get it in 10 years. At that point we may not withdraw any money from savings.

So I am not worried about our financial future, providing I can protect the savings/investments from inflation.

I'm not sure if that answers your question or not.

Clariman

GrandOiseau
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Re: Reasons for investing in a Fund or Tracker?

#139602

Postby GrandOiseau » May 17th, 2018, 3:58 pm

It answers my question.

The problem might come if you ever need the capital and/or you can not deal with the fluctuating returns.

Currently you are investing in something that is preserves the capital and has a guaranteed, all be it modest, return.

Trackers are for sure going to be more dependable and relatively low cost to increase the take a little. And certainly will improve the admin. Investment Trsuts that focus on income something else to look at it.

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Re: Reasons for investing in a Fund or Tracker?

#139890

Postby hiriskpaul » May 18th, 2018, 6:08 pm

A "Safety first" approach is likely to suit you best. With this all your needs are taken care of by pensions and part of your cash savings, the rest invested for growth. I suggest you work out how much cash you are likely need to see you through to your state pensions, then invest the rest in risk assets, most or all of which are likely to be equities. To have some contingency you could invest in income producing funds rather than accumulating funds. Cash would then build up in your ISA accounts which could be drawn if needed, otherwise re-invested once or twice per year. A World tracker, possibly combined with a World bond fund, would produce around 2% per year in dividends and would hopefully grow each year faster than inflation, although "Risk" means the income will be volatile and you may not see the income/capital grow as you might expect it to.

A World tracker, or portfolio of regional trackers, will produce market returns less a small amount to cover management of the funds. Actively managed funds may produce more growth, but come with the risk of producing less. Most managed funds underperform the market and it is not possible to predict in advance which managed funds will outperform. So unless you want the extra angst/euphoria of managed funds, and by the sound of it you don't, I think you would be better off with either a World tracker or portfolio of trackers that you simply buy and hold and either reinvest the dividends every 6-12 months, or draw for additional spending.

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Re: Reasons for investing in a Fund or Tracker?

#140062

Postby monabri » May 19th, 2018, 7:02 pm

Retiring in 50s with a DB pension .....check your NI record and consider class 3 voluntary NI contributions. When you come to take your state pension, the pay back is about 3 years.

Positives : It's over a 30% yield and guaranteed for the rest of your life.
Negative : you won't get it until you retire and - more seriously, you need to live longer than 3 years ( try to oblige ;) !)

Class 3 contributions cost about £750 per person for 1 year extra NI contribution ( ballpark) but will increase your state pension by £4.something per week ( hence the 3 year payback).


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