Index funds

[mdianuk]

I've been reading a few financial books to better understand investing, so I can make my savings work for me.

The most highly recommended books (on here as we as elsewhere) suggest that Index Funds in the long term should yield positive returns, based upon historic data (around 9% per annum). They also suggest that index funds are all you need, and that other forms are investment are generally a waste of time, and that financial advisors will never beat straight forward index fund investing. Jury is out on that of course, I don't know better.

So, on that basis, by Index Funds, do they mean investing in the world markets as a whole (ftse100 etc), or individual shares? If funds as a whole, then do banks offer these as part of the ISA wrapper, because from what I can see, they generally invest in a mix of shares, bonds etc.

Does anyone else take the approach that Index Funds only are all you need for sensible long term (hopeful) gains? If so, who do you use and why?

Any feedback appreciated as I'm a numpty at all this, but learning fast!

Edited by mdianuk on Wednesday 12th April 12:32

[sidicks]

mdianuk said:

I've been reading a few financial books to better understand investing, so I can make my savings work for me.

The most highly recommended books (on here as we as elsewhere) suggest that Index Funds in the long term should yield positive returns, based upon history data (around 9% per annum). They also suggest that index funds are all you need, and that other forms are investment are generally a waste of time, and that financial advisors will never beat straight forward investing. Jury is out on that of course, I don't know better.

So, on that basis, by Index Funds, do they mean investing in the world markets as a whole (ftse100 etc), or individual shares? If funds as a whole, then do banks offer these as part of the ISA wrapper, because from what I can see, they generally invest in a mix of shares, bonds etc.

Does anyone else take the approach that Index Funds only are all you need for sensitive long term (hopeful) gains? If so, who do you use and why?

Any feedback appreciated as I'm a numpty at all this, but learning fast!

1) Long term equity returns may have been about 9% (when interest rates and inflation were both much higher) but in the current low interest rate / low inflation environment, cash + 4-5% is a much more realistic expectation.

2) for equity investment it is true that over the long term, many active managers do not beat the index benchmark - they have to not only get their active positioning correct but also make additional profits to offset trading costs and (their higher) management fees.

My view is that it doesn't make sense to pay for active management ("alpha") when you expect the bulk of your return to come from market exposure ('beta").
Additionally, some market environment are much more conducive to generating alpha through stock selection that others, so even if you believe in active management, there are times when this makes more sense than others.

Conversely, for credit risk, active management can make a much bigger difference in genersting meaningful additional returns or avoiding drawdowns due to defaults.

3) index investing means passive investing in the relevant benchmark - e.g. UK equities (FTSE 100, FTSE Allshare etc) rather than in a small number of inviodual shares

4) Most Stocks and Shares ISAs will be investing to match (or beat) some type of index benchmark and will hold a portfolio that closely resembles the components of that benchmark.

5) there is a lot to be said for low cost passive trackers

[covmutley]

I have index funds in a stocks and shares ISA with Bestinvest.

Returns this year have been good- American index I hold is up 30%, UK one about 15%.

My Dad has held part of his pension (circa 100k) in similar funds and has averaged about 8% over the last 5 or 6 years.

[nyt]

It's all a matter of timing imo.

If you invested in the FTSE 100 10 years ago you would have gained about 12% over the 10 years. If you invested in early 2009 then you'd have gained 80% isn.

There is loads of data on: www.google.com/finance

I suggest that you compare FTSE 100 (INDEXFTSE:UKX) with managed funds. Perhaps the famous Fundsmith (MUTF_GB:FUND_EQUI_T_1UJO18H)

Google has figures for most major indices and funds if you hunt around.

Sites like iii.co.uk will tell you which indices the funds are tracking.

Good luck

[FredClogs]

I have some index funds and some active funds. Seems like a sensible option. I've just sold out a big chunk that was in a US passive tracker and put it into a few of actively managed more risky funds, I don't think they'll be much joy passively tracking the US or UK index for the next year or so - but I don't really know - that's why I'm not rich.

There is a fairly cogent Warren Buffet argument that goes along the lines of "you can't beat the market because the market is a finite resource" - but he has beaten the market for many years and some big "super star" fund managers like Woodford and Terry Smith very much follow his model of picking and holding smaller selections of stock for the long term and they DO consistently beat the index - quite considerably, so you know... Don't trust anyone.

[mdianuk]

So using Lloyds as an example (because I bank with them), their medium risk investment is made up of 51% shares, 39% bonds and guilds and 10% property. https://www.lloydsbank.com/investments/investment-... Would that 51% shares be made up of their own preferred shares, cherry picking from them, or would it be invested in an index fund, offset by I assume safer bonds and guilds?

Sorry to ask such basic questions to most of you, I really have lived a sheltered life of cash savings and isas, relying on my companies to always make decent profits and not consider what to do with it. It seems the moral of most financial books is spend sensible, never beyond your means (always been a saver, never bought recklessly), and 'invest the rest'...wish I had known this at 18, I always assumed 'save the rest'.

Some have suggested that moving into investments at the moment is foolish, with drops likely over the coming years, but all I can do is go off historic data that returns have always been positive long term; and I understand that a bit at a time is wiser than a chunk right now.

[nyt]

mdianuk said:

So using Lloyds as an example (because I bank with them), their medium risk investment is made up of 51% shares, 39% bonds and guilds and 10% property. https://www.lloydsbank.com/investments/investment-... Would that 51% shares be made up of their own preferred shares, cherry picking from them, or would it be invested in an index fund, offset by I assume safer bonds and guilds?

Sorry to ask such basic questions to most of you, I really have lived a sheltered life of cash savings and isas, relying on my companies to always make decent profits and not consider what to do with it. It seems the moral of most financial books is spend sensible, never beyond your means (always been a saver, never bought recklessly), and 'invest the rest'...wish I had known this at 18, I always assumed 'save the rest'.

Some have suggested that moving into investments at the moment is foolish, with drops likely over the coming years, but all I can do is go off historic data that returns have always been positive long term; and I understand that a bit at a time is wiser than a chunk right now.

Morningstar gives you a lot of information: http://www.morningstar.co.uk/uk/funds/snapshot/sna...

I got that from the ISIN code on: https://www.lloydsbank.com/assets/media/pdfs/inves...
ISIN: GB00BGJZLV53

I then simply googled the ISIN code.

[FredClogs]

You can use Trust net or HL website to cmpare fund performance, past performance is no indication of future performance (of course) but comparison between what funds have done compared to each other in the past is pretty much all you have to go on as to what they'll likely do in the future.

There are various methods and legal structures that can be invested in to track the general world economy, I don't know how lloyds would do it in that fund, does the KIID say anything - Just looked it's a Scottish widows product.

The main thing to look at is the charge is competitive and the morningstar risk rating (you can find that on trustnet) suits your sensibility.

It's here...

http://www.morningstar.co.uk/uk/funds/snapshot/sna...

[mdianuk]

nyt said:

Morningstar gives you a lot of information: http://www.morningstar.co.uk/uk/funds/snapshot/sna...

I got that from the ISIN code on: https://www.lloydsbank.com/assets/media/pdfs/inves...
ISIN: GB00BGJZLV53

I then simply googled the ISIN code.

Really helpful thank you. Not sure if it suggests it is a good or bad investment fund, but the returns seem 'stable'!

[nyt]

mdianuk said:

Really helpful thank you. Not sure if it suggests it is a good or bad investment fund, but the returns seem 'stable'!

It's too new a fund to really comment imo.
But ... it has significantly underperformed its benchmark. That's not a good sign. And its morningstar rating is only 3*.

Compare to 'fundsmith' that I mentioned earlier:
http://www.morningstar.co.uk/uk/funds/snapshot/sna...
http://tools.morningstar.co.uk/uk/fundcompare/defa...

http://www.morningstar.co.uk/uk/funds/snapshot/sna...

You mentioned ISAs earlier. Unless you've used all of you allowances then you should hold these as part of an ISA or even as part of a personal pension.
Use your allowances!


There are hundreds of funds out there. It pays to do some research. My worst performing investment over the years have been FTSE trackers. Bought when everyone was saying they were the way to go and then stupidly ignored for years.

Edited by nyt on Wednesday 12th April 13:42

[nyt]

mdianuk said:

So using Lloyds as an example (because I bank with them), their medium risk investment is made up of 51% shares, 39% bonds and guilds and 10% property. https://www.lloydsbank.com/investments/investment-... Would that 51% shares be made up of their own preferred shares, cherry picking from them, or would it be invested in an index fund, offset by I assume safer bonds and guilds?.

In passing, you started off by mentioning tracker funds. This looks like a managed fund.

[mdianuk]

nyt said:

It's too new a fund to really comment imo.
But ... it has significantly underperformed its benchmark. That's not a good sign. And its morningstar rating is only 3*.

Compare to 'fundsmith' that I mentioned earlier:
http://www.morningstar.co.uk/uk/funds/snapshot/sna...
http://tools.morningstar.co.uk/uk/fundcompare/defa...

http://www.morningstar.co.uk/uk/funds/snapshot/sna...

You mentioned ISAs earlier. Unless you've used all of you allowances then you should hold these as part of an ISA or even as part of a personal pension.
Use your allowances!


There are hundreds of funds out there. It pays to do some research. My worst performing investment over the years have been FTSE trackers. Bought when everyone was saying they were the way to go and then stupidly ignored for years.

The Fundsmith fund is certainly appealing, but correct me if wrong, when comparing the two, Fundsmith focus almost 100% on stocks and shares, therefore making it a high risk investment fund no? Obviously the historic figures don't lie, it has done well, but would need to be more accepting of risk with it?

In terms of ISA's, yes, I have the full allowance available to me this year, plus a 6 figure Cash ISA from past years to do something with!!! I just don't know what yet!

[mdianuk]

nyt said:

In passing, you started off by mentioning tracker funds. This looks like a managed fund.

I know, I've derailed my own thread already! I'm so damn confused! So far I've only been looking at managed funds that spread risk across shares, bonds etc (per original post), but having read a few financial books, most suggest that index funds (tracker funds?) are the most sensible approach for long term gains for those without knowledge of the investment markets.

[sidicks]

mdianuk said:

The Fundsmith fund is certainly appealing, but correct me if wrong, when comparing the two, Fundsmith focus almost 100% on stocks and shares, therefore making it a high risk investment fund no? Obviously the historic figures don't lie, it has done well, but would need to be more accepting of risk with it?

In terms of ISA's, yes, I have the full allowance available to me this year, plus a 6 figure Cash ISA from past years to do something with!!! I just don't know what yet!

You are 100% correct - the two funds are not really directly compatible, let alone over such a short investment horizon.

[sidicks]

mdianuk said:

I know, I've derailed my own thread already! I'm so damn confused! So far I've only been looking at managed funds that spread risk across shares, bonds etc (per original post), but having read a few financial books, most suggest that index funds (tracker funds?) are the most sensible approach for long term gains for those without knowledge of the investment markets.

Very simply, equities are expected to produce the best returns over a long investment horizon. However, they also can be volatile and have the biggest risk (of large falls in prices). There is no guarantee that they will offer the best return over any particular investment period.

Indeed the thing about equities is they rarely produce their 'average' return I.e. The average return for equities is a combination of lots of excellent years, some terrible years and a few observations in the middle!

A balanced / managed fund aims to spread your assets over a much wider range of exposures than just equities, to produce a more stable return from year to year, but ultimately this is expected to lead to lower returns over the long term.

Edited by sidicks on Wednesday 12th April 14:09

[nyt]

mdianuk said:

nyt said:

It's too new a fund to really comment imo.
But ... it has significantly underperformed its benchmark. That's not a good sign. And its morningstar rating is only 3*.

Compare to 'fundsmith' that I mentioned earlier:
http://www.morningstar.co.uk/uk/funds/snapshot/sna...
http://tools.morningstar.co.uk/uk/fundcompare/defa...

http://www.morningstar.co.uk/uk/funds/snapshot/sna...

You mentioned ISAs earlier. Unless you've used all of you allowances then you should hold these as part of an ISA or even as part of a personal pension.
Use your allowances!


There are hundreds of funds out there. It pays to do some research. My worst performing investment over the years have been FTSE trackers. Bought when everyone was saying they were the way to go and then stupidly ignored for years.

The Fundsmith fund is certainly appealing, but correct me if wrong, when comparing the two, Fundsmith focus almost 100% on stocks and shares, therefore making it a high risk investment fund no? Obviously the historic figures don't lie, it has done well, but would need to be more accepting of risk with it?

In terms of ISA's, yes, I have the full allowance available to me this year, plus a 6 figure Cash ISA from past years to do something with!!! I just don't know what yet!

Bonds/Gilts prices can vary too. As interest rates rise, bond prices fall. 10% of the fund is in property which also variable.
The fundsmith offering [I'm not recommending, just using as an example because I'm familiar with it] selects from very stable companies that sell stuff that everyone has to buy - washing up liquid etc etc. Fundsmith is so stable that its often referred to as a "Bond Proxy Fund". These are currently out of favour with the press, and it does look like the economic environment where they shone is ending.

[nyt]

sidicks said:

You are 100% correct - the two funds are not really directly compatible, let alone over such a short investment horizon.

I didn't think that the comparison was too far out.
The OPs fund is 59% equities and Fundsmith is known for selecting 'boring' companies that are likely to maintain profits whatever the economy does.

If I misled the OP then apologies

[MrGRT]

I use a combination of leverage 2x market tracker with very low expense ratio and a fund that invest on GBP inflation linked Gilts.
The allocation to each varies of course but I try to have more on the leveraged tracker.
There are many funds that you can invest within an ISA, you don't have to commit to only 1.
Do your research and select what best suits you.

[sidicks]

MrGRT said:

I use a combination of leverage 2x market tracker with very low expense ratio and a fund that invest on GBP inflation linked Gilts.
The allocation to each varies of course but I try to have more on the leveraged tracker.
There are many funds that you can invest within an ISA, you don't have to commit to only 1.
Do your research and select what best suits you.

Why would you be buying inflation linked gilts at negative real yields?

[ReallyReallyGood]

On the topic of funds, given Brexit and the future volatility of GBP, are there non-actively-managed funds that contain within them a currency hedge? I don't want to worry about Brexit deals messing about with my investment value if I can help it.