Investing is Personal

With my poor track record of investing in stocks and shares I knew that single shares were not for me. By June 2019, I was fully aware of how emotional I had been over money and this influenced my thinking as I started to look into yet another attempt at stocks and shares.

As I’m too emotional for single shares, my thinking was to go with Index investing.  My preference is a set-and-forget strategy and one of the benefits is that I only check my fund maybe once or twice a year.

Much better for my mental health when compared to single shares. Constantly checking the price of single shares hasn’t done me any favors in the past.

When reading up on finance to improve my financial literacy, I have found that tracking the markets is a method of investing that is most suitable for me. Many experts like Warren Buffet and John Bogle recommend it and I have also learned from experience.

Tracking the markets is about staying calm throughout the inevitable ups and the downs. The main concept of tracking the markets is that you are looking to match the interest achieved by the entire stock market.

This method gives you diversification (spreading the risk) as your index fund often holds shares in several companies. The companies can be in different parts of the world also (different markets) meaning further diversification. It means you are less exposed if one of the holdings performs poorly.

With over 100 years of data, the entire stock market has gone up an average of 7-8% per year. It might be much lower some years and even negative but if you are looking at it from a historical point of view, it will revert to the mean and over time will average out between 7 and 8%.

If you can let this sink in it will help you look at your investment as a long-term strategy. It will help you avoid common mistakes like buying when the price is high and selling when the price is low.

After doing my research, by mid-2019 I liked the idea of index funds and was also aware of the importance of keeping costs as low as possible.

John Bogle is known as the King of Index funds and he started Vanguard in 1975 and this enabled just about anyone to invest in the stock market.

Vanguard was set up as a low-cost passive fund that is tied to the value of the S+P 500. If the stock market goes up (S+P 500) the fund goes up. If this is reversed and the market goes down, the fund goes down.

What has been drilled into me from what I have read is to avoid the mutual active fund. It is different to a low-cost passive fund in that the fund manager tries to beat the market.

With a mutual active fund, you have to be aware of high transaction costs and taxes. If you do manage to achieve 7% each year but your fund manager is charging you 1.75%, you are down to 5.25%.

You might prefer mutual funds and the chance of getting a higher percentage return on your money. Investing is personal and I am simply going over how I decided to invest in the stock market.

I know that my younger self would have preferred a mutual active fund to make quick money but with a bit of experience I know that the set and forget strategy of passive index funds is more suitable for me.

Deciding where to put your money is a difficult process and the main things to consider are your risk tolerance and your goals. The way I invest my money is specific to me and we all have our own goals that need to be aligned with our investments.

Table 1 will help you to understand different asset classes and how risky they are. If you know you are going to be investing for another 30 years, you can afford to go high-risk high reward when choosing your fund.

Table 1 (Investment risk gauge)

ASSET RISK (ON A SCALE OF 1-8)
EMERGING MARKETS 8 (VERY HIGH RISK)
JAPANESE EQUITIES 7
EUROPEAN EQUITIES 6
US EQUITIES 5
UK EQUITIES 4
PROPERTY 3
CORPORATE BONDS 2
GILTS 1 (VERY LOW RISK)

 

Looking at what fund to go with, I was heavily influenced by my poor investment track record and also by the books I had been reading.

I was happy with my Asset allocation. The fund I was choosing was globally diversified and had a split of 80% shares and 20% bonds. The fund was made up of index assets that tracked the markets (small slice of several companies).

The Vanguard Life strategy 80/20 is the fund I eventually chose. I am 100% not advising you to choose this particular fund. I have to stress that investing is personal, and this fund is what I think is suitable for me and is aligned with my goals.

Once you have decided on your fund, you have to decide what platform to use. I like Vanguard because of the low costs associated with the fund.

I have used Hargreaves and Lansdown and Vanguard platforms so far and there are benefits to both. H+L is more user friendly I would say but Vanguard offer lower costs for the fund I have chosen.

Not only do you need to choose a platform, you also need to choose between an ISA and a SIPP.

Using an ISA and SIPP are both tax efficient, but they have some differences that you should be aware of. For example, you can access your ISA anytime, but you can only currently access your SIPP when you reach 57.

If you love your job and are comfortable working until your late 50s or into your 60s, you might prefer the SIPP option. Then you won’t be tempted to take money out and will massively benefit from compound interest depending on your age.

What I initially decided on was a total of £1000 pcm into my LS 80/20 fund. This was split so that I paid £500 into my SIPP and £500 into my ISA.

My thinking was to build a pot for my 40s with my ISA and build a pot for retirement with my SIPP. Looking at my goals when it comes to money, my main goal is to build a certain amount so that my family would be FI.

I was to give my investment serious thought and ended up deciding to change, as my initial investments didn’t quite match my goals.

If I focused on my SIPP, I could access the money at 57. I decided that increasing my monthly investment in my ISA was more suitable for my ambitious goals.

My new split would be £800 into my ISA and £200 into my SIPP. I have looked further into my LS 80/20 fund with improved understanding and am still happy with the fund. I just needed to adjust my allocation between my SIPP and my ISA.

With my Funds now aligned with my goals, I still wasn’t quite there. Although I do like the Hargreaves and Lansdown Fund platform, I had to re-visit the charges. That was pretty much the first thing I learned when researching investing.

Although it was in the forefront of my mind, I had made a mistake when using HL for my funds. Initially, I chose Vanguard funds via HL and although I was looking at the fees, I didn’t compare them to going direct to Vanguard. This is the cheaper option and I have now moved my ISA to Vanguard to save on costs.

Let’s compare the fees for both platforms. Vanguard fees are just 0.15% on the first £250,000. HL are 0.45% a year for the first £250,000. In addition to this, both funds charge an annual ongoing charge (ocf): 0.15% for Vanguard; 0.26% for HL. This means the all-in costs are as follows: 0.29% for Vanguard; 0.71% for HL. This 0.42% does not seem a lot but over a lifetime of investing could make a massive difference to your pot.

Here is a little summary of what led me to investing in the Vanguard LS 80/20 Fund:

  • Track the markets and aim for 7-8% (this doesn’t take inflation into account)
  • Look for a fund that is diversified across several companies in different markets
  • Make sure your chosen fund (if you decide to invest in a fund) is aligned with your goals – I am confident mine is aligned
  • Do your own research and my own research led me towards John Bogle and Vanguard
  • Read the smallprint and be aware of the costs involved
  • Be tax efficient and understand whether ISA or SIPP is most suitable

As always, I hope someone somewhere can learn from my mistakes. Do your own research and don’t settle for <1% interest from a high street savings account.

 

 

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