The post that seeks the views of the personal finance community to decide how I should start investing in the stock market.
As some of you may know, I recently purchased my first flat, thus achieving what had, until that point been my main financial goal, bordering on an obsession.
As I described at the time, what I now need to decide is whether to keep on saving in cash for the (relatively) short term goal of converting my loft (to turn my one bedroom flat into a two bed), or just get stuck in to the stock market. I imagine the majority of people would advise me to just get on with the investing and decide upon the loft conversion later.
The reason for my haste is that during the property purchase process I discovered that the freeholder is willing to sell the loft space for a surprisingly low premium. So if I do want to convert the space, now is the best time before the freeholder either realises they could fleece me for a lot more money, or sells on the freehold to a much more mercenary landlord.
In any event, after getting a few quotations for the work I think I have decided for reasons of cost and inconvenience not to go ahead with the loft conversion for now and (should I decide to do it in the future) hope that the freeholder’s premium stays the same.
So, let’s assume for now I’ve decided to start investing. I’ve never picked my own funds before (my workplace pension having so far been in the default fund) so I’m having a bit of trouble choosing. I’ve got some basic principles in mind that shouldn’t surprise anyone in the FI community:
Stick to low cost index funds – I’m going to start with index funds rather than ETFs because I feel I understand them a little better. I also intend to invest bit by bit each month, which I believe makes index funds a better bet due to dealing fees – although I’d probably be making use of platform regular dealing fees anyway, which I think apply to both ETFs and index funds.
Keep 20% in bonds and 80% in equities
Have as few funds as possible – I want to keep it simple as I start out. I can always add a bit more variety as my confidence grows. Plus, if I’m utilising regular dealing fees then the fewer holdings I have the better.
I’m not too fussed at the moment about investing in “alternative” asset classes like property and commodities.
I’ve narrowed it down to three options.
Option 1: Stick everything in the Vanguard Life Strategy 80
A popular choice for the novice investor and certainly the easiest choice. For those that aren’t familiar with them, the VLS products are essentially a “fund of funds” and would be a one-stop-shop. The VLS 80 is 80% equities and 20% bonds, the VLS 60 is 60% equities and 40% bonds, and so on.
The pros are that it would be super cheap in transaction fees (technically being only one fund) and the bond/equity ratio would get automatically rebalanced.
As far as the bond portion goes, the potential benefit over Option 2 below is that there are multiple bond indices (or is it indexes in this context?) within the portfolio.
The main downside, as is well publicised with the VLS funds, is its UK bias. The UK weighting is about 20% compared with the 5-7% that UK equities represent in the global market. Some say this is a good thing to mitigate currency risk, but with the whole Brexit mess who knows if I’ll end up staying in this country for the long term.
Option 2: One global index fund and one UK government bond index
To avoid the UK bias of the VLS I could just invest 80% of my money in a global index fund and 20% into a UK government bond index. You can tell I’ve been watching Lars Kroijer’s Investing Demystified series on YouTube.
If people like this option I’d be interested in views as to good index options available in the UK. I’ve been looking at the Vanguard FTSE Global All Cap Index Fund. Alternatively, the HSBC FTSE All-World Index Fund C is slightly cheaper (0.18% fund charge compared to 0.24% for the Vanguard), although I know the investing community puts a lot of faith in Vanguard because of its ownership structure. There doesn’t seem to be too much to distinguish the two in terms of the make-up of the funds.
Being a global index this means it’s heavily weighted towards the US. I know the logic is that this is exactly how it should be, as this is how the US is valued in the global market. Still, there is something that makes me a little uncomfortable being 50% invested in one market, especially when that market is not my home market, however rational that choice is. Plus, I keep hearing a lot of stories about the US market being overvalued.
For the bond index I’d look at something like the Vanguard U.K. Government Bond Index Fund. I’m aware there are cheaper bond indices, so if anyone has favourites then let me know in the comments.
My concern here is that I should have a wider variety of bonds. However, the more bond indices I add to the mix the more expensive it gets for me (if I’m investing month by month). This is where the VLS comes into its own.
Option 3: the Vanguard Life Strategy 60 and a global index fund
My idea for creating a hybrid of the two options above was to invest 50% of my money into the VLS 60 (thus getting the 20% bond allocation overall) and 50% into a global index fund.
The benefit of this is that I get my variety of bond indices whilst still only having two holdings overall, keeping it cheap for a regular investor.
The country spread also tempers my fears for Options 1 and 2. It would (roughly) bring the UK weighing to about 10% and the US weighing to about 40%. However, is this an unnecessary complication? Is my desire to have a slight weighting in the UK pointless, as you should either be on the “home-bias” side of the fence or the “global representation” side of the fence, and straddling the two does you no favours?
Again, as with Option 2, grateful for global index fund suggestions. I’m thinking if I went for this option I should diversify away from Vanguard?
There is another option, which is, until I decide what I want to do with the loft space, shove everything into that much maligned product, the cash ISA. I imagine such a suggestion is almost painful to a FI follower to hear.
My reasoning is that it would keep my money safe until I make a decision, and given how I keep changing my mind on the issue, this has some appeal. And if I decide not to go ahead with the loft (say in a year or so) I can transfer the money to a stocks and shares ISA. I will have lost the potential investment gains in that time but at least I won’t have lost the ISA allowance for that tax year.
So that’s what I’m mulling over at the moment. I appreciate that most people reading this aren’t regulated to give actual financial advice, but I’d be grateful for any thoughts and views. What would you do in my position? Any other options for a very simple beginner’s portfolio that I’m missing?