Page 43 - DIY Investor Magazine | Issue 39

INVESTING BASICS:
INDEX INVESTING FOR THE DIY INVESTOR
Low cost, passive index investing could be the ideal solution for
the time poor DIY investor new to investing – by Christian Leeming
DIY Investor debunks industry jargon, and shows how it is possible for the self directed investor to construct a portfolio of passive investments in line with their risk tolerance; this is not instant gratification, it is betting on the tortoise and, at least according to Aesop, could be picking a winner.
There are indices that deliver exposure to most types of investment, home and abroad, each with differing volatility and risk profiles.
Those seeking a diversified range of investments without the costs of actively managed funds may find index investing an attractive option; here are five reasons why:
1) INDEX INVESTING IS SIMPLE
By buying a product that tracks a particular index – either an index tracker fund or an Exchange Traded Fund (ETF) – you automatically create a portfolio of investments as diverse as the companies that make up the index.
Select the indices you wish to track, set up regular contributions via your stockbroker and any rebalancing is effectively done for you because the constituents of the index change over time; then relax - markets will rise and fall but you’re in for the long haul.
2) INDEX INVESTING WORKS
Studies show that after costs index investors can consistently beat the average active investor; over time index funds routinely beat the performance of actively managed funds, with their very low cost a key factor.
The cheapest fund to track the FTSE 100 is Vanguard FTSE 100 Index Unit Trust, with an ongoing charge of just 0.06% - 60p on £1,000.
To illustrate the effect of fees, £10,000 invested, achieving 6% annual growth over ten years returns £16,929 in an actively
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managed fund charging 1.5%, but £19,185 in a passive tracker charging 25bps.
3) INDEX INVESTING CAN BE CHEAP
Low cost index trackers can be bought from your online broker, often with ultra low commissions on regular investments; invest from as little as £50 per month and build your portfolio over time, swerving the cost of advice.
4) INDEX INVESTING FOR THE TIME POOR
With masses of data to paw over, stock picking can be time- intensive; those flourishing the hazelnut may argue that its discovery justifies the amount of squirrel ordure under their nails, but index investors can achieve solid long term investment performance without living and breathing their portfolio.
5) INDEX INVESTING FOR THE DIY INVESTOR
The government’s Retail Distribution Review changed the investment landscape forever, as those unwilling, or unable to pay for financial advice took personal financial control.
As an entry point to DIY investing, investment community The Motley Fool concluded, ‘all things considered, here at the Fool we believe that an index tracker is the most suitable initial investment vehicle for the vast majority of people’.
Those considering an investment strategy around index trackers should understand the risks they are exposed to and dilute this to a level they are comfortable with.
Work out how much you will need to invest in order to achieve your financial goals and create a number of alternative scenarios by factoring in variables such as the effect of inflation.
Keep a watching eye on costs – even small increases to dealing commissions or platform fees can make a big difference to the long term return on your investments – then be confident and Do it Yourself!
Much more financial information here >
Nov 2023
DIY Investor Magazine ·