Investing can be made really simple.
It’s as easy to invest in the stock market and manage your own portfolio as it is to manage an online bank account.
But what to buy? With thousands of heavily marketed funds, we get bombarded and over-loaded with information.
If you’re feeling nervous / insecure / over-whelmed, well…that’s just how the financial services industry likes it. Nervous people are more likely to pay a lot of money to expensive financial advisers and fund managers.
To cut through all the crap, in 2016 I wrote a post with an example portfolio suitable for pretty much anyone investing for the long term. The idea was that you could choose to copy some, all or none of it on your journey to financial freedom. It’s as valid today as it was 2 years ago. I called it The Simplicity Portfolio and it contained 4 Vanguard Exchange Traded Funds. So yes, its pretty simple. But could it be made even simpler?
Well, actually yes it could.
The most important bit of that post was included at the end. To save you the effort of looking it up, I’ll repeat it here:
One final word. If you are struggling to start, by all means keep it simple with a single global equities tracker fund (such as VWRL: the The Vanguard All World ETF or a LifeStrategy Fund in the UK).
Remember, there is no single right answer in investing. So don’t sweat the small stuff obsessing about micro differences between different Vanguard products.
The most important thing is to get started.
As I may have mentioned before, just investing in a Vanguard global tracker fund is a pretty tough strategy to beat. Its simple, its low cost, it gives global diversification in a one stop shop. And its managed by a company (Vanguard) that’s owned by its customers (and is therefore NOT out to screw you).
Looking at Vanguard’s UK & European product range, there are at least 3 options when it comes to global tracker funds:
- Vanguard LifeStrategy Funds (fees = 0.22%)
- VWRL: The Vanguard All World ETF (fees = 0.25%)
- The Vanguard Global All-cap Index Fund (fees = 0.24%)
Despite their popularity, my reservation about the Vanguard LifeStrategy funds is that they’re not a true market weighted global tracker fund.
When they created it, Vanguard decided to overweight UK shares in the Lifestrategy funds. So LS100 has about 25% of the fund in UK equities versus only about 6% based on market cap weightings.
Hhmmmm….25% of your money in UK shares. What could possibly go wrong?? Let’s keep going.
We then come to the Vanguard All World ETF (VWRL). This exchange traded fund does the job of one stop shop nicely. Its a fund that owns ~3,100 of the biggest companies in the world from all countries. UK shares make up only ~6% of the fund. That’s real diversification for you.
Or, if you want more dividend income paid to you every quarter, you could swap it for the Vanguard All World High Dividend Yield ETF (VHYL) which currently yields about 4.1%. So a 4% withdrawal rate would mean you don’t have to sell any units, you just spend the dividends.
Vanguard’s product range includes both exchange traded funds and traditional open ended mutual funds. It doesn’t really matter that much whether you choose an Exchange Traded Fund (such as VWRL) or a traditional mutual fund (an open ended investment company such as VRXXB). Both do the job nicely and both are physically backed : they hold the underlying shares in all the companies in the fund. The bottom line is that a Vanguard exchange traded fund and a Vanguard traditional mutual fund are more similar than they are different. If you want to dive further into the technical differences, you can read this.
[I personally like the way that Vanguard ETFs pay a quarterly dividend: for me its a regular motivational boost. This is more of an emotional factor than anything: I like a cash reward every 3 months that should come even if the price of the fund has gone down. The cash dividends can be withdrawn and spent or reinvested every now and again.]
The Vanguard Global All Cap Index Fund (VRXXB) is an excellent “one stop shop”. “All Cap” means it includes smaller companies as well as global giants. The number of companies held by the fund at last count was ~6,000 (compared to ~3,100 in VWRL). The inclusion of mid caps means you get an even more broadly based fund. Its inexpensive (fees = 0.24% per year). So we get better diversification at similarly low cost. What’s not to like?
Some will say that you shouldn’t have all your eggs in one basket. And in many situations in life that’s true. This is why traditional full time employment (+ debt) can be so dangerous…you have all your eggs in one basket.
But when you invest in a fund like The Global All Cap Index, you benefit from broad diversification. You don’t care how individual companies are doing because, thanks to the magic of competitive capitalism, if one company is losing, others will be winning. Once you own a global index tracker, the entire capitalist system is working for you.
And even if Vanguard or your platform goes bust, that doesn’t mean you will lose your assets. There is no such thing as 100% safety in life but you should be OK even if Vanguard gets nuked. Obviously prices will go down as well as up. But over the long run it should go a lot more up than down. And if it doesn’t, then something like the Zombie Apocalypse has happened, we’re all fucked and none of this investing lark matters anyway. So don’t sweat the small stuff.
If you are still procrastinating, here’s a way to break the deadlock…you open a PRACTICE account with an online stockbroker like The Share Centre. Its free and there’s no risk. They give you £10,000 of monopoly money to play with so you can get used to what it feels like to “buy” a slice of the world economy via an index fund.
Once you’ve got comfortable with your practice account, its super-easy to start investing real money. And the beauty of The Share Centre is that the costs are simple, clear and fixed. I avoid % fees where possible…that’s one reason I don’t use Vanguard’s own platform.
How to buy an index fund
Well first you gotta put your order in to your online broker.
Index funds are priced and traded at the end of the day after the stockmarket has closed. The price is based on the value of their assets using a set formula which ensures that you get treated fairly and equally to other investors buying into the fund.
Below I’ve illustrated placing an order on the Share Centre platform. We can find the fund by typing in “Vanguard Global All Cap” into the search bar on your portfolio page (once you have an account set up):
You can see that the fund comes up either as accumulation units (dividends automatically re-invested) or income units (dividends paid in cash). Accumulation units make sense for people that want everything to run on automatic pilot with minimal intervention. Income units make sense for people that want income. When you’re not working, those income units will pay you cash for your groceries.
All we have to do is click on the “buy” button which takes us to the dealing page.
We then enter an amount to invest (£10,000 in this example) to buy income units in the Vanguard Global All Cap index fund.
I then click Continue…placing my order at “best” (this just means that The Share Centre have to get the best deal they can for you):
When you’re happy with your order, you click confirm to send the order through, sit back and wait it to be completed.
So, that’s it, we’re done. All you have to remember now is never panic sell during a bear market. A mutual fund is for life, not just for Christmas.
People will tell you its more complicated than this. And you could make things more complicated…but would it justify the time, cost and effort involved? Head space is a scarce and valuable resource.
Remember, the most fun things in life are not about money.
This is provided for information and is not regulated investment advice. The Escape Artist is (thankfully) not an Independent Financial Adviser and will not be handing out personal recommendations.