This post was updated in August 2021
If you want financial freedom, then you want your money to do its share of the hard work.
Your money can end up making more money than you…but first you need to get started with investing.
When you buy into the stockmarket, you are buying into human progress, technology and abundance. That sounds good right…but is it complicated?
No, investing can be made really simple. It’s as simple to invest in the stockmarket as it is to manage an online bank account.
This is important because the stockmarket is the best game in town for long-term wealth building. Long term returns have been about ~10% per year globally. That return comes partly from income (dividends) and partly from capital growth (price increases).
For illustration, let’s say that for every £100 you invested you get an annual dividend starting at £3 per year. Imagine that annual dividend then increased by roughly 7% a year and the price of the fund goes up by a similar amount. In year one, you received £3 of dividend and your investment went up in price from £100 to £107. That’s a 10% total return on your initial investment of £100.
Grumpy people and permabears will mutter that returns will be lower in the future. I used to think the same 20 years ago…and yet here we are. Bears get to sound smart and bulls get to be rich. I wish I’d been more bullish sooner.
No one knows what the future will be. Investing is (and always was) an act of optimism. There are no guarantees but your best shot at financial freedom is to stop
dicking around procrastinating and chuck as much money as you can into your compounding machine, whilst you are still young(ish).
In order to buy into the stockmarket as simply as possible you need to choose 2 things:
- an online broker / platform
- an equities (shares) fund
First up: choose an online broker (also known as a platform) and open an account. Because all brokers / platforms in the UK are regulated by the Financial Conduct Authority, they all meet a certain standard of financial strength and the legal separation of client assets should protect you even if they go bust.
I’ve used Interactive Investor, Hargreaves Lansdown and AJ Bell. There are many others. These offer a wide choice of investments and all allow you to own shares (US, UK and international) and a decent range of funds from different fund managers. They have different charging structures so you need to compare their fees. But in the early days when you are just getting started, the fees are what they are so just get on with it and you can always switch later if you need to.
Or if you just want to buy a Vanguard fund with a one-stop shop then why not go direct to Vanguard’s own platform?
Now we need to choose a fund.
What’s a fund? I think of a fund as a box that contains share certificates…pieces of paper (now electronic obvs) that denote part-ownership of companies.
The value of the fund is determined by the value of all the shares that it owns. It’s a pooled investment vehicle that owns a little slice of all the great companies of the world.
When you invest in a global equities fund, you benefit from broad diversification. You don’t care how individual companies are doing because, thanks to the magic of capitalism, if one company is losing, others will be winning. Once you own a global index tracker, the entire system is working for you.
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 screwed anyway and none of this matters anyway.
But what to buy? With thousands of heavily marketed funds, it’s easy to get bombarded and over-loaded with information.
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 4 good options when it comes to global tracker funds:
- Vanguard LifeStrategy Fund
- The Vanguard Global All-cap Index Fund
- The Vanguard All World ETF (VWRL)
- The Vanguard Developed World ETF (VEVE)
Vanguard LifeStrategy funds
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.
The Vanguard FTSE Global All Cap Index Fund
The Vanguard FTSE Global All Cap Index Fund includes smaller companies as well as global giants.
The number of companies held by the fund at last count was ~7,000 (compared to ~3,600 in VWRL). The inclusion of mid caps means you get an even more broadly based fund. It’s low cost (fees = 0.23% per year). So we get better diversification at similarly low cost. What’s not to like?
The fund is available in either dividend paying form (income units which pay cash dividends) or in automatic reinvestment form (accumulation units which use the cash dividends to buy you more units in the fund).
The Vanguard FTSE All-World ETF
We then come to the Vanguard FTSE All-World ETF (VWRL). This exchange traded fund does the job of one stop shop at similarly low cost (0.22%). It doesn’t include small caps but it does own ~3,600 of the biggest companies in the world from all countries.
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 or a traditional mutual fund structured as an open ended investment company. Both do the job nicely.
So what’s the difference? Well, in summary, exchange traded funds trade on stock exchanges during market hours.
For the user, an ETF is much quicker to get your order filled and you know the price at the moment you buy. For the battle-hardened investor turned bargain hunter, this makes ETFs ideal when buying in the middle of a market crash. In contrast, with traditional funds you have to wait a couple of days for the transaction to get processed at the prevailing net asset value.
In theory, there could be a gap between the share price of the ETF and the market value of the underlying shares in the fund but in practice arbitrage keeps those gaps tiny.
Both are physically backed, meaning the funds 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 far more similar than they are different.
I personally like the way that Vanguard ETFs (such as WWRL) 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.In contrast, Vanguard’s traditional funds (such as VRXXB) pay the dividends annually.
Vanguard’s ETFs are now generally available in either dividend paying form (income units which pay cash dividends) or in automatic reinvestment form (accumulation units which use the cash dividends to buy you a greater share of the fund). The income version is VWRL and the accumulation version is VWRP.
Don’t be put off by the fact that the title of the fund says USD (it’s reporting currency is US dollars). It’s traded on the London Stock Exchange and priced in GBP and you will receive dividends as GBP.
The Vanguard Developed World ETF
So maybe this last one is a bit of a stretch? It’s not a true global tracker fund as it excludes emerging markets.
Why would you do that? Well it’s cheaper for one thing with annual fees of only 0.12% which makes it the cheapest of the bunch.
But a better reason perhaps would be if you don’t want exposure to emerging markets (and especially China) due to their greater political risk, lower governance standards or other risk or ethical concerns you may have. Or maybe you already have enough emerging markets exposure via a specialist fund?
Again, don’t be put off by the fact that the title of the fund says USD (it’s reporting currency is US dollars). It’s traded on the London Stock Exchange and priced in GBP and you will receive dividends as GBP.
So, that’s it, we’re done. All you have to do now is make a choice and remember to never sell in panic during a crash. A 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 extra time, cost and effort involved?
There is no one single “correct” fund to buy. If you are struggling to choose, don’t sweat the small stuff obsessing about micro differences between different platforms or products. The most important thing is to get started.
If you want to hear someone else’s thought process, check out this short (5m), clear and helpful video from The Money Plant Youtube channel:
This is provided for information and is not regulated investment advice.
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