DIY Investor Magazine
/
2015 Issue
48
HIGH FIVE:
INDEX INVESTING FOR THE DIY INVESTOR
Those new to savings and investment could be excused
for being more than a little daunted by the vast range
of asset classes and investment vehicles that are
available, and however carefully worded the marketing
collateral is these days, issuers of financial products all
want to convince you that theirs is worthy of a place in
your investment portfolio.
DIY Investor aims to debunk the jargon that remains
in the industry and equip its readers to objectively
appraise the suitability of different investment types for
their individual circumstances.
By setting long term financial objectives it is possible
for the self directed investor to construct a portfolio of
passive investments with exposure to risk that is in line
with their own risk tolerance.
There are indices that deliver exposure to most types
of investment both home and abroad and each comes
with differing volatility and risk profile.
Those looking for a readymade diversified range of
investments but without the costs that accompany
actively managed collective investments may find index
investing an attractive option; and here are five reasons
why:
1. INDEX INVESTING IS SIMPLE
Even for those with little investment experience, index
investing is easy to understand.
‘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’.
The basic principle is that by buying a product that
tracks a particular index – either via an index tracker
fund or an Exchange Traded Fund (ETF) – you are
automatically creating a portfolio of investments that
are as diverse as the companies that make up the index.
Once you select the indices you wish to track, it is
usually simple to set up regular contributions via your
stockbroker and because the constituents of the
index change over time there should be little need to
rebalance your portfolio as it is effectively done for you.
Then, sit back and relax – markets will rise and markets
will fall but you’re in for the long haul and you’re not
looking to time markets or unearth the next ten bagger.
2. INDEX INVESTING WORKS
Studies have shown that after costs and taxes index
investors can consistently beat the performance of the
average active investor and that over time index funds
routinely beat the performance of actively managed
funds.
A key factor in this performance is their very low cost;
with the total cost of ownership of actively managed
funds very much to the fore post-RDR.
As an example, FTSE 100-tracking Legal and General
UK 100 Index, charges just 0.10% and several brokers
actually offer a discount to this.
To illustrate the effect that fees can have the following
examples represent £10,000 invested, achieving 6%
annual growth over ten years:
•
An actively managed fund charging 1.5% will grow
to £16, 929
•
A passive tracker charging 25 bps will return £19,
185
