BritAbroad wrote: ↑
Sun Nov 18, 2018 8:11 pm
It's an uphill struggle... I thought I'd start him with some of Lars' youtube videos (for a quick and easy introduction), but got the response 'thanks, but I don't even know what an equity portfolio is'
Equities are shares, or stocks as Americans call them (hence "stock market").
Investing in Shares for Dummies by David Stevenson
Investing for Dummies UK Tony Levene
Shares Made SImple by Rodney Hobson
The problem with these books is that they will make it look easy to pick good shares that outperform the market. Actually it is incredibly difficult - for every Warren Buffett there are (literally) 1 million people who have tried and failed - he is unique.
The rational person realizes they can't beat the odds and seeks to minimize fund management Expense Ratios, and also taxation.
For a UK investor that means, basically:
- open up an ISA at Vanguard UK
- buy the global equity index fund (Accumulating or Accumulation fund shares work inside an ISA or a pension, they should not be used in taxable accounts where one uses Distributing shares. This should be 30%-70% of your portfolio (depending on your age and risk tolerance)
- the balance should be a global bond fund (sterling hedged)
If you keep in mind that equities (shares) outperform bonds in the long run. BUT an equity bear (falling) market can lose you half your money in 12 months. -50% is a reasonable bet ( it's -20% before a "correction" becomes a defined bear market, average bear market is probably around -35-40% but there's at least one -70%+, in the UK, in the 1970s; on October 19, 1987 the share market lost 25% in one day).
So one holds bonds for stability and to keep your nerve. The very common mistake in a bear market is to watch it go down (they kept going down, with periodic rallies, from May 2000 to March 2003, for example) and eventually panic and sell out. Thus missing the upturn. The good performance of stock markets comes in a very few days. The stats are something like miss the best 100 days of the last 30 years and lose 4% p.a. in returns. You really cannot afford to be out of equities (up to your risk tolerance).
So one holds bonds. They are much more stable, a good bet is you probably won't lose more than 10% of your value in bonds.
That year when your 60/ 40 portfolio goes down to 30/ 36, you've lost 1/3rd of your wealth. If you were 100% equities you just lost half of it.
There's a lot of merit in just being 60% global equity index fund, 40% global bond fund (investment grade, sterling hedged) and rebalancing back once a year. If you are under 40 there's a case for being less in bonds (age in bonds is a common formula used).
In order of priority for a UK investor in the accumulation (investing) phase of their life:
- pay down high interest consumer debt (basically except mortgage and cheap car loans). Student loans are tricky - moneysavingexpert has some advice I believe
- get up to the employer match in the pension if there is one, in addition to the 3% your employer has to contribute (if you are working in the state sector, join the defined benefit scheme and just forget about it)
- invest in ISAs
- invest any spare cash above that in pension and in taxable accounts - beware the £1,030,000 lifetime limit