by elmads

Introduction

Opening a mutual index fund account is easy, but finding which fund to choose from the tenths to hundredths of funds is an overwhelming task.

In this blog, I will be writing about the basics about my personal fund of choice, if I would have started from scratch again. The things that needs to be considered.

Investment Time Horizon and Goals

Every investment we take should have a corresponding attached purpose in our life. Is it for retirement? for buying a home? for our kid’s university education? for our parents’ support? for capital to starting a business? for purchasing a car? or for other endeavours? Our investment purpose sheds light on what kind of fund we should invest in.

Because our own financial investment goal will have a specified and personal time horizon with it. It’ll be like this, will we be investing for 10years? 15 years? 20 years? or more? before we’ll be needing the money. It quantifies our investment time horizon when we ask such question to our selves.

For instance, let’s say you’re investing for a down payment to purchase your first home. And, you’re willing to wait and invest for 10 years to achieve that goal. Then, you could invest on a fund that is invested in companies as 10 years should always be the minimum time horizon when investing in equities/stocks/businesses.

Personally, I invest the money that I would not need for a decade, as the chances of having a positive return gets higher when we are invested for more than 10 years.

Investment Risk Appetite

This is subjective to each individual. All kinds of investment can lose its value as prices can go up and down in a short to medium period of time. This is what we call market volatility, so if you’re a person who gets frightened easily by seeing your money go down 5-10%, and you lose sleep due to it, then you might be a conservative type of investor.

Whereas, if you can handle 10-19% decline you could be a moderate risk investor, and an aggressive type if you can handle more than 20% price crashes.

It is normal for starting investors to be conservative types, as they do not have the experiences yet. That being said, just contributing money and investing it in a fund of our own choice over a long period of time without minding the prices of the market is one of the best ways in doing this index fund investment strategy.

Before we move forward, It is important to know the fundamental concept of Mutual Funds. If you don’t have any idea about it yet, then you could check my specific blogs for this titled “What are Mutual Funds” and “Passive and Active Funds”.

My Fund of Choice

Disclaimer: I am not a professional investment advisor, this is only for educational and sharing purposes. Not all information given will be accurate. This is not an investment advise. Always do your own due diligence of research, study and understanding of your own investments. Consult an independent financial professional before making any major financial decisions.

If I’ll be starting again and would want to invest without stressing about the markets, to do both intensive and extensive research. With an investment goal for retirement, which is more than 25 years from now, then I would have still used Vanguard, then invest on their fund named “FTSE Global All Cap Index Fund – Accumulation”.

Why? well I’ll explain and breakdown my reasoning for my investment choice.

• Investment Goal & Time Horizon – For retirement. I’m currently in my early 30s and I plan to retire at around early 60s, which gives me roughly more than 25 years to invest.

• Investment Risk Appetite – 25 years of investment time horizon is a long period. Price declines and crashes will surely occur, but being invested for decades increases the chance of not losing money at all. See my blog “The Power of Cost Averaging Investment Strategy”, in which I showed what if we were invested in one of the greatest economic problems in the past 100 years of the top markets globally.

• The Fund “FTSE Global All Cap Index Fund” – This means that my money that I will invest in this fund will then be invested into different companies in the world by a professional fund manager.
  
  Based from the description of the fund, my money will be invested in 7,117 companies of various 49 countries namely, the United States, Japan, United Kingdom, China, Canada, France, Switzerland, Germany, Australia, Taiwan, India, Korea, Netherlands, Sweden, Hong Kong, Italy, Brazil, Denmark, Spain, Saudi Arabia, South Africa, Belgium, Finland, Mexico, Singapore, Thailand, Indonesia, Israel, Malaysia, Norway, Austria, Chile, Ireland, Kuwait, New Zealand, Philippines, Poland, Portugal, Qatar, Russia, Turkey, UAE, Colombia, Czech Republic, Egypt, Greece, Hungary, Pakistan and Romania.

Here is the link for the information I gave above. (https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-global-all-cap-index-fund-gbp-acc%3Fintcmpgn%3Dequityglobal_ftseglobalallcapindexfundacc_fund_link/portfolio-data)

• Why would have I chosen the Global Fund? – It’s for the simple reason that, I believe and at the same time I am an optimist that our world will continue to prosper despite the problems that it will encounter at time to time.
  
  Also, I don’t know which country will be the dominating economic power after a decade or two. Will it still be the US? or China? or another country? At the least, by investing in the Global fund, I would still have the exposure on the growth of the next dominating economic nation.

• What if one, or 1,000 of the 7,117 companies go into bankruptcy and fail? what happens to my money then? – It’s simple, Vanguard’s Global Index Fund Manager will just pull out the money from the failed companies, then re-allocate it on the companies who will fill up the previous positions of the failed companies.
  
  For instance, 100 companies have failed, then the Fund will pull out the money invested from these companies and reinvest it on the next upcoming 100 new companies that will then be joining the list.

The video above shows the Top 10 companies of the S&P 500 index from 1980 to 2020. Not a single company in 1980 still sits at the top 10 list today. So, what’s my point here? Even if the list of companies in an index changes, like if others rise, while some decline, and even falls from grace, that’s not a problem from an index fund’s point of view, because its job is to mimic the index and reallocate capital based from the index it is copying.

• Why just invest in one fund? – for simplicity. If I just want to make my money work for me, not dig deeper about investing and other things that comes with it, then simplicity is key. Investing on a singular fund will take out the hassle of dividing my investment capital into different funds.

Accumulation or Income?

There is this another confusion between mutual funds, what’s an accumulation and income type of funds.

Basically this is about dividends. Dividends are the money given by companies to its shareholders as cash. Not all companies give dividends but others do. Let’s just say that companies give dividends because, either;

1. They have a lot of cash which they do not have any better ideas where to reinvest it anymore, so they just give it to their shareholders. And/or,
2. To incentivize shareholders of their company to continue to be an investor of their business, and not sell it to others.

With this in mind, Remember that “FTSE Global All Cap Index Fund” is invested in companies of different countries. The companies that give dividends will then be received by the Fund itself. The fund manager will subsequently have two choices to what to do with that money. This is where our chosen preference of Accumulation or Income will dictate what will the fund manager do with those received dividends.

• Accumulation – If you choose this type, then the dividends received by the fund from the companies they invest in, will be reinvested back to the fund. In this case the dividends will be reinvested back to the FTSE Global All Cap Index Fund. This in turn will increase our number of shares/units of the Fund.

• Income – In this type of fund, the fund manager will then give the dividends received from the companies they are invested, to you as cash in your investment account. For instance, let’s say that the dividends received is worth £50, then the fund manager will give that £50 directly to you as cash in your account.

So, your decision here will depend on your own investment goals and time horizon. In my own opinion, I still would have chosen Accumulation. My reasoning behind is, I’ll be investing for more than two decades for my retirement and still plan to invest in the same fund, the “FTSE Global All Cap Index Fund” for a long time. I’ll not need the dividends to be given to me as cash anyway, and I would prefer for it to be reinvested automatically for less hassle in my side.

Simplicity is key 🙂

What should we know about the Fees?

As we are using a broker’s services, it is understandable that we will have to pay fees for it. Just like with any other financial services companies, such as banks and insurance corporations.

The following below are the fees that we will be paying when we use Vanguard’s services. These fees are almost the same for all other mutual fund brokers around the globe.

1.) Account Fee – This fee covers the costs of running our online service, customer support team and keeping your investments secure. You only pay one account fee, even if you have more than one account with us. For example, if you have a Stocks and Shares ISA and a General Account. The fee is based on the overall value of your Vanguard accounts, including any cash held. Just 0.15% per year

Capped at £375 per year for accounts over £250,000

For example: if we have £20,000 in our Vanguard account, regardless if it is in cash or invested already in one of their Funds, the fee we will pay yearly will be (£20,000 x 0.15% = 30)

2.) Ongoing costs & Ongoing charges – This fee covers our management of the fund you invest in. It pays for day-to-day management costs and admin expenses

3.) Fund Transaction Costs – In managing a fund we need to buy and sell shares or bonds, which means we have to pay things like dealing costs and taxes. We keep these costs as low as possible by using our size and experience, but it’ll still affect the return you get from a fund

Numbers 2 & 3 are sometimes paid together already, or are shown jointly. In my own chosen fund, the “FTSE Global All Cap Index Fund” ‘s on going cost is 0.23%. This means that this fund will take 0.23% of the amount of money that I would have invested on it to cover their daily management and admin expenses, and others more, to make sure that the fund can continue its operations.

Here is the link for the fees explanation and breakdown of Vanguard UK – https://www.vanguardinvestor.co.uk/what-we-offer/fees-explained

To sum it up

One of the reasons I chose Vanguard is because of their low fees structure. Compared to other broker investment accounts, they are considered as having the lowest fees in the industry.

Probably, you’re thinking how could they make money if they only have low fees? It’s thanks to their size as a company. Handling trillions of dollars of the world’s money is the reason why they can make the fees lower. Basically, they can easily make money due to the size of their Assets Under Management (AUM).

Just think of this, 0.50% gained from Vanguard’s $7 trillion USD Assets Under Management (AUM) will give them $35 Billion USD. Whereas, a small broker company with only $500 billion Assets Under Management (AUM) will need 7% gains just to equal the $35 Billion USD gains of Vanguard. Or to put it simply, Vanguard can make more money even with low returns of money due to the large amount of money they have in their arsenal, whereas their smaller broker competitors need higher returns just to achieve the amount of money Vanguard can generate. This is why Vanguard can lower their fees so much.

There are other funds in Vanguard, like the ready made portfolios specifically for a certain purpose like retirement. I’ll be discussing about this in my next blog titled “Vanguard UK’s Ready-Made-Portfolios”

If you have any questions, don’t hesitate to DM me on any of my social media accounts on Facebook, Instagram, LinkedIn, Twitter, Pinterest or you could send me an email. I’ll be more than happy to give you a hand to start your investment journey.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.