- How to buy your first index trackers
- Choosing an investment platform: A nuts and bolts guide
- Picking an index tracker out of the investing swamp
- How to choose the best index trackers #1: Basics
- How to choose the best index trackers #2: Costs
- How to choose the best index trackers #3: Overlooked stuff
- How to choose the best index trackers #4: ETF-only features
- How to find index funds
- How to find Exchange Traded Funds
- How to buy and sell ETFs
- How to buy and sell index tracker funds
There’s a gap. A gap that exists between the last page of the investing advice books
Where are these fabled funds that lead to passive investing nirvana? How do you pull the trigger? “Just tell me how to buy index trackers, would you?!”
Your wish, dear reader…
I’m assuming you’ve done your research, decided upon your goals, your asset allocation, and the dollop of regular contributions you’ll make towards your masterplan. You’ve opted for the DIY investing route, and the only thing left to do is execute.
I’m also assuming you’re a passive investor who wants to stick primarily to simple index funds and Exchange Traded Funds (ETFs). Because that’s my tribe.
Where to buy index trackers
Buy online. Human contact only ratchets up expense and could leave you in the hands of some slippery smoothie with a script – a script designed to fatten their bank account, rather than yours.
Choose the cheapest online broker (also known as a platform) you can find. Our broker comparison table will help you pick out the right one.
Don’t go directly to the fund provider, don’t use a full-service, ‘advice’ dispensing stockbroker, and definitely don’t walk into your local bank with a bag full of used tenners.
The best brokers offer the DIY investor:
- The cheapest method of buying, selling and holding funds.
- A wide choice of funds from different providers that you can mix and match.
- Tax shields for your funds – stocks & shares ISAs and SIPPs.
- A regular investment scheme to automate drip-feeding.
- Online portfolio tools to track your investments.
- Fund search facilities.
- Easy access to your funds and paperwork.
- An execution-only service – so no advice on purchases.
There’s little practical difference between the various offerings. Hargreaves Lansdown are the one broker that most people have actually heard of but they’re expensive. They score well for customer service but you will pay a premium for it.
I’ve personally experienced four cheaper brokers and never had a problem with the customer service.
The most important thing to be aware of is you’re choosing an execution-only service. You pay low fees because you’re not getting any advice.
Also, your first choice investing platform may not carry the products you want. Always check using the site’s search tool before signing up and transferring money.
Key decision
One of the most important decisions you will make is whether you will pay your broker a flat-rate or percentage fee for their services.
A percentage fee is best for small investors who are likely to have less than £30,000 in assets because that will work out cheaper than the most competitive flat rate charge on the market.
A flat-rate fee is cheapest for investors who are heading north of that £30,000 fee mark. At this point percentage fees slice off more from your assets than the keenest flat rates out there.
You can calculate your own situation here. Most brokers have chosen either a flat rate or percentage fee charging scheme and our broker comparison table has split them along those lines.
Take it steady,
The Accumulator
Comments on this entry are closed.
Once the purchase is made, how often should the passive investor look at how the investment is performing? Look at it too often is a waste of time that would better spent earning money, could cause unnecessary stress when the investment dips, and could tempt the investor to selling too early at the worst time due to market pressure. Don’t look at it often enough and rebalancing opportunities are missed.
Hi Dave, How long is a piece of string?!
Thanks for a very useful piece, as usual. Would it be possible to expand on the comment about Hargreaves Lansdown not being so great for passive investors. I use them for HSBC and Legal & General trackers, and am not aware of administration charges. The warning about the additional 0.5% fee is important – though not levied on their fund and share account – but I am wondering whether I have been missing something. Thanks again!
Great stuff and great timing for me, I’m just about to purchase my first index tracking funds and ETFs – with TD Waterhouse and Alliance Trust, both provide regular investment options at 1.50 a fund.
I’ve not looked into it too much yet, but neither seems of offer a good portfolio tracking service suitbale for the needs of a long-term index tracking investor (especially if split between two companies!).
At the minute I’m leaning towards twisting my head around an excel spreadsheet that will enable me to calculate the overall real return of my portfolio each year.
The tools provided through the companies above for comparing fund performace against thier indexes are OK for assessing individual fund performance, but not, as far as I can see, overall portfolio return.
Any suggestions anyone? How do you manage to track your portfolio periodically – both for assessing the need to rebalance and estimate overall real return?
I find the Hargreaves Lansdown portfolio analysis tool valuable in this regard.
http://www.commfreefunds.com/index.aspx
This lot give you all the commission back (up front and annual) and charge flat £60 fee pa.
Probably works in your favour at around £12,000 plus investments on the ongoing charge.
Some brokers (e.g. HL) may however be able to outprice these folk with further discounts from the fund house.
Personally i go for functionality on the platform and have opted for Barclays Stockbrokers – accepting that i will pay a bit more on some funds but can deal when i want in a wider arrary of instruments.
I don’t think HL charge an admin fee for their vantage ISA (unless you are talking about the cost to buy shares?). But you do have to watch out for the 0.5% charge if the fund doesn’t generate a renewal commission.
If you are careful and only buy index funds that pay renewal commission funds its all free.
(I hope)
I also have an II account and its definitely not as easy to use
@ Dave R – it’s a personal choice. There’s plenty of evidence out there to suggest that constant peeking at and fiddling with your portfolio is detrimental to most investors. Once a year is an oft quoted rule of thumb for very horizontal investors.
@ Neil & Ben – from the H-L website: ¹ Additional annual charge of 0.5% + VAT is applied to this fund when held in the Vantage ISA and SIPP (capped at £200 + VAT per account). This additional charge is not accounted for in the Total Expense Ratio quoted above.
It doesn’t affect HSBC index funds but looks like it does affect L&G e.g. http://www.hl.co.uk/funds/fund-discounts,-prices–and–factsheets/search-results/l/legal–and–general-all-stocks-index-linked-gilt-i-accumulation
Look out for the subscript 1 on the annual charge. Refers to the footnote I quoted above.
@ Dave – I use Morningstar’s portfolio manager: http://www.morningstar.co.uk/uk/membership/signup.aspx?loginType=1&lastvisit=%2fuk%2fportfoliomanager%2fportfolio.aspx%3flang%3den-GB
I did try Trustnet’s version but it had accuracy issues.
@ Paul – there’s no up front or annual commission to collect on index funds. You needn’t pay an annual fee at all.
Depending on the size of your investment pot, it may be more economical to pay HL 0.5% of your ETF/investment trust portfolio as it is capped at £200 a year rather than having your money whittled away circa 0.25% a year for their trailing commission in a open end fund.
£200 seems a reasonable price to pay for the service they provide, as long as you don’t mind interminable emails and mailings, compared to some of the horror stories we read about the industry.
TD Waterhouse does however give you online access to a greater range of markets
@Accumulator
Correct on the L&G vs HSBC, I nearly came unstuck here by buying an L&G Gilt tracker but another eagle eyed monevator reader spotted it so I swapped to the HSBC equivalent
Incorrect on the annual charge (*I think*). The 0.5% fee you mention is specific to funds with no renewal commission not a blanket charge on the vantage ISA. The text from the HL charges page is as follows
“0% for cash and funds that pay renewal commission (more than 2,100 to choose from)
0.5% for all other investments, capped at £200 a year”
Thanks for the clarification. One addition point is that the 0.5 fee is not applicable to all L&G tracker funds. For example, it does not apply to the global emerging markets fund.
@ Neil
Yes – I have purchased that particular fund so had found that out
I am becoming more and more convinced that index investing is the best option for the bulk of investors.
55% of my monthly payments are now invested in index trackers with Fidelity (HSBC features heavily) and this figure will be going up to 100% from the start of the next financial year.
I’d like to get some Vanguard action, but as I’m investing a modest £200/mth, it’ll have to wait for now.
Useful debate on ETFs between two UK fund managers, Terry Smith and Alan Miller, in today’s ‘Telegraph’: http://www.telegraph.co.uk/finance/personalfinance
@ Luke
Have you read ‘Smarter Investing’ by Hale?
He puts across a convincing argument
@ Ben – I’m quoting directly from the H-L website. I’m not saying the 0.5% applies to the whole ISA. I agree that it applies to specific funds – the ones that twinkle with a subscript 1.
Good. That’s a relief. Thought I’d misunderstood the charges for a bit.
Thanks for pointing out the H&L charges (that I clearly should have spotted myself). Unfortunately, I´ve made a mistake and have the Legal & General All Stocks Gilt Index Trust as part of my portfolio with the additional 0.5% charge. Dang.
It also seems that H&L don´t do the HSBC equivalent ´HSBC UK Gilt Index Fund´ either which is a pain.
What would people suggest I do? Hold onto the L&G Gilt tracker until H&L start providing an equivalent (with low ter) I can then switch to? Or sell up now, and have my defensive Gilt trackers with another provider?
@robin
They do sell it – I buy it through HL every month
but for some reason it deosn’t come up on the website
Ask for it over the phone
@Ben
Thanks very much for the info. I’ll give them a bell.
@robin
a bit more info for you:
HSBC UK Gilt Index
ISIN code
(accumulation units):
GB00B4581C50
http://www.assetmanagement.hsbc.com/uk/attachments/advisers/fund-focus/sales_gilt.pdf
Robin,
H&L do offer the HSBC UK Gilt Index fund. I hold it in my SIPP account. They haven’t added it to the list of funds under HSBC header as yet. Also you can not deal it online. They only accept telephone or written dealing instructions. It is available for regular investment with them. I suspect they wish to steer people to managed Gilt funds where they make money. I was the eagle eyed individual who pointed out to Ben that the HSBC UK Gilt Index fund was an alternative to L&G with HL. I’m still waiting for HSBC to launch Global Bond Index fund and Emerging Markets Index fund as alluded to before they launched the Gilt Index.
@Ben and William
Thanks kindly for the info
William/Ben – that is a really great find; I just triple-checked that with them! You guys are going to save me 60+ basis points in charges on my SIPP gilt holdings 🙂
Does anyone know if HL will let you put a lump sum into the HSBC UK Gilt Index fund? Without being hit with the .5% in their ISA?
And do HSBC have an index-linked gilt fund? I can’t find one.
I see incidentally that Royal London’s index-linked gilt fund, TER 40%, does not suffer the .5% in HL’s ISA. This makes it cheaper than L&G’s index-linked gilt fund inside the HL ISA, but the L&G might still be the better bet.
To answer my own question: yes, you can put a lump sum into HSBC’s UK Gilt Index fund within HL’s ISA without either an initial charge or the .5% annual surcharge which clobbers the L&G. Just did it by phone.
For index-linked gilts, Royal London seems the best bet in the HL ISA, with a TER of .4% (not of course 40% as I said above).
@All — Awesome comment thread. Are you guys using the ‘discuss’ link in the top right corner of the blog for updates? You can check back whenever you visit like that. (Or you can subscribe for comments, too).
If there’s a lot of popular appeal, I could set up a forum to run alongside the blog to discuss this stuff more easily?
I would like to see a forum (not that I’ve fully explored Monevator’s existing resources yet). I’ve learned more per minute’s reading time from Monevator than anywhere else; it would be nice to be able to start new question threads here.
I would second that. It’s a ridiculously high quality blog. Long may it continue
I should have said above that the Royal London IL gilt fund is not a tracker and therefore strictly off-post. That and a TER of .43% would rule it out for many, but as far as I can see its performance is very similar to the L&G IL gilt index (.25% outside the H-L ISA, but uneconomic inside it). I think the Royal London in an ISA should beat the L&G outside an ISA at performance levels above .9% a year, since a fifth of that is reclaimed from HMRC; better still for higher rate taxpayers.
If anyone knows better ways for a passive investor to maximise tax efficiency with the H-L ISA, I’d be grateful to hear. (I’m tempted to try some other managed bond funds, on the grounds that the tax saving is equivalent to a TER reduction.)
Thanks guys, much appreciated! Will continue to have a think about introducing a simple forum at some point.
As an update to the above, the HSBC UK Gilt Index is now listed on the HL website :
http://www.hl.co.uk/funds/fund-discounts,-prices–and–factsheets/search-results/h/hsbc-uk-gilt-index-accumulation
@nibbler
that was my doing 😉
I also contacted HL about the HSBC gilt fund, on the very day they listed it!
How does this look?
HSBC FTSE 100 = 15%
HSBC FTSE 250 = 10% (too much?)
HSBC American index = 20%
HSBC European index = 10%
HSBC Japan index = 5%
HSBC Pacific index = 10%
L&G Global EM index = 10%
HSBC UK Gilt index = 5%
Royal London Index linked gilt = 5%
Blackrock Global Property Securities tracker = 10%
Is 25% in the UK too much of a home bias? Am I too heavy on FTSE 250 versus 100? Any other feedback?
That property fund is another HL ‘phone job, TER=0.88 and no additional 0.5%
@ Gadgetmind – the FTSE 250 is approx 15% of UK stock market. If you’re worried about getting the ‘right’ balance between the FTSE 100 and 250 then it’s simplest just to take an All-Share tracker – HSBC do one. That’ll give you both indices weighted according to market cap. If you want to overweight the 250 then do as you’re doing and take the separate 250 fund. The thing that really leaps out is that you’re very aggressive in your 90:10 equity:gilt ratio. I guess you’ve got a long time horizon ahead of you or you’re confident in your ability to live with volatility?
Yup, 10% gilts is comfortable, and I might even hold off before buying these – yes, 100% equities! But gilts are in bubble territory based on yields, whereas equities look bargain basement.
Regards FTSE, I did look at all share, buy want a small.mid cap boost. Of course, I’d like a US small/mid cap boost too, but that’s harder.
I read that the all share is 80% FTSE 100, 15% 250 and 5% other, so a 80/20 mix of all share and 250 should give me 64% 100, 32% 250 and 4% other.
I’ve just heard that HL are about to start charging £2 per month per HSBC tracker.
http://forums.moneysavingexpert.com/showthread.php?t=3620493
Thanks for the tip-off Dave. That’s bad news. Interactive Investor doesn’t charge an AMC so may be worth a look.
I’m staring at the Interactive Investor site, but can’t find the HSBC trackers there. Am I cracking up?
I might go with Fidelity, but there is no low-cost property REIT tracker.
Dammit, we want a pension containing trackers of various “cap sizes” in UK, US, Europe, plus a bit of global, EM, Pacific and Japan, and we want to hold gilts and property alongside.
We want an overall TER sub 0.5%, ideally very sub.
Should it really be this hard?
annoying about the HL situation
a £2 per month per fund charge will make the platform very expensive
have to have a look at the exit penalties and weigh up what to do
prob swith to alliance trust or ii for the ISA, not so sure about the SIPP?
any thoughts?
@ Gadgetmind – go to investing > find and invest > select HSBC Investments (UK) in company search field. The index funds turn up in that list. No, it shouldn’t be this hard.
@ Ben – You could try Alliance Trust, Bestinvest and Sippdeal for a SIPP.
More complimenting of your blog and support for a forum here.
@gadget
Use vanguard ETF’s?
There are US listed product for the US small cap market but not much else. Asides from that mid/small cap is almost impossible to find cheaply, and certainly not in an index form.
Wow, blast from the past!
As it happens, I’m now mostly in Vanguard ETFs held on BestInvest for fixed fees via their grandfathering deal.
Great comments from everyone – but I just wanted to take issue with the comment “definitely don’t walk into your local bank with a bag full of used tenners”, since that’s pretty much what I did (having jumped ship from Alliance Trust after their fee hike). I’m happy with the result so I thought I should share. With the very important caveat that they don’t deal in Funds, I have found HSBC’s execution only share dealing service very cost effective (and trouble free). Accounts are free to open and have zero annual charges (no flat fee, no percentage fee). There’s also the option of having a stocks & shares ISA – again zero annual charge. Dealing charge is a reasonable £12.95. I’ve opened an ISA and bought several Vanguard ETFs within it. As a result I have very low costs and have no need to go near any ‘platform’ (thus avoiding the increasingly dodgy pricing complexity strategies they are all now employing). This approach obviously won’t suit everyone but it is nevertheless a viable option for buying and holding an index tracker very cheaply (which is the subject of this article).
@Gadgetmind, I also had several funds when I first started but replaced them all with the Vanguard FTSE All World ETF (VWRL) – makes life a lot simpler. 48% of this ETF is USA stocks to reflect that the USA is nearly 50% of world stock market by market capitalization. Also because its an ETF, H&L only charge me max of £200 to hold in my SIPP.
Great article and comments. I’ve got an S&S ISA set up direct with L&G investing into their FTSE All Share tracker – set up over 10 years ago on direct debit and mostly forgot about it (I’m probably the ultimate passive investor…). Obviously my ISA fund choice is restricted to L&G funds, but as far as I can see there’s no platform charge, just the charges listed in the fund fact sheet – or did I miss something? If I invested this with my HL SIPP I have through work I would get the HL 0.45% AMC on top, so I’ve been reticent to switch my ISA to a platform broker.
@jon – I do have VWRL in several portfolios, but I hold UK (VUKE), apac (VAPX), and VFEM alongside, plus some bond ETFs, infrastructure funds, REITs, and some “contrarian” ITs that are bought in unloved sectors on big discounts and held until the normalise.
BestInvest charge me £100pa in my SIPP and £50pa in ISAs, but this is the “grandfather” deal.
To The Author: on the picture and once in the text you wrote ‘flate-rate’ instead of ‘flat-rate’.
I’ve had an account with IWEB (Halifax) for a decade or so (though barely used) and I have found their customer service is ok, but not great. I decided this year to switch to Charles Stanley Direct, but what a mistake that was. I had instigated the transfer of stocks when I found out that Charles Stanley do not have their own custody facility for non-UK stocks, so all non UK stocks and ETFs come with a whole raft of additional fees to transfer them into the third-party custody and to hold them there, ON TOP of platform fees and their £12 commission. I had read their price list so was surprised as I didn’t see this. It turns out it’s under “Telephone dealing” (!), because they require non-uk trades to be done by phone. When it became clear how opaque their pricing was I halted the transfer, and then started wondering what the hell I was thinking moving away from IWEB. Yes, their web site is like a 1997 throwback, yes their customer service is just “ok”, but trades (funds, ETFs and stocks) are all £5, and there’s NO platform fees. I feel like I had a lucky escape from Charles Stanley Direct. It seems all these brokers are after squeezing as much in fees out of us as we can and the advantage of a broker with simpler pricing is it’s easier to avoid a bear trap like the one CSD nearly caught me in.
Great as this article is I think the bigger question is what fund to buy? Choosing a broker is complex but understandable, the bit that took me a long time was picking the fund or funds. In my case I decided to focus on VWRL as I want simplicity and having a low number of funds will help me achieve that and it keeps the number of trade commissions down.
But things have been thrown in the air a bit recently because I read Winning the Loser’s Game by Charles Ellis recently and was intrigued that he suggested more people consider avoiding bonds, and focus on a long term 100% equities portfolio.
Absolutely agree with TileStilt & Ben, this is a fantastic website for picking out important information in a short time period. Always good comment threads and I’m sure us ‘lurkers’ get as much value as the active participants.
I haven’t heard many opinions on the Fidelity platform. I’ve picked out some great active funds (good luck/rising share index?) but I’m moving towards investing in trackers. I believe Fidelity charge 0.35%+(0.07% to 0.23%) which sounds like it’s double the ‘best’ rates.
Although it’s a tad off-topic, it’s interesting to hear your comments about CSD, Nyul. I’m currently an index-trackers-only man and haven’t dealt in individual shares (UK or non-UK) so I don’t know what the other platforms do regarding that (and currently it doesn’t affect me), but it is interesting how even if you think you’ve read “everything” about a platform’s fees.. you still probably don’t know “everything” you need to know!
I’ve been buying VWRL which is an ETF, so the stock commission pricing applies. If you look at the CSD pricing page, there’s a link you can click to see the “Telephone” dealing prices, and under there it mentions the £30 per line per annum charge for holding non-UK assets. They also wanted to hit me for transferring IN my ISA (per line!) on top of me being charged by IWEB on the way OUT.
https://www.charles-stanley-direct.co.uk/What_We_Charge
https://www.charles-stanley-direct.co.uk/Products_And_Services/Telephone_Dealing_Team
CSD have made me appreciate the benefits of IWEB’s simpler pricing. CSD blew it with me. I have some stock in there but I’ll be transferring it out I think as I hate dealing with companies that maintain opaque pricing – it’s bordering on dishonest.
Good article and starting point.
At the moment my small investment (although it is about half what I have in a cash ISA) is with nutmeg but going alone seems like a better idea in the long run.
Paying a relatively high fee proportionally, but when I consider that the difference is what I might spend on an evening out I’m not in any rush so still researching. I think next financial year I will do some DIY ISA investing, then perhaps transfer over nutmeg fund/allowance.
The platform fees are rather confusing and off-putting, they would benefit from simpler pricing for small-time investors
Apologies if this has been answered elsewhere, but where is the best place to hold USD ETFs? I am returning to the UK after a 5 year expat, and want to invest USD in the UK (I could convert to GBP which would be simpler, but I don’t want to lockin a 1.7 rate, I’m hopeful it will move back in my favour).
I have Vanguard FTSE tracker at the moment which I think I will move to iWeb where I will just hold it. They charge 1.5% on purchase and sale of stock for USD though as they have to convert to GBP and are not allowed to hold USD – seems very steep. I would like to buy and hold Vanguard S&P UCITS ETF (VUSD.L). Looks like TD allow you to hold and buy in USD but charge .3% up to £250k and .2% thereafter, whereas HL charge .45%. Are there any better options to invest in USD from the UK? Many thanks!
Just having a look at investing in Index funds through my pension provider as opposed to the active funds I’m in and wondering if I have this right.
Take for instance “SL Vanguard FTSE Developed Europe ex UK Equity Index Pension Fund”, they have this marked as FMC 1% – .75% scheme rebate which is nice, but then the “advisors” take .25% on top of that making it .50% (+.02 expenses?)
If I was to move 100k to Interactive Investors SIPP and plonk it all in the same fund “Vanguard FTSE Developed Europe ex UK Equity Index Acc” (they are the same yes?) for instance the FMC = .25% plus the 144 fee on the 100k being .14% = .39% total.
Would that be right or am I missing something? Would only be a difference of 110 a year so not sure it’s worth moving it. The discounts seem good on active funds just not trackers that have their FMC increased to begin with 😐
@ Matt – Google the International Investor. That’s an excellent site for guidance on holding foreign ETFs. When I looked into this about a year ago, I was going to plump for Youinvest. They put up their currency charges though and I didn’t go for US ETFs in the end, so I’m not sure how competitive they are now.
@ Paul W – thanks for being my spell-checker 😉
@ One Day – here’s a calc that will help you see how much a small difference can make over time. At least then you can take a long term view on whether a move is worth it: http://www.trueandfaircalculator.com/calculators?type=standard&refer=index
Thats a nice one for direct comparison thanks. It does add up over the next 25 years I have to go so it makes sense to move that pot, I’d also have a slightly better tracker choice in the SIPP.
The calculator is rather scary when I put in the current active fund charges and assume they don’t outperform…
@TA – an easy mistake to make, but if flate doesn’t mean anything, your more reliable spell-checker should underline it in red. Mine does 😉
And thank you for your great job. I should have somehow told you in person, but anyway you’ve got my huge respect and gratitude.
I LOVE the bit about avoiding real humans for this sort of thing. I agree, the costs just go up and up. Sometimes has to pay them! The fact is, the internet will be able to tell a person more about how to invest than any investment salesperson (oops, I meant adviser) could ever tell them.
I use Vanguard exclusively. But of course, who doesn’t??
@Nyul
“… I read Winning the Loser’s Game by Charles Ellis recently and was intrigued that he suggested more people consider avoiding bonds, and focus on a long term 100% equities portfolio.”
There was an article a few weeks ago about how much you can safely withdraw from an retirement investment pot each year (safe withdrawal rate or SWR). This referenced some studies which showed how resilient different mixes of equities and bonds have been, depending on the year of retirement. This shows that a small portion of bonds does reduce long term risk, but heavy dollops of bonds are worse than 100% equities.
See http://www.bogleheads.org/wiki/File:TrinityTable3.jpg. With 100% equity and a 4% withdrawal rate each year, 95% of retirement years between 1926 and 1995 would have sustained that withdrawal rate for 30 years. With 25% bonds, the success rate increased to 98%. (Success defined as not running out of money for 30 years.)
With 50% bonds, the success rate falls back to 95%, same as 100% equities. But with 75% bonds, a 4% withdrawal rate would have failed for 29% of retirement years. With 100% bonds, the failure rate goes up to 80% of retirement years. Even a 3% withdrawal rate would have been too high to last 30 years in 20% of retirement years.
Interestingly, if you use a 5% withdrawal rate instead, 100% equities had the highest success rate.
This particular study was for the US markets, but I suspect the broad conclusion would be the same for a global spread.
Thanks ivanopinion, that’s a fascinating table. It’s reassuring to see that if things got hairy, dropping to a 3% withdrawal rate has a significant impact.
I’m still undecided on bonds. 100% equities will probably give a better return over the very long term, but that ride will clearly be agonising at times. I think 10-20% bonds is probably sensible for me, to smooth the volatility a bit, and being able to rebalance from bonds to equities when the latter collapse in value might take a tiny bit of the sting out of it.
I can’t bring myself to invest in bonds explicitly, particularly not at the moment, with a huge price drop inevitable at some point, once interest rates go back to “normal”.
My compromise is that I do invest a reasonable chunk of my portfolio in certain funds aiming for lower risk than 100% equity funds. eg, SLI GARS, Troy Trojan. These have holdings of a variety of things, including bonds, commodities, as well as equities. So elements of the fund portfolios should have quite low correlation with equities, giving the same sort of smoothing effect. I’m sure purists would scoff that it’s not the same, however.
@ Nyul – you’re right, one of the major uses of bonds is to keep investors in the game when the going gets tough – they’re an anti-panic device. Here’s a piece on research that offers a more nuanced view on bond allocations over an investors lifetime: http://monevator.com/buy-shares-in-retirement/
@Accumulator, that’s a great piece, thanks for the pointer. Bonds have their advantages but as others have said the low interest rate environment raises their risks and probably their returns a bit higher. We’ll all find out who’s right in a few decades!
Does your advice not to go directly to the fund provider apply to Vanguard? If, for instance, one had the necessary cash to invest directly with them why would one go through a broker/financial adviser/online platform? What would be the advantage?
The problem with going directly to a fund provider is if you find it locks you in to a limited choice of funds and prevents you from diversifying across institutions as well as asset classes.
http://monevator.com/assume-every-investment-can-fail-you/
http://monevator.com/investor-compensation-scheme/
The advantage of going direct is if it eliminates some level of cost or enables you to access a level of service such as avoiding this:
http://monevator.com/nominee-accounts/