Disclaimer: This isn’t advice and I’m definitely not a financial advisor. This is for information only.
I’m going to give you some background info into what attracted me to index funds. Then I’ll give you some basic info about index funds. And finally, I’ll be telling you how to invest into a Vangaurd Index fund via an ISA (ISA is for UK only but the principles can be applied anywhere).
The reason for this post is because I’ve been asked about it quite a lot recently. This is from people who want to invest but aren’t quite sure how to do it. They are confused about what index fund to invest in or what platform to use. Then it’s whether to use an ISA or a SIPP.
Today’s post is going to focus on investing via your ISA (Individual Savings Account). There are pros and cons when deciding to invest via an ISA or a SIPP but that is for another post.
You can invest £20,000 per annum into your ISA (in the UK). This is known as your ISA allowance. You can’t go over this number and you can’t carry your allowance over to the next financial year. If you max out your ISA, you’re doing well. If you manage to invest £5,000 in a given year, your remaining £15,000 available allowance is lost. You get the point.
I made questionable investing decisions for far too long. Like losing money in the stock market in 2010 and 2011. I rushed in without doing research and I didn’t know what I was doing. At the time, I had zero financial literacy. Learning the hard way over the years, I’ve realised how important it is to be financially literate. If you’re financially literate, you can invest with skill.
The decision to learn about money and become financially literate came towards the end of 2018. I was unhappy and being poor with personal finances and investing was a big factor in my unhappiness. This led to personal development, and I realised how much I liked to learn.
A few of the books I was reading at the start of 2019, were nudging me towards Index investing. I wanted to invest in the stock market, but I knew I’d been an emotional investor in the past. What I was reading, encouraged me to get back into investing in the stock market and it was 8 years since I’d last tried to invest into stocks.
The theory was that you invested each month (dollar cost average) and didn’t check in on your index fund all that often. Like maybe once or twice a year. And since starting to invest into index fund 3 years ago, I’ve stuck to the advice from the books I was reading at the start of 2019. I’ve manged to remove the emotions and have become more neutral with my investing.
Index investing BASICS
Far and away my favourite way to invest. This type of investing is how I got back into investing in the stock market after 8 years of burying my head in the sand. It’s what the experts recommend when you read the books and it’s what suits an emotional investor like me.
Instead of being exposed, with one company, you have several companies within your fund. A large pool of investors pools their money together and the fund manager takes care of the rest. The fund manager will pick what companies in what market. I went with a diversified fund that has companies around the world in different markets. The theory is that the more diversified you are, the less exposed you are if one company or one market crashes.
If you speak to a financial advisor, they will discuss your risk tolerance. If you are 20 for example, you might have a high-risk tolerance because you have time on your hands to ride the inevitable ups and downs of the markets. On the other hand, if your 60 odd and looking to retire, you are probably guarding your money with everything you’ve got and have little appetite for risk.
If you struggle to pick a fund, maybe speak to a financial advisor. Personally, I was happy to do the research when I started looking into it back in early 2019. My research and my interest in low fees, led me to Vanguard. The list below will get you started with index investing:
- This is what the experts recommend for beginners
- This is my favourite way to invest
- Research your risk tolerance
- Research your platform
- Research your fund
- HOW MUCH can you invest pcm
- Set and forget
- Only check your fund once or twice per year
How to invest via Vangaurd
There are many investment platforms where you can invest into index funds. I’ve mainly used Hargreaves and Landsdown and Vangaurd. Both are very good from my experience but I do prefer Vanguard because the fees are so low. They are also a WHICH recommended provider for investment platforms – four years in a row.
To open a Vangaurd account simply type Vanguard UK into Google or whatever search engine you prefer. There are a few ways to invest but again I’m focusing on investing into your ISA.
Once you are on the Vangaurd site, scroll down and click on stocks and shares ISA. This is a low cost and tax efficient way to invest. The stocks and shares ISA enables you to invest without paying capital gains and income tax. You will then need to open an account. Make sure your passwords are secure and that you keep them in a safe place.
When you have opened your account, it’s time to choose your fund. This is where I would take your time and do some research. John Bogle’s book, THE LITTLE BOOK OF COMMON SENSE INVESTING is a book worth reading if you’re interested in index investing.
There are many funds available and it’s very much dependent on your risk tolerance. I like the Life strategy funds because it gives you access to thousands of shares and bonds in a single investment. This helps to reduce your risk as it means your investments are spread out with different companies in different parts of the world.
Being diversified with index investing is the opposite of what I was doing in 2010 and 2011 with single shares. It went wrong with the companies I invested into, and I lost all of money. If this happens with my index fund, I won’t lose all of my money because the risk is spread over several companies.
Back in 2019 I decided on a Life strategy 80/20 fund (80% stocks 20% bonds). In recent months, I’ve changed to a Life strategy 100 fund. These decisions are based on what I think is most suitable for me and my strategy at the time. You will need to find a way of investing that is most suitable for you.
A word of warning
This is not investing advice. It’s just some info that will help investors thinking about investing via index investing.
The main things to consider when choosing your index fund is your risk appetite and length of time you are going to invest for.
I’ve went with LS 100 which is high risk. This is because I intend to invest for at least 20 years, so I have time on my side to ride the ups and downs of the stock market. Look at how old you are and how long you intend to invest for before considering your risk tolerance.
If you have any doubts about anything in this post, you can always speak to a financial advisor who will help you choose a fund most suitable for you. The drawback is that they will charge you for their services and advice.
Personally, I chose to go it alone back in 2019. I wanted to save on costs and maximise the returns from my index investing. If you’re not fussed on doing the research, speaking to a financial advisor might be the way forward. Remember we’re all different and we will think differently when it comes to investing our hard earned money.