Mar

20

basic guide to Stocks and Shares ISAs part 6: all about providers

Filed Under investment | 4 Comments

the guide to Stocks and Shares ISAsFor a while now, I’ve had a trickle of requests for a basic guide to investing in UK Stocks and Shares ISAs.

As I want to go through things carefully, I’ve split all the details into several different parts, starting with thinking about yourself and what you want with the money, and moving into what there is available, and the nuts and bolts of products and investments. This is part 6 of the basic guide to Stocks and Shares ISAs.

Previously on the basic guide to Stocks and Shares ISAs:

separating out funds and providers

The key to thinking about ISAs, is remembering that they are just containers. You want to pick the best investment that you can, and then put it into the cheapest container that you can. So the way to find the best ISA provider for you, is to pick your funds, and then find a cheap provider of them.

When your money is in the fund, it doesn’t matter who you bought it from it will return the same underlying performance. It’s just that a cheap provider will take out fewer fees so more of the performance will be returned to you.

the rules on Stocks and Shares ISA provider

Firstly, implications of one of the basic rules of ISAs. In any given tax year, you are only allowed one Stocks and Shares ISA from one provider (you may also have one Cash ISA from one provider). This means that you are restricted to using the investments available through the provider of your ISA.

Suppose you want to invest in the Legal and General UK FTSE All Share Tracker Index Fund and so open an ISA with Legal and General. If you want to invest in any other fund as part of your asset allocation, you have to invest with a fund offered by Legal and General. Fortunately, there are a couple of loopholes.

funds supermarkets

Firstly, there are funds supermarkets; these sound like what they are - a place where you can buy all sorts of investments that are offered by all sorts of companies. They also do Stocks and Shares ISAs, so if you open an ISA through a funds supermarket, you can pretty much invest in whatever you like. In addition to offering you more choice, they generally offer discounts on funds.

Generally, a fund may have an initial charge, and an annual management charge. Funds supermarkets generally discount both of these, often discounting the initial charge all the way to zero.

The typical fund in the UK has an annual management charge of 1.8%, so for every £100 held in the fund each year, £1.80 will go to the management company. There is usually no charge for holding an ISA with a funds supermarket.

stockbrokers and exchange traded funds

Exchange traded funds (ETFs) are a lot like regular funds, except that you buy and sell them like shares. Just as regular funds collect together everyone’s money and then invest it, so do ETFs, but because they float like shares their prices per unit can go up and down. This isn’t too important as there is a good market which naturally regulates the price, so for a long term buy and hold investor, this shouldn’t matter.

ETFs generally have very low fees typically around 0.4% annually, with no initial fee. However, you need to buy them from a stockbroker, who do have fees. These tend to start at about £10 per trade, plus stamp duty of 0.5%, so a £100 initial investment would cost approximately £10.50 in fees.

As you can imagine, if you want to use ETFs you need to minimise the number of separate transactions you make, so they are better suited to lump sum investments.

comparing providers

In my other life, I’m a spreadsheet queen, so I’ve created an interactive spreadsheet that’s all zipped up for you to download. If you don’t have a spreadsheet program on your computer, I recommend using Open Office, free and open source, my copy definitely opens this spreadsheet.

The spreadsheet compares two inexpensive funds supermarkets - Hargreaves Lansdown and Fidelity - and two inexpensive stockbrokers - TD Waterhouse and E*Trade. As far as possible I’ve used comparable funds which are the cheapest available from each provider, details of the funds are in the spreadsheet.

You can input your details into the pink boxes - you should have the amount and frequency that you want to invest, and your asset allocation. The spreadsheet is a little simplified, but it should be good enough for comparing costs (not performance).

Let me know if you have any problems, and I’ll see what I can do.

still to come…

Coming up in the basic guide to Stocks and Shares ISAs:

  • conclusions – what’s been covered, and what to do next

Mar

19

basic guide to Stocks and Shares ISAs part 5: all about funds

Filed Under investment | 8 Comments

the guide to Stocks and Shares ISAs

For a while now, I’ve had a trickle of requests for a basic guide to investing in UK Stocks and Shares ISAs.

As I want to go through things carefully, I’ve split all the details into several different parts, starting with thinking about yourself and what you want with the money, and moving into what there is available, and the nuts and bolts of products and investments. This is part 5 of the basic guide to Stocks and Shares ISAs.

Previously on the basic guide to Stocks and Shares ISAs:

where are we up to?

So, by now you should have a basic idea of what you want to invest in, and are aware that you might need to tweak it based on the amount of money that you have to play with. We started looking at what is wanted in general before delving into the specifics because I find investment fund websites incredibly difficult to navigate. Funds tend to be named the same sorts of things, and there’s either no choice at all, or far too much choice. It’s easier to start looking at them when you know basically what you want.

choosing investments

Now you should have your desired asset allocation in 5 main groups. As I mentioned before, the cash component should be held separately to your actual Stocks and Shares ISA as you can get better rates elsewhere. Within each asset class, you want to be diversified to reduce the risk that any one thing will be done badly. For the purposes of this, I’ll assume that you don’t want to hold individual shares in your ISA but you want to pool your money with other people in a collective investment like a OEIC, unit trust or similar (in the US, these are called mutual funds).

I’m a big fan of index funds because they are cheap, often beat managed funds, and I understand how they work, so I’ll be focussing on the relevant indexes. If you don’t want to invest in index funds, you should be aware of the major indices so that you have some sort of benchmark. I don’t know how you go about picking good actively managed funds - some resources that might help are:

equities - UK

The generic measure of everything in the UK is the FTSE All Share Index. It is well diversified in the UK and is weighted by market capitalisation (more money is invested in the things that are worth more). If you want to use an index tracker that covers essentially the whole of the UK market, without specialising in any one area, this is the tracker for you.

FTSE All Share trackers are pretty competitive - depending on the provider the cheapest is usually either the Fidelity Moneybuilder UK Index (0.1% fund charge, providers charges vary) or HSBC UK FTSE All Share Index Fund (0.25% fund charge, provider charges vary). In any case you should be paying well under 1% for a simple tracker.

Other useful UK indices that are used as benchmarks include:

  • FTSE SmallCap - companies in the All Share Index, but not in the top 350
  • FTSE 250 Index - mid-sized companies outside the top 100
  • FTSE AIM Index - companies floating on the Alternative Investment Market, rather than the London Stock Exchange

equities - international

If you want to diversify abroad (and there’s certainly an argument that you should), the choice of index isn’t so clear. One of the problems is that, of course the UK makes up a proportion of the world economy, and you don’t want to be over-represented there.

Some potential indices to track include FTSE World ex-UK (cheapest example is usually Norwich International Index Tracking Fund at 0.9% depending on your provider), MSCI World (cheapest example is usually an ETF such as iShares MSCI World). You should be able to get a international fund for around 1% per annum.

equities - specialised

As you get more interested in investing, you might want to weight your portfolio towards a particular sector that you think is going to perform well compared to the rest of the economy, or focussing in your international investments into countries or regions that you think will grow compared to the UK.

More ‘interesting’ equity funds are outside the scope of this guide, but one of the pitfalls of this approach is that your funds may overlap and you may not have the asset allocation that you want. A useful research tool is the Morningstar Portfolio X-Ray, which shows you what your whole portfolio is actually invested in.

bonds and gilts - UK

Chances are that the bonds weighting in your asset allocation is lower than your equities weighting. This means that you’ve got less scope to diversify by investing in different bonds fund.

The main indexes that you might want to consider are the FTSE-A Index-Linked All Stocks Index, or FTSE-A Government Securities All Stocks Index (cheapest tracker funds are usually Legal and General) which are for different types of government bonds.

There are fewer bond index funds, so you may need to get an actively managed fund, in any case there should be one available with fees below 1%.

property

You can invest in property through a property trust. If there are few bond index funds, there are even fewer property ones, and if you want to go the index tracking route, your best bet is an ETF such as the iShares FTSE EPRA/NAREIT UK Pty . Otherwise, actively managed property funds are available - you can use the tools at Morningstar to find the various funds.

summary

Hopefully, I’ve given you some ideas of funds and indices that you might be interested in for your Stocks and Shares ISA covering the main sectors. If you find this a little daunting, remember that you don’t need to do it perfectly to make a good start on your ISA investment, and starting is much more important than anything else.

still to come…

Coming up in the basic guide to Stocks and Shares ISAs:

Mar

18

should Paul McCartney have had a pre-nup?

Filed Under philosophical | 11 Comments

I’m sure most of you non-Brits have heard of Paul McCartney. It’s also probably common knowledge that he’s in the process of finalising his divorce from his second wife, Heather Mills.

Much has been made here of her claims to a substantial sum of money, and she has eventually been awarded £24 million (plus child support). A conservative estimate would give him a fortune  more than 15 times this figure, most of which he almost certainly accumulated before meeting Heather Mills.

I read something somewhere, either on another blog, or a forum post expressing surprise (and some disbelief) that McCartney didn’t have a pre-nuptial agreement. The lack of a pre-nup didn’t surprise me at all - they aren’t legally enforceable in the UK.

This doesn’t mean that you can’t have one, and it doesn’t mean that it’s not worth the paper it’s written on. In a divorce case the ruling judge is likely to take any pre-nuptial agreement into account as a statement of what the couple intended to happen in the event of a divorce.

If the couple’s relative financial circumstances have changed little since then, it’s presumably likely that the provisions in the pre-nup will be followed. On the other hand, if things have changed for the couple, and the current state of affairs wasn’t covered by the pre-nup, I imagine there’s less chance that it will be followed strictly. In either case, the judge has the freedom to ignore the pre-nup if appropriate.

There are some calls to make pre-nups legally enforceable, but as things stand, if you want one you should be aware that in the UK at least just because you’ve written one doesn’t mean that it will happen. Given the way the Mills and McCarney saga has gone, I don’t think it would have been any less painful and drawn out if there had been a pre-nuptial agreement anyway.

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