Want to invest in a footsie tracker ISA, is this a good idea or not?

[ABitTipsy]

I want to start using my ISA allowance and have been thinking I might invest in an investment ISA that tracks the footsie. Partly for the lower charges, but also because I think the stock market is at a low right now and as I want to invest for the long term, ie 20 years, I feel fairly certain that in 20 years time the stock market will be a lot higher than it is now.

What do you think? And if this is not a good idea do you have any suggestions as to which investment isa I should put money into and why?

Thanks

PS. I am going to put in around £100 per month.

[BeenBeta]

I feel strongly that people in the UK are often badly advised about investing and that there should be a law passed that forces investment advisors to tell people the following 3 things:

1. If you have any debts at all (including a maortgage) you should pay them off before investing in anything.

1. You should save 6 months of your after tax income in a National Savings in case you get made redundant.

1. If you have got any money left after doing 1 + 2 then consider using up your ISA allowance by putting money in a low cost FTSE 100 tracker. Only do it though if you are willing to accept the risk of losing 50% of your money and sure that you will not need the money in a hurry.

Have you paid off all your debts and saved 6 months of your earnings? If not, then do that first. Then consider the ISA.

Investing the same amount of money per month (eg £100) in a FTSE 100 tracker ISA is the best way of doing it but you must do it consistently and regardless of whether markets are going up or down. Do not try to time the market. This consistent passive method is known as 'Pound Cost Averaging'.

What that means is that as you put the same amount of money in per month you will tend to be buying more shares when the market is low and less shares when it is high.

Academic studies I have seen show this is an almost guarnteed way to beat the market in the long run but it is a long run strategy.

The only question is, are you really willing to put the same amount in per month even after a big drop? If not, then equity investment is not for you as it does not suit your risk apetite.

[ABitTipsy]

Hi Beta, thanks for responding.

To answer your questions, no, I haven't paid off all my debts and no, I do not have any savings, (let alone 6 months of after tax income).

But, I do still want to invest some money, DH and I plan to invest £100 each per month into a tracker fund.

I know the advice about paying off our debts first is good, but we have other investments which will be used to pay off our mortgage at a later date.

I am prepared to keep drip feeding money into the fund, even when the market is down. Do you think that we are likely to lose money after 20 years if we invest in this way now?

[BeenBeta]

We cannot tell the future. It is impossible to know with certainty whether people will make money out of the stock market by holding shares for the next 20 years.

Look at the Japanese stock market. It peaked out 20 years ago and is now only 35 - 40% of its peak value.

After the 1929 crash it took until 1954 for the Dow Jones Industrial Average (US Stock market) to recover back to its 1929 peak. The UK and US stock markets are still currently 15 - 20% lower than they were in December 1999.

That is why I think anyone who does invest in shares needs to be willing to lose 50% of their money and consider whether thay will ever need the money to live off or pay down debts.

Me and DW make a living from investing. We do it all day every day but that is not practical for most people so passive low cost index tracking approach is a very good way to do it with minimal effort - as long as they are prepared to suffer potentially large losses. Do also consider whether your other investments that you are using to pay off your mortgage may also be invested in the stock market by a fund manager. You may have some stock market exposure already.

Good luck!

[ABitTipsy]

Thanks Beta, you have given very good advice and clearly know what you're talking about.

We do have exposure to the stock market via DH's company pension but no other stock market investments. I don't have a pension to speak of. Our other investments are all in property not shares which I suppose is why we were thinking we ought to invest a bit more into the stock market.

I know it's hard to make predictions. But I am aware that the UK stock market is currently at a low which is kind of why i thought it might be a good time to put some money in. I know there is a global economic downturn at the moment, but I hope and think that in 20 years time there will have been some genuine growth and therefore increase in value in the stockmarket.

[LadyWellian]

Hi ABitTipsy

First off, I'm not a financial adviser and therefore can't tell you whether you should invest in the stockmarket or not - but if it is what you have decided to do, can I just say that a FTSE 100 tracker is not the only low-cost option. There are things called exchange-traded funds (ETFs) that track all kinds of indices all over the world with very low charges - useful if you fancy a bit of non-UK exposure, though still - like the FTSE 100 tracker - a passive investment. If you wanted an actively managed investment (ie one where a real live fund manager tries to add value through asset allocation, stock selection etc), the lowest-cost way to do this is often through an investment trust ISA. Some of the big global or UK investment trusts have total expense ratios (basically charges) that are as low if not lower than a unit trust/Oeic tracker fund. Just watch out (in both cases) for the charges on the ISA itself. Through my own laziness (not moving a very small unit trust ISA holding that got passed from one platform to another after a corporate takeover), I'm currently paying something like 10% a year for the privilege of continuing to hold an investment that is still 30% lower than when I took it out a decade ago (it's a tiny investment and a flat fee). So Beta is definitely right about regular investment being worthwhile, and it would quickly make a flat fee look more acceptable.

[ABitTipsy]

Hi Lady, thanks for the advice. Is it possible to hold an ETF within an ISA?

I personally don't think an actively managed fund is worth the extra in charges. The current BP incident shows that even the most talented fund manager can be caught out (I know a footsie tracker would also have been affected by BP) but I do think the whole stock market investing thing is essentially bit of a gamble and so I might as well keep the costs/charges of gambling down to a minimum as the end result will probably be roughly the same whether in a tracker or managed fund.

[LadyWellian]

You can buy ETFs through any self-select ISA as they are listed on the Stock Exchange like a normal share. Barclays has a range of ETFs called iShares that you can buy through its Investment ISA (though that would be true of any ETF and any self-select ISA, I think). The thing to watch out for would be the costs, as if they charge a flat dealing fee for all purchases it could work out as quite a big chunk of your £100 a month.

I take your point on active versus passive - the jury is still out on whether active managers really add value - but a big active investment trust like Foreign & Colonial has a total expense ratio of 0.59% so it does at least stack up from a cost perspective. Also the FTSE 100 is increasingly concentrated in mining and resources stocks. A FTSE 350 tracker would give you exposure to the biggest 100 companies and the next 250 (mid-caps) as well, which would broaden things out a bit.

Good luck!

[ABitTipsy]

Hi Lady,

Thanks for the information and advice. I think we will probably go for a tracker for this financial year and next year perhaps go for an ETF. I think we will go for a FTSE 350 tracker, a broader spread of companies seems more sensible.

OK, having made a decision, I now just have to actually get off my backside and do it.