Active and tracker funds. How do I choose for the best

Active and tracker funds. How do I choose for the best

One of the things that scares people most about investing is the idea that you have to pick a winner. You have to understand the intricacies of the market, as well as a specific company, and then you take the plunge by buying stock in that company, putting all of your eggs into one basket.

Well, it certainly can be like that, and there are plenty of people out there, from amateurs to investment gurus, picking individual stocks to put their money into. But that doesn’t mean that you have to, because rather than investing into specific stocks or bonds, you can invest into stock funds and bond funds. You can even invest into funds that contain a mixture of both, giving you an instant portfolio!

Before we get into what they are and look at a couple of different options, let’s take a look at why you would consider the fund option over the individual option in the first place.

It’s actually pretty straightforward. Let’s say that you invest all of your money in a single stock, such as Tesco. If you invested £10,000 and Tesco shares soared on the back of a massive upturn in profits, then you’d be in the mood to celebrate, perhaps splashing out on a Tesco Finest Malbec to go with that Ben and Jerry’s that you bought when it was on special. But, if Tesco’s share price plummeted, cutting the value of your investment in half, you’d be in a spot of bother. Back to Tesco Value for you, amateur investor.

Now, if you invest in stock funds as opposed to individual stocks, or perhaps even several different types of stock funds, then you won’t have to worry about a single stock hugely impacting your investment, because your money is spread out to prevent that from happening. If Tesco is one of the stocks that makes up your fund and it plummets, your other investments should protect you. That said, there’s the risk that you’ll be kicking yourself if Tesco booms, as the benefit to your portfolio will also be less obvious.

Get it so far? Well then let’s look at two different types of fund that you could invest in.

Actively managed funds

How’s this for interesting? The first investment fund was launched in 1931, and contained about 25 stocks. Instead of having to pick individual stocks to put their money into, actively managed funds allowed your average investor to choose an overall fund that would suit them. These days you can select a fund based on the amount of risk you’re willing to take, by the location of the collection of stocks, by the industry, or by a whole host of other categorisations. All that you have to do is pick one, and the rest is taken care of. You’re an investor!

The beauty of this approach is that you get an instantly diversified portfolio (albeit most likely diversified in just one way) – your eggs are no longer in that one basket – which means that you don’t have to worry if a single stock that you’re invested in goes down. Plus, you have an expert money manager making all of the difficult decisions for you. What’s not to love?

Well, the fees, for a start. That expert advice costs money, and a lifetime of fees can really eat into your profits. Managed funds certainly bring peace of mind, as you know someone with a lot of experience is monitoring the situation, but as with most things in life, you pay for the privilege. Plus, as the manager is actively trying to beat the market, they’re going to be buying and selling stocks frequently, incurring trading fees to go on top of those management fees.

And can these experts actually ‘beat the market’ and get you huge returns? Well, they’d have to be able to predict the future and know which way the market is going to go. Can anyone actually do that? Well, that’s an area of mass debate, and one that is worth your time looking into before you make any choices. It’s a fact that there are rockstar investor managers out there beating the market year in, year out, you just need to choose carefully. Time to do some research…

Tracker funds (passive funds)

If you’re interested in finance, you may have heard of a man called John Bogle. If you haven’t, he’s well worth a read. Bogle is the founder of Vanguard, who have been creating low-cost ‘tracker’ funds for 40 years. Instead of being ‘actively managed’ by a fund manager, these funds automatically buy stocks to match a particular market using computers.

So what are the advantages here? Cost and stability. A tracker fund’s annual expenses are a tiny fraction of an actively managed one, so if the market goes up over time, you should come out better (should, but might not, of course). They’re also easy to maintain (normally just adding money each month) and are instantly diversified. Plus, most are set up on the premise that you’re investing for the long term – there’s no trading to beat the market – meaning you’ll hopefully weather any peaks and troughs as the years go by.

Of course, as tracker funds match the market, if the market drops, so does your investment. And you’re still human, so if you suddenly see your investment tanking you might still make an emotional decision and pull all of your money out. Plus, with so many options to choose from, there is more research to be done if you take this route, and you’ll have far more work on your hands. There’s no expert money manager picking funds – it’s all down to you.

Most of you will know Warren Buffet, widely considered one of the greatest investors of our time, who said “I believe that 98 or 99% – maybe more than 99% – of people who invest should extensively diversify and not trade. That leads them to [a tracker] fund with very low costs.”

When Warren Buffet talks, people listen.

So what do you do?

You’ve read our summaries of stocks, fixed interest assets (like bonds) and now funds. What next? Which path do you go down?

Well, we know plenty of people who actively manage their portfolio, enjoying the tinkering, the research and the excitement. But, we also know plenty of people that are passive investors, and even some that have a mixture of both. This blog isn’t here to tell you what to do, just to help you understand some of the options that you have.

Warren Buffet thinks a low-cost index fund is the way to go, but you may decide you’d rather have a money manager actively looking after your investments. There’s no right or wrong answers here, only choices.

One last point – all of these investments come with risk, but so can everything! What about the risk of losing money every single day that you’re not invested or that your money isn’t working for you?

If you are still looking for help based on your individual circumstances, feel free to give us a call for an exploratory chat.

 

This article is for general use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be or constitute advice.

The value of investments can fall as well as rise. You may not get back what you invest.

GreenSky Wealth Limited is authorised and regulated by the Financial Conduct Authority. FAC No. 629624. Registered Office as above. Registered in England and Wales, Company No. 07103441

2016-11-04T11:14:18+00:00

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