In this article I want to talk about using Vanguard Investor in the UK to invest in a range of index funds to allow you to work toward long term profit in the stock market and beyond. I will also talk about what funds you might want to invest in to diversify your investment and spread your risk.
(This post is not sponsored by Vanguard, nor do I receive any benefit from any kind of affiliate links, etc)
Just remember I am not a financial advisor and nothing of what I say should be considered financial advice! Always seek input from a professional before making any big financial decisions.
Why should I invest in index funds?
Investing in the stock market can be a great way to generate wealth over the long term. Historical returns on global markets have be shown to be betweeen 7%-10% annually over the last 50 years or so. Even with all the ups and downs, and the various financial problems over the years, the stock market has been the best performing asset class over all.
But it can be scary to get started.
What stocks to pick? What companies are the best for investing your money. Where in the world should I invest? What investing platform should I use? How much do I need to get started?
All these are valid questions and typically the advice from those involved in balanced long term investing is to invest in
- a broad range of companies
- companies across the globe
- a mix of growth and dividend paying companies
- various risk profiles (stocks and bonds)
A good way to invest in all the above is to use Vanguard Investor as your platform to access a range of index funds that will give you access to a wide ranges of companies and geographic locations to effectively buy the world!
Ok, so what does that mean?
Well instead of buying a stake in specific companies, you can effectively invest in all of them (or most of them depending on the product you choose) by investing in a single bundle that contains a small piece of all the companies trading in a particular index – this is an index fund!
For example, instead of trying to pick some of America’s best companies, you can instead invest in the S&P 500, giving you instant exposure to all 500 of America’s biggest companies, thereby offering instant diversification and spreading your risk.
Couldn’t I just pick my own stocks?
It is a fact that roughly 85% of traders cannot produce better returns than the market. This includes all the professionals on Wall Street and Canary Wharf with all the experience and information they have available.
It seems to me that investors like you and I, who are simply looking for a strong return on our money may not have a realistic chance of doing any better.
So as promised, I want to put together a hypothetical portfolio below, that could get you started investing with Vanguard ETFs, that aim to track the market, not beat it.
What is in your example portfolio?
The first index fund we will look at is FTSE Developed World UCITS ETF (VEVE)
This index is a widely recognised benchmark of the large and mid-cap sized companies on global developed markets. The index contains over 2000 companies across the globe and gives us immediate access to the world’s prosperity as a whole.
We will assign 35% of our portfolio to this fund.
The second fund we are going to buy is S&P 500 UCITS ETF (VUSA)
This is instant diversification in the top 500(ish) stocks and equities in the United States. Since it’s inception in the 1920s it has return around 8%-10% per year. There is a lot to love about having access to this market in the biggest economy in the world. While many of the companies in this index will include ones we already have in the VEVE index, such is the strength of the US economy, in general terms, we will assign some of our budget to this index. Companies in this index include Microsoft, Apple, Amazon, Google – companies which have huge global reach and are likely to grow and evolve as time goes buy.
We will invest 35% of our portfolio in this fund.
Our third index will be FTSE Emerging Markets UCITS ETF (VFEM)
This is an index investing in emerging markets such as China (which makes up most of the index), Taiwan, India, Brazil, South Africa and others. The returns can be explosive in this index, but emerging markets are much less established and carry a greater risk.
We will allow 10% of our investment to this index.
Finally, after investing in equities up to now, it may be prudent to add some bonds to our portfolio. All these choices are just an example after all, but bonds are considered “safer” investments. With that extra security, typically comes lower returns but this offer balance to a portfolio.
So the last 20% of our portfolio will go to Global Aggregate Bond UCITS ETF (VAGP)
The Index includes investment-grade and government bonds from around the world with maturities greater than one year. This is a fairly new ETF offered by Vanguard but the underlying assets are over 5000 in number and looks to be a decent holding.
Index investing offers a simple, no-frills way to invest in global stock markets without the need to research and pick stocks, follow news on companies, and consistently make the correct decisions every time.
Not only that, but “Set and forget” investing has been shown to be a highly effective way of realising profits from the stock market in the long term.