How to start investing: picking the right index fund & platform

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0:34After your trial, you'll save an extra£5 a quarter on the subscription, which is exclusive to Making Money listeners. And that's moneyweek.com forward slash money. But there's a link in the description if you just want to click that.

0:50So exciting episode today, Tamayne. I'm really excited. Finally, 12, 13 years in the making this, I think. We're going to set you up within the stocks and shares ISA and we're going to put an investment inside of it. So we're going to look at how to pick an investment platform, sometimes called a broker. We're going to look at then, you know, the type of account that you should use and kind of the thought process I go through when selecting where I invest. And then also we're going to just take a look at deciphering some of the investments on the platform so you can know what they mean and then hopefully have the confidence to start investing yourself.

1:22There's a lot going on on the platform. There's going to be a lot of clarification. Yeah, but I think actually what we can do today is we can, we'll realise that a lot of it is the same thing or just different variations. And once you understand a few key terms, you can cut through that. And even I don't understand everything in the names and stuff. So what I'll also do is show you how to figure out what's in there. Teach a man to fish kind of vibes. So let's just start first of all, by talking about actually selecting a platform to invest with. I've got some notes here. If I look at these for the people that are watching on YouTube, it's just to make sure that I cover every point.

1:56But there's lots of different ways to invest in the UK. You can use traditional legacy brokers, which are like Hargreaves, Lansdowne, Vanguard, the big platforms, AJ Bell. There's the newer discount brokers, they're called, or discount platforms. And they would be Trading212, FreeTrade, these kind of more popular app-based ones. And then there's robo-investors, which are, they basically say they do the work for you, Moneybox and other ones like that where you don't really pick the investments, they do it for you. I personally don't use robo-investors because I think they charge you a fee to be a middleman when they don't need to.

2:40You could do it yourself. The key question that you need to ask yourself before you start is, what type of investing do I want to do? Because not every platform offers everything. It's like going to a shoe shop to buy a ham if you buy a ham. When I try and get my shoes size 12 and a half I never have my size. You've got to go to the outlet malls you know like Nike outlet. Do you see these? Oh fancy. Size 14s mate. Size 14. Look at that. Look at the tongue. It's a size 14. It's a fraud. You're not size 14. Look at that. Oh that's quite good. You're not a size 14. Yeah I am a size 14. So well no I range from a 12 to a 14.

3:17Yeah it's fraud. Fraud. But you can get them at the outlet malls. Anyway it's you need to Sorry, I'm just putting my shoe back on. So you need to, after Tomein ripped it off my foot aggressively, you need to decide what type of investing you want to do because then that's going to dictate what platform you use. There's no point saying I want to be someone who invests in individual stocks and then going on the Vanguard platform and signing up because they don't offer that. Okay? So do you want to invest in funds? Do you want to invest in individual companies? Do you want to do a little bit of both?

3:47And that's going to whittle down the options. Every year I make a video on this where I say these are the best platforms in my opinion. And we can link that in the newsletter for this year. But yeah, have that conversation with yourself. The next thing you want to do then is, okay, I know what style of investing I want. Now, do they offer the type of account that I need? So the types of accounts are general investment account. This is just your bog standard account, like a bank account, but for investing inside of. There's then an ISA, which is the tax efficient version of a general investment account in my personal opinion um some people would disagree but i would always be using an isa instead of a general investment account because why not protect your money from tax long term future proof it yeah and then you also have things like sips which are pensions right self-invested pension plan yeah yeah i'm gonna say yeah that might it might be It might be wrong.

4:42Don't quote me on that. Yeah. So obviously understanding what type of account you want, because people might open a sip, put the money in, and then realize they can't touch it until they're late 50s and be like, oh no. Or what's more common is people invest through general investment accounts and then realize, oh crap, I should really be inside of an ISA. For most people listening, I would say, if you want to, if you're thinking, oh, I don't know what to do, an ISA is a great place to start. That's where I'll be starting. Yeah. And that's what we're going to do for you today. So you've considered what type of investments.

5:13You know that those platforms then have the account that you want, the type, and that's whittled you down. Okay. Next, you look at fees. So the types of fees to consider are the platform fees themselves and then the investment charges. So the platforms will typically have a fee. There can be so many different types of fees. It can get quite confusing. They can have, you know, like fixed platform fees of 0.15 % of everything you invest. Yeah. or they might have an FX conversion fee, which means if you buy an American investment, you pay a little bit, like when you go to the post office and they charge you, they take a little bit off the top.

5:49A little slice. Yeah, a little slice. So a lot of platforms have that as well for the conversion. So you're just going to need to Google the name of the platform and look at their fees and they should have a full breakdown of all of the fees. What I would say is the lower, the better. That's like anything in life, but it makes a massive impact in the world of investing. so try and hammer the fees down as low as possible and then the next and final thing is like a little throwaway is do you want it app-based or website-based Vanguard is only website some people love that because it stops them from doom scrolling on their portfolio every day whereas I like an app based service as well because I want to check in quickly you know so that's the kind of way to and narrow it down.

6:33And off that you probably have a couple that you would look at. I guess the final thing that we should talk about is security, as in how safe is your money? Most brokers that operate in the UK, especially ones that offer ISAs, will be regulated by the Financial Conduct Authority. That means they're covered by the Financial Services Compensation Scheme. We sat down and spoke to them, if you remember. So that means you're covered up to 85K. A lot of people are like, oh, I don't trust these new brokers. if they've got those stamps, they've got that cover, I personally am okay with that up to that limit typically.

7:08I like to have a few different brokers anyway because I like to have multiple pots that will be 85K, so I'm covered across the board. It also kind of mitigates the risk in case. It gives me a bit of variance. It just means all my eggs aren't in one basket. But I want to reassure people and from that conversation that we had that there are robust regulations in this country and most brokers that operate here are authorized and regulated, but there are certain brokers that are not. So what you need to be doing is going on their website and check in or going on the FCA website or the Financial Services Compensation Scheme website, plugging in the name of the broker and making sure that they've got that cover.

7:47If they're not covered by that, don't use them because there is zero protection for you. And why wouldn't they be covered? Me personally, I wouldn't mess with them. Don't touch it. No. So that's how we whittle that down. it's a personal choice today we're going to be using trading 212 my personal choice yeah used it a few years ago yeah and then took it all out and put it all in crypto yeah and now we're coming back for diversification yeah that's what we're doing mate we're going to get that isis set up full circle gonna make you a millionaire yeah so for those who are listening on audio we've got a laptop in front of us where we've got the platform up we'll link the video as well so if you feel that it'll be useful to watch the video you can when we're talking through the platform i'll explain what we're seeing so you can help visualize it.

8:30But yeah, we do film these on video as well if you want to watch that. We'll have the screen recording up. So coming onto this platform now, it's quite a simple layout really. The home button portfolio is empty because you've got no investments. We're going to start with the search option so that we can nail down an investment. Before I go, just know that we went into the ISA section. Yeah, the top right corner. So they list their accounts quite nicely. They have three different There's ISAs, CFDs, and invest. CFDs are contracts for difference. That's a form of options trading. It's betting on movements.

9:04It's like a lot riskier. 70, 80 % of people who use CFDs lose money. They say that in the adverts. I'm like, that's a great, great ad, is that why? Yeah, they have to do. Yeah, they're like, get into this trading. 80 % of people lose money. And I'm like, I will not be touching that. Yeah, imagine if other companies had to do that. Coca-Cola, drink this for your whole life, it'll kill you. Imagine, it's so addictive. It's good. Yeah, but they don't, but they have to say that with CFDs. So yeah, we've got your ISA set up. How easy was that to set up an ISA by the way? It was very, I can't believe it was taking me so long.

9:35What did you have to do? Click on the ISA option. Click on the ISA button, that's it. I already had the app. All I had to do was click on the ISA button. They might make you sign a declaration, which is just like, it's like a form that comes through the app where you just tick yes and it's like a terms and conditions thing. But yeah, opening an ISA, people think it's this crazy thing. Actually, it's just you flick onto that section on the thing in your OA. So if you go on there, you can deposit funds and that's as simple as that. You can do a bank transfer or you can do it via your card. You know, real simple, but we'll get to that in a minute.

10:04So if we go on the search icon, we've got all of the different investments and they break them down into stocks and ETFs. We just want to clarify what an ETF is. Exchange traded fund. Yeah. Look at me learning stuff. Look at this guy. Do you know what the difference is between an ETF and an index fund? No. Okay. There are differences, but from an investing perspective, it doesn't make much difference. Which one do you go for? I'm not bothered. I'm not bothered. Hold on a second. I'm just watching this back. And while this episode is focused on beginners, and I don't want it to get too bogged down in the details because, you know, T will just go fully under.

10:41I do think there are some important differences between the two, index funds and ETFs, that we should talk about. The main difference between an index fund and an ETF or an exchange traded fund, is that an ETF can be bought and sold like a stock, meaning the price fluctuates throughout the day. Whereas an index fund, they set one price a day that you can purchase it at, normally at the end of the trading day. For long-term investors, this difference doesn't really matter, but ETFs do tend to be slightly cheaper. Now, cost isn't everything though. Quality needs to be considered also. With ETFs, there are different types, or a better way of saying that is certain ETFs track the index or list of companies in different ways.

11:23Let me just give you a couple of examples. If I go on to VWRL, which is Vanguard's World Fund, it's also an ETF. You will see here it says investment approach through physical acquisition of securities. The key word there is physical. Physical in this context means that the fund actually buys shares in the company on the list. So if there are 3 ,665 companies in the index, every time you buy it, your money is spread across that amount of businesses. You own tiny little bits of each of those businesses. You may also see a fund state that it uses representative sampling like here on Vanguard's FTSE Global All Cap.

11:57This means that instead of buying the whole index and copying it exactly, they're buying a sample of the companies in order to replicate the returns of the index. If we look at the provided past performance chart which compares the returns of the index fund itself versus the index they're trying to track, we can see here that the sampling technique has a good job of mimicking the underlying index. I've linked an article in the newsletter that compares these two types, both physical strategies in more detail for you. Finally, sometimes you can see other ETFs state that the purchase method is synthetic, or this can be listed as swaps like it is here on this X-Tracker's S &P 500 swap usage ETF.

12:32This means that they're not actually buying the companies, they instead use complicated instruments like swaps to replicate the performance. These sorts of ETFs have become popular because the fees tend to be even lower, but for me personally, I want to know that if I'm buying an index, that the index is then actually buying the companies itself. You're looking for words like physical or synthetic in the description for the fund, or most funds on their overview will have a section like this called replication method. Notice here how it says physical. In the newsletter, I'm going to include a link to a video that goes into this in more detail and just explain some of the differences between synthetic and normal ETFs, and also gives you some of the risks that are involved with the synthetic ones.

13:10But Right. That's enough for me. Let's get back to this.

13:16We're going to look at ETFs, exchange traded funds, basically index funds. We're not going to look at individual stocks today. That's a video for another day. Obviously, there's plenty of different types of investment that you can do. Exchange traded funds are just one. You could look at stocks. You could look at managed funds, actively managed financial advisor. We're only looking at this because this is what I do. So it's my experience. And we don't want to pay those financial advisor's fees. keeping my money yeah okay so if we go on to etfs here the reason i like trading 212 is they give i mean most will do this but they give lists of like the most popular so if you click on most popular you can see all these different funds and each one does a different thing think of it again as it's just tracking a list so when it's saying the vanguard s &p 500 dist or vanguard footsie 100 acc that basically is them saying we are vanguard that's who the money is with and we're tracking the footsie 100 and if you don't know what that is you just google it you know so where i get confused is all the difference the bits at the end growth let's just take the top one on the list here which is the vanguard s &p 500 distributing or dist okay it says it's listed on the london stock exchange.

14:37That's important because you might see ones that are listed on say the New York stock exchange, but that would mean then you were buying it in dollars. So if there was a currency conversion fee on the platform, it's going to hit you. You might see that the same fund or what appears to be the same fund is listed in a few different countries. I personally would buy the UK version to avoid any currency concerns. You might wish to buy the American version, but I I wouldn't personally. So all I've done is Google the name of the fund. Yeah. And it brings up lots of information about it. You could go on Vanguard's website and see what it says specifically about it.

15:13So if you click on it, there's also an information section within 212 itself. But if you look here, it just says the fund's objectives. So the fund employs a passive management or indexing investment approach. Yeah. Like everyone knows that basically just means that no one's picking the investments. It's just tracking this list. It's just tracking the - Yeah. Through physical acquisition of securities and seeks to track the performance of the Standards and Poor's 500 index. So if you're looking at a fund and in the description it says, it's looking to track this index. If you're unsure what that index does, Google the name of the index.

15:50So if you then do that, you'll get the information here. See the Standards and Poor's 500 or simply the S &P is a stock market index tracking the stock performance of 500 of the largest companies listed on. the United States. So now you know this fund is tracking that list. And if you wanted to look at that on Trading 212, is there like an information section? Yeah. So you could click on Trading 212 itself, click on the actual investment, and then you can scroll down. And within the documents, you should have a key information document like this. So again, you can find that information. It says a risk and reward profile here.

16:26I don't like these personally and financial advisors would probably hate me for saying this, but I think that they paint the risk as too high. Someone will look at this and go, it's a six out of seven risk. Bloody hell, that's like jumping out of base jumping. Do you know what I mean? What in your life is a six out of seven? You know, so. It's like chances of getting burned extremely high. Yeah, what's buying, what's going all in on Dogecoin if an index fund of the 500 biggest businesses in America is a six out of seven. Or Toecoin. Yeah. Toecoin, like what is like the riskiest investment you can get?

17:00That's a six and it's meant to be an index. That's got to be like a 15 out of seven. So yeah, but all they basically do this for is because it's all in equities. There's no bond allocation and that. Last time we recorded, Tomei, and you were having some real dramas with your accountant. So how's that been going, mate? They're sacked. So drama sorted. They're a big corporate firm. They didn't really reply to my emails very quickly, like took a week or two at times. And they charged me way too much. I mean, I've got pretty simple taxes and yeah, they were charging me thousands. They saved me some money, but yeah.

17:30I had to move on. Slow and expensive. Pretty much, yeah. This is one of the reasons that we're really happy to be partnering with TaxApp. It's a tech platform that makes self-assessment simple. Whether you're self-employed like me, a freelancer, or a director like Demo, big dog. Instead of sending endless emails, bills, and spreadsheets to your accountant, you just connect your bank, answer a few questions that are only relevant to you, and your tax return can be ready in as little as 15 minutes. TaxApp is really easy to use, and it's HMRC-recognized software, so it's Safe, secure, and legit. The price is also decent.

17:59So if you're self-employed with one income stream, it's just£89 as a one-off fee. No big accountancy fees. And we also have a discount code, of course. If you need to file a self-assessment this year, give TaxApp a try. We've left a link in the description and use the code MONEY10 for 10 % off your first tax filing. That code is MONEY, M-O-N-E-Y 1-0. So Mr. O 'Carolet, I hear you are a salesman. Elite salesman, yes. One of the best, they say? I've got a little bit of experience in the game, yeah, I could say. You've done a few deals. Bill, Bill. What would your compliance team say about you? They would say that I am always nagging them and that essentially I just have beef with compliance.

18:41I love the team. Compliance slows down all my deals because every time I get to the finish line, they've got to check documents, KYC, GDPR, and it's just a nightmare. It slows the deal down by like two, three weeks. It's always on both sides as well, isn't it? Sometimes it can be blocked on the other side. Well, that's where today's sponsor can help. Indeed. Vanta helps companies of all sizes get secure and compliant fast. And they stay that way. They do it by automating compliance with over 35 security and privacy frameworks like SOC2, ISO 27001, and HIPAA. Yeah, all of them. And this saves businesses so much time and money.

19:16According to a recent IDC study, Vanta customers save over half a million dollars a year in costs. Not bad. And they also help you complete security questionnaires up to five times faster, which is great because everybody hates filling out forms. If you're a business that needs to prove security and compliance, visit vanta.com forward slash making money to sign up for a completely free demo today. That's vanta.com forward slash making money. There's a link in the description though, so you can just click that. So let's just run through some of these now, see if you can. Yeah, when I came on to look for my ETF, it just got confusing.

19:52So I'm like, there were six called Vanguard and then. So Vanguard's just the name of the company. Yes, the name of the company. That's the brand. And then the Footsie. iShares is BlackRock. Four Footsies. Yeah. So Footsie, again, Footsie 100 is the Financial Times Stock Exchange top 100 companies in England. Footsie 250, top 250. No, it's the number 101 to 350. The top 100 and then the next 250. Again, you can find that out by copying and pasting and it will tell you. So how does that work? But then the 500 is the top 500, but the 250 is not the top 250. It's not the top 250, no. How do you keep track?

20:29So is it 500 is top 500? Well, if you click on it, it says this fund passively tracks the FTSE 250 index. You paste that in. One sec. Damien's still figuring out copy and paste. Oh, mate. the FTSE is comprised of the 101st to 350th largest company listed on the London Stock Exchange. So this is what we're talking about. Make sure you know what you're investing in. Yeah, because you might buy that and go, oh, that's the top 100, 250. I'll do that. That's what I would have done. And then I'm like, oh, it's not the, I'm like, where's one of Tesco's? And it's like not there because it's in top 100.

21:05But you can see how easy it is to get that information. Click on the key information document, copy and paste what the list is. And Wikipedia will tell you what that does. So if we, let's say now you wanted to invest in the S &P 500 because we're looking at the top list here. So it's only giving us one for each. Whereas if we go ETF, now there's loads of S &P 500s, right? So let's whittle this down a bit so we can kind of figure out what some of them mean. Because I understand someone might plug in S &P 500 and then get a bit worried or confused about 50 options. I was that someone. In a minute, we'll go through a global index fund for the same process.

21:40but I do the S &P because it's the most tracked market on the planet. So there'll be loads of different funds. So it's a good exercise for showing how to decipher them. So first things first, what stands out here? We've got Vanguard ones. Okay, we've got three different Vanguard ones there. We've got an iShares one, which is BlackRock. So if they've got different logos like this, Vanguard, iShares, X-Trackers, just think of that as different brands selling the same stuff. it's like packs of crisps or olive oil on a shelf do you mean it's just different brands okay if you look on the the right hand side here you can see the different exchanges so you see this one here is listed on the italian exchange and this one here is the german so you can almost discount those but unless you want to buy in those currencies and then you can see these ones this one here says dist and this one says acc distributing and accumulating do you know what that means uh accumulating you get dividends you get dividends in both it's how the dividends are paid okay so distributing means it's paid to you as income so you get the money in your trading 212 account accumulating is automatically reinvested oh yeah that's the one most people talk about accumulation funds as if they're better it's the exact same it's just with distributing you get you've got to reinvest that yourself what what would be typically how people might use them is they use an accumulation fund over the lifetime of their investing while they're building their pot and then in later life they might switch it all over to a distributing and live off the income that it pays i use a distributing version of a global fund because i like to receive the dividend and reinvest it myself it's like a little little treat being a little high yeah you get a little buzz that's right mate so if i was going to choose one so far i'd probably be looking at the third one you'd be looking at that one s &p 500 it's a The UK fund, it's listed in pounds.

23:31It's distributing. So you might want to look for the accumulation version, which is right here. Oh, no, that's... See, even Damien gets confused. It's a lot. No, that's in dollars as well. Oh, my word. Maybe there isn't an accumulation version of the fund. You can find it with another company. Okay. What you would want to do then is, let's say you've got a couple here where you're like, okay, there's a Vanguard one. There's a BlackRock one. There's a few here that look okay. You click on it. You then want to look at the key information documents again. And what you want to look at is the fees.

24:06So you see ongoing charges here. So on every key information document which we're looking at, there has to be a charges section. And they have to list all of the fees. So the ongoing charge for this fund is incredibly cheap. 0.07 % a year. I don't mind that. That's very cheap. Sounds all right. One benefit of investing in the American market is you can get very cheap funds. much cheaper than even a global index. Oh, there it is. S &P 500 accumulation, right below it. Yeah, we couldn't see the wood for the trees or whatever the saying is. But yeah, it's right there. So yeah, that's the accumulation version of the one above.

24:40So all that basically means is that that one will reinvest your dividends automatically. That one will distribute them to you as income. So you'll get every three months with this fund in particular, it says this is how you get your dividend. I think I'll go for the accumulation. I don't get the rush that you do. by reinvesting. Well, we're going to look at global indexes in a second. I just did the S &P because it's easy to do. Do you think they'll have the same fees? Yeah, yeah, it should do. It should be a 0.07. 0.07. There you go. Same fee. Yes, good stuff. And the key information document tells you everything.