When you are new to investing you can easily be overwhelmed by the sheer number of options available. Numerous asset classes, individual companies and funds are all in competition for your money but what do you choose? Well lets start by by setting some expectations and looking at what you want to achieve.
Expectations of Investing
The stock market is a tremendous wealth generating tool. Many rich people have grown or created their fortune in this way. It is important to note however this can only be amassed overtime.
Time in the market
The stock market is not a get rich quick scheme. People who make lots of money over night on stocks are usually extremely lucky, already have a lot of wealth to invest or are incredibly skilled. For every success you hear about beating the market there will be countless people who have lost out. There’s also no way to know if they’ll be able to achieve this consistently.
This is why time in the market is so important as it decreases the probability of seeing a loss. This is also why investing should be seen as the steady approach. This means it suits itself to medium to long term goals and you being able to lock this money away without interference.
Diversification
Another way to reduce the probability of losing all your money is to diversify your investments. Now just focusing on equities such as stocks and shares you can diversify by investing in lots of different companies. You can then diversify across business sectors and finally across region of the world. In essence we are avoiding having all our eggs in one basket as if one business, sector or region performs badly others may perform better to reduce its overall impact on your investments.
What can the average person expect?
Well a good target to aim for is around a 7% annual return. This is the figure for the average global stock market return over the past 110 years for the S&P 500. This is a real gain with inflation taken into account. The global stock markets have also achieved in the same ballpark so 5-8% real return each year is good in my eyes and will undoubtedly put you better off than just utilising a savings account.
Fees and the passive approach
Factoring in to the returns is also fees. The lower fees you pay on your investments the more profit you get resulting in a better real return. Passive index funds tend to have lower fees as they don’t have a person making the management decisions which would be an active fund. A passive approach can also reduce stress on the investor as you can set it up with automatic monthly investing and then it will handle the rest. A simple set and forget strategy so you can save money and time which is a win win.
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What do you want to achieve?
To summarise the above the average new investor should be looking at the following:
- Achieving a good return – aiming for that 7% average.
- Being well diversified – reducing volatility and the probability of making a loss in the long term.
- Passively investing – to reduce stress.
- Low fees – to keep more of your profit.
- Investing over the medium to long term – to capitalise on compounding.
How do we achieve this? Well this is where a passive global investment strategy comes in.
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The Strategy
Its a simple strategy – aim to replicate the global stock market. What does the global stock market look like? Well thankfully this is tracked through an Index such as the FTSE All-World Index and we can use it to understand the market.
As of the 30th November 2024 these are the approximate allocations based on market regions and sector.
FTSE All-World Index Split by Region
Region |
Percentage |
|---|---|
North America
|
67.5%
|
Europe
|
13.8%
|
Emerging Markets
|
9.3%
|
Pacific
|
9.2%
|
Middle East
|
0.2%
|
FTSE All-World Index Split by Sector
Sector |
Percentage |
|---|---|
Technology
|
28.0%
|
Financials
|
15.3%
|
Customer Discretionary
|
13.9%
|
Industrials
|
13.1%
|
Health Care
|
9.7%
|
Other
|
20.0%
|
How do we replicate this?
Single Fund Approach
The simplest way to replicate the global stock market is to buy a global ETF which tracks a world index as its benchmark such as the FTSE All-World index mentioned prior. These funds give you a simple, set and forget solution.
For instance in a global ETF your money is split into the percentages above and any growth the global stock market gets you get. This is essentially you saying that you believe the world will increase its wealth in your investing time frame which knowing humans and capitalism could be considered a likely scenario.
Example
An example of a global ETF which tracks the FTSE All-World Index is the Vanguard FTSE All-World UCITS ETF (VWRL/VWRP). This is not a recommendation but a good place to start to understand the type of fund I am suggesting.
Multiple Funds Approach
You can also look at replicating the an all-world index through utilising multiple ETFs. You can buy individual ETFs which cover more specific regions such as just the UK, just the USA or only emerging markets. You could then invest to match the percentages listed above and potentially gain a similar profit. The main reason for doing this is to pay cheaper fees but be careful of overlap within your portfolio as you could end up overly exposed to certain sector or region which you didn’t wish to be.
Example
A two fund approach to this could utilise the Vanguard FTSE Developed World UCITS ETF (VEVE/VHVG) at 91% then the Vanguard FTSE Emerging Markets UCITS ETF (VFEM/VFEG) with the remaining 9%. This would give you a total annual fund fee of 0.13% as apposed to 0.22% for VWRL/VWRP. Once again this is not a recommendation but an example which you can research further if you so wish.
Rebalancing your portfolio
When you purchase multiple funds, you will also need to rebalance these yourself on an annual basis to ensure they are still in line with the percentage exposure you wish. As you can see by doing this you are making this more complicated and potentially making a passive approach into a more active one.
Investing Strategy
Once you’ve decided on the fund(s) you wish to purchase you will need to decide how frequently you are going to invest. This could be all in one go (lump sum) or on a recurring schedule e.g. monthly (pound/dollar cost averaging).
For the average person the latter is very beneficial as you can invest part of your salary on a monthly basis. This also helps you achieve a pretty fair average share price over the long term if you invest at the same time every month.
It also means you don’t have to worry about timing the market. Consistency in the long term will win out and give you a better return. After all nobody can predict the future.
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My Two Cents
I currently use both the single and the multiple fund options as my pension and ISA providers offer different choices of investment. They have both produced a similar return and so far rebalancing has not been too big a hassle. I always use a monthly investing approach for the benefits mentioned above and because, like most people, I don’t have a large pot of money lying around just waiting to be invested!
I hope this whistle stop tour into global index funds aids you in making an informed choice as to whether this type of investment is right for you.
As always please do your own research but if you have any questions feel free to comment below. Happy investing!
Disclaimer
All information is not financial advice and is purely meant for educational purposes only. Investing involves the risk of loss of capital as well as its gain. Any investments mentioned on this website are meant as examples not specific recommendations. Always do your own research and/or gain the help of a financial advisor.
