So you’ve read the wealth creation and investing blogs and books, you want to get that magical wealth accelerator “compounding” working hard for you BUT there’s a problem.
Getting started can feel like entering a complex maze. How do you know where to start, what path should you take and how do you actually buy your first index tracking fund? Where are these fabled index tracking funds that give you access to the stock market returns at low, low cost? How do you actually get them in your life and working hard for you?
“How do I actually buy an index tracker, Ann?!”
You’ve decided upon your goals, you’ve got your spending under control, your debt is destroyed or you’ve put your debt destruction plan in place and your emergency fund is stocked up. Woo – hooo. Now it’s time to get your automatic investment with regular contributions started to get your asset pot growing. It’s time to jump in.
As a Wealth Chef, you understand the benefits of taking responsibility of your own financial wellbeing, this means DIY investing rather than being a TV diner money cook buying pre-packaged investment products and you understand the benefits of investing in simple index tracking investment vehicles – be they either Unit Trust Funds, OEICs or Exchange Traded Funds.
Where to buy index trackers
Buy online. Humans need all sorts of things which generally need money. The more you involve other humans in your investing, like financial planners and fund managers in actively managed funds, the higher your expenses will be and the less money you’ll be left with actually working hard for you.
- A fund supermarket
- An online discount broker
Don’t go directly to the fund provider, don’t use a full-service brokers, ‘advice’ dispensing stockbroker, and definitely don’t walk into your local bank with a bag full of dough.
The best discount brokers and fund supermarkets offer the DIY (Wealth Chef) investor:
- The cheapest method of buying, selling and holding funds.
- A wide choice of funds from different providers that you can mix and match.
- Options to invest through tax shields for your funds – like stocks & shares ISAs (UK only), 401k’s (USA), Superannuations (AUS), RA’s (SA) and various personal pension options.
- A regular investment scheme to automate drip-feeding and maximise the benefit of cost averaging.
- Online portfolio tools to track your investments.
- Fund search facilities.
- Easy access to your funds and paperwork.
- An execution-only service – so no advice on purchases.
There’s little practical difference between a fund supermarket and an online broker in terms of service or cost. The most important thing to be aware of is you’re choosing an execution-only service. You pay low fees because you’re not getting any advice.
Also, your first preferred investing platform may not carry the products you want. Always check using the site’s search tool for index trackers before signing up and transferring money.
Fund supermarkets mostly concern themselves with offering a one-stop shop for investment funds in the following two flavours:
- Unit Trusts
- OEICs (Open-Ended Investment Companies)
Index tracking funds will be structured as either a Unit Trust or, more likely, an OEIC. Again, the distinction is not something we need to worry about. The main point here is with these type of funds you are buying a unit or small part of the fund from the company that looks after the fund.
Although fund supermarkets mostly deal in funds, nothing in investing is clear cut and simple. Many fund supermarkets are part of bigger operations that will also dabble in other services, including share dealing.
It all amounts to the same thing in the end, as you just refuse all offers of advice and use the companies execution-only channel to access the index tracking funds sold at the supermarket.
Execution-only stockbrokers are generally the way to go if you want ETFs and access to a wider range of investment vehicles and the option to expand into direct share investing as your knowledge grows.
ETF’s are index tracking funds just like their Unit Trust and OEIC cousins, the main difference being the fund is divided up into shares of the fund and these are sold directly on the stock market so you buy the share of the ETF on the stock market rather than from the company that manages the fund. Many online stockbrokers will also offer you access to index tracking unit trust funds and OEICs.
To find an online broker just use wonderful google and type “online stock broker” and your country into the search field.
Be patient here – and keep your calm. Many online financial services companies seem intent on never having customers with way too much confusing information, jargon or just plain obscure explanations of their services.
Here is what you are looking for:
Index tracking funds – you want to be able to invest in these
Regular investment options – you want to be able to set up a regular investment into your chosen fund so you can put your wealth creation and investing on autopilot.
Platform costs – these are any cost you will incur to hold the broker account
Costs per trade – the cost you will pay when you buy and sell the fund
Costs of the investment – these are the ongoing costs of the fund or funds you want to invest in. Look for the Total Expense Ratio (TER)
You want to keep your costs of investing as low are possible so you get more of the money working for you.
Many Unit Trust index tracking funds and OEICs have no trade costs but have higher ongoing TER’s compared to ETF’s which will have a trade cost but usually lower ongoing TER’s. So if you only have a small amount to invest in each trade every month, a Unit Trust or OEIC index tracker may be the best option to start with rather than an ETF. The bottom line is you want the total of all your costs to be less than 1,5% per annum.
Get your Automatic Investment Plan started
So here’s your Automatic Investment Plan (AIP) Index Tracker recipe:
- Step 1 – Commit to a specific amount to pay yourself.
You can start an AIP with most investment houses from very small regular investment amounts. Remember the habit of paying yourself first is more important than the specific amount of money right now. As you see the money grow in your investment account your motivation to add more will increase.
- Step 2 – Select your fund supermarket or online broker
- Step 3 – Select your Index Tracker FundChoosing an index tracker is relatively simple. There are three main things to consider:
- which index it tracks;
- what type of fund it is; Unit trust, OEIC or ETF
- its charges.
Most people start with the primary index for the country they live in. From there you can add trackers for other geographic regions and sectors. Your target will be to have up to 4 or 5 different trackers in your whole portfolio.
- Step 4. Complete the application forms and START your AIP.You can start your AIP with most fund supermarkets or online brokers online. Get the forms, fill them in and get going. Make sure you set up a direct debit from your bank account on the day after your income comes in so that you are paying yourself first.
There you have it, get started and learn as you go. Update your balance sheet with the value of your investments every three months and do a review of the funds you are invested in once a year.
Sit back, relax knowing you’ve got your money working for you and get on with loving your life.
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