S2E3: How to pick the right index fund & investment platform
How to pick the right investment platform
There are broadly three types of investment platform (sometimes called a broker) in the UK:
Traditional ‘legacy’ brokers like AJ Bell, Hargreaves Lansdown & Vanguard.
Newer ‘discount brokers’ which are app-based like Trading 212, InvestEngine and Freetrade.
Robo-style brokers which ‘do the work for you’ but Damo doesn’t use them himself because they charge a fee to effectively be the middleman. If you’re curious, you can go through one of their user journeys to see what investments they’d recommend for you, and then choose the same investments on a legacy or discount broker for a lower fee.
Consider these 5 things when picking your investment platform:
What style of investing do you want to do? Are you just going to invest in index funds or will you pick individual stocks? This is because not every platform offers everything, e.g. Vanguard doesn't offer individual stocks.
You need to consider the type of account you want to use, and check the platform offers it - for the investment you want. For instance, I (Will, the guy writing this) signed up for Vanguard only to find out they don’t do Lifetime ISAs which was one of the account types I was looking to invest through. These are the key types of account:
GIA, meaning general investment account.
ISA - the tax efficient version of a GIA. Check out our ISA episode if you want to understand its benefits and the different types. This is generally the kind of account to invest through first (up to the annual personal allowance of £20k) to protect yourself from tax.
SIPP, or Self-Invested Personal Pensions. This is for pensions only. You can’t touch this money until you're 55 (at the time of writing) or you’ll face a big tax bill.
Look at the fees. Generally the lower the fee, the better. In finance, higher fees rarely correlate with better performance, not least because the fees cut into your ultimate performance.
Do they have an app or is it website only? And which would you prefer? Vanguard is website-only, which some people prefer (myself included) so they can ‘set and forget’ whereas Damo likes to check how his portfolio is doing on the reg so likes having a mobile app.
Consider how secure the platform is. To be honest, most brokers in the UK will be regulated by the FCA and your money will be covered by the FSCS, up to £85k. You can learn more in our episode with the FSCS here. This means you should check the platform is on the FCA register. Lots of people don’t trust the newer ‘discount’ brokers - that’s a personal choice - but Damo’s comfortable himself. However, he uses multiple platforms where he can have up to £85k.
Here are some of the biggest investment platforms in the UK - and Damo uses all of them too.
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How to pick the right fund (from all the options)
Once you’ve decided what you want to invest in, like a global index fund, or the S&P 500 (the biggest 500 companies in America) you should search for that kind of index fund on the platform you’ve chosen. Depending on what you’re looking for, you’ll probably be presented with various options.
You will see names like Vanguard or iShares (for BlackRock). These are basically different brands selling broadly the same thing, like types of olive oil in a supermarket.
Whenever you don’t understand something, Google it, but here are some key things to look out for when choosing your fund:
Check where the fund is listed - is it the UK, US or elsewhere? Damo always buys the UK version (if there are multiple) to avoid being at the mercy of currency conversion.
Click on the Key Investor Information Document which covers various key points. Check the fund’s objective. Is it trying to track an index, like the S&P 500? If you don’t know what the index is, Google it.
There are often two types of the same fund - accumulation or distribution (sometimes called something else like dividends). Accumulation means dividends will automatically get reinvested rather than paid out to you. Distribution means dividends get paid out to you and then you can choose what to do with the money.
Look at the fees to find the best offer.
Check the past performance. You want to see how well the fund tracks the index - if the index went up 17.1% one year, did the fund go up by 17.1% as well? If you’re looking at a few different options, you might want to compare the past performance of each against the other - although the difference should be minimal (if the funds are doing their jobs tracking the index!)
Google jargon you don’t understand. For instance, high dividend means the fund invests in companies that have a track record of paying high dividends. Maybe that’s what you want but maybe you don’t want that because you want to benefit from the growth of smaller companies which don’t have a track record so aren’t in the fund. It’s up to you, but you need to understand the stuff so you can make an informed decision.
Glossary of key terms
An index is a list of public companies (on a stock market) that meet specific criteria - and indexes are put together by companies. For instance, the FTSE 100 is a list that’s created by the Financial Times of the biggest 100 companies listed on the London Stock Exchange - hence it’s called the FTSE 100. Another famous index is a list of the 500 biggest companies in America, put together by Standard & Poor, called the S&P 500.
You can invest in index funds. An index fund can be bought and sold for one price per day.
Or you can invest in an ETF, an exchange traded fund, which often tracks a particular index, like the FTSE 100 or S&P 500. ETFs offer an easy way to invest in index funds because ETFs are traded like individual stocks, meaning the price moves all the time (when the market is open) and you can buy them easily on the platform of your choice.
If you’re buying an ETF which is tracking an index, you should check whether the ETF is tracking the index physically or synthetically. Damo likes it to be physical because that means the ETF is actually buying shares in all the companies listed in the index, whereas synthetic means the fund is using complicated financial instruments to mirror the performance of the index.
Damo also mentioned representative sampling. This means that instead of buying shares in every company listed on an index, the fund is buying a sample of the companies to replicate the returns of the index. Here’s the article Damo mentioned which explains more about the difference between physical (sometimes called full replication) and representative sampling.
A passive fund means no one is picking stocks - the fund is just tracking an index. This contrasts with an active fund, where someone (or a group of people) are hand-picking the stocks that are in the fund.
‘All cap’ means companies of all levels of capitalisation or size - small, medium and large.
Global and World mean the same thing. Thanks for nothing.
Accumulation means the dividends you’ll get paid will be automatically reinvested. This allows you to ‘set and forget’ and build wealth over the long-term on auto pilot.
This contrasts with Distribution, or Dividends or other words - you need to hover over the explanation on the platform you choose. This kind of fund will pay you a dividend whenever there is one, and you can choose whether you reinvest it or not.
ESG means environmental and social governance, which means more ethical - at least in theory. Search what their criteria is because different people have different ethics.
And here’s that compound interest calculator for you to play around with!
Next episode - How to survive the mortgage crisis, with Rob Dix
If you’re a home-owner, you’re probably fretting how you’re going to deal with these interest rates. Next episode we sit down with Rob Dix, Co-Host of The Property Podcast, to figure out which way is up.
