Back one horse or many? And is it better to invest in a better performing index which has a slightly higher fee?

Investing
#1

Hey Jeremy! Firstly, I just wanted to say how helpful and informative your insta page is. You have changed the way I think about money and saving for the future. So thank you very much!

Secondly, I completely agree with your rules of " invest early and often". However, I’m a little stuck. Should I back one index (for example s&p500) and invest all £500 a month, or invest in 2/3 ( FTSE 100 / NASDAQ) and split the £500 between the 2/3 indices?

Finally, I saw you highlighted the importance of low fees. I see vanguard has very low fees. Would you say vanguards U.S. equity index fund- accumulation ( fee 0.10%) is a better long term investment compared to vanguards S&p500 (fee 0.07%).

Looking at the data on their website, the US equity index has done better over time but of course has a slightly higher fee. Which would you recommend?

I really appreciate your time & assistance. Please continue to teach & provide invaluable info!!

#2

Hey @Dhirschowitz!

I would recommend buying the broadest index available. i.e. I would prefer a “Total US Market” index (About 4,000) companies over the S&P 500 (500 companies) or the FTSE 100 (100 companies).

The reason is, when you start slicing and dicing the total market, it’s easy to find what looks like a trend looking backwards (recently large tech companies have outperformed), but it’s impossible to know which other slice of the market is going to outperform going forwards. So to buy the recent outperformer is just “chasing past performance”. Whereas buying the broad market is guaranteeing your full share of market growth with as little volatility as possible. So I don’t look for a better horse. I back all the horses (which are conveniently sold in a single total market index fund package).

For investing in the UK, both of those expense ratios you mentioned are extremely low.

It’s nice you have Vanguard available in the UK. If it were me, I’d drop 100% of my investments into a Target Retirement Fund based on your birth year +65 (rounding up). You can see them here:

https://www.vanguardinvestor.co.uk/what-we-offer/all-products#p

So for example, if you were born around 1985, I’d dump it all in the Target Retirement 2050 Fund - Accumulation. It’s a slightly higher expense ratio (0.24%) but it has global stocks and bonds which carry higher expenses, plus it automatically rebalances and reallocates for you. Taking that off your plate is likely to return more than its cost. Here’s why I love target date index funds:

#3

Thank you very much for the informative reply! One day I’ll buy you a beer in return.

With regards to the target date index fund. If for some reason I wanted to withdraw my investment before the end date, would I get penalised or taxed?

Many many thanks once again for your expertise!

#4

The target date fund just happens to be named after a year. You can buy/sell/trade it exactly as you do any other index fund or mutual fund. (i.e. it matters what type of account it’s in, not the fund itself)