UK investment: index tracker-info wanted

For years, I’ve been meaning to put some dosh into a UK index tracker fund, as suggested on (a good read, with lots of handy money tips). Over time, an index tracker will surely do better than the 0.1% interest offered by LloydsTSB.

Anyone out there been through the process of setting one up?

Three things you need to look at:

  1. tracking error
    This number tells you by how much the fund deviates from the index. the smaller the number the better.

  2. fees
    since you are not looking to outperform the index, then why should you pay high fund manager fees? Again, look for a low number. (Stating the bleedin’ obvious, right?)

Then compare the products. I seem to remember years ago that Virgin’s UK tracker fund stood up quite well. Much may have changed since then. Vanguard is the market pioneer in these products.

  1. Which index are you tracking?
    A large cap index? A small cap index? A broader index?

basically, the broader the index, the less volatile. Large cap indices may have just a few dozen companies; others hundreds. FTSE100 obviously has a fewer number of larger companies, well-established but tend to trade at higher values. FTALLshare has all listed companies. more smaller companies, which tend to outperform slightly over many years.

Broader, small-cap indices are harder to replicate (track). Narrower, large-cap indices much easier.

Statistics suggest that the market fairly seldom underperforms short rates over ten-year periods. The data for the US market is that in the 131 years from 1871 to 2002, the market underperformed short rates in 26 ten-year periods; equities outperformed in 95 ten-year periods. if you use data from 1926 onwards (to exclude the ‘emerging market’ period for the US) that becomes 13 underperforming periods to 53 outperforming.

If you like those odds, go for it.

  1. Figure out which index to track

  2. Find the cheapest fund that tracks this. Look for the smallest TER - Total Expense Ratio. Trackers should have a TER of less than 1%, a particularly cheap one is HSBC FTSE 250 Tracker which has a TER of only 0.2%.

  3. Go to the fund company’s website, download the application form and send it off with a cheque for your opening balance. You can pay all in one go - lump sum - or monthly instalments - usually not less than 25 pounds.

  4. The company will do various electronic checks to verify your identity and address. If you’ve been out of the UK for some time, these may not work, so the company will ask you to send copies of drivers licence or passport.

  5. If you’ve not already done so on the application form, tell the company you want to be able to monitor your investment online.

  6. Sit back and watch it grow. Don’t worry if it falls, it will rise again. Don’t do as my parents did and buy when the market is really expensive and sell when it falls by 50%. Be patient and it will do it’s job. You need around 5 years to iron out the ups and downs of the market. Or if you’re lucky like me, you’ll earn 40% after only 2 years. :slight_smile:

  7. Do some research into ISAs (for tax free investing). A bit more complicated but worth it if you have the time.

N.B. I used my parents address and had them send me anything that needed signatures. Not sure how the company would react to me giving a taiwan address.