Confused about investing

[Baffled007]

Hiya, this is possibly really dumb, I've googled and can't find an answer that I understand.

Ive put £5000 into a S&S isa and left it. It's a vanguard lifestrategy. Sometimes it's up 4%, up 7%, other times it's down similar amounts. All fine. I know this happens and I don't need the money right now. Its there long term.

But what I don't understand is how this increases (hopefully) over time.

With a fixed bond saver at the moment, it might gain 4% each year for example. So it's going up each year.

But with the vanguard, it seems it fluctuates (which I know it will). But how does it grow? Am I meant to do something more than leave it sat there? Am I missing something?

When it's up, does that give me more units or something? That then exist for the future? Or not?

Even if I put in another £50 a month, it feels at the end of 10 years, it will be the total amount I've put in + or - whatever % at that point.

In my head it is beginning to seem that my money sits there doing nothing, and then it's luck of the draw on the year I want to take it out.

I'm so so so confused. Can anyone shed any light on this? Or even begin to understand my ramblings?...

Thanks

When did you put the money in? If it has not been in for very long then it is normal for it not to have changed much in value.

If it stays in over a longer of time, think 7 years minimum, then it should hopefully increase at a decent rate, where “decent” means a few percent more per year than you would get with pure cash or bonds. I say “hopefully” because there is no guarantee. But the odds probably do favour that sort of outcome.

This graph shows how the value of one of the Vanguard funds has changed in the last 5 years.
£100 invested then would be worth ca £135 today, but as you’ve noticed it’s not a straight line (see the big dip in Mar 2020 during Covid).
Some people try to time the market and buy when the price is low and sell when it’s high, but that requires research, and probably luck. Some advise to buy little and often, rather than one big lump sum, to avoid losing too much if the price is high and then suddenly drops if that makes sense.
There’s really no much you can do at this stage, just monitor and don’t panic when you see small losses.
With your bond saver, you are guaranteed 4% a year. With S&S, there is no guarantee, but a “probably” more than 4% on average, with possibly some years in the negative%. It’s all down to your attitude to risk and how much you trust Vanguard to manage the fund well.

With an accumulation fund, when the underlying shares pay a dividend, that money gets reinvested in the fund and the unit price increases.

It is the unit price that is important, as you have brought a certain number of units. The value of a unit changes, up and down, but general trend is upwards. When you sell is when you realise that change in value.

@nannynick how does the unit price increase? I'm confused about this too.

It's easy when you buy individual shares and can see price go up and down but funds are different.

Also what happens when you buy an equity income fund? What happens to the dividends? Are they automatically reinvested?

There is no guarantee that it goes up. It’s a risk you take. Historically, markets go up but it’s also possible to lose everything if the economy takes a nosedive. That’s why the advice is to only invest what you can afford to lose. Or choose low risk investments.

@Amboseli This may help explain how an Accumulation fund grows: monevator.com/accumulation-funds-dividends/

Equity Income Fund - not sure what that is... but as it has Income in the name then I expect it pays out a dividend, which would go to your investment account as cash, which could then be withdrawn.

@nannynick Thank you that does help explain it although I still don't fully understand. Oh well!

The equity income fund invests in an index of high dividend paying shares as opposed to eg a global tracker which invests in companies according to market value.

I've trying to diversify from a global tracker and invest in a different set of companies and not always the Apple, Microsoft etc which always seem to pop up in every index I look at. I've got Vanguard Global Equity Income for eg as well as Global Equity Index tracker.

I'm also investing monthly in an asian fund with Indian companies making up a large component which I'm quite excited about. It's a very long term investment at least 10 years. Let's see how it does.

I wish I had more time to research, I'd like to buy individual shares but that's a lot more scary than a fund because you're putting all your eggs in once basket.

To be honest, neither do I. I just accept that over a period of time the unit price changes. So instead of paying out a dividend, the accumulation fund reinvests the dividends.

I see that the Vanguard Global Equity Income fund has an accumulation class, as well as the income class. So you can have it in a version which automatically reinvests the dividends back into the fund.
If you compare the Accumulation version with the Income version, on the VanguardInvestor website, look at Price & Performance and you will see that the price is different. Income: 23-Feb-23 169.02 Accumulation: 23-Feb-23 206.35
On the Income version click on Distributions to see the dates of the dividends and payment dates.

Yes I've got the accumulation equity income fund.

Thanks for your help. It's all so complicated and confusing!

The Vanguard Equity income fund is actively managed and about double the cost of a global tracker.
The problem with active funds is they don't tend to maintain their out performance over the long term so they are not a set and forget investment like a passive index fund.
Also if you believe markets are for the most part efficient then tilting away from the index suggests you think you have an edge over everybody else which as an average DIY Investor is unlikely.
Once you give into the idea you have no special insights it actually frees you up. Just set an asset allocation that suits your risk tolerance buy every month through thick an thin an relax.

@Bucks67 I've already got quite a high proportion of my investments in a global tracker and wanted to diversify into a different set of companies.

I've invested in s&p which I feel overlaps quite a bit with the global tracker ie Apple Microsoft etc.

The vanguard equity income is a small proportion of my overall investments but it's not tech heavy. It's got a high proportion of financials, healthcare, industrials and energy.

I've also started investing in an Asia fund, not with vanguard, where the biggest companies are in India. To diversify away from the US a bit. Again a small proportion of my overall investments.

I know a lot of people feel one global tracker is all you need. But I've read that the highest growth for the future is likely to be in Asia rather than the US.

We'll see! I just put in a small amount every month and will leave it for at least 10 years.

Do you invest in one global tracker?