Best way to invest savings and understand index funds

[Ignoramus12]

I really don’t know much about investing or finance . I’ve had quite a lot of money in ISAs and instant access accounts for some time as we have been planning to move and thought we may need it .
What is the best way to invest it?
What are index funds for a start?

Do the rebel finance school

Will you need this money within 5 or 10 years? If so maybe don't invest it.

Index funds are a collection of shares in lots of different companies. They are good because they give instant diversification. You can get ones which only contain shares of companies in a single country, or global ones, or ones that don't include smaller companies, or ones that focus on a particular sector only like tech or green companies. They can be passive or actively managed. Passive ones have lower fees and historically perform better. Investing in the fund means you own a tiny bit of the hundreds of companies in the fund. The fund rebalances automatically, if one company does rubbish, it gets booted out and replaced. You don't have to do anything, just leave it alone for years until you want to access the money.

To invest, pick a platform eg Trading212, vanguard, fidelity
Then add money and buy funds.

But seriously do the rebel course before you do anything with ££££

I’m doing it right now. Thank you.

The key thing about index funds as opposed to active funds is that an index fund must hold the companies that are in a certain established index, such as the FTSE 100. https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-100-index-unit-trust-gbp-acc/overview

An active fund can hold companies that a fund manager thinks might be advantageous at a particular time, according to the fund's investment policy.
www.vanguardinvestor.co.uk/investments/vanguard-active-uk-equity-fund-gbp-accumulation-shares/overview

The advantage of index funds is that they are low-cost and the performance doesn't depend on the expertise of a manager, which might vary from year to year. The disadvantage of index funds is that if a company is not doing well, the manager cannot sell it or buy more of it at a low price because they have to follow the index.

Before saving and investing, I would recommend the following:

1. Pay off any credit card debts or loans first - these often have high interest rates - much much higher than any form of investment returns could give so it makes sense to clear these first.
2. Figure out how much you want as easily accessible cash vs the amount you are comfortable with not touching for 5 years
3. Cash you want to access easily, stick in a Cash ISA account (max £20k per year). This is the lowest risk option
4. If you are saving for a first home, consider investing in a Lifetime ISA (you get contributions from the government)

Only when you have exhausted the above, now start looking at other investment options...

1. If you are happy to leave your cash until you retire, increase your pension contributions - this is the best form of investing as it is tax free - which could be significant if you are a higher rate tax payer. Eg £100 would be £140 in a pension pot. Also some companies, match your pension contributions so you have the potential to invest even more.

2. Look at options your employer offers for savings. Eg Mine is a large PLC (household name) which offers Sharesave schemes and these are also great for tax purposes and getting potentially more money than you invest if you don't need to access your cash between 3 - 5 years. However these are more risky as it will depend on the share price of your company.

3. You can then think about investing in Funds. This is a lot more risky and I suggest reading a lot around this and what your attitude to risk is. Generally, investing in the stock markets need a long term view - the longer, the better. I would recommend starting with a simple tracker type fund that invests in FTSE100, FTSE250, or FTSE All Share or the S&P500. If the last sentence sounds complex, then I suggest doing some more research and reading and possible entlisting the help of a Financial Advisor.

I’ve watched up to halfway through episode 8 of the RFS. The issue is I am retired and we need to draw on savings for things like holidays etc.

I have looked up the Vanguard index fund recommend on RFS but not clear how to actually invest in it. The application form on the website doesn’t list index funds. Do you do it directly with Vanguard or through a platform? Very confused.

If you're going to spend large lumps of this money in the near future, don't invest it all, keep some in cash if it's for your holidays in the next few years

But to answer your question, Vanguard is a platform. If you want to use them, you download their app and open a stocks and shares ISA with them. You add money to this account. At this point it's still in cash, it's not invested.
Then you search for the index fund in the app. This might be called "Vanguard FTSE Global All Cap Index Fund GBP Acc" if you're wanting to use the fund they talk about in RBS. You use the cash in the account to buy into the index fund. It will probably take a couple of days to complete the purchase.

I would suggest using a small amount of money first so it feels much less scary, untill you're happy you understand how to use the app.

So vanguard is a platform and vanguard is also a provider of index funds. You could choose to buy vanguard index funds on a different platform, like fidelity if you like. You choose the platform you prefer based on them having low fees, an app you are comfortable using, a good reputation, offering the funds you want to invest in, customer service etc. figure that bit out first.

I would watch over the last few weeks of RBS again, the ones that focus on investing, before you do anything.

Thanks. I’m a bit confused about the stocks and shares ISA because I thought RFS was not encouraging investing in stocks and shares? Can you only buy index
funds if you do that first? I will finish watching the whole series before I do anything. Episode 10 gets a bit mind boggling .

Stock and shares ISAs are just the name of the account, don't overthink that bit.
They are the most tax efficient way to invest. That's the important bit. Yes you can buy index funds without a S+S ISA, but you'd pay tax on your gains, so don't do that unless you want to invest more than £20k a year from outside an existing cash ISA wrapper.

You can invest in all sorts if things in your S+S ISA eg:
Individual stocks/shares
Gold
Index funds
Government bonds

RFS encourages investing in index funds and discourages investing in everything else. You need to make your own mind up about what you think is best.

Don’t overthink this. A global index fund - such as Vanguard or HSBC - is a good start. Just make sure you hold as much as possible in an ISA - you can invest up to 20k in each tax year.

Drip feeding is best for most people. All you need is set up a standing order - £1666.66 a month.

Op index funds are baskets of everything ,usually across sectors and global as most big companies are global.

So you can't really go wrong.

You can also make up your own little fund and buy individual companies as well but I would mostly have 90% in broad index funds and take a little punt with individual shares.

If your retired I'd make sure the money was spread around which I am sure you have already eg money in a cash ISA ...money in premium bonds and isas.

I skim off mine now eg I have a fund that's doing v well and im skimming off it for a holiday only because it's a special birthday year.

Once my ISA hits a certain amount I'm happy to do that .

So once it gets going thats one way you can keep your capital but skim off the top.