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Investing For Beginners – The UBS S&P500 Index Fund

First off I’d like to share with you my experience of this fund before assessing whether or not the UBS S&P500 index fund is a good starter investment.

The UBS S&P500 index fund is effectivley a collection of investments spread across a range of scetors and businesses in the American economy.

I opened my UBS S&P500 accumulation fund with Hargreaves & Lansdown on 15th July 2019. At this point the share value was 101.11 (pence) I bought the shares in a dip and saw an impressive immediate return on investment.

Unfortunately the next few weeks suffered from the August blues and the uncertainty of Brexit, Germany’s reduction in GDP growth and Trump’s stand off with China rocked the market. I didn’t quite see the returns I wanted.

Disclaimer: This article is for information purposes, I advise you do your own research to compliment this article before making any investments.

However this is where Index funds shine, despite my individual stocks in Microsoft, Apple & Amazon and a whole list of other market leaders dropping by 5% on average in August, my UBS S&P500 index fund has still maintained a 1.19% overall fund increase.

We’ll go into how this is possible later in the article.

1.19%, So What?

I made £35.75, so what? So let’s re-word that last question. If I could make an average 1% gain each month, whilst also contributing an additional monthly direct debit to the fund how much would I make in a year? (whilst compounding interest and re-investing dividends!) If you don’t follow read on, if you do read on anyway.

(Please note this is based on an assumption of my August performance and may not be a certainty for future returns)

I’m going to assume you’re somewhat new to investing if you’ve clicked on this article. Index investing IS NOT a get rich quick scheme, it’s an alternative to scatter gunning  your savings across a range of individual stocks without knowing what you’re doing.

If you do this without proper time investment, and toolset you will fail. And fail badly. Index funds are a legitimate long term investment strategy for beginners that can see ludicrous returns.

What Is An Index Fund?

Before we go any further in our assessment of whether the UBS S&P 500 index fund being a good choice, humour me as I explain what an index fund is.

An Index fund is a low cost investment in a collection of “bundled” shares created to spread and mitigate the risk. They are designed to be held for 5+ years (longer if possible) to ride the market and see optimal returns. They are not a get rich quick scheme, more of a long term passive investment. But that in itself is why they are considered so valuable.

By spreading the risk across a wide portfolio of markets an index fund can even ride the wave of macroeconomic uncertainty. For example H&L’s UBS S&P500 highest share holdings are:

  1. Microsoft with 4.12% of the portfolio.
  2. Apple with 3.4% of the portfolio
  3. Amazon with 3.17% of the portfolio

So what are the advantages of this? Well this effectively mitigates the risk of investing in individual stocks. So as mentioned earlier where my individual stocks in the three mentioned tech titans dropped by 5% average, the other stocks in my index fund buoyed the loss.

Funds you pick depend on whether your dividends are re-invested or paid out as cash. For index funds I highly recommend you choose one that re-invests dividends, for reasons I will touch on later. The S&P 500 accumulation index fund does this.

Don’t take my word for it, investing supremo Warren Buffet swears by index funds and he’s not the only one, John C. Bogle and Peter Lynch both attribute index funds as excellent ways to see returns on the market.

Why Are They So Popular?

Lets take a look at the historical annual returns of the S&P500:

Baring the obvious market crashes, and a few blips, the S&P500 has stayed the test of time. With an average 10% annual return since it’s inception. So what would this look like had you created an account in 1965 with $10, and then topped it up every month with an additional $10? Well it would be worth $155,000 in 2019.

Doubtful? Check it out yourself here

Lets take a look:

This my friends is where index funds come into a world of their own. The power of compound interest, and re-invested dividends is astounding. Einstein once said compound interest is the eight wonder of the world. It’s not hard to see why.

It’s a slow start, but once you start re-investing the interest you make, over a large period that interest starts generating its own substantial interest, and so on until you start seeing obscene returns.

The same goes for re-invested dividends. Since 1926, dividends have accounted for an average annual return of just over 4%. According to John C. Bogle in his book, dividends made a contribution to markets appreciation that is almost beyond belief:

$10,000 invested in the S&P500 on January 1st 1926 would have grown to $1.7 million in 2017, with dividends reinvested it would be $59.1 million. If you want to learn more about the details that make this possible, I highly recommend John’s book.

Outperform Hedge Funds

A hedge fund is a pool of capitol from investors and actively managed in a range of assets for a fund manager, using a variety of complex techniques. Unfortunately, a hedge fund is only as good as it’s managers. And its accumulative costs can often eat into your returns.

Warren Buffet famously bet that an index fund would outperform a collection of managed hedge funds over the course of 10 years and he won.

Of course, there are some hedge funds out there that outperform the S&P500, but they are few and far between. Mainly because the compound costs over time can severely diminish your annual returns.

Don’t require much management

If like me you’re strapped for time, and can’t spend your day regularly monitoring individual stocks, calculating risk ratios, price to earning ratios, debt vs capitol, board strategy, market/industry volatility (the list goes on) then a index fund like the UBS S&P500 might be for you.

Just drop your money in there and let it grow. Remember if you choose an index fund, it’s recommended to leave your money in for 5+ year at least. The investing model I follow is to direct debit a cash sum into the fund every month. I may also deposit an extra bit of cash in there on low performing days.

Low Costs & Lower Risk

Unlike hedge funds, index funds aren’t actively managed. This means the costs are severely reduced. Hargreaves & Lansdown’s UBS S&P500 accumulative index fund has a 0.55% annual charge. A hedge fund charges three times that amount in management fees, then a potential 15-20% annual performance bonus on top of that.

Quite frankly this is shocking when the costs compound over time. Again, I advise you to read John C Bogle’s book to fully understand the impact.

Because your fund investment is across a range of sectors, your portfolio is diverse. This lowers the risk. So if the retail sector takes a hit, you’ve still got technology, or if the technology industry takes a hit well at least the food industry is doing well.

The S&P500 index trend also demonstrates that the market will bounce back during a recession, so stick in there and play the long game.

Is it a bubble?

Some heavy hitters have come out against index funds recently. Particularly around the lack of reactive flexibility they offer. Lack of downside protection i.e if the market crashes it leaves you vulnerable.

Michael Burry, portrayed by Christian Bale in The Big Short, believes the mass transition to index fund in recent years has inflated the value of market stock indexes. Perhaps worth listening to then.

UBS S&P 500 Index Fund Specifics

OK, so another disclaimer: Historical performance is not necessarily a indication of how stocks will perform in the future. I’m sure you know this. But with the UBS S&P500 index fund one of the things we can reliably bet on is the American economy.

Despite global uncertainty, and the pressure from China, the U.S is still the power house economic power, by a country mile.

So is the UBS S&P500 index fund a good starter investment? Lets take a look at some specifics:

Take a look at the past 5 years performance:

Seems pretty good right?

There’s some market dips, but the main thing to take from this, and I’ve repeated it a few times in this article. Is to invest long term. If you ride those market dips you’ll see the returns over time.

Final Say

I hope this article has been helpful in laying a foundation of knowledge around index funds, what they are and how they work. Please do your own research and invest wisely!

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