Simple and Low-cost Investing guide (for the UK)

Over the past few years I read a lot of articles, blog posts, and a few books on stock market investing. I wanted a simple approach that would have good enough returns, but without spending lots of time maintaining a portfolio and risking losing money just because I was a few hours late selling some stock.

In this article I will describe what I do as of today, and why I think it’s good enough for anyone that also strives for a simple low-maintenance approach with good returns long-term (10+ years).

TL;DR - The short version

Max your company’s pension contributions to get their maximum rate, it’s free money.
Open a Stocks and Shares ISA account.
Setup a monthly direct debit to invest in low-cost, low-maintenance index funds like the FTSE Global All Cap Index Fund and FTSE Developed World ex-U.K. Equity Index Fund inside your ISA account.
Save money in NS&I Premium Bonds, and win monthly tax-free prizes.
If you still have money after maxing out all the previous options, then awesome for you, keep investing in global index funds using a regular investing/trading account.

That’s it, without too much effort we maximized our long-term returns in a relatively low-risk, low-cost approach 💸

Stocks and Bonds

The most important book I read which I recommend everyone to also read is The Little Book of Common Sense Investing. The main idea is that to avoid most of the risk, albeit reducing potential returns, is to invest in the whole stock market using low-cost index funds. This approach exposes you to the entirety of traded companies, which means that if a company goes under water it won’t affect you a lot, since some other company that did well will cancel out the losses.

Based on this simple idea, my current portfolio includes:

U.S. Equity Index Fund - This fund invests in the top (roughly) 3500 companies in the US. This fund is very simple, thus having very low annual maintenance cost at 0.10%. This is the UK version of the super famous US fund Vanguard Total Stock Market Index Fund - VTSAX.
FTSE Global All Cap Index Fund - This fund invests in the top (roughly) 7000 companies in developed and emerging markets around the world. The annual maintenance cost is a bit higher on this fund (0.23%) but still well below the market average for actively-maintained funds. This is the UK version of the US fund Vanguard Total World Stock Index Fund - VTWAX. Note that this fund is somewhat a superset of the above, and just using this one can be enough and simpler, depending on if you want exposure outside the US.
- FTSE Developed World ex-U.K. Equity Index Fund - Update 2023: I switched from the Global All Cap Index fund to the Developed World Index fund. It excludes the Emerging Markets which had dissapointing growth over the recent years, and I prefer the more stable developed world. This fund also excludes the UK to avoid home-bias, which is OK for me, since living in the UK and getting paid in British Pounds (£) is enough exposure to the UK. It has a lower annual maintenance cost too at 0.14%.

Both funds are relatively new (just a few years old) which explains why their total invested assets are way below the corresponding ones in the US (hundreds of billions), but hopefully as they get bigger, their cost will get further down, and maybe even reach the US-levels at some point 😅

All reputable investing resources suggest that someone invests in bonds as well, which have much lower returns but also much lower risk. I personally don’t invest in bonds, since I have several decades of investing ahead of me, so I don’t need the lower risk at the moment. But, if you want to have some exposure in bonds, the following is a good global fund.

Global Bond Index Fund - This fund invests in more than 12000 bonds from around the world, with an annual maintenance cost of 0.15%.

There are more things to consider, but by investing in the above funds you are exposed to the whole market at a low cost, and with good enough potential returns.

Honestly, you could simplify this even further. If you really want a no-maintenance approach, then you can just invest in one of the LifeStrategy Funds (or similar alternatives) and let the fund managers figure out which funds to invest in. You can choose the pecentage you want to be invested in stocks, the rest is invested in bonds, depending on your risk appetite. For example, the LifeStrategy 40% Fund invests 40% of your money in stocks, and 60% in bonds. Therefore, the easiest approach would be to invest in the LifeStrategy 80% or 100% funds early in your career, and switch to the 20% or 40% funds closer to your retirement.

I use the Vanguard funds because I find them to be among the cheapest and the best around, but keep in mind that most of the investment companies and brokers provide their own variations and alternatives, so do your own research when choosing a broker.

US versus International

As I already mentioned, the U.S. Equity Index Fund (like VTSAX) is only investing in US companies, whereas the FTSE Global All Cap Index Fund (like VTWAX) invests in international markets as well.

There are huge and myriad debates among professionals and individual investors trying to decide what’s the best. Trying to answer the question of how much you should invest internationally, and if you even need to. Each side comes up with all sorts of (valid) arguments supporting their view. You can read some of the discussions at [1] [2] [3] [4] [5] [6].

Personally, I believe that it makes sense to have international exposure. However, I find the US market stronger at the moment, hence why I invest in both funds, so that I can tilt my weight more on the US market. Having said that, I gradually increase my share of the global fund because I believe that non-US markets will thrive over the next few years, maybe even more than the US.

This is just another speculation, my speculation, thus if you have no opinion just go with the global fund and relax.

Stocks and Shares ISA

In the UK there are some special savings accounts called Individual Savings Accounts (ISA) which allow you to save up to £20000 a year (as of 2020), and any interest you get is tax-free.

The great part is that you can have a Stocks and Shares ISA account, which means that you can invest in the funds mentioned above and any return you get is going to be tax-free. As you can imagine, over the years, the reinvestment of compound tax-free interest can result in substantial money 💰

In my opinion, everyone should use a Stocks and Shares ISA, and if they exceed the yearly limit, then proceed with a normal stock trading account.

Lifetime ISA - LISA

I haven’t personally used this (yet), but if you are planning on buying a home in the UK, or want to plan for retirement it could be a nice addition to your normal ISA account. You can put up to £4000 into a LISA account, and the government will add an additional 25% of your investment up to £1000, only applicable till you are 50 years old.

The £4000 comes out of the total ISA allowance, which is why it might not be useful for someone not planning on staying in the UK for long, since the only way to get the money out of the LISA account is to either buy a house, or withdraw the money once you reach 60 years old.

NS&I Premium Bonds

I recently found out about the NS&I Premium Bonds, which is a 100% safe way to store your money since they are backed by the government, and they have monthly money draws that give out tax-free prizes.

There is no guaranteed return on the premium bonds, but for every £1 you invest you get one entry in the monthly draw. Prizes range from £25 to millions, and therefore if you are lucky it can be very beneficial.

Keep in mind that unless you win the big prizes this is not going to match the returns of the stock market. However, in the few months I have been using this, I got more returns than any savings account rate a traditional bank would give, which makes this a winning option for me.

Bank Savings accounts

A few years ago you could find traditional bank savings accounts, or even current accounts, with high interest rates in returns. For example, the Lloyds Club Current Account had 5% return up to a £5000 balance, which over the years got reduced down to 4%, 3%, and now it’s around 1%.

However, I can’t find any savings account these days that’s worth saving money in, therefore I recommend just putting a small amount of money into your Stocks and Shares ISA using one of the above low-maintenance funds instead.

Stock Trading Brokers

I am not writing this article to advertise a specific broker, even though I solely provided links to Vanguard 😅

The only suggestion I have is to go with a broker that has great customer support, and low annual maintenance costs. These are the two things I care about, especially since I want a low-cost approach, and a good customer support is always helpful when I have questions.

As an example, Vanguard’s low fees, clear costs approach is one of the things I love about it. There is an annual account cost of 0.15%, and in addition to that the annual maintenance cost for the funds invested. So far, 0.15% account management cost is the lowest I have found, hence why I use and recommend them.

One low account fee Just 0.15% per year

Capped at £375 per year for accounts over £250,000

— By Vanguard Investor

As of 2023, Interactive Brokers also introduced their ISA accounts, which has even lower fees. It chargers £3 / €3 per trade for Western European stocks, with a minimum £3 charge per month.

£3 / €3 per trade for Western European stocks, with no added spreads, account minimums or platform fees. These simplified commission rates are available with IB SmartRoutingSM, which optimizes the execution quality for clients by accessing the many exchanges and trading venues across the continent.1 Pricing on US stocks starts at just USD 0.005 per share.

There is a minimum monthly activity fee of £3 for a Stocks and Shares (adult) ISA and £1 for a JISA. You receive one free withdrawal per month and there are no custody fees for all account types. All ISA accounts are cash only, no margin.

— By Interactive Brokers

Conclusion

No matter how much money you can save per month, even if it’s just £50-100, it’s highly worth it to open up a Stocks and Shares ISA account, and invest that money into one of the low-cost, low-maintenance, global funds mentioned above (or similar alternatives) and enjoy the power of tax-free compound interest. 💸⛱️💰🏡