Hello 🌻

So far I have talked about

1. Total amount of charges for purchasing ETFs
2. Difference between investment & speculation
3. Assset allocation between investment & speculation (if you want to speculate a bit)

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Now, we need to understand the risk of purchasing ETFs – focusing on the equity ETFs this time.

Risk is a complicated concept, and you can go into real death and read a whole book (or 2 or more!!) about it.

However, as a private investor who is thinking about sticking to those simple products, you don’t need to worry too much about the complicated concepts (I think… 😉)

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So what risk am I taking when I’m purchasing an equity ETF?

1. The risk of share price movement (in this case the whole market movement such as FTSE100)
2. The risk of currency movement (if you are purchasing non-uk ETFs)

For example, if you are an UK investor and purchasing S&P 500 ETF (US market), you need to be aware that you are exposed to the movement of US$.

People tend to focus on the equity price movement only, but the currency movement plays a big role in your total fund performance.

Let’s say

1. S&P500 went up by 5% in the last year, but the US$ weakened by 3% against British pound….. your overall gain is only 2% (ignoring the cost you are paying to your broker/fund manager).
2. S&P 500 went up by 5% in the last year, and the US$ strengthened by 3% against British pounds… your overall gain is 8%

If your investment strategy is for a long term, the movement of the stock market or currency over the short period of time shouldn’t matter too much. However, you need to be aware that you are taking currency risk as well when you are buying a non-domestic product.

This concept leads you to decide your country allocation. Do you want to invest majority in UK or do you want to allocate more for non-UK investment etc…..

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Saying that, I’m sure that there are some non-UK ETFs with its currency being hedged. The concept of hedging is an another thing, which I will talk about it later.

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The most important thing is to make sure that you don’t forget about the currency exposure risk when you are buying ETFs of the overseas markets.

My happy samurai life in London💫

Hinata

Hello🌻

What is speculation?

Its definitions are:

1. the forming of a theory or conjecture without firm evidence
2. the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value

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For example, short term foreign currency trades are considered as speculation by many investors.

By looking at a chart, you think “it looks cheap, so should go up soon, maybe, most likely…”

But you have no firm evidence.

You may be able to make a good profit in a short term or lose a lot….

Definitely a speculation.

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So is speculation a bad thing to do?

It is risky, but not a bad thing.

High risk – High return…scary but attractive💕

You just need to be sure the maximum amount (or % out of the total) you are willing to put into speculation. And of course, you need to stick to it!

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When you are making a long term investment safely, you don’t need to worry much about short-term movement of the market. You need to check once in a while especially when there is a big movement, but that’s about it.

However, if you are speculating, you need to be at least aware of the market sentiments/direction.

If you can’t be bothered with that, DO NOT speculate.

If you like to study about the market (like me), a little speculation can be fun😉

You just need to know what works for you.

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For now, I’m planning to allocate about 10% of my savings into speculation. I like currency trading ! (I’m not a day trader though😅)

I’m aware that I could make a big loss for that portion, but I acknowledge the risk.

Once I pay off a bit more of my mortgage, maybe I can increase the %, but then I’ll need to think about the kids education, my age etc. So many things to consider.

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Rounding up….

If you are going to start investing (in this case mainly ETFs)

1. check the total amount of charges you need to pay to purchase the products & decide which broker/fund manager you are going to use.
2. Understand the difference between investment & speculation (your own understanding – not what the others tell you)
3. decide the % you will allocate for speculation (could be 0% depending on your circumstance & preference).

Let’s start investing!

My happy samurai life in London💫

Hello 🌻

Once you have researched into fees, you need to decide how you are going to make your investment. Is it bond, equity, commodity, ETFs, individual stocks etc??

Asset Allocation‼️

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Before you make this decision, it’s important to understand the difference between “investment & speculation”

I’m sure everyone has different opinion. Some people might say speculation is same as gambling etc.

The important thing is that you have your own understanding and definition of them.

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My idea of investment is

1. It is long term
2. Risk is diversified
3. Consider stable income such as dividends etc as well

If you consider these points, I still think ETFs are great way to invest in the market. For example, if you invest in S&P500ETF, your risk is already diversified among 500 companies (ignoring the USD currency risk for now)

You could, for example, buy some Apple or Microsoft shares considering the long term growth of the company. Since this is for a long-term & both companies are well established, it sounds like an investment.

However, I still think if I’m owning shares of one company, it starts to become more of a speculation as the risk is not diversified at all.

Who knows what will happen to one company in the future???

Even the professional research analysts often get their forecast wrong, so if you are just a private investor like me, how can you be so sure???

Whereas, if you purchase the shares of many different companies, you can be quite certain that not all of them are going to go bankrupt!

And most likely, the share prices of the market will go up over a very long period of time.

So this is an investment – my point of view😀

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I’ll finish here today.

It is important that you have your own idea about “investment & speculation” It doesn’t matter what other people say.

After all, it is your own money😉

My happy samurai life in London 💫

Hinata

Hello🌻

I’m planning to invest some money into ETF through my ISA account. I have been trying to understand the fee structure which turned out to be a little more complicated than I expected. https://samuraihinata.home.blog/2019/03/08/buying-etfs-why-is-it-so-hard-to-understand-the-fee-structure/

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If I decide to buy one of the Lyxor’s ETFs through Fidelity, I’ll pay…..

1. Annual management fee to Lyxor. This varies depending on the ETFs, but let’s say 0.07%/annum (their fees are very competitive!)
2. Transaction fee to Lyxor. Some of their ETFs don’t charge this fee, but some do. This is the cost associated with the daily trading activities within the fund (buying, selling of bonds etc) This fee again varies, but let’s say 0.02%/annum
3. Service fee to Fidlity. This is currently £45/annum if you are holding ETFs only.
4. Share dealing charges to Fidelity. This is currently £10. This is how much you pay every time you buy/sell ETFs through your ISA account. So more often you trade, more you pay.
5. These are the fees that I managed to find out, but I might have missed something….They really don’t make it clear for you. it is so hard to find out💦

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Why do I need to pay to both Lyxor & Fidelity??

Basically Lyxor is the ETF provider who creates this product, but they don’t sell this directly to a private investor. They sell this through a fund manager or a broker (in this case, Fidelity where you hold your ISA account with). That is why there are some fees that gets paid to Lyxor & some to fidelity.

If you see an advertisement saying something like….

“competitive management fee from Lyxor EFT. Only 0.07%/annun!!!”

You need to think, “What are the other fees then???”

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So if you are planning to buy ETFs through your ISA account, you will need to consider

1. The fee to the ETF provider
2. The fee to the fund manager/broker (where you hold your ISA account with)

If you can find an ETF that costs less than 1%/annum in total, that is a pretty good deal😉

So, I’m going to do more research now.

My happy samurai life in London💫

Hinanta