COMMENT
Three Ways To Win With Shares

By Cliff D'Arcy
October 7, 2005

Unless you're completely uninterested in personal finance, or have spent this year in a cave, you'll know that the UK stock market has been doing rather well of late.

Indeed, since the start of 2005, the FTSE 100 index - which measures the value of the UK's one hundred biggest listed companies - has had a great year. It closed yesterday at 5,372, up 11.6% on the 4,814 recorded at the end of last year. On top of this, investors have received income from their shareholdings, known as dividends, which currently average out at almost 3.2% a year. Not bad, eh?

However, I personally believe that there's more to come, and I plan to invest a lot more money in shares in the run-up to the end of the year. That's because the market looks cheap on several measures, such as the price/earnings ratio, which, at 14, is low by historical standards. What's more, company profits are soaring, yet the Footsie is still more than 22% down on its all-time high of 6,930 reached at the end of 1999.

Here are three ways that you can join me on the stock-market rollercoaster:

1. Index trackers

Index trackers are investments funds which track a particular stock-market index (you don't say)! Run largely by computers, with little human intervention, they blindly track an index up and down. As you're not paying for a highly paid fund manager, index trackers' fees are much lower than those charges by professionally managed funds.

For example, as I explained in Let The Tracker Wars Begin, Fidelity reduced the annual charges on its MoneyBuilder UK Index Fund to a mere 0.3% a year, making it one of the cheapest FTSE All-Share trackers. Note that the All-Share index covers around seven hundred companies, which gives it wider exposure than the FTSE 100.

For the record, the majority of index trackers have total expense ratios (which add up the annual management charge and other, often hidden, expenses) of 0.75% or more. As the golden rule for trackers is "choose the tracker with the lowest charges", these expensive trackers are best avoided!

You can invest in the UK's largest index tracker here.

2. iShares

iShares, also known as exchange-traded funds (ETFs), also track a particular index. However, as their name suggests, they are shares, so they can be bought and sold through stockbrokers throughout the stock market's opening hours. On the other hand, trackers and other funds are priced only once a day, so their price doesn't change almost every second, as happens with ETFs. Since March 2004, I've been building up my holding of iFTSE 100 shares (LSE: ISF), because they are practically a free ride on the stock market.

First, you don't pay stamp duty when you buy iShares, because they are based in Dublin, which saves you £1 for every £200 invested. Second, my online broker, Squaregain, doesn't charge any buying commission when I buy iShares inside my shares maxi-ISA, which saves me a further £12.50 per trade. Hence, the only cost of buying iShares in this way is the £12.50 selling commission, plus iShares' total annual charge of 0.4% a year, which is dirt cheap.

You can open an account with Squaregain in our Online Brokers centre.

3. Actively managed funds

Investors who buy into actively managed funds hand over their money to a professional fund manager who decides which shares to buy and sell on their behalf. Each fund will have a different strategy with some, for example, investing in big blue-chip firms, while others build up stakes in smaller companies.

I've personally never bought into a managed fund, because their annual charges are roughly five times higher than those charged by the cheapest index trackers. Indeed, these extra charges handicap investors over time, with the result that most fund managers - about eight in ten - don't beat the market over the long term, say twenty years. In effect, many of these managers run 'closet trackers', producing index-like returns at high cost. What a swizz!

However, if I were to buy into managed funds, I'd probably choose a fund from the Equity Income sector. I'm a great believer in getting decent dividends from my shares, what I call the "show me the money" approach. Indeed, I chose an income fund for my wife's 1997/98 PEP, the Invesco Perpetual High Income fund run by star manager Neil Woodford. This has absolutely thrashed the market and almost all other funds over the last five years, so I made a good choice.

If you do plan to invest in managed funds, you can cut their high initial charges from, say, 5% or more to zero by investing through a discount broker (learn more here). Several of these brokers also share their ongoing commission with you by discounting annual management charges. My wife's PEP is now managed by Hargreaves Lansdown in its HL Vantage plan, which cuts Invesco Perpetual's annual management charge by 0.25%. When it comes to investing, every little helps!

Why pay tax on your share dividends and gains? Shelter your shares in a tax-free ISA!

More: Visit our Index Trackers and Online Brokers centres | Invest tax free in an ISA.

Cliff owns iFTSE 100 shares and invests each month in an index tracker.