A Beginner’s Guide to Investing with Vanguard

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Vanguard are one of the UK’s most popular investment companies as they offer a good selection of funds, low fees and an easy to use platform but when you are just getting started with Vanguard, it can seem a little overwhelming (I know it did for me!), so I decided to create a guide that I wish I had read before I got started with Vanguard.

Disclaimer

I am not a finance professional and this is not financial advice! Before making any kind of financial investment, always seek the advice of a professional.

Vanguard Investment Accounts

When it comes to getting started with Vanguard, you first need to choose which type of account you are going to use and there are 3 options for UK adults:

1. Stocks and Shares ISA

The Stocks and Shares ISA (Individual Savings Account) is the account that most people looking at Vanguard will be thinking of using as it offers lots of tax incentives, including:

  • Save/invest up to £20,000 a year
  • Pay no Income Tax on dividends
  • Pay no Capital Gains Tax
Vanguard Accounts

2. General Investment Account

The most basic type of investment account that Vanguard offer and this doesn’t include any of the tax advantages that an ISA does, which is why Vanguard themselves on recommend setting one of these up if you have already reached the £20,000 limit on your ISA.

3. Self-Invested Personal Pension

A relatively recent addition to Vanguard is their SIPP, which allows you to set up your own personal pension and choose your own investment strategy.

When it comes to SIPP’s, I’m still learning about them myself but according to Vanguard, the advantages of a SIPP are:

  • Pay no Income Tax on dividends
  • Pay no Capital Gains Tax
  • Tax relief of 20% for basic rate taxpayers
  • Additional 20% and 25% for higher rate tax payers
  • Tax relief allowance is up to £40,000 per year

Vanguard Fee’s and Minimum’s

One of the most important sales points of the Vanguard platform is there low fees but these can be a little confusing as to what these fees actually are, so I have broken them down for you below:

Account Fees

These are annual fees that you pay to Vanguard for having an account with them and this is set at 0.15%, no matter which account you have. This is also capped at £375 a year or the equivalent of having £250,000 invested with Vanguard.

So basically, any balance you have invested above £250,000 doesn’t incur this account fee, which is definitely appealing for the big investors out there!

But what does the Vanguard account fee actually cover?

This fee is used to keep their online services up and running, paying for the customer support team and keeping your investment safe and secure (so worth paying in my opinion!)

You also only pay one account fee, no matter how many different investment accounts you have and it is charged on the total amount you have invested.

The account fee is billed every quarter and can either be paid from the cash you have available in your account or by Vanguard selling off a small amount of your investments to cover it.

Fund Management Fees

The fund management fees are broken down into three individual parts:

Ongoing Charge Figure (OCF)

This is the charge that is readily advertised on the Vanguard site next to the list of funds they have available and this fee covers the general admin and day to day management of the fund.

The amount you pay does depend on the fund that you choose to invest in but ranges from 0.06% to 0.78%, with a large percentage of Vanguards funds having an OCF of between 0.20% and 0.25%.

The funds that have higher OCF’s are usually actively managed funds as they require more input and management than the more passive funds.

Fund Transaction Cost

To put it simply, this fee covers the cost of buying and selling the stocks that make up the funds that Vanguard offer.

This isn’t free to do, even for a company the size of Vanguard, so they do pass some of these costs on to us, the investor but these transaction costs are still low, just due to the pure volume of trades that Vanguard carries out on a daily basis.

Once again, these costs vary between funds and range from 0.02% to 0.79%.

Vanguard Fees

ETF Costs

The OCF and Fund Transaction Costs apply to all funds on the Vanguard Platform but if you decide to buy ETF’s, then you are going to incur at least one additional cost:

  1. One-off Costs – these are charged whenever an ETF is bought or sold and these costs are used to cover the spread between the bid (what someone is willing to pay for the ETF) and the offer (what someone is willing to sell the ETF for) and the fee’s range from 0.02% to 0.15% (if you want to learn more about the bid/offer spread, then check out this post from Investopedia)
  2. Quote and Deal Service – you will only pay these is you decide to buy an ETF at the live price and it will cost you a fixed fee of £7.50 but most people will opt for the free bulk trade option that Vanguard offers and as these bulk trades are usually done twice a day, it can save you quite a bit of money (not financial advice though!).

All of the fund management fees are automatically taken from your investments and factored into the return figures that are quoted within your Vanguard dashboard.

Minimum Investment Requirements

All of Vanguards accounts have a minimum investment requirement of either £100/m or a £500 lump sum and these need to be set up when you are creating your account.

It doesn’t really matter which on you go with as you can set up a recurring deposit from within your dashboard or choose to invest a lump sum.

With the monthly deposits, you can also go in and alter the amount you want to transfer to your account every month (it just can’t drop below the £100).

Investments

Now it is time to look at the different funds that Vanguard offer that you can invest in to and they have a few different options:

Target Retirement Funds

Vanguards Target Retirement funds are blended funds of equities (stocks and shares) and bonds but are quite unique in their approach as they work in the following way:

  • Choose the year closest to your desired retirement date (they work on every 5 years so 2035, 2040 etc)
  • Invest a lump sum on regular monthly contributions
  • The fund will then split your investment into equities and bonds (the further off you set your retirement year, the larger percentage of equities you will have)
  • The fund will then start moving your investments from equities to bonds, the closer you get to your desired retirement age

They are designed to work this way as bonds are seen as safer, less volatile investments and as you get closer to retirement, you want your money to become more stable.

Life Strategy Funds

One of Vanguards most popular offerings is their Life Strategy funds and they are designed to offer a completely passive way of investing in a globally diverse funds, while maintaining your chosen split between equities and bonds.

Vanguard offer a total of 5 Life Strategy Funds:

  • Life Strategy 20: 20% Equities and 80% Bonds
  • Life Strategy 40: 40% Equities and 60% Bonds
  • Life Strategy 60: 60% Equities and 40% Bonds
  • Life Strategy 80: 80% Equities and 20% Bonds
  • Life Strategy 100: 100% Equities
Vanguard Life Strategy

When choosing a Life Strategy funds, it all comes down to the level of risk you want to have when it comes to your investments and the higher the percentage of equities, the higher the risk.

Many investors prefer the Life Strategy funds over the Target Retirement ones as it gives you more control over your investments and you can choose if and when you want to start moving more of your portfolio over to bonds.

Index Funds

This is what Vanguard is famous for as it was the founder of Vanguard Jack Bogle who actually created the Index Fund in 1975 as a low cost way for investors to be able to be able to invest in the entire market or as he put it:

“Don’t look for the needle in the haystack. Just buy the haystack”

Jack Bogle

Now the quick history lesson is out of the way, what are Index Funds?

Index Funds are passive investment funds that look to track the whole of an index and the funds that Vanguard offer track indexes that:

  • Can track Country Specific Indexes such as the USA or UK
  • Can track indexes from countries in a certain region such as Europe or Asia
  • Can track indexes from developed countries or emerging markets
  • Can track indexes from all over the world with the Global Funds

This variety of funds allows you to build a portfolio that is completely unique to you as you can choose where you want your money to be invested but do your research into the different funds as you want to minimise the crossover of investments as much as possible.

Vanguard also have a range of ESG funds and this stands for Environmental, Social and Governance and these funds are designed to be more ethical options as they aim to avoid investing in companies within the index that may be somewhat controversial such as tobacco companies or weapon manufacturers.

Active Funds

Most of Vanguards funds are passively management but they do have a small number of funds that are actively managed and what this means is that the companies that are included within these funds have been handpicked by Vanguards team of investment specialists, with the hope that these specifically chosen stocks will outperform the market in general.

The Active Funds that Vanguard offer do have higher OCF fees ranging from 0.35% to 0.78% due to being actively managed, many also have higher transaction fees as well.

All of the fund types mentioned above (Target Retirement, Life Strategy, Index and Actives funds) can be bought as either Accumulation (dividends automatically reinvested) or Income (dividends are deposited in your account) options and it is up to you as to which one you want. Also you can buy fractional shares of all the funds mentioned above.

ETF’s

The final investment option from Vanguard are ETF’s or Exchange Traded Funds and these work in a similar way to Index Funds in that they track indexes from chosen markets but there are a couple of subtle differences:

  1. ETF’s are traded live on the stock market and can be bought at their current price (this incurs the £7.50 fee mentioned in the fees section)
  2. They incur a one-off fee when the ETF is bought or sold
  3. Currently, there is no fractional share option for ETF’s, meaning that you need to buy full shares

If you don’t want to buy at the live price, then you can choose to use Vanguards bulk buy feature, which usually happens twice a day and is completely free to use (you will still have to the one-off fee though).

This does give the ETF’s some advantage over the mutual funds that Vanguard offer as mutual funds are only usually traded every 2-3 business days and you buy them at the price when the trade is completed, not the price when you submitted the buy order.

Conclusion

Vanguard is one of the easiest investing platforms to use but as with anything that is new, there is always stuff to learn but I hope that this short guide has helped you understand a bit more about what Vanguard offers and some of the things that are involved with investing, such as fee’s etc.

Anyway, I hope it has been a helpful read and you learnt something from it and wishing you nothing but good fortune on your investing journey but just be aware that it won’t always be a smooth and comfortable ride!