Simple Pound

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I have recently come across the Zopa website, which claims to connect lenders and borrowers without involving banks - thus guaranteeing both parties better rates. The whole site is built around a community of people either willing to lend or people seeking to borrow money - from each other directly, rather than going to their local bank and thus making these institutions even richer than they already are.

And it seems to work as they are quoting quite competitive rates of 5.95% APR for a £5000 loan over 36 months, while promising lenders an average of 6.75% pa for their money (after bad debt and fee, before tax). Since I am not planning to take out a loan very soon, I was more interested in the lender aspect of this. It is essentially a bond based on an individual (and his credit rating) rather than a government or corporation - only with a much better return.

And here’s how it works: If you decide you have got some money left over that you wish to temporarily make available to someone else, you create an account with Zopa and transfer your money in, specifying which credit rating you will accept and for how long you want to lend the money. Their credit scores range from A* (very reliable) to C (still reliable, but less credit history - e.g. a student), which is based on an extensive identity-, credit- and risk-check. According to them, a person with a credit rating of “C” is still more creditworthy than the majority of the population. Well, that sounds good, but is obviously very difficult to prove…

The interest you get for your money depends upon the duration you’re intending to lend money and the people you’re happy to lend to. Since the website essentially functions like a market, the actual interest rate you are receiving will be based on supply and demand. So in order to get a decent return, you should put down your money for as long as possible (5 years) and ideally to C-rated people, because for these categories demand will potentially be highest. Obviously decisions like that depend upon you’re own risk attitude!

There is no lower limit for how much money you can put in the Zopa account - people start at sums of £10 or use Zopa as a regular savings account and make small monthly contributions. In most cases you won’t be lending to a single person, but your money will be spread across various people seeking a loan. This is an in-build protection mechanism based upon the wisdom that diversification limits risk. And if the conditions of your lending aren’t appealing to anyone in the market-place (for instance, your lending period is too short), you will still earn 4.5% interest on the money in the Zopa account - which is more than I am making with my savings at the moment!

As I said at the beginning, I’m beginning to really like this idea. Especially since you will know where your money is going and in most cases people also share what they are using the money for. In short this means that whenever you decide not to spend your money but put it in your Zopa account, you could potentially help fulfilling someone else’s dream!

Head over to their website for more information! And please, if you’ve had any experience with Zopa at all, leave a comment and have the rest of us benefit from your knowledge!

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After I have talked you through many, many, many indices in various countries and on various continents, we need to draw some conclusions to actually make all of this worthwhile.

The main criteria for the list will simply be the medium-term growth rate (I consider 5 years to be medium-term since long-term investing is usually assumed to be > 10 years). The 5 year span should be sufficient to expose a growth trend, but there’s obviously no guarantee - especially if you’re looking at countries like India, which have become very fashionable in the last few years. If you remember the last “fashion trend” and what happened (I’m talking dot.com bubble…), you should know what I am talking about. On the other hand, most of you will be young and far away from retirement, so there’s nothing wrong with a little risk in your investment - if you’re that sort of person.

So here we go - the Top 5 indices of the “What are we tracking” series:

1. India - BSE Sensex (BSE 30): 5 year growth rate of 400.88%
2. UK - FTSE Fledgling: 5 year growth rate of 126.66%
3. UK - FTSE 250: 5 year growth rate of 92.65%
4. Hong Kong - Hang Seng: 5 year growth rate of 90.28%
5. Spain - IBEX 35: 5 year growth rate of 84.53%

I don’t know about you, but I’m quite impressed with these numbers. Most of them would have doubled your capital since 2002! The next challenge, however, is going to be to find index funds that are actually tracking these indices. I will keep you posted on my research, but you are obviously more than welcome to share your experiences and/or tips with the rest of us in the comments!

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By now, we have covered an extensive list of indices and I have decided not to cover anything too exotic like South-American or African. The reasons for this are fairly simple: I’ve collected all this information to make it easier for me (and others) to judge which indices might possibly yield the best return in the long(er) run. However, we may also not forget that we have to find index funds which are actually covering those indices, i.e. the more exotic it gets, the harder it is to find appropriate funds and the more expensive the fund’s fees will be. Therefore, I will stop - after looking at major Asian indices - and return to our original investigation of investment possibilities…

But before then, here’s a brief overview of Asian indices:

• Hong Kong: The Hang Seng (HSI) is a capitalisation-weighted stock index for the Hong Kong Stock Exchange. It covers the 36 leading companies listed and represents about 65% of the overall capitalisation on the Hong Kong Stock Exchange. The Hang Seng is a rather old index - started in 1969 - and is maintained by a subsidiary of Hong Kong’s second largest bank (Hang Seng Bank - in case you were wondering). It has grown by 90.28% in the last 5 years.

• Japan: Japan’s main stock index is the Nikkei 225 and together with the Dow Jones and the FTSE 100 it is probably the most commonly quoted stock index with investors. The index is price-weighted and contains Japan’s 225 largest companies (well, those that are listed on the Tokyo Stock Exchange…). The Nikkei includes an interesting variety of industry sectors including bus companies, fishery, precision instruments and shipbuilding. It reached its all-time high in December 1989, but has grown a respectable 58.42% in the last 5 years.

• China: The Shanghai Composite Index is the oldest stock benchmark for the Chinese securities market and covers all stocks traded on the Shanghai Stock Exchange. It has grown by 47.4% within the last 5 years, even though most of this growth can be attributed to the previous 2 years as you can see nicely in the chart below.

• India: The BSE Sensex (unfortunate acronym for Bombay Stock Exchange, which is the oldest stock exchange in Asia) is a value-weighted index of the 30 largest and most actively traded stocks on the Bombay Stock Exchange. It’s base was set to 100 in April 1979 and since then the index has been growing at a rate of roughly 27% per annum (~18% per annum after compensating for inflation). Between 2002 and 2007 it grew by an astonishing 400.88% - and trust me, I’ve done the Maths twice to double-check that result! The index, which is also called BSE30 is currently quoted at 13,384 points.

I’m too busy marveling at that phenomenal growth rate to come up with a decent closing sentence. The good news is, we’ve completed our research on (readily) available indices now and can thus draw conclusions - Top 5 list in the pipeline! I know who’s gonna be first…

Read the last part of “What are we tracking?” on the top 5 indices >>

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Enjoy part 2 of the selection of European indices that might be considered as base indices for a tracker (index) fund.

• Spain: The IBEX 35 is yet another capitalisation-weighted stock market index which includes the 35 most liquid Spanish stocks traded on the Bolsa de Madrid. It grew by a solid 84.53% within the last 5 years.

• Sweden: Sweden’s main stock index is the OMXS30, which consists of the 30 most traded stocks on the Stockholm Stock Exchange. The OMXS30 is market-value-weighted as opposed to the more common capitalisation-weighted indices we’ve encountered so far. Companies represented by the index include AstraZeneca, Ericsson, H&M, Nokia and Volvo. Contrary to my expectation, IKEA is not among them… The index grew by 54.41% since its inception in July 2004, i.e. in under 3 years.

• Norway: The Oslo All-Share Index (OSEAX) is a market-capitalisation weighted index consisting of all shares listed on the Oslo Stock Exchange. Its base value was set to 100 in December 1995 and it is currently priced at 527.40. Of this overall growth, 31,74% can be attributed to the last 5 years.

• Denmark: The OMX Copenhagen 20 is the top-tier stock market index of the Copenhagen Stock Exchange and is a market-value weighting of the 20 most traded stocks. It grew by 53.76% since April 2002.

• Switzerland: The SMI (Swiss Market Index) is Switzerland’s blue chip index and therefore the leading index in Switzerland. It consists of the 30 largest and most liquid stocks listed on the Swiss Exchange (SWX) and represents ~90% of the total market capitalisation of all Swiss and Liechtenstein equities on the SWX. Companies like Merck, UBS and Nestle are among the companies currently tracked by the SMI. The index was introduced in June 1988 at a baseline value of 1500 points and is currently traded at just under 9,200 points. 71.78% of the growth occurred within the last 5 years.

The final selection of Asian indices will follow shortly before I’ll return to the original series on Investment Choices.

Read part 5 of “What are we tracking?” on Asian indices >>

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Fool.co.uk published an article with advise for first-time investors, which I think sums it all up nicely and confirms what I have said about index funds, ETFs and diversification so far.

The author gives a list of tips on how not to lose money, which reads as follows:

• don’t put it all in one company, especially not a small one
• spread it across large companies by using a tracker (we’ve seen that you can get some pretty decent returns in the long run, so return on investment is not an argument in favour of buying single shares)
• diversify by buying companies in different sectors
• keep of bandwagons - when “the blokes down the pub” are all talking about the latest investment craze, that’s when it’s time to look elsewhere
• drip your money in, regularly, over a longer period (some index funds allow a monthly contribution of as little as £20)
• only invest for the long term

While he then concludes that he’s probably gonna put all his money “on a high-risk small company”, this is clearly not what you should take away from this. When you don’t have much money to invest, do yourself a favour and check against these rules to avoid disappointment!

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I have already mentioned how important diversification is in order to minimise the impact that one sector’s / index’s performance can have on your overall returns, and by examining stock indices abroad I’m hoping to provide you with a decent selection of possible indices to invest in.

This time I will have a look at European indices, but since there are plenty of countries to choose from, I will only look at one key index per country. Despite this restriction I felt that you might be overwhelmed by too much information at once (and let’s not forget I’ve got finals in 3 weeks…) which is why I have divided the topic into two posts.

If there is any (European) country you are particularly interested in and that I haven’t mentioned, please leave a comment or start your own research here or here.

• Belgium: The BEL20 is the main stock index for the Euronext Brussels. The shares represented by the index are chosen by the Euronext market authorities based on criteria like market capitalisation. There is a striking dominance of financial companies which represent about 40% of the index’s market capitalisation, compared to a weight of < 8% given to technology- and telecom-related shares. The index has experienced a growth of 64.32% in the last 5 years.

• France: The main French benchmark index is the CAC 40, which is a capitalisation-weighted measure of the 40 most significant values among the 100 highest market caps on the Paris Bourse. It was started at a base value of 1,000 in December 1987. The companies represented in the CAC 40 are mainly multinational companies which means that despite their French origins about 45% of the shares are owned by foreign investors. Companies included in the index are for example AXA, BNP Paribas, Carrefour or Renault. The index has gained 27.14% within the last 5 years.

• Germany: The Xetra DAX is the most important stock index in Germany. It is a blue-chip index consisting of 30 major companies trading at the Frankfurt Stock Exchange. Companies represented by the index include Adidas, BASF, BMW, Daimlyer Chrysler, Deutsche Bank, Lufthansa and SAP, all of which have contributed to a growth of 35.15% in the last 5 years.

• Italy: The S&P MIB is currently Italy’s most important stock index and lists the 40 most largely-capitalised stocks traded on the Borsa italiana. It has been commonly used since September 2004 when it replaced the MIB 30. The index grew by 30.64% within the last 5 years.

• Netherlands: The Amsterdam Exchange Index (AEX) is a stock market index that is composed of the 25 largest companies that trade on the Euronext Amsterdam. The maximum weight any company can have within the index is restricted to 15%. ABN Amro, Philips and Unilever are just a few of the many well-known companies represented by index, which experienced a huge fall in 2002. Therefore the overall growth for the last 5 years is currently only 1.39% even though it grew by 48.41% within the last three years.

• Portugal: The Portuguese Stock Index (PSI 20) lists the 2o largest and most liquid share issues from all companies on the Portuguese stock market. The constituent weights are limited to 20% of the index capitalisation. The PSI 20 experienced a growth of 54.56% in the last 5 years.

The next post is going to cover Spain, Switzerland and the Scandinavian countries in the North who are usually known for their great economic strength - I’m curious whether that’s reflected in the growth rate of their stock indices!

Read part 4 of “What are we tracking?” for more European indices >>

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