Investing in the United Kingdom
The FTSE 100 earns most of its money abroad. A weak pound helps it and a strong pound hurts it.
Understand what you own when you buy the UK.
How Investing in the United Kingdom works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
What a 2% fee costs over thirty years
Both lines earn the same 8%. One pays 0.07% a year, the other pays 2%. The gap is not a rounding error, it is most of the point of the exercise.
- 1
The FTSE 100 is a global index in disguise
Roughly three quarters of its revenue comes from outside the UK: oil, mining, pharma, banks, consumer goods. British economic news moves it far less than people expect, and a falling pound often lifts it, because foreign earnings translate into more pounds.
The FTSE 250 is much closer to a bet on the actual British economy. If that is what you want, that is the index to look at.
- 2
It is an income market
The UK market has long traded on higher dividend yields and lower growth than the US. That suits an income investor and frustrates a growth one, and it is why UK valuations look permanently cheap next to American ones.
- 3
Which makes the dividend trap the local hazard
In a high-yield market, the highest yields are still the sickest companies. Check the payout ratio and whether free cash flow covers the payment, every time.
- 4
Use the tax wrapper
A stocks and shares ISA shelters gains and dividends from tax entirely, within the annual allowance. This is a large, certain, risk-free improvement to your returns, and it requires no skill whatsoever, which makes it the best trade available to a UK investor.
You can explain why the FTSE 100 rose on a day of bad British economic news.
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