There are some factors to look at when searching for a suitable fund. First, I’d see if it leans towards value, growth or a blend of both. Next, I’d look at its geographical and sectoral focus. For instance, does it typically invest in the UK, US or elsewhere, and does it focus on any particular sectors like technology or healthcare. I’d then look at its top holdings, and past performance.

Top investment funds

My number one pick that I’d buy right now, even though I already hold it, is Fundsmith Equity. Managed by the highly-regarded investor Terry Smith, Fundsmith continues to be a staple in my portfolio. I really like its approach to investing. It aims to be a long-term investor in the shares it owns, so it doesn’t trade in and out of shares frequently. This keeps costs low and allows time for companies to perform. Fundsmith also tries to only own high-quality stocks with businesses that are difficult to replicate. This requirement for a ‘moat’ was popularised by esteemed investor Warren Buffett.

The numbers

So how has the fund performed so far? Well, performance at Fundsmith has been nothing short of exceptional, in my opinion. Since its inception in 2010 it has grown by 17% per year. More recently, over the past five years, it has more than doubled, achieving an annualised return of 15%. Looking at the shares that it owns, more than 70% are listed in the US and the largest holdings include Microsoft, and Novo Nordisk. Lastly, Fundsmith has been buying some new positions recently. One of these includes Google and Youtube owner, Alphabet. I reckon that’s a phenomenal business and I’m glad to see it become a holding.

That being said, there are a couple of stocks that could hold the fund back in the short term. Fundsmith owns shares in Paypal and Meta. Both of which recently suffered 20%+ share price declines after disappointing earnings reports. Overall though, I reckon it’s diversified enough to withstand near-term shocks in a few of its holdings.

UK’s top 100

When picking funds, I like to ensure they cover a few different locations and sectors. That’s why in addition to a global vehicle like Fundsmith, I’d consider a UK-oriented option like ishares FTSE 100 UCITS ETF (LSE:CUKX). The objective of this one is to replicate the performance of the FTSE 100 index. And one reason why I’d want to do that is because it includes several sectors outside technology.

I calculate 40% of FTSE 100 shares are either financials or industrials. This should provide me some diversification and allow me to invest in some established, and cash-generative businesses like Diageo, Tesco and BP. Bear in mind though, if I had invested in this UK fund five years ago, I would have achieved only an annual 5% return. That’s much less than the 15% per year achieved by Fundsmith. That said, I’d still own both right now. The next five years could look quite different to the last five, and I favour a mix of shares such as these two offer.

It’s not that difficult

This is a massive shame, especially since the government gives us all a great incentive through the annual £20,000 Stocks and Shares ISA allowance, which allows you to take all your returns free of income tax and capital gains tax.

Many people simply don’t know where to start. That’s understandable, as there are hundreds of different companies listed on the London Stock Exchange, and buying individual stocks is simply too risky for many.

So let’s keep things simple.

Choose your platform

Your first step is to open an ISA account with one of the major UK trading platforms, here’s a list of some of the best. You’ll need proof of ID and either a current account or debit card, and can start trading within a few minutes.

That still leaves the other problem. What do you buy? For beginners, I would recommend a passive investment fund that tracks the fortunes of the UK stock market.

The FTSE 100 index of top blue-chip stocks is by far the best known index as it gives you exposure to the UK’s largest companies. Like any market, it will be volatile in the short run, rising and falling as investors rush to buy or sell shares.

Some companies will do well, some will do badly. One or two might even go bust. By investing in a spread of stocks, you have a massive cushion if one fails.

Patience is the ultimate virtue

Never invest in the stock market for less than five years and ideally you should leave your money for 10, 20, 30, 40 years or more, the longer the better. That way you don’t have to worry about short-term volatility, which always passes if you give it enough time.

The easiest way to start is to invest in a dirt cheap FTSE 100 tracker. Exchange traded funds (ETFs) are hugely popular because you can buy and sell them in seconds like any stock, and the charges are as low as can be.

Core holdings

For example, the iShares Core FTSE 100 UCITS ETF has no upfront charge and an annual fee of just 0.07% a year. The HSBC FTSE 100 Index tracker runs it close with charges of 0.18% a year.

You could widen the net by also buying the iShares FTSE 250 UCITS ETF, which invests in the next 250 largest UK companies, which often grow faster than large-caps. It charges 0.4%. The SPDR FTSE UK All-Share UCITS ETF widens the net further by investing in around 650 listed UK companies, charging 0.20%.

Make sure you invest all your dividends back into the funds for growth. Over the last 10 years, the average annual return from the FTSE 100 with dividends reinvested was 8.3%, but if you took the dividends instead, that falls to 4.3%.

Top up your fund whenever you can, otherwise just sit back and leave your money to grow, ignoring short-term stock market upheavals. What could be simpler than that?

Unlucky 13 is CF Woodford Equity Income. Ace fund manager Neil Woodford was supposed to head the pack, not trail it. Mr Blue, not Mr Red. 

Mr Wrong

I first bought units in his fund in January 2015, with a couple of small top-ups later that year. After more than four years, I am in the red by 0.16%. That is only a tiny loss because I was lucky enough to get in when Mr Woodford still delivered.

I’ve stayed loyal and fought his corner in these pages. In December, I valiantly tipped him to fight back in 2019. Here are three reasons why I’m beginning to lose heart.

1. He deserves to be relegated

Fund management is like football management: reputations rest on results. There is a difference, though. Football managers pay for bad performance with their job. As owner manager, Woodford stays in post even as punters walk out of the door. His flagship fund peaked at £10.2bn in May 2017, today it manages just £4.3bn.

Recent results have been woeful. Trustnet.com figures show that over three years, the UK All Companies sector returned 28.9%. Woodford fell 7.2%. As for fighting back in 2019, forget it. His benchmark sector is up 8.1%, he is down 1.2%. In Premier League terms, Woodford has a Manchester City profile, and Huddersfield form.

2. He’s destroyed my faith in star managers

My faith in star managers has never been that strong, I have seen too many enjoy a day or two in the spotlight, then fade. Typically, I prefer trackers for core markets like the UK and US.

Neil Woodford was the great exception after smashing markets for 25 years, and dodging the dotcom crash and banking crisis. Now it turns out he’s fallible after all. Every manager can expect the odd stock picking disaster but he’s had too many lately.

Do I want to hold a fund that still has a 5% stake in doorstep lender Provident Financial? That’s a stock I wouldn’t touch myself, yet he owns a quarter of the calamity and is backing a £1.3bn takeover bid to buy the rest of it.

And don’t get me started on misguided investment trust foray Woodford Patient Capital. Luckily, I dodged that bullet.

3. Trackers charge less

There is another reason I prefer trackers – their fees are so much lower. Thankfully, actively-managed fund fees have been driven from the days when you paid 5.25% upfront, and up to 1.75% a year. Woodford Equity Income has zero initial fee, and an annual charge of just 0.75%.

However, iShares Core FTSE 100 ETF has an annual charge of just 0.07%. Say you invest £10,000 and both funds grow 5% a year on average over 20 years. With Woodford, you would have £22,898 but £26,181 with the ETF. That’s £3,283 more due to charges alone.

Of course Woodford might justify the higher fee by storming back into form. I’m holding on, just in case, but I’m not too hopeful. 

Fees cost

ETFs have come into their own in recent years as investors wake up to the damage that high annual management fees inflict on investment fund performance. Say you invest £1o0,000 in a portfolio of actively-managed funds charging 1% a year. If it grows at 5% a year, you will have more than doubled your money to £219,112 over 20 years. However, if your ETFs charge 0.2% on average (and some charge as little as 0.03%), you will have £255,402, an incredible £36,290 more, assuming the same rate of fund growth.

If managers could regularly beat the market they would justify their higher costs, but three-quarters don’t. Investors are waking up to the message and these three ETFs are particularly popular, numbering among the top five most traded in the UK.

Vanguard performance

The first is the Vanguard S&P 500 Growth ETF (LSE: VUSA), which does exactly what it says on the tin, tracking the S&P 500. The total expense ratio is a minuscule 0.15% a year, which Vanguard claims is 87% lower than the average charge on funds with similar holdings.

Over five years it’s up 140%, according to Trustnet.com, piggybacking on the booming US market. Look at this: the average actively-managed fund in the Investment Association North America sector has returned notably less at 113%, according to Trustnet.com. The charges will be higher as well.

iSpy iShares

You won’t be surprised to discover the second most popular ETF among British investors is the iShares FTSE 100 ETF (LSE: CUKX), which tracks the UK benchmark index of blue-chip stocks. Its ongoing charges are even lower, at just 0.07%, and it has grown 52% over five years.

Unit trust trackers have also become cheaper. For example, HSBC FTSE 100 charges just 0.18% a year. However, on £10,000 invested for 20 years, this is the difference between ending up with £25,638 (iShares) or £25,298 (HSBC). That slither of a charging difference has amounted to £340.

Mid-cap winner

In a single low-cost swoop, you’ve now bought into 600 of the largest companies in the Western world, big names such as Apple, Microsoft, Exxon Mobil, Amazon and Facebook in the US, and HSBC Holdings, Royal Dutch Shell, BP and British American Tobacco in the UK.

My third suggestion for your early retirement ETF portfolio is the iShares FTSE 250 (FTSE: MIDD), the fifth most popular ETF in the UK. This mid-cap index has thrashed its blue-chip counterpart lately, and the ETF is up 100% accordingly. Now you have a spread of smaller companies to go with your retirement portfolio’s big boys. However, the total expense ratio is slightly higher at 0.4%. That’s actually more than the HSBC FTSE 250 tracker, whose ongoing charges total 0.18%.

ETFs may be cheap, but they’re not always cheapest. Yet when their performance is so strong, they certainly are very appealing.

When it comes to investing, however, we’re in with a shout, with the UK economy racing ahead of the emerging market giants who dominated the last decade.

Beating The Big Boys

Big guns Brazil, China and Russia are shorn of star quality right now. Like ageing footballers, they’re showing signs of slowing down, according to latest OECD data.

Britain, by comparison, “is steadying at unusually strong growth rates”.

The OECD published its report shortly after government figures showed UK industrial output had leapt 3% in the past 12 months, beating analyst expectations.

Finally, Britain looks like a winner.

The FTSE 100 has thrashed Brazil, China and Russia over the last 12 months to return 15.61%, according to MSCI. That is more than double the growth rate on the Chinese stock market, which returned 7.34%. Russia and Brazil fared even worse (see table). 

This isn’t merely a flash in the pan. The UK also conquers over three years, returning 7.01% while the other three all delivered negative returns.

Source: MSCI

The Indian Exception

Britain isn’t beating all the BRICs. India, is up almost 24% over the past year, as markets recover from the country’s political and currency turmoil. Over three years, Britain still wins easily.

The UK looks well placed to outperform, given the problems facing Brazil, China and Russia.

Brazil Loses Its Flair

In March, S&P downgraded Brazil’s credit rating to triple-B-minus. JP Morgan recently reported “a consensus that the fundamentals are so bad they are even off the radar”. The World Bank has just cut its forecast growth rate from 2.4% to 1.5%. Sentiment could improve if October’s election delivers a more market-friendly alternative, but there’s a world of risk in-between. 

China Crisis

The World Bank also downgraded China’s growth forecasts, if slightly, from 7.7% to 7.6%. Even this depends on the success of the government’s rebalancing efforts, as it seeks to contain credit and property bubbles without destroying growth, and shift the country from an export-led to a consumption-based model. 

Russian Gloom

The World Bank is also down on Russia, predicting 0.5% growth, far lower than the 2.2% it forecast in January. Ukraine, naturally, is to blame, as the threat of US sanctions continues to hang over the economy.

Brazil, China and Russia are likely to find the going even harder as the US Federal Reserve continues tapering, draining emerging markets of yet more liquidity. 

By contrast, the UK economy is “stirring into life”, the World Bank says, predicting growth of 3.4% next year, rising to 3.5% in 2015.

Don’t just watch from the sidelines; you can participate in the UK recovery by buying a low-cost FTSE 100 tracker such as iShares Core FTSE 100 Ucits ETF (LSE: CUKX) or db x-trackers FTSE 100 Ucits ETF (LSE: XDUK). 

With the market trading at a reasonably priced 14.22 times earnings, and offering a yield of 3.5% a year, now could be a good time to get stuck in.