A little while ago we talked about why nothing seems to change, even in the face of overwhelming evidence to do so.
Whilst human behaviour plays a large part in our collective inertia, money arguably makes up much of the rest. Where our money goes inevitably reinforces the direction we take.
Pretty much everything we do as adults takes some sort of financial investment. We earn money to spend on keeping ourselves warm and fed; to get around; to be entertained.
Being fallible humans, we can often choose between eating well, or eating pizza. We can choose between staying sober, or drinking into a stupor, just as we can choose to drive a mile to the shop for a pint of milk, or we can walk or cycle. We can use our willpower to do the right thing.
These may seem like small actions, even inconsequential, but collectively they have far-reaching consequences to the economy as a whole. The companies that want to sell us the bad food; the cheap booze; or allow us to gamble away our hard-earned money, make a lot of money at our expense.
The stock market
If a company wants to raise money, it can sell shares on the stock market. A company can have anywhere from a handful of shares to several billion, but the price of each share can fluctuate according to the perceived value of that company.
If a company seems to be making good decisions, is making a healthy profit and isn’t embroiled in controversy, or saddled with crippling debt the share price may rise. If they make bad decisions, or are making huge losses, the price will probably fall.
However, the stock market is a pretty broad church. There are some good, socially responsible companies floated on the stock market, but there are also companies like Wetherspoons; BP, Shell, Ineos and a raft of tobacco, car and gambling companies.
Oil, tobacco and cheap booze may not be furthering humanity, but they are understandably lucrative. Whether they are addictive, or used in all manner of manufacturing processes, they’re historically safe bets.
As are cars, or motor vehicles in general. Governments across the world go out of their way to lay infrastructure for cars to travel on (yes, I know we were there first…) and the path of least resistance is to one of car ownership and all of the perils and pitfalls that brings.
Whilst Hollywood and its movies like Wall Street and Quicksilver, has done its best to portray the stock market and its associated excess as something beyond the reach of most of us, if you have a pension it is likely already invested in the stock market, potentially in equities responsible for many of us retiring into an apocalyptic wasteland.
However, with savings rates that are often below inflation, it makes sense for at least some of your savings to be invested too. With inflation currently around 2.5%, if your savings rate is lower than that, you are effectively losing value as time passes.
It’s often said that the economic recovery we’ve seen since 2008 hasn’t reached the rest of us. The central banks in much of the western world has been engaged in a programme of quantitive easing for years now. There’s a lot more “money” in circulation now, but much of it is in the hands of the big banks and large corporations. Stock prices continue to rise, even if the money in our pockets isn’t.
Fortunately, there’s nothing stopping you and I seeing the benefit of a comparatively bullish stock market. A stocks & shares ISA will allow you to earn capital (the price of each share you buy can go up in value) and also earn dividends to buy more shares with.
With so much uncertainty in the world right now, with you-know-what and talk of the global economy slowing down, it seems counter-intuitive to think about investing now. However, if we do have a recession, share prices will fall for a time, but they will inevitably increase again. If you buy 100 shares for 50p each during a downturn, but they were normally £1, in theory they will slowly return to their regular price as the economy picks up again, doubling the value of your investment –in theory…
Risk & Reward
The stock market can best be described as fickle. Stock prices can rise and fall on a whim, but in a growing economy, the general trend is usually upwards at a rate that currently leaves savings rates behind. However, there will always be an element of risk.
If you were to buy £100 worth of shares in one company, you would be at the mercy of the market on the value of that one company. If it happened to be a company that fell into administration, or it was embroiled in an international incident, or it was Tesla and Elon Musk tweets something stupid, the value of your shares would drop. However, the general trend tends to be upwards. This is the FTSE100 since 1983. That blip between 2004 and 2011 was the credit crunch of 2008.
Investing in just one company isn’t a good idea. It is possible to lose everything if the company goes under, so diversification is key. If you had put your life savings in Carillion for example…ouch.
The stock market is made up of a number of different types of assets. Equities (or shares), bonds, property and cash. There are assets from a number of different sectors across a whole world of territories. Arguably, the more sectors, territories and asset classes you can cover, the better. If you are starting out with a small amount of money it is difficult to build a diverse portfolio. Then again, if you buy individual shares, even if they are sufficiently diversified, you still have to manage your investments closely and be prepared to dump stock if there is trouble ahead. A more sensible option is to invest in a fund –particularly as you avoid the transaction fees and ongoing charges associated with buying individual shares.
A fund is in essence a pool of money that is used to buy into a ready-made portfolio. Open-Ended Investment Companies (OEICs) buy shares in a range of companies with the aim of targeting a certain market (Japanese large-cap equities for example) or achieving a specific aim. You then buy shares in that OEIC. There are hundreds of funds to choose from, some better than others. Just as an individual company like Apple or Admiral will see their share price rise and fall, the share price of a fund will also rise and fall each day depending on the value of the investments it has made.
Some funds will lean heavily into a particular market, or be particularly weighted in favour of a particular asset class, but you can diversify within your portfolio too, perhaps into a fund that is full of equities and a fund that is mostly comprised of bonds or gilts, wrapping everything up in a single stocks & shares ISA.
Funds will either be accumulation funds, or income funds. Unless you are hoping to earn a living from your investments, an accumulation fund will reinvest dividends in additional shares but an income fund will dish any dividends out to your settlement account.
Funds however, do attract fees. Passively managed funds and indexed funds tend to be cheaper to maintain than actively managed funds, but even a well-managed actively managed fund may struggle to match or even beat a passive fund (it’s mostly down to luck).
Investing is a long-term game – 5 to 10 years ideally. You should only invest money you don’t need right away and given fluctuations in the market, it is best to drip-feed money into it. Some months you’ll buy more shares with your £100 than in others. You also need to restrain yourself from selling when the market dips –hold your nerve and ride the wave as the market recovers.
But where do you invest?
Now we finally get to the whole point of this article. A fund may have a broad range of assets, some may include fossil fuels; cars and other vices. It is surprisingly difficult to find a fund that is completely clean. Like a perennial weed, the fossil fuel and car industries are buried deep in society.
You may find a fund that invests in renewable energy, but it may well be one that also invests in fossil fuels. You may find a fund that ticks nearly every box, but then also includes shares in a bank like Barclays.
According to the Banking on Climate Change report, the worst offender in Europe is Barclays. Since the Paris agreement was signed at the end of 2015, Barclays has funded the fossil fuel industry to the tune of $85bn, from fracking and coal here in Britain to the Dakota Access pipeline in North America. In each case this funding has been integral to fossil fuel companies undertaking ecocidal projects, sometimes forcefully, against the wishes of local communities.
Fortunately, a growing number of funds have more ethical aims. Funds that invest in recycling, clean energy and those with an ecological or ethical bias.
Websites like Morningstar will rate funds for sustainability, but it is worth reading the prospectus of any fund you are looking to buy into. Some claim to be ethical, but may have skeletons lurking in them. I’ve seen supposedly ‘ecological’ or ‘ethical’ funds that include BP in their list of top-5 holdings –that same BP of Deepwater Horizon fame.
But this is not the case. Ethical investing is a considerably broader sector than many imagine. Traditional ethical funds – referred to as “dark green”, do take a very restrictive approach to investing, screening out stocks that are involved in “unethical” industries such as alcohol, animal testing, tobacco, oil and armament firms.
Retailers that do not uphold certain factory conditions or manufacturing companies that do not comply with reduced carbon initiatives also fail to make the grade. The oldest ethical fund F&C Stewardship even originally refused to invest in financial companies because their practices included little consideration of environmental and social impacts.
Being the change…
The choices we make every day end up influencing the world we live in. Whether we are buying coffee at a coffee shop that pays its way; or investing our savings in companies that aim to make the world a better place, we have more agency over our futures than we think.
It’s really easy to open a stocks & shares ISA –my bank allowed me to open one and buy into my first fund within a few minutes. Researching funds takes a bit of work, but I must admit to finding it fascinating. My first pick was fairly safe, average in terms of ethics and growth, but I’m still researching funds, reading prospectuses before I start diversifying my portfolio further.
Most of the big banks will allow you to open a stocks & shares ISA and even the challenger banks like Monzo are working on it. Some will give you a bewildering choice of funds you can choose from on its platform, but others may limit you to a handful of funds that are stacked according to your appetite for risk. A relatively high risk fund may be comprised entirely of equities; a low risk fund may be mostly bonds; but a medium risk fund will be a combination of the two.
I won’t lie, investing is something that is really easy to get started, but there’s a huge amount to learn; there’s an eye-watering amount of choice and, whilst there are risks, there’s also a great deal of potential reward too.
Reuters reports that fund ownership of Giant Manufacturing Co. Ltd leapt 10 percent last quarter of 2014. At Merida Industry Co Ltd fund ownership jumped 11 percent in the same quarter, while for Dorel Industries Inc it grew by 6 percent. Accell Group currently reports fund ownership at over 15 percent.
We can do what we can to change behaviours, but we also need to look at where our money goes. We can choose to invest in bike manufacturers; companies that have embraced the circular economy; public transport; ethically-driven companies in a variety of sectors and those that genuinely aim to make the world a better place.
Through the winter I’ve been doing a lot of reading, particularly about investing and money management. There has been two books that have really stood out and, as luck would have it, I have affiliate links for them.
The first one is The long and the short of it by John Kay. This is a book that claims to be “A guide to finance and investment for normally intelligent people who aren’t in the industry”. I can safely say it does just that. It’s very easy and surprisingly entertaining to read and it’ll give you a good grounding in finance generally. I’ve included a referral link to Waterstones here, but you’ll also find it on Cardiff’s library catalogue.
The second book is more of a comprehensive guide to investing. The Financial Times Guide to Investing by Glen Arnold is vast. It’s a veritable encyclopaedia of investing that covers everything from the basics of investing, to working out yield and P/E ratios, to understanding balance sheets and a company’s annual statement of accounts. Once again I’ve included a Waterstones link, but this is another you’ll find at the library.
We also now have our rough guide to investing, which you can find here.