Some time ago we talked about how the average car payment in the UK was £388 per month. This is a sizeable chunk of cash to spend on a device that spends 97% of its time parked and 100% of its time depreciating.
What if you could put that money towards something that will be worth more in future? Something that will grow over time and give you the financial security that will help you sleep soundly at night.
Perhaps it is time we talked about how to invest. So, without further rambling, here’s the Cardiff By Bike rough guide to investing.
I’m no financial advisor by any stretch of the imagination, but it is an interest of mine that I believe has the power to help change our world for the better, by using our ISAs and pension funds to invest in companies that will have a positive impact on our world, whilst consciously not investing in those that would do us ill.
This article is meant as a primer to help you get started, nothing more.
However, this means I’m not qualified to offer financial advice. If you need financial advice tailored to your specific circumstances, please seek independent financial advice. You’ll find the ins & out of IFA’s over on MoneySavingExpert.
Assets vs Liabilities
An asset is something that puts money in your pocket, a liability is something that takes money from you. Unless you own a fleet of cars that you then rent out to people for money, they’re not assets. The car that sits outside your home is a liability.
It asks for regular servicing, fuel and VED, all the while rotting into a rusty heap, like the car in the picture above. You’re probably also paying interest on the financing for it too.
Assets are things like shares, bonds, businesses, or property that you rent out. If you are a home owner, some will argue that the house you live in is also a liability, unless you take on a lodger.
The “Why” part…
Ever since the financial crisis in 2008 interest rates have been at rock bottom. If you are lucky you may find a savings account offering 1.5% but these are few and far between. Most cash accounts offer rates barely above nothing-at-all. This makes growing cash very difficult, so in order for the example below to work we need to look elsewhere.
On the other hand, if you were to put £388 per month into a stocks & shares ISA for much of your working life (let’s say 46 years), growing at a very conservative 4% per year, you’ll end up with £622,603 in the bank. As personal “investments” go, cars are a catastrophic waste of money.“Business as usual” – Cardiff By Bike
By buying shares on the stock market, you get to own a small piece of a company. If the company does well, so do you. Then again, if the company does poorly and their share price eventually hits £0, so does your investment.
Each share has the potential to increase (or decrease) in price over time, as well as pay a dividend to its shareholders. The more shares you hold, the greater the effect.
One thing this pandemic has made abundantly clear is that the good times will inevitably end at some point, as they did in 2020. Years of easy credit, low interest rates and rampant consumerism left us in a weird place when people suddenly stopped consuming and the credit dried up.
The geopolitical uncertainties certainly aren’t helping either, but for various reasons people have started to save more.
Official figures show households are saving more of their disposable income than at any time for four years. The so-called savings ratio revealed UK households saved 8.6% of their disposable income in the first three months of the year, up from 5.4% during the same period last year.Coronavirus: People saving more but get little in return – BBC News
Saving money may not help businesses that rely on our consumption, but they help us all to ride out the bumps in the road, as well as massive pandemic-shaped craters. Dave Ramsey recommends having $1,000 saved for emergencies, but as we’re in the UK, £1,000 is enough to cover many sticky situations, such as needing to get a plumber or electrician in to deal with leaks or power issues.
It will also mean that you won’t need to sell your investments in a hurry. However, saving a grand may feel like a really big hill to climb without knowing where every £1 is going. This is where budgeting apps like Emma (referral link) are great. They plug into your accounts and categorise everything, whilst offering helpful insights into where our money disappears to while we are not looking.
If you invest only in one company, you will benefit if that company does very well, but you will also lose everything you have invested if that company fails –or does a Ratner.
However, if you were to invest in a dozen companies, one failed company would only be 1/12 of your portfolio. However, to do that you not only need to have the means to buy shares in a dozen companies (plus trading fees), you would need to have done your homework on all twelve to make sure they were not another Carillion in the making.
Also, if you buy a dozen shares but they are all in the same sector, that will be less diversified than if you were to buy shares in a number of industries. For example, if you owned shares mostly in airlines and oil at the start of 2020 you are in for a rough ride.
For this reason we’ll look beyond buying individual shares for the time being. Whilst it can be done –if you have the time and inclination to read annual reports and company accounts, not to mention the means to build a diversified portfolio from a range of individual companies, but it’s not for us.
Instead, we can invest in funds, which are companies that buy shares in a particular sector, or a broad range from across the world. Some will aim to replicate an index, such as the FTSE100, or the S&P500. Others will target the largest companies in Japan or any other part of the world. Some will aim to track the price of gold, others will target technology stocks. By buying a share in a fund, you effectively buy a small share of a number of companies. If one company was to fail, it would drop out of the index to be replaced by another.
There’s probably a fund out there for everyone. There are thousands of them to choose from.
OEICs & ETFs
Whilst funds are companies in their own right, with a management structure, annual reports and a prospectus you can read at your leisure, they mainly take two forms.
Open Ended Investment Companies (OEICs) issue shares that are priced daily according to the value of the assets held in the fund. So, the price changes once per day.
Most OEICs will offer two different flavours to choose from, with one being an accumulation fund, the other being income. The idea here is that if you are young and are in the process of building up a nest egg to supplement your income in retirement you can buy accumulation funds as these will automatically reinvest any dividends that the fund collects from the shares it owns.
Once you reach retirement, at whatever age that is, you can switch to the income version of the fund, which will periodically pay you a dividend for each share you hold.
On the other hand, Exchange Traded Funds are traded on the stock market like any other stock. Their price will fluctuate constantly throughout the day, but tend to be only available as income funds, so the dividends are paid to you at the end of each period and you have to then reinvest them manually.
However, their fees tend to be slightly lower than an equivalent OEIC.
There is a third type, a closed-ended fund. However, the only way into one of these is to buy shares during their initial public offering (IPO), so we won’t worry about them for the time being.
Risk & Volatility
One thing about investing that needs mentioning here. Investments can rise and fall in value day by day, so they’re a longer-term strategy to grow your money. You’ll want to be investing for at least five years, preferably 40…
However, whilst stocks tend to be the most volatile, bonds are far less volatile and can also be part of your portfolio. There are funds out there that invest solely in bonds, or a mixture of both stocks and bonds. Some funds will buy government bonds, some will buy corporate bonds at varying degrees of risk.
As a rule of thumb, if you are 20 years old, having 20% of your investments in bonds is a good place to start. As you hit your 40s, you could go for a 40% bonds and 60% stocks split. As you head closer to retirement, you may want to move more into bonds depending on how exhilarated you want to feel when you occasionally glance at the business news. Of course, if you are 20 years old you have a long time to ride out any storms, so 100% stocks may be better in the long run.
You’ll often find that when stocks hit a rough patch, bonds tend to rise or at least hold their value, but over the longer term there’s more potential for growth in stocks.
That’s fine, tell me how already…
Right, so you might have guessed that you can’t just go down to Argos and buy these funds from the laminated book of dreams, but in all seriousness the process isn’t all that different.
The first task is to choose a fund platform that suits you. Ideally you want the fees to be low; for them to let you set up a direct debit and automatically take money from your account when you get paid. That way you can just set it and forget it.
You’ll also want a platform that offers funds to suit your investment goals. For me I want to avoid investing in fossil fuels, weapons and Wetherspoons, so I tend to look for ESG funds. There’s a whole long essay on Ethical Investing for you here.
You’ll probably also want a platform that allows you to open a Stocks & Shares ISA, allowing you to shield your investments from capital gains tax. Some platforms charge extra for this, but there’s a rundown of the best ones over on MoneySavingExpert. As a place to start, Vanguard are as good a place as any. I’ve been using them for a few years now. They’re very good value, have a good range of funds and let you set up a regular payment. They take care of everything else.
Your bank may also offer an investing platform, but they are often restricted to their banking customers. This may be fine today, but if you feel the need to move your banking elsewhere in future using the Current Account Switching Service, you’ll probably be forced to sell your investments and transfer your ISA elsewhere. When you do, your new provider may provide you with a form to fill in and send off to authorise the transfer, but it should only take a couple of weeks to complete.
You can hold any number of funds in your portfolio, but one broad market stock fund and a global bond fund will cover most eventualities.
You can save or invest up to £20,000 per year in an ISA, but this can be shared between a Cash ISA and Stocks & Shares ISA’s depending on what your savings goals are right now. Generally speaking, if you are intending to use the money in the short term, cash is best. If you are planning for the long term, cash is risky thanks to a combination of inflation and abysmal savings interest rates. The longer your money sits in cash, the less you can do with it.
To get started in investing, £100 is generally the minimum for a regular payment, or £500 for a one-off payment. A £100 direct debit that you can put to the back of your mind is a good place to start, particularly if you are in your 20s right now.
A word about fees…
One thing you see in the world of investing that you don’t see with cash savings accounts is fees. Fund platforms generally charge fees, as do the funds you put in them. Some fund platforms (such as Interactive Investor) will charge you a flat fee, some (such as Vanguard, Hargreaves Lansdown etc) will charge a percentage of what you have invested.
This means that as your investments grow, a percentage of your holdings is going to become quite a handful, so a flat fee is probably best there. If you are just starting out with a £100, a percentage of your holding is the way to go.
As mentioned earlier, funds also charge a fee, but this can vary wildly depending on the fund. Funds can either be actively managed or passively managed.
- Actively managed funds tend to attract higher fees, but the jury is out as to whether they really earn those higher fees, often underperforming relative to a similar passively managed fund over the long term. It may occasionally outperform the index, but then again a stopped clock is right occasionally.
- A passively managed fund will usually track an index, be that the FTSE, S&P, NASDAQ etc and have noticeably lower fees. However it will only ever match the index and won’t outperform it. However, even Warren Buffet advocates for index funds and he’s an active manager…
Fees also tend to be higher in certain types of funds, particularly those targeting emerging markets, real estate or commodities. If the assets are particularly illiquid, such as property, the fees will be higher.
On the subject of fees, whilst ‘Roboadvisors’ seem to be popular at the moment, with the likes of Wealthify and WealthSimple (the former being based in Cardiff), their fees are surprisingly high. It’s the price you pay for a flashy website I guess.
With the markets there will be times when the economy hits a few bumps and the share prices of many companies will tumble. Yet, as we’ve seen during the pandemic, whilst some companies will struggle, others will find themselves in the perfect place to capitalise on the disruption. By buying an index fund you spread the risk across many different companies and sectors, limiting any losses in the process.
However, you only ‘lose‘ if you panic and sell your shares at the bottom of the market. Do NOT do this. They will usually recover within a few weeks to a few months. Shares are assets that can be turned into money when sold, or can produce an income through dividends. They are not money in and of themselves.
It goes without saying that you should only invest what you don’t need right away, but you should also try to think of these downturns not as a loss, but as a flash sale.
If the index fund you’re investing in normally sells for £100 per share, but one month it is sitting at £80 per share, you’ll end up with a slightly bigger slice for your £100. Many fund providers allow you to buy fractions of a share, so some months you may get 1.2 shares for your £100, sometimes it’ll only be 0.95 shares, but it all balances out in the end.
The thing to remember is that you need to invest regularly, ignore the news and maybe check on your investments every couple of years. Invest for the long haul and the daily ups and downs will have been smoothed out.
I dare say Hollywood has a lot to answer for. It has long been churning out movies that portray the stock market as something for only the brave, the macho Gordon Gecko types who buy up entire companies, or the Jordan Bellafort “Wolf of Wall Street” types who live a life of excess and eventually get caught out. Of course, there’s always our favourite, Quicksilver, where Kevin Bacon turns from stock broker to bike messenger.
You don’t see movies about people like Ronald Read, a janitor and garage attendant who after years of living well below his means and investing regularly, had $8 million dollars in his account when he died.
A community in Vermont was surprised in 2015 when Ronald Read, a retired gas station attendant and janitor, turned out to have been worth nearly $8 million upon his death — and left about $5 million to his local library and hospital.The Janitor Who Became A Multi-Millionaire by Retirement
Setting up a stocks and shares ISA can be done in a few minutes. I’ve been with two providers now, but both were up and running in no more than about 5 minutes each. You can easily transfer an ISA between providers too, should you find that your chosen platform doesn’t quite offer what you want.
It’s no harder to do than opening a cash savings account, but I find it more fun to think of it as shopping. Yes, it’s fun to buy a new gadget, but it can also be fun to research funds and spend your wages on shares instead. They can be sold within a few days if you really need to get the money out, but it is best to try to build up a collection over a long period of time, give them time to appreciate in value and then think about switching them to income shares when you decide to stop working.
What you invest in is arguably less important than the act of just getting started. Once you have your first £100 invested you can start thinking about how you can optimise your monthly expenses to build your pot faster. Before long you’ll have enough invested that it starts to take on a life of its own, growing all by itself.
With that said, conscious investing can also be a way to steer our money towards companies that take us forward, providing affordable renewable energy or enabling remote working, whilst steering our money away from fossil fuels, vices and weapons.
There are ethical (usually branded ESG or SRI) funds in most fund platforms these days.
It has taken a few years of soul-searching and living very simply in order to start getting a handle on my finances. I’ve made a lot of mistakes, but there are a few books that I’ve read over the past couple of years that have made a world of difference.
The links below are affiliate links, so if you use them we get a small kickback at no cost to you.
Dave Ramsey – The Total Money Makeover
Dave Ramsey has a no-nonsense approach to getting your finances in order, living within your means and building a solid financial footing.
If you’ve ever heard of the debt snowball, it is probably from this book. It, as well as a number of practical steps for getting your finances in check are within these pages. There’s no sugar-coating here and the whole book is a brutal slap in the face that I dearly needed a few years ago.
Of particular interest to us is Dave’s views on car debt –if you can’t buy it with cash, you can’t afford it. That’s something we can get behind.
Grab a copy from Waterstones.
The No Spend Year – Michelle McGah
Have you ever wondered where your money goes? The coffee & scone here, the odd takeaway there when you don’t have the motivation to cook. Perhaps it’s the subscriptions that seem to mount up, with Netflix, Prime, Apple Music or Spotify. It all adds up.
This was Michelle’s problem. She had no idea where her money was going, so on Black Friday one year she set about having 12 months of buying nothing at all. Apart from paying her mortgage and the bare essentials, she couldn’t buy anything. She couldn’t even pay to get around, so she cycled everywhere, including for holidays.
This is an excellent, eye-opening book that you should be able to find at the library (I did), but you can also pick it up on Amazon here.
Tony Robbins – Money: Master the game
One thing that Dave Ramsey and Tony Robbins’ books have in common is that they are written for an American audience, so some translation is required –401K is essentially what we would call a SIPP; but they don’t appear to have what we call an ISA so we have an advantage here. There are also some vowels missing…
However, where Dave Ramsey is a slap in the face, Tony is a goldmine of information when it comes to the psychology of money.
You can grab them both from Waterstones at the links above.
On the other hand, if you would like to try an app that will connect to your accounts through Open Banking and give you a give you a bit more clarity on where your money goes each month, I can heartily recommend Emma.