The important part of investing your savings is to be able to do it yourself and pay as little fees as possible, especially in the early days. The difference between using a financial adviser and not can be a significant difference. In my experience, financial advisers rarely outperform the index’s, and there is a minimal point in using them when you can do it yourself by merely buying index funds or ETF’s.
As an example, if we were trying to become a millionaire by the time we were 55 and invested £200 per month, from the age of 23 to 55 years old, you should have £506,867 in your bank account. If you’ve used a financial adviser and you’re paying 2.5% for the pleasure, that same investment would only grow to £343,104. The financial adviser would have cost you a massive £179,370 over the 31 years.
I’m a massive fan of self-investing, and I believe it’s the best way of growing your money over time, especially in the early years. That said, you need to understand whether you’re capable of self-investing.
Too often, I speak with people who’ve tried to follow the advice but found it too difficult to discipline themselves to save and invest over time. Typically, they follow this advice and self-invest but only do it for six to eight months of the year. Why? Because in the other months, they spend the money before they have time to invest it.
On the same token, because your money is freely open, you need to be disciplined enough to leave it growing over the years. Too often we meet with people who’ve started building their investment portfolio but have decided to take their growing pot and spend it. The effects of which can be seriously detrimental to your future.
As an example, if you saved £200 per month between the age of 23 and 55 (i.e. 33 years), with compound interest and an interest rate of 10%, you’d end up with £506,867 by your 55 birthday. If aged 33, you decided you wanted to liquidate your retirement portfolio, you’d be able to take out £46,699. However, with your portfolio now starting at zero, the £200 per month that you were investing will now only become £161,283 by the time your 55.
What Am I Trying to Achieve?
What we’re investing for really boils to one thing, compound interest. When you’re working our the interest on your investment, there’s typically two way to do this; Simple and Compound. As an example, if you invested 1,000 in the stock market and it grew by 10%;
- With simple interest, at the end of year one, you’d have £100 in interest. At the end of year two, you’d have £100, year three £100 and so on.
- With compound interest, things work slightly differently. At the end of year one, you’d have £100 in interest and a total pot of £1,100. In year two, you’d now have 10% growth on the £1,100 meaning that your interest would be £110 and a total pot size of £1,210. At year three, it’s now £121 and £1,331 and so onwards. The point is that with compound Interest, over the years, your money will grow quickly.
What Risk Level Am I Prepared To Take?
Risk tolerance depends on your investing time horizon and when you need the money back. If you need the money back in the next three years, you cannot afford to take chances with your money. If it’s not there because you have invested in emerging market equities and they have dropped in price, your retirement is at stake.
If you’re starting out saving for your retirement, you should be looking at portfolio growth, and this means taking a risk. You should be looking at the equities market, especially across emerging markets such as Asia or Africa.
It’s also acceptable to put money into the latest IPO, knowing that if it doesn’t perform right from the outset, you have time on your side to wait for it to perform, and growth on your money.
Market timing is everything. The idea with shares is to buy low and sell high. The problem, I don’t have a crystal ball, and I cannot predict when the markets are going to rise or fall. If you cannot predict when the markets are going rise, basically you have no chance of ever making money on the stock market – or do you?
Actually, you do, and you do this by Pound-Cost Averaging. The idea behind is that you buy a fixed amount of a specific investment each, and every month. It doesn’t matter if the stock-market goes up, or down, you keep buying every month. Effectively we’re accumulating shares in a specific position over time, with the idea that at some point in the future, we can sell those multiple positions for more than we paid for them.
As an Example
Each month, I buy £500’s of SPDR FTSE UK All Share UCITS ETF into an ISA. I buy this every month whether the market is up or down. At the time of writing, it cost £52.28 per share, meaning that for my £500, this month, I bought ten Shares. The point is, I have been buying shares since May 2015 when the share price was around £40 per share, however for a few months in 2016, in dropped to around £35 per share.
With pound cost average, you need not let this phase you. All in means is my £500 per month, was buying six-teen shares, rather than the current ten shares. Since 2015, I’ve accumulated over 600 shares, and due to pound-cost averaging, I’ve managed to time the market perfectly with a 30% return that I would not have been able to achieve if I had tried to time the market.
Watch Out What Your Broker Is Charging
Your broker is the person that will be buying the shares on your behalf. They will charge a commission, however, it’s essential, especially in the early stages of investing, that you minimize this commission.
As an example, let’s imagine that you’re buying £ 100’s per month of the SPDR FTSE ETF that I buy each month. Your broker is likely to charge you £7.50 of this transaction. This means you need growth of a massive 7.5% just to cover your transaction costs.
Realistically, the minimum size for a transaction that will cost £7.50 is £500 or 1.5%, however, this can be reduced further if you increase the amount, or only buy shares ever two/three months.
So Where Do You Start
The first point to make clear, you don’t need the help of a financial adviser to grow your money. It’s possible to invest, and grow your money, yourself through a self-invest platform.
Your first point of call is the set yourself up an ISA. In the UK, if you’re over the age of 18, you have a £20,000 annual ISA allowance. By investing in an ISA, you will not have the pay any tax on the stock-market gain that you make.
Currently, there are two types of ISA’s, Cash ISA’s and Share ISA’s, however, to grow your money, you want to invest in Stocks and Share’s ISA’s as cash ISA’s will not provide you more than 1.5% growth.
Share ISA’s come in a range sizes, prices and option, however one of the best options for you in these early days, would be the US financial institution Vanguard.
Vanguard operates across the world and has assets upwards of £3.5 Trillion. Their ISA investment platform is an ideal starting point for you save your £100 per month due to the zero transaction fees and meagre annual management fee.
If you set up a stocks and shares ISA, you could buy and sell Vanguard Funds with no commission and depending on the fund, a low annual management fee.
As an example, I would be looking at the Vangaurd LifeStrategy 100% Equity Fund which currently charges 0.22% Annual management fee and to-date (October 2019) has returned, 5.9%
Generally, there are two tax implications you need to think about before you start investing.
- Capital Gains Tax: If you’ve invested outside your Stock’s and Shares ISA above, and sold your shares at a profit, capital gains tax will be liable on your shares.
- Dividends Tax – Like above, if you’ve invested outside your ISA, you’ll be liable for dividends tax on everything above the £5,000 tax-free dividend allowance.
- Stamp Duty – is charged at 0.5% on each transaction.
You can’t outsmart the market.