Despite what many financial advisers will tell you, investing does not have to be complicated. In the UK today, most people start saving money into company pension plan in the early part of their career. As they rise through mid-management in their late twenties and early thirties and their salary starts to increase, they have more disposable income to think about saving more money for later in life.
Outside of a company pension, your first investment portfolio will most likely be inside an ISA. At time of writing, you can put £20,000 per year into an ISA wrapper, and pay no tax on any capital growth. This is a great way to invest for the future.
While there are not many people I know maxing out their ISA’s each year in their early thirties, if you saved £500 per month, between the age of 30 and 55 (i.e. 25 years) into an ISA and it grew by 10% each year, you’d have a tax-free portfolio of £687,845.
How To Make 10%
If you’re anything like me, you can probably afford to save £500 per month, even if it require tightening up your finances in a few areas. You’re real question, is how to achieve a 10% growth every year. When you start thinking about an investment, every investor whether experienced, or a total beginner, has a view of and what they should and should not invest into. If you speak to ten financial advisers, you’ll generally get ten different opinions, if you search for advice on the internet, you’ll as many different opinions as you want.
While I’m not a financial adviser, I can tell you what I have done to grow my money over the last fifteen years. Remember, up until recently, I have never earn’t more than £65,000, my wife has never earn’t more than £40,000, yet we will retire millionaires aged 55. It all starts with setting up your investment, and actually investing money on the stockmarket.
Remember, the rules? Whats rule number four? Invest for the long term, we’re not day traders, and don’t buy and sell. This means buying business that we think are going to grow over the long term.
A great business, will mean a successful business, and a successful business will mean financial growth. With every investment I make, I hope to share in the financial success over the long-term.
Where most investors loose money is through short-term trades. They buy hype that they read across the internet and think they’re on a sure win. The problem, as you buy that stock, the early investors who made money, are selling, eventually leaving you holding and when its runs out of buyers, you loose money. Remember rule number four.
What Makes A Great Business?
You don’t need to be a financial wiz, have an MBA from a top University, or even have worked in finance to understand what is, and what’s not a great business. Typically there are three things that make a great business to invest into, First, Best or Lots of Cash and No Debt.
- First – If a company is first into a brand-new industry, it will give them the opportunity to take full advantage of the market and most importantly, give them a head-start over rivals.
Typically, when a company invests time and money into using another company’s products, it makes switching to a rival provider very difficult, even if they have a better product. As an examples, Tesla is widely considered to be the first, mass manufacture of electric cars. Being first has allowed them to reap the rewards,
- Best – means you have the better product than all your competitors. As example, Zoom Video Communication has grown over the past year to a 140Billion Market cap, however its core product is not new, but it is firmly the best on the market.
Across the internet, there multiple video conferencing platforms, but firstly none are a good as Zoom, and secondly none as a good companies to invest into as Zoom. In 2020, Zoom is up over 600%, and while it has the best video conferencing product, it will continue to reap the rewards.
- Size Matters – First and having the best product is one thing, but size matters. Size often means cash, and cash matters when it comes to growth. Big businesses often have the competitive advantage, as it helps lower costs through economies of scale, and allow the larger business to spend more trying out new markets than those of smaller rivals.
Apple Inc is example of a size matters business. They started in personal computers and struggled, although the iPhone in early 2000’s and the success around this development, has allowed them to develop new businesses and models. In the early days, the vast majority of profits and growth came from the iPhone. Today profits come from a range of business to include Mac Computes, IPads, Wearables, Home, and Accessories.
I hate selling stock and as general rule, I don’t sell. The biggest problem with selling is knowing what happens next and when to buy again. In the past when I have sold, I have watched it go down slightly, before returning with a vengeance. I haven’t bought because I’m totally convinced it’s a dead cat bounce and I will be able to get it at a lower price.
In my experience, when I have sold a stock, I have ended up missing the vast majority of growth for that year even in those times when a recession is upon us. That all said, there are two times when I will sell my stocks, firstly when I need the money, and secondly, when I see major change in the company. Major change includes leadership changes, acquisitions, debts, competitive threat, or changes in legislation that can all stop or slow growth in a company.
Winner’s Keep Winning
The most important rule to any investment strategy is remember, winners keep winning. The problem is the physiology behind the price now and the price you paid when you first bought the stock. Once you start to see the price increase past that point you bought it, it starts getting harder and harder to buy more shares.
Sadly, we’ve all done it. We’ve all made excuses why we’re not buying more, instead hoping that it’ll come back to your original investment point. The problem is that the stock is at an all-time high and you feel like it’s expensive
There are three investor profiles that I focus my attention to, but ultimately what you invest into depends on your risk tolerance and time horizon (I.e. when you need the money back). Generally, there is a correlation between age and risk level. The younger you are; the more risk you’re prepared to take when it comes to portfolio construction, however it also does depend on how much money you have in your portfolio.
If you’re just starting out, and you’re investing £200 per month, buying 200 of Diageo is not the right move if you’re paying £10 to trade. If you made this trade, you’d need 5% growth, just to cover trade fees. It would be much better to invest £200 into a fund with no dealing charges.
Later in your investing career, more risk, usually means, more exposure to stock’s, especially those in emerging markets, and the FTSE 250/AIM markets. It can also mean exposure to ETF’s, especially targeting specific markets or sectors.
The Starting Point
Early investment is about making those early investments that set you up for the rest of your life. Remember, If you saved £200 per month, from the age of 23 to 68, you’d have a pension pot of £110,400. If you invested it, and it grew by a conservative 8% a year, you would have over a million pounds in your pension pot – £1,044,391 to be precise.
Personally, I have a Stocks&Shares ISA with Hargreaves and Lansdown. With an H&L ISA, you can invest tax-efficiently into over 2,500 funds, unit trusts, OEICs, shares, investment trusts, gilts and even corporate bonds.
A stocks and shares ISA with HL cost’s 0.45% per annum on the first £250,000 of funds within each HL account, 0.25% per annum on the value of funds between £250,000 and £1m, 0.1% per annum on the value of funds between £1m and £2m, and no charge on the value of funds over £2m.
In terms of investments, you have two choices:
- HL Ready Made Portfolio – Personally I started with a £200 per month investment into two funds, the Balanced Growth and the Adventurous Growth. These are both worldwide, majority equity funds, that offer a great growth potential.
Admittedly, they have not done very well for the last couple of years having achieved -7% and -12.2% respectively, but the way I look at, there are going to be some good years, like 2016 when the fund made 22% and those units I have picked up cheaply now, will be valued highly when pound-cost averaging comes into effect.
- TheRetirementBlog Portfolio – Once I had invested for a few years, I started to pick my own funds. Even today, I invest £500 per month into my ISA, into the following funds.
Firstly because I have time on my side before i retire, I invested heavily into risky assets such as emerging markets and technology focused funds. I have also tried to diversify my investments into global funds that offer exposure to major markets:
- Fidelity Global Technology – Cost’s – 1.04%, Offers exposure to fast growing technology companies such as Google, Amazon and Facebook. Made 35% last year and 91% in the last five. (Fact Sheet Here)
- iShares Emerging Markets – Cost’s 0.16%, offers exposure to some of the fastest-growing economies including China, India and Malaysia. The fund made 7.63% last year and 12.31% the year before. (Fact Sheet Here)
- Vanguard FTSE ALL-Share – Cost’s 0.06%. Offers exposure to a board range of companies from across the UK. The fund lost -11.2% last year, but made 3% the year before. (Fact Sheet Here)
- Legal & General US Index – Cost’s 0.06%. Offers exposure to a broad range of US companies across the major indexes. The fund made 20.27% and 126.93% over the last 5 years. (Fact Sheet Here)
Less Than 50 Years Old
I started my career aged 23, and had no spare cash for the first few years. My salary was minimal, and I worked hard on my career, my side-gigs took time, and what little I did have to invested, I invested into my ISA. It really wasn’t until my late 20’s that I was able to step-up my investments.
Given the tax-free nature, you need to be maximising your ISA contributions. As it stands, you can add £20,000 a year to an ISA tax-free. It’s important that you max out this tax free allowance. It’s also important that you think about your risk profile. Personally I’m open to risk, I don’t want to take silly risk’s, but I certainly have no problem with a equity based portfolio while trying to achieve a high rate of growth.
You must make sure you diversify your investments to try and cover all the major industry groups to include healthcare, communications, financials, real estate, energy, utilities, consumer discretionary, consumer staples, industrials, and materials.
In terms of investments, I typically look for 40% ETF’s, 50% Company Shares (40% in UK shares, 35% in Worldwide Shares and 25% in Small/Mid-Cap Stocks), and 5-to-10% in cash.
ETF’s are a fantastic investment tool as they allow you to invest into a broad range of stocks, commodities and Index’s cheaply. One point, you need to choose your EFT’s wisely as the fee’s they charge vary. As an example, the iShares FTSE 100 ETF has an annul management fee of 0.07%, however there are ETF’s that cover the same group of stock representing the FTSE 100, that cost over 2%.
UK Companies – While the iShares FTSE 100/250/All Share ETF’s cover the broader UK companies, there are few UK companies that I think are worth buying into. These have either been recommend or I feel they offer good opportunities for growth.
- British Petroleum/Shell
- Gammer Communication
- Avon Rubber
- Polypipe Group
- Ocado Group
World-Wide Stocks – While the iShares Core S&P 500 and Invesco EQQQ cover the vast majority of the American market, there are American companies that I have either been recommend or I feel are good investments for growth.
- JP Morgan & Chase
More than 50 Years Old
My biggest fear is that aged 55, the year I want to retire, their’s a major recession, 50% will be wiped off the stockmarket and over-night my multi-million pound pension fund will be cut in half. As a consequence, my over 50’s portfolio focuses on growth, without the risk.
As it currently stands, your allowed to invest £20,000 each year, into an ISA and allow it to grow tax-free. The great thing about an ISA over a SIPP, is that you can access it in the same way as you access a bank account. That said, once you have reached your limit into an ISA, what’s next?
The choice is either a stockmarket account but you’ll pay capital gains tax on any growth, or a self-invested pension scheme, but you cannot access this until ten years before your state pension age which for me is probably 58 years old.
My Over 50 Portfolio
Much like the above, the over 50’s portfolio tries to focus investments on a broad range of sectors to cover all the major industry groups to include healthcare, communications, financials, real estate, energy, utilities, consumer discretionary, consumer staples, industrials, and materials.
The focus is on returns, without taking on an excessive amount of risk. I’m looking for growth, but the days of me investing in small-cap technology stocks are long gone. To achieve a low risk portfolio, a portfolio should be split into the following;
- Cash & Low Risk Funds – 40%
- Global ETF’s – 40%
- Global Stocks – 20% (80% Large & Mid-Cap, 20% Small-Cap)
Cash & Low Risk Funds – While I intend to have a lot of cash on hand in both my emergency fund, and inside my portfolio, cash doesn’t literally mean money doing nothing. What it does mean, is low volatility, low growth, but very liquid, that I can cash in when needed.
- Artemis High Income Class – (Fact Sheet Here)
- Legal & General Gilt Index Trust -(Fact Sheet Here)
- ASI Sterling Money Market – (Fact Sheet Here)
- M&G Gilt and Fixed Income Fund – (Fact Sheet Here)
Global ETF’s are a fantastic investment tool as they allow you to invest into a broad range of stocks, commodities and Index’s cheaply. Unlike in the
- iShares FTSE 100 – (Fact Sheet Here)
- SPDR FTSE UK All Share – (Fact Sheet Here)
- iShares Core MSCI World – (Fact Sheet Here)
- Vanguard FTSE Dvlp Europe – (Fact Sheet Here)
Global Stocks – These are individual stocks that I have either been recommend or I feel are good investments for growth over the long term. They are all established businesses that offer low risk and and growtgh over the long-term.
All these stock fall into the “Size Matters”, of what makes a good stock for the future, and while you can never be 100% sure, I would be happy to bet that my children will be investing in these stocks.
- JP Morgan & Chase
- British Petroleum/Shell
Choosing an investment portfolio doesn’t have to look like mine, however whats important is diversification. You need to have a range of different investments in a range of different sectors.
What you tend to find is that as investors we migrate to one sector. This year, technology has been on fire, and I’ve bought a number of the latest technology stocks for the future, but this does mean my portfolio is now tech heavy. When technology as a sector has good day, my portfolio increases substantially, but when technology has a bad day, my portfolio looses.
This year, I will need to either adjust by strategy, or think about re-balancing my portfolio to keep it diversified.
Note: The information in this article should not be taken as financial advice or investment advice. Stocks, ETF’s, Funds and model portfolios are shown as for educational purposes only. Remember, financial and investment advice needs to be tailored to the individual and will depend on numerous factors not included within this article. You must research and understand whether a specific investment is right for you, and remember, past performance does not guarantee future performance.