Holly's blog: All you need to know about investing. 12 things. 5 minutes.
By Mike Narouei, Content Producer at Boring Money
21 July, 2018
This week I promised someone I would write the blog for her. She’s started to read it because “I really should understand this stuff a bit more.” Here is my potted version of what I think you need to know about investing in 5 minutes.
Investments exist so that countries and companies can raise money. We collectively give them money so that they can afford to trade (East India Company), build roads (governments) or buy new planes (British Airways). We do this because they will either pay us some interest on our loans, or because we hope they’ll do well, get more valuable and so our share in the company will go up in value.
There are 5 main types of investment that retail investors tend to think about. Cash. Property. Gold. Bonds. Shares. Bonds are like IOUs we receive from countries and companies which net us some interest and a share of any good fortune the company has. Shares, or equities, are literally buying ownership of a small fraction of the company.
Generally it’s a good idea to have a mix of this stuff because they balance each other out. If Donald Trump starts shouting at North Korea, shares will typically fall because it’s seen as a threat to the normal functioning of companies and markets. No-one’s thinking about buying a new car, flying or importing steel for their factory when a nuclear threat is raging. But at the same time the price of gold would probably soar because it’s tangible, you can keep it under the bed and it’s seen as safe when everything else is not.
We all know that investing carries risk. But this risk is not the same as running across a motorway, which is just stupid risk! Investing risk typically means volatility and is not to be confused with being cavalier or putting it all on black. It’s just describing how much something will jump up and down in value. Cash is like a staid old tortoise. Bonds are like a gentle wave. UK shares are like the Peak District. And Emerging Market shares are like a grasshopper on speed.
One of the only really important questions is how long your timeframes for investing are. The main thing is to avoid being a forced seller when things are rubbish. If you had invested in 2005 and needed the cash to buy a house in 2008 after the global meltdown, you would have been stuffed. If you had invested in 2005 and taken the money out in 2015, you would have made 74%. The longer your timeframes the more volatility you can stomach. If you are saving for 20 years and are sitting in the comfort blanket of cash, the major risk is that you won’t have enough money when you retire. Taking out a cash Junior ISA (https://www.boringmoney.co.uk/learn/investing-guides/product-guides/junior-isa/) for a baby is nothing short of bonkers. This is an 18 year contract so for heaven’s sake spice it up for schnookums.
Less confident or time poor investors should avoid buying single shares or following tips from the cabbie or an ‘expert’. Use a fund. This has been true since the 1600s when investors realised that packaging together and backing multiple ships and journeys of the East India Company was smarter than backing one which could be sunk or raided. Think of a fund manager like a personal shopper you employ to find the best things for you and match them together. A fund will typically have about 30 – 80 investments in it so you don’t have to do the choosing or monitoring.
A great way to start is a ‘multi-asset’ fund. Back to point 2. This means you pick one investment fund and in that, the experts will blend all of those investment types from around the world. So you get a truly balanced meal with a dash of China, a dollop of bonds and a pinch of Apple. A passive multi-asset fund is the cheapest way to get going. You will generally have to choose how risky you are prepared for this to be. Back to question 5 and timeframes. 5 years or less? Go less risky. 10 years or more? You can spice things up.
Don’t pay more tax than you need to. We all have a £20,000 Isa allowance every year. An ISA is like a see-through financial Tupperware box you stick your investments into and the tax man can’t get into it. Use it.
Don’t procrastinate. There is no right time to start and no-one has a clue what the future holds. Not even very clever grey haired Mathematicians. We live with trade wars, oil price shenanigans, Brexit Blah, lunatic leaders and in a nation that like Love Island. This all defies logic and how grown-ups should behave. Drip feeding in a little every month on a direct debit is a good way to smooth out the price at which you buy in to the markets.
Do not panic if in year one things go south. In 2008 £1,000 in the FTSE fell to about £700. The next year it basically made it all up. If the Daily Mail shrieks stock market meltdown in the headlines, consider topping up. The stock market is “On Sale” and cheaper than it was last week. This take cojones by the way, but is actually quite sensible.
Ignore all the waffle and jargon and over-complexity. If the experts could really predict what markets would do they wouldn’t need to work as an expert. Save as much as you can, as often as you can, as early as you can. Pick a simple investment to get started with. Don’t overpay.
I would suggest Vanguard (https://www.boringmoney.co.uk/isas-pensions/vanguard-investor/)LifeStrategy in an ISA if you are worried about high fees. If you only want to start with a tiny amount try Wealthify which opens an account for people with £1. If it’s a pension and you like the security of a huge brand which won’t go anywhere then try Aviva for a (relatively) simple journey. If you are time poor and want someone to do it all for you try Nutmeg, which asks a few questions and then does a Blue Peter – here’s-one-I-made-earlier. Our Best Buys (https://www.boringmoney.co.uk/isas-pensions/)tables have lots of filters so you can pick the right one for you. If you want to blend your own then check out some ideas from independent research firm Square Mile here (https://emailboringmoney.co.uk/t/4QZH-RRI-DEQJU-AI86-1/c.aspx).