You know cash rates are pathetic. But you can't quite bring yourself to think about shares. Should you? Shouldn't you?
You think the stock market is just a bit dodgy. Risky. Not for you. But you know how important it is to save and are also highly fed up with getting pennies in interest every year. Overcome your suspicion for 5 minutes and see what investing in 2019 is really like.
1. Meet Suspicious Savers
Don't get us wrong. Cash is an important part of any savings plan. Having at least three months’ worth of expenses in cash for those emergencies makes sense. And you shouldn’t chance it in the stock market for stuff you’ll need in just a few years.
But if you are saving for some longer-term goals and leaving it all in the bank, we don't think you're making your money work hard enough. The stock market carries risks but there are smart ways to take sensible amounts of investment risk on, without turning investing into gambling.
3. Funs, Shares Equities... What?
This is just an example of what a worldwide share fund could look like. You access lots of the world’s biggest brands in one simple packaged up investment. This will usually be called a ‘Global Equity Fund’.
There are lots of ways to invest in stocks and shares without having to choose your own stocks and do months of research. We’ll outline a few of them in the following pages.
Hiding behind the jargon, these are just investment accounts which are protected from tax. Over 2.5 million of us paid into one last year and there's about £250 billion sitting in Brits' stocks and shares ISAs.
Lots of readers are wrestling with whether they leave their money floundering about uselessly in some low-rate cash account OR try and put it to work in the stock market. Yes, this involves risk and yes, might lose some money.
But here's a fact. Since the stock market began, we have been 90% more likely to do better in shares than cash over any 10 year period. And 99% more likely over an 18 year period.
Hhhmm. So how much is at stake? Say a huge crash in the main UK stock market sees it fall by about 30%. Turning your £100 into £70. If you stick the course, you are likely to find yourself back up to £100 in a few years.
You can hedge your bets here too. You can have a cash ISA and a stocks & shares ISA as well – this is not an either/or decision. You can put a very hesitant toe into the world of shares and not dive in with a huge splash.
If you’re saving with at least a 5 year timeline, then having something in the stock market needs to be considered. Especially when interest rates are so dire.
Bamboozled by choice? We’ll tell you which providers we like and why, and show you how other investors rate them too. Have a look at our Best Buys.
Even the stuffy world of finance is going digital and there are some nice new apps which make saving a lot easier. Some apps just round up your change from card purchases and invest it. That’s smart.
And budgeting tools to help you manage your finances. “How much should we save?” is a common question. Try splitting your income into 50% bills, 20% savings and 30% you. What does that look like? Take the Pay Yourself First tip. When you get a pay rise immediately set up a direct debit for 30% of the extra to a savings account. You can’t miss what you never had! Click here to check out some Saving's Apps we reviewed.
The 5 Min Expert
All you need to know. 12 points. 5 mins.
1. 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.
2. There are 5 main types of investment that retail investors tend to think about. Cash. Property. Gold. Bonds. Shares. Bonds are like IOUs we make to 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.
3. 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.
4. 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.
5. 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 have 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 for a baby is nothing short of bonkers. This is an 18 year contract so for heaven’s sake spice it up for schnookums.
6. 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.
7. 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.
8. 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!
9. 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 Mathemeticians. We live with trade wars, oil price shenanigans, Brexit Blah, lunatic leaders and in nation that likes 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.
10. 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
11. 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.
12. We would suggest Vanguard 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.
Compare your options
Our Best Buys tables (https://www.boringmoney.co.uk/best-buys/all-providers/)have lots of filters so you can pick the right one for you.
Stocks and shares ISAs
Suspicious Savers treat cash like a comfort blanket. But with interest rates at historic lows, sitting in cash for years on end is not the smartest thing to do as a default position. You can set up a Stocks & Shares ISA online, from £25 a month and you don't need to be a maths grad either.
Workplace pension – free money
However suspicious you feel, if you work and are over 22, chances are you’re invested in the stock market through your now compulsory pension at work. From April 2019, we pay in 5% of our salary and the boss pays in 3%. So that’s about 8% in total, year in year out. It will make an enormous difference to your life in the long run.
Contact your boss or HR department to know more. You can opt out but this is generally a really bad idea as you kiss goodbye some freebie top-ups from your boss and the Government. Again: free money from your employer and the Government. Make sure you get what you’re entitled to.
These do for investing what Sainsburys Online did for your weekly shop. Make it easier, quicker and simpler. To date it’s been the domain of funky start-ups but with big banks having launched robo advisers in 2018 this is becoming mainstream. If you’re nervous you can pick a lower risk bundle of investments and feel your way. The good news is you don’t have to know anything about the stock market to get going and you delegate all the hardcore management decisions to experts.
For more info about robo advisers, click here.
If you’d like to learn more about what funds are and which one might be right for you, click here.
For more about workplace pensions and how to get free money from your employer, click here.
For more about online investment platforms (the Ocado of the investment world), click here.