What caught my eye this week.

There are many things I do because I am an investing maniac that you probably shouldn’t.

For starters, I invest actively. That’s why I coaxed in my passively-pure co-blogger to keep Monevator on the straight and narrow.

Here’s another crazy notion of mine – I want to be able to live off my capital.

I don’t mean reach some lump sum that I then dwindle down to nothingness while eating grapes and watching Loose Women.

I mean replace a notional salary with an investment income that exceeds it, generated from an otherwise unmolested portfolio.1

This is a pretty quixotic goal on multiple fronts, as some of you have pointed out over the years.

First, it means I need a lot more money amassed before I can declare I’m financially-free on my terms. Not planning to spend the wodge down to zero has a big impact.

Second, I don’t plan at this point to ever entirely stop working for money. So my notional salary will be topped up by some kind of continuing income for years to come, making it all an even weirder modus operandi.

Third, I don’t have kids, have never aspired to, and it’s now looking unlikely I ever will. So there will be no official heirs to leave a woefully under-taxed inheritance to – only friends, relations, and the metaphorical dog’s home.

Really I should plan to spend the lot on Wine, Women, and Whatever – feel free to re-jig for your own sexuality and alcoholic tastes – and go out with empty pockets. Perhaps I will, but it’s not a goal I have in mind.

But for me, investing isn’t really a means to an end, it’s a means to a means.

When I tell people I don’t care much about money, they raise their eyebrows, given my passion for markets – and this site. Obviously on some level I do care about money, but really even spending it is not what motivates me.

I seem to find it all a big game and a passport to self-purpose. In my head I am a bohemian and I lived like a graduate student for decades despite having increasingly chunky assets because I liked it that way. I rarely judge people for not being able to save as I have, because frankly I found it no hardship.

But most people – even most of you – aren’t like that. You’re investing because you have to. You want to be able to retire in comfort, sooner or later, and perhaps have more to spend along the way. You have kids you’d like to help out. You hate your job and want to be free.

Remix to suit.

Who’s weird, anyway?

What you might not realize is that people like you have puzzled economists for decades.

Indeed, even though some of what I’ve written about myself above probably seems a bit out there, lots of people – especially in the US but increasingly here too since the advent of the pension freedoms – are arguably just as irrational.

The reason – the puzzle – is why most people don’t buy annuities when given the choice?

Theoretically annuities maximize the amount of spending you’ll potentially be able to do in an average retirement. This is because annuities spread the risk of any particular retiree outliving their savings among many retirees.

The alternative – to self-insure against a telegram from the Queen – is an expensive option.

I suspect people don’t buy annuities because the thought of being hit by a bus the next year and leaving an annuity company hundreds of thousands of pounds up on the deal is eye-watering.

But that risk is the price you pay for not running out of money – and for probably spending more than you would have in that year until the bus comes. Your sadly early demise keeps somebody else having fun at 100.

Also, as you’d be dead, who cares?2

I won’t hash it all out here because Victor Haghani of Elm Funds has done a great job for us.

In a post succinctly entitled The Annuity Puzzle, he makes a few simplifying assumptions and then offers the following graph:

The blue bars shows a consistent and high spend from an annuity. The red bars show what happens if you have to make sure you don’t run out of money.

It’s a pretty compelling image, presuming the maths checks out. As I say, assumptions are made. Your mileage may vary.

One thing that probably isn’t a valid criticism of the pro-annuity argument though is that annuity rates are too low. If rates are low it’s probably because expected returns from other investments are (in theory) somewhat lower, too.

And low expected returns don’t have anything to do with longevity risk, anyway.

I’m no expert on annuities – they still seem far away so I’ve not crunched the numbers for myself. Friend of the site and IFA Mark Meldon wrote a great post on annuities back in May, so check that out.

And of course you can see all our articles on deaccumulation for the other side of the argument, such as this one from The Greybeard.

You should also read the full article at Elm Funds.

I’ve long thought I’d buy an inflation-linked annuity to cover my basic income floor. Beyond that I’d be the oldest Wolf of Wall Street on the block, and maybe die as one of those mystery millionaires you read about who hoards supermarket vouchers. (Albeit from Waitrose or Whole Foods!)

But what about you?

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1. In reality I’d probably continue to tinker until senility sets in. But this would be the high concept. [↩]
2. I know, I know, your heirs and spouse. [↩]

Okay, so you know how to open an online broker account. The next step on your road to fully-fledged investor status is to actually purchase some investments.

In this article we’ll look at how to buy an ETF (Exchange Traded Fund).

What is an ETF?

Before we get giddy with over-excitement, a quick reminder as to what an ETF is.

ETFs are funds traded on a stock exchange, as the full-fat version of their name suggests.

As investors buy and sell the ETF throughout the day, their price will vary.

Strictly speaking this means the exact price you pay for the ETF depends on supply and demand, rather than on the value of the assets held by the ETF.

In practice though, there is very little difference between the price of a typical ETF and the value of the assets it holds. Any differences are almost always quickly arbitraged away.1

To be completely accurate, we should note there are some obscure and illiquid ETFs where pricing and asset values may not always align.

There can also be a divergence for brief moments in extreme market turbulence – again usually only with smaller ETFs, or those holding more exotic stuff such as rarely-traded corporate bonds.

Neither factor should concern a passive investor. We should be choosing ETFs that track broad indices, and watching Netflix rather than our portfolios when the market throws a wobbly.

The art of the deal

Let’s get trading! To start we need to navigate to the trading screen. We’re using Hargreaves Lansdown in our example, but the process is similar for other platforms.

First off, we need to find the ETF we want to trade. We find it by searching for its ticker symbol.

The ticker is the unique name given to each traded security on the stock exchange. You’ll find the ticker on an ETF’s factsheet, or perhaps from an article like our guide to low-cost funds for passive investors.

In the screen below we’ve typed in HMWO, which is the ticker for one of HSBC’s global equities ETFs:

The platform finds the ETF and gives us the option to trade (that’s the green arrow in the picture above).

Next we’re taken to the dealing screen:

Woah! Let’s run through the information we’re being bombarded with here.

Nice spread

The first thing you might notice is that there is a difference between the ‘Buy’ and ‘Sell’ prices. The sneaky broker is charging you more to buy the ETF than you’d get if you wanted to sell it.

This is common to all exchange traded securities (shares, bonds, investment trusts and so on):

• The bid/sell2 price reflects the market demand for the ETF. That is, what the market will pay for your holding.

• The ask/offer/buy price reflects the market supply for the ETF. That is, the price the market will charge you when selling you their holding.

The difference between the two is called the bid-ask spread. This spread in effect represents the cost of trading in the ETF, ignoring any additional trading fees levied by your platform.

For our example ETF, the spread is very small at around 0.05%3. The ETF we’ve chosen is a large and highly traded security.

For smaller, less frequently traded securities, the spread can be much wider. This means trading such an ETF costs more.4

Dealing options

Going back to the screen above, we next see two further options – ‘Deal now’ and ‘Stop losses and limit orders’.

• ‘Deal now’ does what it says on the tin – you’re looking to buy and sell at that moment in the market. The option to deal now is available during market trading hours. That’s 8AM to 4:30PM Monday to Friday for the London Stock Exchange.

• Stop losses and limit orders are different. You don’t immediately buy and sell with these orders. Rather, they are instructions to sell or buy a security if it reaches a particular price, which you set yourself. The idea is you don’t pay more than you want for your chosen security, nor sell a holding for less than you want to get for it. Passive investors in large liquid ETFs can ignore all this, but The Investor has written an article about these more advanced trading options if you’re curious.

We’ll proceed to deal now. We fill in the rest of the details, double check them, and then press the ‘Place a deal’ button.

The Final Countdown

We’re now taken to the following rather intimidating screen:

You’ll notice there’s a big flashing countdown warning us that we have only 15 seconds to accept the offered price. There’s also a fair bit of jargon. We’ll get to that in a moment.

Don’t panic! Remember to keep breathing, and that you are not launching nuclear warheads.

All we need to do is take a few seconds to triple check we’re happy with the details – that we’ve got the right ETF, that we are buying, not selling, and the value of our trade.

Should the countdown elapse the trade simply expires and all we have to do is click the button to refresh our quote. So we needn’t rush.

We click ‘Buy’. A moment later our broker cheerily confirms the trade has gone through. It will show the details of the trade in a screen like this (and will also email or message you this information):

Give yourself a mini fist pump. You’ve successfully bought your first ETF!

Jargon Busting

The last two screens saw a few new terms come up:

• PTM Levy – This is an extra £1 charge made when you buy or sell London Stock Exchange listed shares with a total trade of more than £10,000. It’s used to fund the Panel of Takeovers and Mergers (PTM). The PTM levy is not chargeable on ETFs.5 So we didn’t pay a charge.

• Commission – This is the fee our broker stings us with for buying or selling investments. Typically you pay a fee to deal in shares. Though some brokers don’t charge for trading ETFs. Ours does, billing us for £11.95.

• Stamp Duty – Not to be confused with stamp duty on property (technically, that’s called Stamp Duty Land Tax), this is an additional 0.5% charge levied when you buy shares. You don’t pay Stamp Duty when buying an ETF. So again, we didn’t have anything to pay here. That leaves more money for us to compound over time – result!

• Settlement Date – The date at which ownership of the security is transferred. We bought our ETF on 1/10/2018, and it won’t be settled until 3/10/2018. This delay is to reflect the process of legally transferring ownership between buyer and seller. In practice this isn’t a big deal – if you sell via your broker, the money will appear in your account and you can use it to purchase new investments. If you buy, the holding will appear in your list of holdings.6 For ETFs and shares, settlement is ‘T+2’ – that is, two days after the trading day. For Corporate Bonds settlement is T+2. For Gilts, T+1.

The Contract Note

All this information is formally set out on a record called a Contract Note. Your broker will provide this to you shortly after you complete your trade. Here’s a copy of ours:

You’ve bought your first ETF

So how was it for you? Hopefully you remembered to keep breathing when the 15-second countdown started and you’re still with us.

It’s really not that scary to buy and sell on the stock market. These days it’s no more complicated than buying novelty socks on Amazon.

Just remember to do your research in advance, and avoid getting drawn into day trading or other wealth-sapping activities. Make your well-researched investments, then go and do something fun and leave them to grow.

• Are you ready to invest? Have a look at some low-cost funds we favour.

Read all The Detail Man’s posts on Monevator.

1. Arbitrage is when sophisticated investors with deep pockets buy one asset and sell another to pocket any anomalies in pricing. [↩]
2. These terms are used interchangeably by brokers and investing nerds. [↩]
3. Worked out as £0.01/£1.68 [↩]
4. The relationship between spread and ‘liquidity’ is very complex, something I spent a year of my life researching and investigating for work. I won’t get that year back. [↩]
5. It is not charged on Open Ended Investment Companies, aka OEICs, either. [↩]
6. Note that when it comes to dividends, you need to legally own the security on what’s called the ‘Record Date’ to be entitled to the dividend. [↩]

What caught my eye this week.

A short while ago the UK blogger DIY Investor wrote passionately about the threat of climate change. He’s now put money into the Impax Environmental Investment trust in part to do something about it:

As I was writing my article on climate change recently, I must admit to a feeling of guilt that I did not hold a ‘green’ fund in my portfolio.

I have some reservations regarding this sector and suspect many funds are not really as green as they make out.

However some are clearly better than others [and] I think that being aware of a potential problem brings with it a responsibility to do something positive.

So, time to make amends.

We get a fair few queries about ethical / SRI1 investing. In response, The Accumulator wrote a big article about it last year, with a tilt towards passive options.

What jumped out at me from DIY Investor’s write-up though was this section from Impax on the happy consequences of buying a big wodge of its shares:

Environmental impact of £10m investment in IEM plc

• Net CO2 emissions avoided 7,940tco2
  Equivalent to taking 3,940 cars off the road for a year

• Total renewable electricity generated 2,150 MWh
  Equivalent to 520 households’ electricity

• Total water treated, saved, or provided 2,340 megalitres
  Equivalent to 18,500 households’ water consumption

• Total materials recovered/waste treated 1,340 tonnes
  Equivalent to 1,340 households’ waste arising

I am as concerned about the environment as anyone I know. I applaud the aims of both the trust and my fellow blogger.

However I can’t decide whether buying into a trust like this really equates to anything like the impact quoted above.

I’m not doubting the underlying green businesses which it invests in. I haven’t researched them.

Rather, if you buy shares of an investment trust in the open market, you’re simply swapping your money for the shares of someone else. You now own a bunch of companies achieving those lofty targets – but now somebody else does not. Surely it’s a zero sum trade?

It’s only when the fund raises money that new funds will go into the sector.

That’s on the one hand.

On the other hand, the greater the demand for assets like this, the stronger the secondary market and the easier such companies – and funds – will find it to raise money in the future.

So on balance I think owning the fund does no harm and probably a little good – but it would be best to buy into such trusts when they first raise money if you want to make the most impact.

Of course, I own Tesla shares and console myself for putting up with their volatility with the importance I see in its mission.

But then again that electric car / battery / controversy maker will certainly need to raise money again in the future if it’s to achieve its ambitions. Hence its shares really do need all the support they can get.

Do you consider ethical factors when making an investment – and would you feel easier flying to Spain on the back of it?

Let us know in the comments below.

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1. Sustainable, Responsible, Impact Investing. [↩]