This is a guest article by Lars Kroijer.

From today you can invest up to £15,000 a year into your ISA. With rates on cash at historic lows, more and more people are looking to invest in the equity markets.

So is it time to find an expensive whiz kid fund manager who can turn your modest savings into millions?

Or maybe you’re the new Warren Buffett – should you get to work ferreting out some winning stock market investments?

Not so fast! (And I say that as a former hedge fund manager myself).

Getting to a great portfolio is quick and easy, but you need to make sure you’re going down the right road first.

I estimate it will take you another 300 seconds or so to read this article and discover how to create a portfolio that will deliver better returns than nearly all the expensive options out there.

Can you afford not to read on?

Don’t try to beat the market

Let’s start by accepting that you can’t outperform the financial markets. Don’t worry, virtually nobody can beat the market for long – very probably including those that sell you expensive financial products.

And you don’t need to beat the market anyway to get a perfectly good outcome from your investing.

So don’t buy any expensive funds!

Instead, I suggest you invest your ISA (aka NISA) into a simple portfolio that consists of just the following two investments, in proportions that suit your risk tolerance and stage of life.

#1: A cheap global equity tracker fund

If you are after high returns and can tolerate high risk, buy the broadest and cheapest equity index tracker you can.

You want an ETF or index fund that tracks the MSCI All Country World equity index, or something equally broad. Look at Vanguard, iShares, Fidelity, and State Street, or read previous Monevator articles for the very cheapest options.

A global tracker gives you maximum diversification at minimum price (perhaps 0.3% per year, pick the cheapest). It is probably the only equity exposure you will ever need to have, in your NISA or elsewhere.

Don’t buy funds that charge you more to actively pick a different set of stocks from the index.

They probably can’t do better than the index in the long run and the costs will eat into your returns.

#2: UK government bonds

If you want minimum risk, buy UK government bonds with a time to maturity that suits your time horizon. So if your horizon is 10 years, buy 10-year maturity government bonds, and so on.

If the bonds don’t match your time horizon, then you either end up trading shorter term bonds until your 10 years are up (which is an expensive headache), or you take unnecessary interest rate risk with longer term bonds.

UK government bonds are the highest credit quality security in the country, and this leg of your portfolio aims to give you security, not returns.

Again, you can get your bond exposure via an appropriate ETF – which saves you trading the bonds yourself. And again you should pay very little for it, perhaps 0.15% per year.

Look at the same cheap tracker providers for your bond fund as you did for your equity exposure. These companies are market leaders for a reason.

Blend your equity and bond exposure to suit

If like most people you want an exposure in between the two, mix the stock and bond ETFs accordingly.

• For a young person who can take a higher risk, perhaps a 75%/25% equity/bond split.

• For someone closer to retirement, perhaps a more conservative 25%/75% equity/bond split.

Whatever your exact split, this simple, low cost, two security mix portfolio will in my view provide you with a less complex and better risk/return profile than 95% of portfolios out there today.

Investing your ISA doesn’t have to be difficult or expensive to be effective.

Lars Kroijer’s Investing Demystified is available from Amazon. He is donating all his profits from his book to medical research. Alternatively, read his Confessions of a Hedge Fund Manager.

Good reads from around the Web.

A bit late with the links today. Blame BT broadband. It fell over in my house and made it impossible to load about nine out of ten of the websites I tried.

Google, of course, remained accessible throughout. It’s tough as a cockroach.

I’m sure we’ll be Google-ing cures for radiation burns and tasty recipes for three-eyed rats come the apocalypse.

[continue reading…]

“I am not obliged to do any more. No man is obliged to do as much as he can do. A man is to have part of his life to himself.”
Samuel Johnson

I assume the famous 18th Century Londoner and dictionary pioneer Samuel Johnson would include women if he were still issuing pithy soundbites today.

Because despite the headlines about high youth unemployment – or perhaps the cause of some of them – the bigger problem is that British men and women alike are working too many hours.

Since the recession pulled down productivity, we’re producing 21% less output per hour of wage slavery than the average G7 nation.

Real incomes have stagnated, too. The 1% are at least getting richer off of all this effort – and you can if you run your life like a capitalist – but many in the middle are in hock to a treadmill they bought on a payday loan from a late night TV shopping channel to keep up with their next door neighbour’s rat rotastak.

Sorry, I think I got up on the wrong side of bed.

Ratting out the rat race

As a nation we’ve worked hard for decades to get ever more deeply into debt.

And what for?

Even the simplest middle-class aspiration – a humble mortgage – looks all but beyond the next generation.

In the South East we’ve built too few homes, allowed too few to buy the ones we have built, and bid up house prices to a level where the Bank of England governor has just stepped in to stop first-time buyers in London (at least those who don’t work in the City or have a hotline to the Bank of Mum and Dad) from getting a house in the traditional pre-financial crisis way – enough optimistic bragging about their income to make an oligarch blush, if not outright fraud.

But maybe it’s all academic, anyway. Who can afford to buy a house after they’ve paid for university?

Enough!

Instead of slaving away for 45 50 years and keeping your spirits going with stuff you don’t need, can’t afford, can’t digest, or that plays havoc with your marriage and/or your nasal passages, why not slave away (or work smarter) for merely 20-25 years, spend less, invest the spare, and retire early to a life of leisure, global exploration, study, money-making on your own terms, or a dream career that pays peanuts?

Or heck, even dossing at Ladbrokes as the only mug punter in credit if that’s what floats your boat.

The point is to find your own terms, as best you can, and live them. We live in a world full of money, wealth and opportunity, but it’s easy to squander the lot.

“Most people are too busy earning a living to make any money,” someone once said.

History doesn’t record if he said it hunched over a desk he didn’t want to be at aged 65.

Then again, perhaps the words weren’t bitter, but triumphant. Shouted into the wind from a chilly, gorgeous and empty British beach where he was walking his dog during rush hour, because he runs his business from home.

Live this moment

The title of today’s post was nicked from the British poet Simon Armitage’s wonderful Selected Poems.

The following two stanzas from his poem It Ain’t What You Do It’s What It Does To You sums it up for me – and I am partly writing this rant because I’ve drifted myself, and I need to get back on track.

I have not padded through the Taj Mahal
barefoot, listening to the space between
each footfall picking up and putting down
its print against the marble floor. But I

skimmed flat stones across Black Moss on a day
so still I could hear each set of ripples
as they crossed. I felt each stones’ inertia
spend itself against the water; then sink.

You’re a long time dead.