Yesterday I related the tale of D., my friend who reached out to a financial adviser, only to get his hand wedged in the door of the adviser’s getaway vehicle as it sped from the scene of the crime, leaving incomprehensible documents and 7% fees fluttering in its wake.
What advice should D. have got instead? Where should he put his money?
Firstly, he should have got an education.
Perhaps financial advisers should be forced to give out general advice and simple literature explaining the basics of investing (such as costs and compound interest) before they’re allowed to sell any products.
At the very least, a client shouldn’t leave more confused than when they went in.
As for saving for the future, I’m not an adviser, but when asked how to get started, I usually suggest a super-simple cash and index tracking combo, all held in tax-free accounts (ISAs in the UK).
In my view, new investors should:
- Read up on investing
- Meanwhile get out of debt
- Build up an emergency fund with your monthly savings
- Use a tax-free cash ISA
- Move your savings to follow the best rates
In D.’s case, that would keep him busy for 2-5 years given his current rate of saving (which he should massively increase, I agree) until he was ready to invest in riskier assets.
Next steps:
- When your emergency fund is big enough, think about equities
- Direct half of the monthly savings into a cheap total world market index tracker
- Run the tracker in a tax-free stocks and shares ISA
- Keep saving the other half as cash, into a new account
- (Keep the emergency fund cash separate and untouchable)
Even with a 50% drop in the stock market, the new investor’s portfolio will only fall to 75% of funds invested, without the complications of introducing bonds or other assets.
Ongoing strategy:
- Try hard to save more money
- Don’t worry about stock market fluctuations
- After 3-5 years, consider a more diversified ETF portfolio
Simple is best for new investors
My aim with this simple 50/50 cash and equities strategy is clarity and low charges.
Compared to what D. was sold, the charges are:
- Initial fee: 0% (compared to at least 4% with the active fund)
- Ongoing costs: 0.5% or less (against the 2% pinched by the fund and adviser)
We can argue the details, but a simple, easy to understand strategy gets somebody like D. started, establishes the savings habit, and helps them understand the gyrations of the stock market – while also benefiting from pound-cost averaging, tax-free growth and low fees.
How do you suggest a new investor gets started? Let us know below!
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How do you suggest a new investor gets started? Let us know below!
I agree that simple is best. Indexing is the simple approach to stock investing. I don’t believe in Buy-and-Hold (ignoring valuations when setting your stock allocation). Investors need to have confidence in their plans and I don’t think it is possible to maintain confidence in a plan that does not call for allocation changes in response to big price changes. So I would advise a newcomer to consider a modified approach to indexing in which valuations are taken into account (Valuation-Informed Indexing).
Rob
Over the past ten years i have trusted my money with fund managers with the likes of Neil Woodford, Crispin Odey, Angus tulloch , Hugh young, Hugh Hendry and more recently with William Littlewood. These guys have a lot of experience and i believe they are likely to do a lot better job of selecting stocks or making macro calls than i ever will and compared to what the stock market has done over the past decade, these guys have made me a decent amount of money than i would have obtained from a tracker fund and have thus been happy paying for charges. To cut charges i would recommend a discount broker. I would never suggest to any one that they must do this as everyone has their own views and each person will play their investment game differently and that is why financial education is important so that each person can decide what is good for them and how best they can make a return in the way they want. Some may even decide that investing in a business is a better approach for them as you actually have a say in shaping the future growth of a business than being a minority shareholder when buying shares.
@pkora – Thanks for your comments and congratulations on your super choice of fund managers. Crispin Odey in particular seems to be emerging as some kind of genius. 🙂
I’m glad this route has worked out for you, and if you’re going to invest in managed funds then discounts from the supermarkets is definitely the way forward, I agree. It keeps the Financial Adviser’s hand out of your pocket, as well as refunding other initial charges.
However I still think it’s a poor strategy for new investors.
Even leaving aside the known problems of picking fund managers (costs, survivorship bias, style drift etc) I think new investors are paradoxically the *least* likely to be able to hone in on decent managers. There are thousands of managed funds available to UK investors and, what, less than 100 that have delivered over the medium to long term? The chances of a new investor (or even an older one, but that’s another matter) picking a winner is in my view extremely slim.
To get around this, some investors buy several funds, but then you’ve basically created a pseudo-tracker but with much higher annual charges. If you’re going to invest in managed funds, conviction holdings are required in my view.
Incidentally, if you like Woodford you might want to look at the Edinburgh Investment Trust, which is run by him in his usual fashion and on a big discount at the moment so cheaper than buying the managed fund. (It’s carrying some expensive debt though, as a caveat).
Thanks for presenting the other side with your comments, and each to their own! 🙂
Good to see schools now endeavouring to make some in roads on providing the younger generation with financial education , start at the basics & build your way up
THE INVESTOR .. have you noticed though , alot of the greatest lessons we learn in life do come from painful experience of loss , the pain itself either paralysing us into inaction or forcing a change
That isn’t to say we cannot learn useful things from others , it’s just that paradoxically loss maybe the exact thing we sometimes need
Maybe that’s abit contrarian to this article though
@Davy – I’m inclined to agree about the lessons from loss, though sometimes it’s not a lesson you can ever actually use (e.g. Realizing the value of a loved one only when they pass away, although it may help you appreciate other relationships).
In investing terms, I’m glad I saw a couple of small caps blow up on me early on in me investing days. One was was down to fraud – totally unknowable. Anyone who puts all their money into one (or even a tiny handful) of listed companies better hope they never learn the lesson that you can’t 100% trust any directors. (I was pretty diversified, happily enough).
In terms of financial advisers, I think a lot of people never even realizing what they’re losing from the relationship. Same thing with expensively managed pensions. Or by the time they do, their working life is over – too late.
Investor,
Do you know of any index/etf ‘s that track the top yielding shares from the UK/Europe/US/Japan?
Thank you
.-= David de Souza on: Tax Rebate Scam Emails Continue – Beware – =-.
iShares has a few – sort of. For instance IUKD, which uses a bespoke filter to allocate money to the top 50 high yielders in the UK, with money allocated according to a hard-to-fathom filter.
Be warned, this is NOT a high yield portfolio equivalent. People who bought it as a cheap income fund were severely burned in the bear market. It’s more like a play on beaten down markets and recovery, with High Yield acting as a signal.
Personally I think it’s hard to beat a good Income Investment Trust on a discount if you want someone to manage a portfolio of decent yielding shares for you. If you can buy when the discount is very high due to panicky conditions you can take away some of the fee pain over the long-term, too.
That’s a good idea regarding the investment trusts.
Do you have any examples?
.-= David de Souza on: Tax Rebate Scam Emails Continue – Beware – =-.
@David – You’d have to look at the up to date yields (or I will in a future article) but a good example is the City of London Investment Trust. From memory it has increased dividends every year for about four decades! Investment trusts hold cash reserves, which means they can ride out a year or two of dividend cuts (like we’ve seen recently).
I wrote on Monevator here about the possibility of investing in City of London back in mid-2008. It was yielding a lovely 5% at the time. 🙂
Hi, I’ve just found this site and it seems like I’m in the right place.
I’m saving hard and building a nest egg but my money is languishing in premium bonds or tied up in property. I’m a complete beginner but looking to diversify into stocks, and think mutual funds would be the obvious choice for a newbie.
The problem I have is I am a dual National – UK born, married an American. Now, America has been pretty keen to force its dominance on dual nationals and this is particularly felt here. They introduced a tax treatment definition called a PFIC – a passive foreign income corporation. Its designed to prevent off-shore money laundering etc. BUT it’s a very wide definition which also includes foreign (i.e UK based) mutual funds. In essence the US taxes the heck are out of these investments often beyond any profits. The obvious solution is to only buy US mutual funds, but as I live and work in the UK my income is in pounds so currency conversion fees would eat up any profits.
So… my question is… if you couldn’t invest in mutual funds, how would you invest in the stock market?
Sorry for such a rambling question and thanks in advance!