Yesterday I related the tale of D., my friend who reached out to a financial adviser [1], 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 [2], 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 [3]
- Build up an emergency fund [4] 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 [5]
- Run the tracker in a tax-free stocks and shares ISA [6]
- 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 [7].
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 [8]
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!