Financial education: Part 3 – more basics of investing
So, you’ve got to Part 3 which suggests that you could be serious about joining the ever growing number of people that are taking personal control of their finances on the road to financial independence; tired of losing the real buying power of their savings to inflation, and contemplating investing for the first time – financial education is the key.
Muckler knows just how tough it is – you’re servicing student debt, your wages are squeezed, the cost of your accommodation is exorbitant and, admit it, you do quite like avocado on toast; however, you will never be better positioned to take maximum advantage of the miracle of compound interest.
However little you are able to invest, the effect of earning interest on interest over the course of a long term investment strategy can make a significant difference to your financial outcomes and life goals – Do it Yourself, Do it With me, Do it For me – just don’t do nothing!
Muckle offers no financial panacea; if there were a wand to be waved or a unicorn to be milked, Muckler would be on a beach in his budgies by now cradling something cooling.
‘if there were a wand to be waved or a unicorn to be milked, Muckler would be on a beach in his budgies by now cradling something cooling’
This is not a get-rich-quick scheme – Muckle is committed to empowering the next generation of investors to adopt a rational approach to long term wealth creation and preservation in pursuit of financial independence; the ability to retire early even if you decide not to, and security in the knowledge that you will be well provided for in your dotage.
Financial education is key to this revolution and in a series of posts Muckle aims to engage and enlighten those new to investing and encourage them to embark on a very personal journey.
In Part 3 we look at some more of the basics to be addressed before you take the plunge, and some of the options that are available.
I don’t think I’ve got enough money to be an investor
Other than a lack of knowledge and therefore confidence in their ability, this is the most regularly stated reason that young people give for not investing – effectively, investing is only for the wealthy.
However, there is no minimum required to join this particular club; little and often is rarely worse than nothing and never and as long as you keep the cost of your investments down, even very small regular investments made over a long period of time can make a significant difference.
‘little and often is rarely worse than nothing and never’
However, it is prudent to never invest more than you can afford to lose; in the event of a stock market crash, you could face losing a significant proportion of your wealth if you have too much of your money invested.
One of the benefits of long term investing is that it has the ability to smooth out the inevitable peaks and troughs in markets; however, unless you have an investment horizon of at least five years, there is the very real danger that you could buy when prices are high, and be obliged to sell when markets have tanked.
In these circumstances, the paucity of the interest on offer may be the price to pay for the certainty that your money is safe in a savings account.
If you are living from month to month, with few savings and large debts, gambling on stock markets, for that is what it is, may not be the right option just now; however, if you’ve built up a reserve, and are fed up with low savings rates, an affordable investment may be the way to achieve greater returns.
Many fund managers, brokers and automated investment platforms will allow you to invest small, regular small monthly sums with no, or low rates of commission.
How do I invest?
Technology has changed everything in the world of investing, providing instant online access to markets around the world; private investors now have access to information and data that had for decades, if not centuries, been the preserve of the red-braced, often at no cost.
Investment platforms now come in such a wide range of shapes and forms that there will be one just right for you; do you want to choose individual investments, buy ‘readymade’ portfolios or hand over to a financial adviser – fleshy or otherwise?
‘private investors now have access to information and data that had for decades if not centuries, been the preserve of the red-braced’
Are you happy to pay for advice or actively managed investments, or do you believe that keeping costs down with ultra-low cost passive investments – trackers – are the way forward?
There will be an ideal solution for you.
So, the process is to decide what level of involvement you want, and thereby what type of platform, and then set about deciding which type of investments you wish to buy.
You will then typically face two charges when you buy an investment – a platform may charge you a commission to buy, for example, a share, but now increasingly charge you a fee for ‘custody’ or a management fee – i.e. looking after your investments.
These can either be fixed, or charged as a percentage of the value of your investments so it’s worth understanding what is best for your personal circumstances, and monitoring it over time as you hopefully become more wealthy.
Certain investments will also levy a management fee, for example to cover the cost of having a professional fund manager; these issues will be covered in more depth when we look at different asset types, but a major initiative by watchdog the Financial Conduct Authority (FCA) is intended to deliver transparency to the retail investor (us) so that all related charges are transparent.
It is important to understand exactly what you are subscribing to when you sign up for a platform; execution only brokers are relatively straightforward and have the disclaimers to match.
They offer a wide range of investment options and when you hit ‘buy now’ it is very much caveat emptor; whilst some investments may be covered by the Financial Services Compensation Scheme in the event of failure or subterfuge, usually if you make a duff investment that is down to you to wear.
The new crop of digital wealth managers – sometimes ‘robo advisors’ – differ greatly in the precise nature of the service they provide; to the untutored eye they may all look the same but some offer ‘financial advice’ (albeit without the Hobnob) whilst others offer ‘guidance’ or ‘automated investment management’.
FCA is keen to ensure that these definitions are clearly understood because whilst it may make little difference when things are on the up, where is the ‘blame’ likely to fall if things turn turtle?
They also differ in terms of their underlying investments – ranging from low-cost trackers to actively managed funds; this will have a bearing in terms of how these investments respond to differing market conditions, but also means that some will be more expensive than others.
In the next post we will be looking at the various ‘asset classes’ – types of investment – that are available and how they work; we will also look at how you can protect your profits from tax by using ‘wrappers’ such as ISAs.