Financial Education: Part 5 – Do it Yourself, Do it With me, Do it For me – just don’t do nothing!
So, for all of the reasons we have looked at, you’ve decided that savers are only getting poorer due to the corrosive effect of inflation and the best way to achieve your life goals and plot a course to financial independence, is to become an investor; financial education is the key.
There, you said it ‘my name’s Lotty, and I’m an investor’ – all growed up; doesn’t seem so scary now does it – and the more effort you put into your financial education the less daunting it becomes.
Understanding that a ‘fixed income bearing debt security’ is an IOU whereby you lend your money, for example to a company that needs it to be able to grow, in return for which you receive regular reward payments – ‘coupons’ in the parlance.
The City gents’ version of Cockney Rhyming Slang was no less impenetrable and many have made their fortune deciphering it for their clients; Muckle is committed to debunking and demystifying financial services and once people realise that its core principles are actually very simple, hopes many more will join the movement to FIRE – Financial Independence, Retired Early.
Muckle is not about being geeky; it aims to bring together like-minded individuals with goals to reach, experience to share and a belief in the benefits of financial self reliance.
Achieving better financial outcomes by investing a little of yourself in the process; if you’re fretting, you either need to get a little bit more involved, or maybe investing is just not for you. That’s fine too.
‘bring together like-minded individuals with goals to reach, experience to share and a belief in the benefits of financial self reliance’
In this latest episode, we take a very high level look at the options that exist to you as a ‘newbie’ investor; it is designed for those that want to be in control of their finances and see it as a way to enhance the quality of their life, but actually have better things to do with that life than paw over spreadsheets.
So, if money and investing aren’t top priorities, here are five easy strategies to do it and get on with your life; use the one that’s most suitable for you:
DIY Investment Management
Do it Yourself investing is for those that want to be hands on with their investments; doing their own research and making their own investment decisions; it is a commitment, but the level of that commitment depends on what you invest in.
Investing in the shares of an individual company will require some effort; buying an investment fund will deliver you an instantly diversified portfolio managed by a professional in pursuit of the objectives of a fund; an index tracker or ETF aims to deliver the performance of a given index – or group of companies.
The costs of DIY investing are the commissions and fees associated with buying and selling individual investments and the charges applied by your chosen platform; this would normally be an execution only broker or a fund supermarket.
If you invest in low-fee funds and trade infrequently, this could be the most economical investment management approach, but just because the fees are low, that doesn’t mean you’ll come out on top.
DIY investors have to understand their attitude to risk – how would you feel and behave if the value of your portfolio were to suddenly, and dramatically drop – and select a mixture of shares, bonds and cash to reflect that.
Termed ‘asset allocation’ this requires the DIY investor to ensure that their portfolio has the potential to deliver the outcomes they seek, but without keeping them up at night; this will require regular rebalancing to ensure you don’t have more of your portfolio in one type of investment as markets move, but as you are ‘investing’ rather than ‘trading’, once a year may suffice.
‘but you are in it for the long term, you will hope to avoid the cardinal sin of buying high and selling low’
A number of financial management programmes exist to help those with a decent grasp of basic investment principles to master asset allocation and track their investments; there are also plenty of ‘social trading and investing networks’ such as eToro where communities discuss investment strategies and allow you to mirror those that appeal.
Core concepts such as risk tolerance, asset allocation and rebalancing are relatively straightforward once you get to grips; if you have a low tolerance for risk, you’ll want to have a lower proportion of your portfolio in stocks than if you have a high tolerance.
Those choosing to DIY invest, but with a relatively light touch, should minimise their number of holdings, trade infrequently and be mindful of fund management fees — lean towards lower-fee funds.
If you accept that markets will ebb and flow, but you are in it for the long term, you will hope to avoid the cardinal sin of buying high and selling low.
Free Financial ‘Advice’
With the precise definition of what constitutes ‘financial advice’ remaining a topic of debate, if you would like some support and an expert to answer basic investing questions, but don’t want to turn your portfolio over to a financial adviser, most discount brokers will have someone on hand to offer ‘guidance’ or possibly offer a house view.
For the sake of differentiation, these ‘financial representatives’ have basic finance and investment knowledge and are available to answer rudimentary and generic questions at no-charge to account holders.
‘it’s also important to understand basic investment concepts’
When going down this Do it With me route, it’s also important to understand basic investment concepts; make sure you understand all the fees you will incur – however, be aware that you won’t be getting a full-fledged financial plan, and you are unlikely to be given guidance on individual investments and neither will it be specific to your individual circumstances.
An increasing number of brokers and platforms now offer a Do it With me option based around model portfolios; you will have to do a bit of soul searching to establish your objectives and risk tolerance, but will then have the opportunity to buy a readymade, risk adjusted portfolio of professionally managed investments in line with your requirements.
Limited Financial Advice
Since 2012, financial advisers have had to charge explicit fees for the service they provide rather than take commission from the providers whose products they recommend.
The aim was to ensure greater transparency but one result was a large number of clients were ‘orphaned’ because they did not want to pay for something they previously thought was ‘free’ and in some instances were cut adrift as being ‘unprofitable’ by their adviser.
The initial impact was a reduction in the number of those offering traditional, face to face advice, but more recently it has seen a resurgence in those offering occasional or one off advice.
Whereas a financial adviser required to do a deep dive on a client in order to offer genuine bespoke advice could previously have serviced maybe one hundred clients, the new breed, often using automated investment management technology may be able to offer a service to many times that.
‘a fee-based service that gives you a limited number of ‘contact hours’ for basic money and investment management’
Fee-only financial professionals may now charge an hourly amount for one off advice, or a fee-based service that gives you a limited number of ‘contact hours’ for basic money and investment management.
Those that have constructed a financial plan, but wanting a second pair of eyes to review it, might benefit from a fee-only financial planner who can review their portfolio and provide recommendations.
The scope of this service can be as simple or as complex as you choose; it may change over time if your affairs become more complex and you hopefully accumulate more wealth, when you may wish to pay for a complete financial plan that considers your tax, estate planning and other money concerns.
Where Do it With me meets Do it For me – if you prefer full-fat financial and investment management you may wish to turn over your finances to a professional adviser; they will not only provide a plan to manage your investments, when granted ‘discretionary investment management’ status, they can make buying and selling decisions on your behalf
Setting up with a money manager can be cumbersome, because he or she is required to ensure that any investments they makes on your behalf are ‘suitable’ – according to your requirements, circumstances and level of understanding; technology helps a little here, but there are few corners to be cut – which is probably a blessing for all.
‘Full blown financial advice comes at a price’
Full blown financial advice comes at a price – anything from 0.50% to 1.75% of the value of your assets under management – which may be in addition to any costs incurred in creating and maintaining your portfolio.
Technology means that it is relatively simple for a client to monitor the performance of their investments and therefore their adviser; financial advice may appeal to those further into their financial odyssey, when the consequences of a poor decision, or a missed opportunity may be more significant and even relatively chunky fees something to be tolerated for some peace of mind.
Robo Advice — Purely Digital or Hybrid
A lower-cost option for those wanting Do it For me financial management, robo advice has become an increasingly important part of the investment landscape over the last few years.
Notwithstanding the fact that to the untutored eye, their service may look similar, some of these new platforms offer ‘automated investment management’ whilst others deliver bona fide ‘financial advice’.
They typically create an investment portfolio in line with your goals, timeline and risk tolerance; these are then automatically rebalanced and the digital money manager may provide a host of additional investment related services.
Generally it is simple to open an account with a robo advisor, and to set up regular investments as you embark upon your journey; costs are generally low, and access to valuations and information simple and convenient. Despite the ‘robo’ tag, few are without human advisers available at the end of a phone.
As the new breed of financial advisers bed in, an increasing number are hybrid – ‘cyborg’ if you will – delivering an ongoing investment regime online based on algorithms and available to dispense bespoke advice in exceptional circumstances; they may also offer additional features such as tax-loss harvesting, a choice of investment styles or the ability to additionally invest in individual stocks.
‘Do it Yourself, Do it With me, Do it For me – just don’t do nothing!’
Robo advisors allow you invest from just £1 and encourage the establishment of a long term investment habit with low fees and engaging propositions geared for the way we live our lives today.
Many will also interface with other aspects of your financial life to show a holistic view of your worth and allow transfers between accounts.
Just as the robo advisors offer different services from a regulatory perspective, so their fee mechanisms differ; it is worth ensuring that you select the most appropriate for your circumstances and the way in which you will use it, and whether you are comfortable with a totally digital experience or want a human adviser.
Whichever route you choose will have a bearing on the potential outcomes you may achieve, and as we face a period of potential market volatility it is always worth reminding yourself that investing is for the long term.
However you access their services, active fund managers – unit trusts, OEICS, investment trusts – seek to outperform markets and typically charge higher fees; passive funds – index trackers, ETFs – seek to deliver the performance of an index, but with lower fees.
Do it Yourself, Do it With me, Do it For me – just don’t do nothing!
Leave a Reply
You must be logged in to post a comment.