Here we go my first blog, where I will be providing some useful information on how to start investing! We will touch on bonds, stocks and exchange traded products. This particular Blog will be very efficient and practical. Multiple subjects will be mentioned without expanding for now. Thought I will prepare linked blogs to expand these.
So shall we make some investment! What will we need to create our first investment portfolio?!?
Ingredient 1: Savings:
No way around it. You need to start saving. You cannot invest safely without any initial capital, even if this is just minimal. If you have any debt, you should pay it back first as debt is outflow with certainty in your life. Make sure you have sufficient cash flow after paying your debt & other expenses. When all is considered you start saving and can start allocating residual to your investment portfolio.
So how much cash flow we will need to start? Well as little as £20 pounds a month will do in the beginning. However, more you save higher your portfolio in the future as all powerful cumulative interest will kick in. Also, your transaction cost will be the lower percentage of the overall portfolio. I would recommend saving anywhere from few hundreds (100,200 etc.) to few thousands a month.
Simple example on Cumulative interest rate:
Save £20 a month with the annual return of 5%, time period 5 years.
>>> After five-year: Portfolio Value £1,385.79, Profit £185.79.
Save £500 a month with the annual return of 5%, time period 5 years.
Ingredient 2: Portfolio allocation decision:
Say you have saved a portfolio of £1000 (can be £100). We will need to look into two broad buckets equity and bond (fixed income). Rule of thumb is if you are young <35 you should be investing more in equity and if you are older should move allocation to bonds.
- <35 Age – Looking something like 25% Bonds/ 75% Equity
- >35 Age – More going to 50/50
- >60 Age – (retirement) going for 25% Equity / 75 % Bonds.
The ratios may change depending on your particular situation and objectives. The way it works, more you invest in bonds more you want your investment to be safe, more you invest into equity more risky investment you have. Also if equity investment is in large CAP companies is safer than investing in small CAP.
Ingredient 3: Diversification:
This is a long subject. So I will give you short version and expand later. The idea is not to keep all eggs in one basket. The expression you have heard in the past.
However, how much is reasonable. My personal view:
- One stock/asset/bond no more, that 5% of a total portfolio. If you have more you should really know why.
- Country exposure, you should aim to invest in assets in all over the world. Make sure that your country of origin is not the only country you have exposure too. In the global index, USA has 52% and UK 6%. However, the weight could vary from your personal situation.
Ingredient 4: What kind of investor are you/Psychology:
Coming from step 2 you need to decide what kind of investor you are. I will create full blogs dedicated just to this fascinating subject.
Rule of thumb, consider if you like an extreme sport and gambling or prefer relatively certainty. Could be something in between. When analysing yourself you start to understand what effect your decision making. Further reading Link
>>> So far we have found out your age, your risk sensitivity, bits of personality. Time to get in specifics<<<
Ingredient 5: Find means of investing:
For your investment directly in Equities and Bonds broker will be required. The way you choose broker is based on research they provide to you and transaction fees. As everything else is rather similar, maybe better colours in the website :). We will soon learn that transactions fees could make or break your portfolio.
The following review will be mostly for investment portfolio starting from around £1,000.00. Keep in mind it is better to start sooner and learn with lower portfolios as some mistakes are inevitable. All the best investors did them.
Top three broker that you can use, first being the one I use:
- AJ Bell YouInvest – www.youinvest.co.uk
- Fidelity – www.fidelity.co.uk
- Alliance Trust – www.alliancetrustsavings.co.uk
You will open ISA account. Also, can create Dealing Account if you have more than 20K invest in a year. Alternatively, there is no need to have a separate Dealing account as you can in both similar assets. Both are relatively simple open. Will go in further steps, what can you buy/sell in these accounts etc.
For smaller investments of £20, we can use some P2P lending platforms or apps on your smartphone.
If you are just starting and have very low savings under £100 then. You can start with:
- Funding Circle – www.fundingcircle.com
- Moneybox – On Apple Store
Funding Circle – Is P2P lending site with a minimal investment of £20 pounds. You buy a small part of the loan, which is given to business around UK. Same is available in USA. So effectively you are giving back to the economy. Loans have various credit scores. If your portfolio is very low (<30 loan parts) and you decide to go with Funding Circle, then you should choose the investment with highest credit score. When you get to £500-£600 investment, it is ok to invest in riskier assets. The site has Auto bit option, which submits a request to own loan part automatically if there funds available. So say you get to point where you invest >£1000. This means that each month you will have enough funds generated by investment in your account to buy one more part, which will be >£20. Then Auto bit automatically will invest in a new loan part. Thus, increasing diversification and minimising input required by you. Your money will be fully invested all the time.
You can expect 6% return with comparatively safe investment and 7-8% for more risky options.
MoneyBox – Is an app that links with your bank account. You save money into ISA provided by the app or investment account. They have 3 options for different portfolios. Low risk, medium risk and high risk. It looks very easy to use and soon will have life ISA, which I will introduce later in a blog. However, this is not as flexible as investment via a broker and may not be suitable for all investors.
Also, note that ISA can be one per person. So if you have ISA with a broker you cannot have ISA with MoneyBox. Keep in mind that you can have both one ISA and one LifeISA. Total funds you can deposit are 20K a year over two ISA. I personally prefer investment via broker as you have more options and reports, feel like I have more control on my investment and future.
Ingredient 6: Investment Products:
- Equity – You buy ownership in the company. Returns are Div, which is usually paid semiannually and capital appreciation. Equity investment requires investigation and research. More about it in future blogs and will add links here. In short, you need to know the company as if you are running it before you buy stock. You must not buy a stock just because it goes in value or sell because it is dropping. Always be “110%” sure why you are investing in particular stock and do not go more than 5% of your portfolio.
- Bonds – Very unlikely you will be able to buy bonds directly as these are sold in very large issues. Main returns are Coupon payments. Refer to ETF for more info on buying.
- ETF – One of the best investment option for retail customers. This is fund traded on the stock exchanges in units. Basically, you buy one unit and get some exposure to a whole fund, which can be invested in thousands of stocks and multiple countries. Thus, with one purchase you can get good diversification. They have fees, but these are very low. Usually less than 1%. There are ETF that invest into bonds and you can get exposure this way.
Ingredient 7: Additional information sources:
There are many other sources on the web. So it happens I am using these particular once. IC is a magazine that has good small cap review. Website and magazine provide a great overview of the overall economy and the stock market. Has good information on ETF to invest and advises on Tax and Pension planning. A lot of my knowledge comes from them. This has trial period 12 issues for £12.
Stokopedia is an excellent website for sock investigate. It ranks stocks based on their fundamentals, which makes decision making much easier and more rational. This website is an amazing source of information, for those who are passionate about equity investment like I am. Also, it saves loads of time from decision making, as all data is given to you and you do not need to go around the internet looking for it. You no longer need to be a big bank to have this under your finger. Keep in mind that you should not be buying stock with the highest rating. I would recommend comparing IC and Stokopedia for the same stock and make a decision. This has a trial period of 2 weeks, I believe. When I have signed up with them it was a game changer. My portfolio became more balance and produced mutch better returns.
Finally: Let’s mix all up into a portfolio:
Example: John has an investment portfolio of £1000 and he lives in UK. He goes online and buys a trial for IC (£12) and Stockopedia (free for few weeks). Then goes to AJ Bell YouInvest creates an account with no cost.
Makes a decision that has average willingness to take a risk. Do not have a large portfolio and is <35 years old. So decides to allocate 25% to Bonds and 75% to large cap equity and have 50% investment in UK and 50% in the rest of the world.
Then makes a research analysis using provided sources of information. Selects few 3 ETFs
- One with bond exposure and invest around 25% of his portfolio, with 50% exposure to bonds.
- Then ETFs that have stronger exposure to UK and invest around 30% of the portfolio.
- The last EFT have strong exposure to the rest of the world and invest 35%.
- John had some overlapping between world and UK, then he just adjust weights slightly to get require 50%/50%
When buying investments you should think about them as once in a lifetime decision. Investment is not trading! Of course, statement before is slightly over the top, but it has a lot of truth. So John decided that the only reason he would sell these ETFs if he needs to adjust weights/exposure. Also if following needs to be taken care of:
- Education investment
- Health needs
- Liquidity needs
- Buying your first home
As an alternative to Fixed Income ETF, John could have invested in Funding Circle. However, he is aware that loans are exposed to UK.
Also, he could have gone with an App, which would have required less research, but less flexibility.
Then he thinks when he should buy these investments. The truth is nobody knows, when is the best time to buy. If someone knew, they would be rich as hell. So for retail investors, the best strategy to invest regularly. Say once a month or quarter specific amount. Say £250 every month and ignore market fluctuations. This will make sure you do not overtrade, but also make regular savings. At the end, the stock market is going up in long term and in >10 years current fluctuation will have limited effect on the overall portfolio value.
The End!!! Now, let’s explore each element separately and make you move from novelist in investment to someone, who can hold a strong argument about a decision made about your portfolio. Knowledge is power and I hope to give it as much as I can.