I am back, had some busy weekends. Moved to a new place. Hope new home will help to deliver even better content to this blog. Today, we will continue with the subject of various assets. The particular asset we will be reviewing will be ETFs. I personally believe that this is one of the best options for many retail customers and is a fantastic tool to diversify your portfolio with minimal time, cost and effort. Also one of the easiest way to invest in foreign countries with minimal cost.
There are many options for ETFs in the market. It can be a bit overwhelming, they can cover various assets, regions, sectors and markets. The key thing to keep in mind, you what to minimise cost and get good diversification, also need to look into your overall portfolio and make sure that there are no considerable overlapping. For example, if you have a significant investment in technology stocks, you need to ensure that your ETF has lower exposure in this sector. Of course, if you like more exposure opposite is true.
Let’s go now via name and what means:
Exchange – The asset class is traded on some exchange like LSE or NYSE. This is a venue, where buyers and sellers can exchange financial products like ETFs, stocks, bonds.
Traded – You can buy and sell this product in exchanges any time while these are open.
Fund – Mean that include multiple assets in a particular combination.
ETFs are run by computers, thus, low running cost (0.2%-0.8%). You can have ETF tracking FTSE 100, small-cap stocks in all over the world, world index, bond index, etc.
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This is the first blog, that will start to look into a building block of Asset Allocation in more detail. This will be exciting series that will cover bonds, equity, alternatives, funds, etc.
Please keep in mind that blog is about investing and not trading. We aim to buy low (or when the price is going down) and sell high (or when the price is going up). Opposite to trading, where you buy when the price increase and sell when the price goes down.
From previous blogs, you may have decided, how much you would like to invest in stock, but before you start, we should understand these a little better.
You may have heard before that when you buy a share, you buy part of the company. Easy to remember, no? Of course, it is a quite small part in the beginning. But why do companies sell their shares? Well, it is all to do with the capital structure of the company, they do not want to take more debt and could raise funds by offering part of the company to the public. This is also what is called IPS (Initial public offering). Companies’ usually use funds for expansion or paying back some debt. In UK, companies are broadly classed as Limited (Ltd) or Public (PLC). Both can sell shares to investors, but as retail investors, we are interested in PLCs, these companies offer their share via the stock exchange, which is called London Stock Exchange. For the reader, who is not in UK structures are still very similar.
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In my last blog, we looked into what kind of investor you are and slightly touched on some errors Link. Now it is time to see how our minds play with us and affect our decision making as well as look into judgment errors/biases. In investment management, there is traditional finance theory, which assumes that all individuals act rationally and is opposed by behaviour finance. As there is a large quantity of information available online around traditional finance and it is not very applicable in real life, we will spend most of the time talking about behavioural finance.
As you know life is not perfect, we will never be in a position where we know everything about the entity/investment or able to process all available information in the market. Our next subject is based on this idea.
Bounded rationality is looking into individuals decision making with incomplete information. When we start looking into stocks, we will need to make a huge amount of research to be comfortable with investment. However, eventually, we come to the point, where additional information does not help us to make a better investment decision, and it is entirely okay. So you have to satisfy yourself with what you have. Of course, if you feel that there is more fundamental information that needs to be researched, please, do so. Some examples could be that you have reviewed market, company fundamentals, and all directors. However, you cannot get information about inside changes in the business. If you are happy with your research and feel confident about the company’s future prospect, you can invest without knowing this additional info. The decision will not be optimal in traditional finance sense, but acceptable. You should make sure that the price is right as well and you leave some room for error, but we will speak in future blogs about stock selection. Continue reading →
This part of the blog is to help you to stick with your goals and help to create a customised portfolio for you.
When you come first time to wealth adviser Investment Policy Statement (IPS) needs to be prepared. To finds out more information about you and help adviser to provide products that are most suitable for your current needs. The statement is usually reviewed yearly or if your financial situation changes. So we will create one for you…
The primary goal is for you to be decisive and stick to your goals. However, also we will determine what reasonable goals are. Create IPS, and you will remove most of the stress from the investment. The result will be a gift you will make to yourself when you start investing. You will not need concern yourself with market volatility. We will try to get you to a position where your money is working for you within given boundaries, which we will create.
True, it will take some time at first. However, you do it once and later you will need just updating it. You can download a simple copy of IPS here (IPS).
At end I have also attached document form The Great Life Assurance Company. It is quite good summary document for our dicsussion and can be used for your decsion making.
What will be considering in IPS?!?
- Unique circumstances
- Target Asset Allocation
- Financial Goals
- Any additional information which is relevant to investment decision making. Like, where you would like to invest.
Now we will go into more detail on each element to help you to learn more about yourself and potential investment portfolio, which you can construct.
Return: Continue reading →
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.
>>> After five-year: Portfolio Value £34,644.72, Profit £4,644.72.
Ingredient 2: Portfolio allocation decision: Continue reading →