Get Closer To Average – One Thing You Can Control
As the investment markets are way down the tubes this week it is worthwhile you and I reflecting on what’s happened, what it means and what you should do about it (cue nothing it’s too late) but…
For obvious reasons, there is an issue of me being so boring and anal on this subject that you’d sooner fall asleep or worse still just stop listening but stay in the room.
There is some good stuff coming.
To put things in perspective we have been in the middle of a “Bull Run” a rising market since 2009 or so, in fact, since then there has been no recession in the UK or worldwide – well at least not in any advanced economy. Germany has come close.
This is unprecedented in modern history. So, a correction is due or overdue. We used to have recessions every four or five years – seemingly not any more. During a recession investment markets go down, uncertainty drives down prices.
The image below shows the FTSE250 index chart. I’ve chosen this because it represents UK firms, primarily with income from the UK. These are the mid-band firms traded on the UK stock market – and form this index.
The indexes represent the total price of all the shares in the index added together.
A bit about the indexes – the FTSE 100 index is the total value of the share price, added together of the largest companies listed on the stock market registers in the UK – not always UK firms. The FTSE 250 – the next smallest firms listed in the UK. And, the FTSE 350 – smaller firms again, 350 of them.
To Explain Further
With something like the FTSE 250 index, there are 250 individual company shares that make up the index, 250 firms making widgets, selling services. Some will go up in value every day, and some will go down – that’s the way an index works.
It also means that your investment will go up and down, some days one share goes up and another goes down. If you are invested in an index like the FTSE 250 all you need is the ups to be more than the downs and the value of your slice is…. Going up in value, like magic.
The FTSE 100 index is made up of firms that get income (sell stuff) all over the world.
As you’ll notice it has been up and down quite a lot.
But the list of recessions (from Wikipedia shown below) provides the dates and the chart clearly shows the effect on the index – a clear dip and then a bounce back. The following run, on a clear path, shows growth since then. A bull market.
One thing that is always out of our control is the economy. You and I have no way of knowing what is going to happen. We are clueless about the right time to invest or not.
In fact most Governments and Central Banks seem to have few ideas about what drives the investment markets. But, all you and I need to know is that the markets go up and down, in the same way the price of oranges goes up and down – they are market-driven.
We can’t help that. This is how the system works. It’s what the experts, the fund managers are always trying to do, to call the market correctly, to invest in the right company at the right time.
And they get it wrong most of the time. It’s very complicated to work out and the market is always moving – the expert fund manager might think they know – however the evidence is that they don’t. With that in mind.
Investment Markets
You and I have no control over them, we don’t know what’s going to happen.
We literally have no clue, the markets are the markets. They go up or down, seemingly with a mind of their own. Of course, there are patterns, and we can spot them, these are of course historic – backwards-looking – which makes guessing the direction really hard.
It’s easy to know what happened in hindsight because it’s happened, it’s a fact. How that may impact on the future – we have no idea it is simply an unknown. But we do know that markets do tend to trend up and then down on a regular basis.
We have knowledge that all markets go up and down, vegetables, cars, interest rates all move up and down. Assuming we are looking to get income and growth on our investments we just need to be aware of one thing.
Has the market just fallen? If so, is now a good time to invest? The answer is nearly always yes, of course, it would be – why buy something at today’s price when it may well be lower tomorrow, and if not tomorrow then maybe the day after. Provided you are looking to invest, then being able to buy that investment at a lower price than it is today makes sense.
It’s a fact that markets go up and down, by following asset allocation principles you will always be in a position to buy something at the right price, instead of the price offered today.
You can take advantage of the market movement.
It is only you and your reactions that can be controlled, the market and it’s response is something you can have no control over. Like a drunk teenager – the market’s response is always volatile – and like the drunken teenager, it always falls down or at least sleeps for a few hours. The markets are more like a lairy schoolkid who’s done more Pinot Grigio than he should have done. You have little control over them. Only your reaction to them.
Type of Investments You Should Consider
Never invest in managed type funds – the charges are just too high and you can’t really make a good income with charges much over 1% – many ‘managed’ type funds have higher charges than this.
You are also making an assumption that the manager of the fund knows more than the market, has some secret information, some secret sauce.
Income – always invest for income. Or take the income option. It can be rolled up within the investment and forgotten, but best not. Have it paid to you, it is yours after all. You then have control over it – you can reinvest in the same thing or something different.
Asset allocation tip – the spreading of investment risk is a great thing to do/have and by using your income to spread the risk makes perfect sense. By buying an investment in an index you automatically get a spread of investment risk, buy investing in different types of investment you create a further spread. Effectively, the chances of every single investment of yours plummeting to nil value is reduced dramatically when you have a range of investment types.
When considering types of investment in shares or bonds (stock market type investments) the only one’s I now suggest and you should be interested in are either ‘tracker type funds’ or exchange-traded funds.
This type of fund requires no human opinion and therefore is the lowest charging of them all. It also means there are no opinions that can be wrong.
Of course, there has been a debate about what are the best types of funds to invest in, those managed by humans or those managed by a computer or a process. So far there is little evidence that those managed by humans do better – which is why a fund that invests in ‘ the highest income-producing shares in x or y index’ can be managed very cheaply.
Performance-wise you only want your low-cost investment to be better than average, any more than that means paying someone to take a view as to what shares to hold or sell. Human involvement is flawed as it always is and expensive.
It’s also helpful to note that there are more fund managers in the Uk than there are shares to invest in. More opinions about what sort of orange to buy than there are types of orange.
The One Thing You Can Control – there are two but this one is important.
Charges – when comparing investments, the one thing that will have the biggest impact on your financial future – the one that compounds up to outweigh more than anything is charges. It is the only thing that you can control and it will rob you of a secure financial future if you don’t pay attention to it.
At a 1% charge, ten percent 10% of your investment goes every ten years) at a 1.5% charge fifteen percent of your investment goes every ten years, at a 2% charge then twenty percent of your fund goes every ten years.
More maths on that, at a 1% charge that thirty percent of your fund every thirty years and it compounds against you, with ten percent less to invest – that means your future growth is based on 90% of your investment and not on 100% – the ongoing effect of charges is horrendous. I thought long and hard about using that word.
Ideally, you should be looking to achieve a total charge of .5% to .75% plus a token platform charge, ideally a fixed fee.
With most of the online platforms, you end up having to pay a percentage of fund charged – which is fine until your portfolio gets to the point where you will be better off paying a flat dealing fee – or an annual fee for the holding service.
Don’t Put All Your Eggs in One Basket – Asset Allocation How?
Some twenty years ago I was part of the team that first started to roll out an asset allocation tool for consumers. It was probably the first that the financial advice industry had seen.
Our team had proven that the most important things to be concerned about when investing was…
Asset allocation – spreading your investments across a range of geographic and market locations – in fact, this was more important than the choice of funds you should invest in.
Which also meant you could reduce charges to a very low figure – simply by using tracker type funds and ETFs. This was important for consumers and important for the way we worked with our own clients.
A sample portfolio might look something like this.
Cash | £10% |
| Fixed Interest | £20% |
| UK Stock Market Income Funds | £30% |
| US Stock Market Income Funds | £15% |
| Far East Stock Market Income Funds | £15% |
| Gold/High Risk | £10% |
You and I have no idea which market is going to go up/down/sideways. To some extent, there is no way of ever knowing, not until the event has happened.
But we do know that each one is progressively higher in risk especially as there is a currency risk. Because of this increased risk – an investment could double in value or half. If it doubles in value good news all round, if it halves in value, no train smash. This is the beauty of this kind of plan.
The real key to all of this is for you to understand, to learn. To get this right for yourself. To know, to make sure you can do this for yourself because the advice industry or the lack of one at the moment means you can’t look for help there. Asset allocation is as important as investing initially.
Advisers
Really just salesman in disguise – as per my article in Financial Adviser some weeks back.
If advisers had had the answers, the perfect solution – do you think they’d be advisers? Of course not, they’d be off doing it for themselves, they would be making sure their own pockets were lined perfectly first – then they’d go off and play golf or ride horses. If you had the answers to making money work for you – perfectly, you wouldn’t need to work. Not even out of boredom. Therefore, anyone working for a living does not understand – so why would you accept advice from them?
But if you are going to be insistent, and if you are thinking about taking financial advice you should ensure that there is a fee payable for that work on invoice with VAT added.
There will be no ongoing charges automatically deducted from your investments – everything will have an invoice and you will be notified in advance.
You won’t find many advisers that operate like that, but plenty of solicitors, accountants, plumbers and local builders. Just about every other trade or profession works on a fee basis and will produce invoices for work done. Very few financial advisers do.
Go Have an Average Life/Day/Investment Portfolio
My parting words on this.
If you could just go and have an average day, you’d have a better day than half the population, if your investments are only doing better than half of the population you will be enjoying a lot more than the bottom 25% and much more than those in the bottom 49%.
Going for just over average is not a bad place to be, if you can do that on low charges and add an income from the investments into the mix there is a good chance you will be doing better than half of the investors but hopefully in the top 80% of people that invest on the stock market.
Given that the average of all pension funds, over the last ten years have returned less than 6% per year after charges and the yield on my favourite ETF – IUKD the ongoing yield from income alone is 6.76% with the opportunity for capital growth.
At least half of all pension funds have returned less than .60% per year. Of course, this is a disaster for you if you own a non-performing pension.
Just being in the bottom half wastes time that you will never wake up, wastes your money because you are being charged for this disaster and it’s your pension, it should be working hard for your future. Not for someone else’s now.
With That In Mind – here this is a fund that has been around for a while and meets a lot of expectations for a good number of investors. It’s an ETF or ‘exchange-traded fund’ see appendix for a full description. Basically means that you buy a single share (the ETF share) at low cost from a stockbroker or providers. The single share is actually invested in a basket of other shares – like a fund – but not a fund.
They were developed by the fund industry to access a broad range of investments easily and subject to low dealing costs and fund charges.
Of course I can’t make a specific recommendation of this investment as being suitable for your requirements, but if you are a paying subscriber to the Moneytrainers Financial Education package you’ll get access to the entire fund list and be able to make up your own minds as to when and how you should invest.
Using this kind of investment is the thing that will make all of the difference to your life and your investments.
- It has low charges
- No fund manager to decide in what or how to invest
- Income paid to you directly or through your investment account
- The ability to buy and sell when you want
Just about everything you could want from an investment.
With these few simple tips you will save money in reduced charges, you will be able to invest at the right time and when it suits you. And, you will end up with investments that work for you, produce income and you will see each dip in the market as an opportunity to invest more. Just remember that when you make an investment from your hard-earned, you will make that first to your cash pile.
The next thing you’ll need to do is manage your cash pile. And that is coming up in the next instalment.
Appendix
What are ETFs?
Exchange-traded funds are baskets of different types of investments that are pooled together into a single entity, which then offers shares to investors that are subsequently traded on major stock exchanges. Each share of an ETF gives its owner a proportional stake in the total assets of the exchange-traded fund.
ETFs generally track various benchmarks, with each fund investing with the objective of matching the returns of the benchmark that the fund has chosen. There are a few ETFs that have portfolio managers that actively select their own investments, but because of the disclosure rules that require such funds to tell investors about their holdings on a daily basis, most managers who want to manage money using active management strategies choose vehicles other than ETFs.
F
Get Closer To Average – One Thing You Can Control
As the investment markets are way down the tubes this week it is worthwhile you and I reflecting on what’s happened, what it means and what you should do about it (cue nothing it’s too late) but…
For obvious reasons, there is an issue of me being so boring and anal on this subject that you’d sooner fall asleep or worse still just stop listening but stay in the room.
There is some good stuff coming.
To put things in perspective we have been in the middle of a “Bull Run” a rising market since 2009 or so, in fact, since then there has been no recession in the UK or worldwide – well at least not in any advanced economy. Germany has come close.
This is unprecedented in modern history. So, a correction is due or overdue. We used to have recessions every four or five years – seemingly not any more. During a recession investment markets go down, uncertainty drives down prices.
The image below shows the FTSE250 index chart. I’ve chosen this because it represents UK firms, primarily with income from the UK. These are the mid-band firms traded on the UK stock market – and form this index.
The indexes represent the total price of all the shares in the index added together.
A bit about the indexes – the FTSE 100 index is the total value of the share price, added together of the largest companies listed on the stock market registers in the UK – not always UK firms. The FTSE 250 – the next smallest firms listed in the UK. And, the FTSE 350 – smaller firms again, 350 of them.
To Explain Further
With something like the FTSE 250 index, there are 250 individual company shares that make up the index, 250 firms making widgets, selling services. Some will go up in value every day, and some will go down – that’s the way an index works.
It also means that your investment will go up and down, some days one share goes up and another goes down. If you are invested in an index like the FTSE 250 all you need is the ups to be more than the downs and the value of your slice is…. Going up in value, like magic.
The FTSE 100 index is made up of firms that get income (sell stuff) all over the world.
As you’ll notice it has been up and down quite a lot.
But the list of recessions (from Wikipedia shown below) provides the dates and the chart clearly shows the effect on the index – a clear dip and then a bounce back. The following run, on a clear path, shows growth since then. A bull market.
One thing that is always out of our control is the economy. You and I have no way of knowing what is going to happen. We are clueless about the right time to invest or not.
In fact most Governments and Central Banks seem to have few ideas about what drives the investment markets. But, all you and I need to know is that the markets go up and down, in the same way the price of oranges goes up and down – they are market-driven.
We can’t help that. This is how the system works. It’s what the experts, the fund managers are always trying to do, to call the market correctly, to invest in the right company at the right time.
And they get it wrong most of the time. It’s very complicated to work out and the market is always moving – the expert fund manager might think they know – however the evidence is that they don’t. With that in mind.
Investment Markets
You and I have no control over them, we don’t know what’s going to happen.
We literally have no clue, the markets are the markets. They go up or down, seemingly with a mind of their own. Of course, there are patterns, and we can spot them, these are of course historic – backwards-looking – which makes guessing the direction really hard.
It’s easy to know what happened in hindsight because it’s happened, it’s a fact. How that may impact on the future – we have no idea it is simply an unknown. But we do know that markets do tend to trend up and then down on a regular basis.
We have knowledge that all markets go up and down, vegetables, cars, interest rates all move up and down. Assuming we are looking to get income and growth on our investments we just need to be aware of one thing.
Has the market just fallen? If so, is now a good time to invest? The answer is nearly always yes, of course, it would be – why buy something at today’s price when it may well be lower tomorrow, and if not tomorrow then maybe the day after. Provided you are looking to invest, then being able to buy that investment at a lower price than it is today makes sense.
It’s a fact that markets go up and down, by following asset allocation principles you will always be in a position to buy something at the right price, instead of the price offered today.
You can take advantage of the market movement.
It is only you and your reactions that can be controlled, the market and it’s response is something you can have no control over. Like a drunk teenager – the market’s response is always volatile – and like the drunken teenager, it always falls down or at least sleeps for a few hours. The markets are more like a lairy schoolkid who’s done more Pinot Grigio than he should have done. You have little control over them. Only your reaction to them.
Type of Investments You Should Consider
Never invest in managed type funds – the charges are just too high and you can’t really make a good income with charges much over 1% – many ‘managed’ type funds have higher charges than this.
You are also making an assumption that the manager of the fund knows more than the market, has some secret information, some secret sauce.
Income – always invest for income. Or take the income option. It can be rolled up within the investment and forgotten, but best not. Have it paid to you, it is yours after all. You then have control over it – you can reinvest in the same thing or something different.
Asset allocation tip – the spreading of investment risk is a great thing to do/have and by using your income to spread the risk makes perfect sense. By buying an investment in an index you automatically get a spread of investment risk, buy investing in different types of investment you create a further spread. Effectively, the chances of every single investment of yours plummeting to nil value is reduced dramatically when you have a range of investment types.
When considering types of investment in shares or bonds (stock market type investments) the only one’s I now suggest and you should be interested in are either ‘tracker type funds’ or exchange-traded funds.
This type of fund requires no human opinion and therefore is the lowest charging of them all. It also means there are no opinions that can be wrong.
Of course, there has been a debate about what are the best types of funds to invest in, those managed by humans or those managed by a computer or a process. So far there is little evidence that those managed by humans do better – which is why a fund that invests in ‘ the highest income-producing shares in x or y index’ can be managed very cheaply.
Performance-wise you only want your low-cost investment to be better than average, any more than that means paying someone to take a view as to what shares to hold or sell. Human involvement is flawed as it always is and expensive.
It’s also helpful to note that there are more fund managers in the Uk than there are shares to invest in. More opinions about what sort of orange to buy than there are types of orange.
The One Thing You Can Control – there are two but this one is important.
Charges – when comparing investments, the one thing that will have the biggest impact on your financial future – the one that compounds up to outweigh more than anything is charges. It is the only thing that you can control and it will rob you of a secure financial future if you don’t pay attention to it.
At a 1% charge, ten percent 10% of your investment goes every ten years) at a 1.5% charge fifteen percent of your investment goes every ten years, at a 2% charge then twenty percent of your fund goes every ten years.
More maths on that, at a 1% charge that thirty percent of your fund every thirty years and it compounds against you, with ten percent less to invest – that means your future growth is based on 90% of your investment and not on 100% – the ongoing effect of charges is horrendous. I thought long and hard about using that word.
Ideally, you should be looking to achieve a total charge of .5% to .75% plus a token platform charge, ideally a fixed fee.
With most of the online platforms, you end up having to pay a percentage of fund charged – which is fine until your portfolio gets to the point where you will be better off paying a flat dealing fee – or an annual fee for the holding service.
Don’t Put All Your Eggs in One Basket – Asset Allocation How?
Some twenty years ago I was part of the team that first started to roll out an asset allocation tool for consumers. It was probably the first that the financial advice industry had seen.
Our team had proven that the most important things to be concerned about when investing was…
Asset allocation – spreading your investments across a range of geographic and market locations – in fact, this was more important than the choice of funds you should invest in.
Which also meant you could reduce charges to a very low figure – simply by using tracker type funds and ETFs. This was important for consumers and important for the way we worked with our own clients.
A sample portfolio might look something like this.
Cash
£10%
Fixed Interest
£20%
UK Stock Market Income Funds
£30%
US Stock Market Income Funds
£15%
Far East Stock Market Income Funds
£15%
Gold/High Risk
£10%
You and I have no idea which market is going to go up/down/sideways. To some extent, there is no way of ever knowing, not until the event has happened.
But we do know that each one is progressively higher in risk especially as there is a currency risk. Because of this increased risk – an investment could double in value or half. If it doubles in value good news all round, if it halves in value, no train smash. This is the beauty of this kind of plan.
The real key to all of this is for you to understand, to learn. To get this right for yourself. To know, to make sure you can do this for yourself because the advice industry or the lack of one at the moment means you can’t look for help there. Asset allocation is as important as investing initially.
Advisers
Really just salesman in disguise – as per my article in Financial Adviser some weeks back.
If advisers had had the answers, the perfect solution – do you think they’d be advisers? Of course not, they’d be off doing it for themselves, they would be making sure their own pockets were lined perfectly first – then they’d go off and play golf or ride horses. If you had the answers to making money work for you – perfectly, you wouldn’t need to work. Not even out of boredom. Therefore, anyone working for a living does not understand – so why would you accept advice from them?
But if you are going to be insistent, and if you are thinking about taking financial advice you should ensure that there is a fee payable for that work on invoice with VAT added.
There will be no ongoing charges automatically deducted from your investments – everything will have an invoice and you will be notified in advance.
You won’t find many advisers that operate like that, but plenty of solicitors, accountants, plumbers and local builders. Just about every other trade or profession works on a fee basis and will produce invoices for work done. Very few financial advisers do.
Go Have an Average Life/Day/Investment Portfolio
My parting words on this.
If you could just go and have an average day, you’d have a better day than half the population, if your investments are only doing better than half of the population you will be enjoying a lot more than the bottom 25% and much more than those in the bottom 49%.
Going for just over average is not a bad place to be, if you can do that on low charges and add an income from the investments into the mix there is a good chance you will be doing better than half of the investors but hopefully in the top 80% of people that invest on the stock market.
Given that the average of all pension funds, over the last ten years have returned less than 6% per year after charges and the yield on my favourite ETF – IUKD the ongoing yield from income alone is 6.76% with the opportunity for capital growth.
At least half of all pension funds have returned less than .60% per year. Of course, this is a disaster for you if you own a non-performing pension.
Just being in the bottom half wastes time that you will never wake up, wastes your money because you are being charged for this disaster and it’s your pension, it should be working hard for your future. Not for someone else’s now.
With That In Mind – here this is a fund that has been around for a while and meets a lot of expectations for a good number of investors. It’s an ETF or ‘exchange-traded fund’ see appendix for a full description. Basically means that you buy a single share (the ETF share) at low cost from a stockbroker or providers. The single share is actually invested in a basket of other shares – like a fund – but not a fund.
They were developed by the fund industry to access a broad range of investments easily and subject to low dealing costs and fund charges.
Of course I can’t make a specific recommendation of this investment as being suitable for your requirements, but if you are a paying subscriber to the Moneytrainers Financial Education package you’ll get access to the entire fund list and be able to make up your own minds as to when and how you should invest.
Using this kind of investment is the thing that will make all of the difference to your life and your investments.
It has low charges
No fund manager to decide in what or how to invest
Income paid to you directly or through your investment account
The ability to buy and sell when you want
Just about everything you could want from an investment.
With these few simple tips you will save money in reduced charges, you will be able to invest at the right time and when it suits you. And, you will end up with investments that work for you, produce income and you will see each dip in the market as an opportunity to invest more. Just remember that when you make an investment from your hard-earned, you will make that first to your cash pile.
The next thing you’ll need to do is manage your cash pile. And that is coming up in the next instalment.
Next thing, get a shimmy on with this – change your life – well your financial one. You can book a borrow my brain – an hour of pure gold for your finances.
Appendix
What are ETFs?
Exchange-traded funds are baskets of different types of investments that are pooled together into a single entity, which then offers shares to investors that are subsequently traded on major stock exchanges. Each share of an ETF gives its owner a proportional stake in the total assets of the exchange-traded fund.
ETFs generally track various benchmarks, with each fund investing with the objective of matching the returns of the benchmark that the fund has chosen. There are a few ETFs that have portfolio managers that actively select their own investments, but because of the disclosure rules that require such funds to tell investors about their holdings on a daily basis, most managers who want to manage money using active management strategies choose vehicles other than ETFs.
From www.fool.com
rom www.fool.com