Here we are at session number 6 , and we’re going to be talking about the basics of investing. This will be a bit of an introduction to the whole subject, and will be a little bit less structured than usual because it'll be in the form of an interview with Justin Urquhart Stewart.
Justin is arguably the most recognisable financial commentator in the UK. He's often on BBC radio and TV, Sky TV and many other channels. His distinctive red braces mark him out, and he is known for talking common sense about money, and also for his irreverent humour. He also happens to be the Marketing Director for my sponsors, Seven Investment Management.
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Everything you need to know – Interview
I chatted to Justin about the basics of investing – here's a summary of the key points:
- Investing should be dull
- You should understand your tolerance for risk (more on this in a near-future session of the podcast)
- Managing risk in investing is about:
- Diversification across different assets
- Understanding the correlation of assets, and how they interact
- Being aware of and managing exchange rate risk
- When getting started, choose a multi-asset fund as a broad foundation
- …which matches your risk tolerance and desired return
- Look for ‘steady in the middle' not the star turn
- Watch out for charges
Everything you need to DO
Here are the three things you need to do if you are at the early stage of wanting to start investing and saving.
1 – Identify your risk tolerance and desired return
It is tough to do this in the abstract – everyone wants a 12% return with no risk – but this is not going to happen. Risk is a complex subject. Talking primarily about stock market risk here, but risk is broader than that.
When starting out and doing your own research into investment funds, you could start with the desired return, based on your goals, and then see if the volatility of that fund is acceptable to you.
- Make sure you look at a long term average performance though, say over five or ten years.
- With over 2,500 UK investment funds to choose from, it's tough to choose between them
- www.trustnet.com or www.morningstar.co.uk are good places to start
Unless you are prepared to do a lot of work yourself, I'd seek advice. To put that in context, we don't even choose funds at Jacksons, but outsource this to the experts.
2 – Watch out for charges
Arguable whether or not this is an action step really, but I thought it was important enough to give it its own section!
Whichever fund(s) you decide on make sure you understand what the charges are. There are two acronyms you need to know:
- AMC – Annual Management Charge
- TER – Total Expense Ratio
But watch out for other expenses – it is still not a requirement for a fund manager to disclose all their costs in one easy-to-understand number.
Costs can be a huge drag on performance over the long term. In some cases, total costs can be upward of 2% on some funds, but I would generally want to see charges of less than 1% on any fund I chose.
3 – Use an ISA
If you are just getting started with regular saving and investing, it makes sense to use your ISA allowance.
ISAs are free of capital gains tax and largely free of income tax. Other than pensions, they're the most tax-efficient way of investing for ordinary UK people.
They're accessible, usually, so you can get at your money should you need it. But remember you shouldn't be investing unless your emergency fund is fully funded first.
Hopefully you've got some food for thought there about getting started with investing. It's a massive subject. People are either really interested in the mechanics of investing, or they're not, and just want to put the money away and see it grow over time.
Again, seek advice from a competent financial planner – More on this soon
I hope that this session of the MM podcast was helpful – Did I miss anything? Do you have any tips or tricks that work for you? Any questions?
Please leave any comments or questions below, and if you like what you hear on this podcast, (and we're really just getting started), please leave a rating or review on iTunes. This helps others to hear about the show and to subscribe
Next time we'll be talking about the five steps of successful financial planning. If you have any questions about this, go to meaningfulmoney.tv/feedback and leave a voicemail.