20 Jun 2013, 10:54am
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  • Aaargh – More RDR fallout as TD does an Interactive Investor on me and starts charging to hold funds

    …Bastards. I am getting close to the point where I’m just going to get out of funds. Period. I’ve never liked them, preferring the ETF variant, but used them because, well, they used to be cheaper because you didn’t pay dealing costs or holding costs on ’em. The RDR has now buggered that up something rotten.

    One of the secrets to reducing costs in the modern world is to shoot anyone who wants to have a regular dib in my accounts. I have no Sky TV, I have a PAYG phone and I just don’t do regular payments for anything where I can help it.

    So when Interactive Investor decided they would charge me regularly to hold an ISA with them I told them to get on their bike. They also did some dodgy stuff in the runup to that, like charging to buy funds as if they were shares, which TD haven’t stooped down to – yet. Now TD deliver themselves of the following by email, linking out for more detail

    Extending our Platform Fee across all Funds (Unit Trusts and OEICs)

    If you hold funds with us, you may be aware that we introduced a platform fee of 0.35% in July 2012 on trail-bearing funds paying trail commission of more than 0.5% annually. As well as rebating all of the trail commission we receive on these funds, since July 2012, we have also introduced a range of clean funds, which do not contain trail, meaning more of your money stays invested in your fund portfolio. We now have over 1,500 clean funds on our platform. If you already hold trail-bearing funds with us, we will be writing to you soon to let you know how you can convert to clean funds in the next month.

    We will continue to rebate the trail commission we receive, however we wanted to remind you that from 1st August 2013 the platform fee of 0.35% per annum will be applied to all fund holdings (Unit Trusts and OEICs). This will be accrued daily and charged twice a year on or around 1st January and 1st July.

    So that more money staying invested in the fund portfolio is going to come out again to go into your sweaty mitts, is it, chaps? I am fed up with the endless nickel-and-diming associated with funds as all these hangers on want a slice of the pie. There’s something good and honest about shares and ETFs there – you pay to buy them and you pay to sell them but otherwise they just sit there. You don’t pay to hold them, you don’t pay to get the divi if any, they don’t cause any trouble. Like my phone – If I don’t use the damn thing it doesn’t cost me any frickin’ money. I like that in products and services. So no thanks, TD, bollocks to your platform fee. The only funds I hold are an HSBC EU fund and a Vanguard FTSE DEVxUK. I may out that EU fund and buy the Vanguard Developed Europe ETF, and upscale the holding since the HSBC one is a paltry £800. At the time I had a fond idea of drip feeding to build up a holding. I only built up about six months at £100 a go before iii decided to charge to buy funds which put the kibosh on that plan leaving me with a legacy rump holding.

    The Dev Europe ETF has about 30% UK exposure, but lifting the lid on what’s in the index it so happens that GSK is the only firm in the top ten that I hold, and marching through the list of constituent parts on the FTSE website totting up the weight of everything that overlaps with my HYP the overlap is only 5% of the total in the ETF. I can live with only 95% diversification to ditch the yearly thieving paws in my portfolio. The TD annual charge of 0.35% on funds is more than the 0.15% TER of the ETF for crying out loud. And yes, obviously I will eat 0.5% stamp duty plus £12.50 (or £25 on the turn in and out) so on about £2500 of this it would take me seven years to get ahead of the charge. It’s not unreasonable to expect to hold that sort of fund longer, however, and I don’t want to carry passengers. I don’t mind paying for the ticket to get on and off, but that’s enough for me.

    Over the coming years I will add to that holding, and I haven’t yet worked out whether it is better to build up a drip feed holding in the fund and then sell up and convert it into a lump ETF holding of the same sort of thing once I have stopped ISA accumulating in about ten years.

     

    14 Jun 2013, 7:19pm
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  • I’ve no ‘king idea what we are doing up here mate…

    A great quote from Jimmy at FinanceRomance from a market maker looking back at the ramp up over the last year and getting the jitters about the lack of substance behind the market rally, from the May 10 line or earlier. His jitteriness was prescient, well on the one-month timescale, anyway.

    He was right to be worried ;)

    He was right to be worried 😉

    Round about the same time, back in May, an Ermine was surveying his eyrie, thinking to himself “really need to do something with this year’s ISA allowance”. Although it will push me over the FSCS guarantee I’ve decided that the Retail Distribution Review has made everything so unclear I will eat the risk and stick with TD for another year.

    There was still the problem, however. I was unable to see any good reason why we are up here, either. Let’s face it, the Euro fiasco is still lurking under the water and has got to blow some time, the fundamentals if anything are getting worse as the rot metastasizes and begins to eat at the core. If someone were to take bets that in five years Greece would return to the military dictatorship where it was in my schooldays I’d consider putting some money on it, and switching off the TV station has a kind of cold-war symbolism, like the last broadcast at the start of this clip from Hungary that chilled my grandparents in 1956 as they listened from neighbouring Germany:

    There are six levels of crap going down in Syria that is killing shedloads of people,  threaten a new cold war, threaten the oil supply and for some reason we appear to be choosing some unusual bedfellows over there. Please, no more foreign wars until somebody works out how to win the peace…

    It’s a puzzle to me exactly why there’s been such a party in the markets. The trouble with the ISA allowance is it’s a use it or lose it. But I couldn’t really find much worth buying. Though it was a dearly hard-won piece of learning, I have learned don’t chase momentum…

    Then I lit on the section on TD which had Bed and ISA forms, and figured I still have some unfinished business with Sharesave. I sold 10k of Sharesave shares last year, both to thin out CGT liabilities and to diversify the holding into something else. Though holding a shedload of shares in one’s ex-employer is a lot better than holding a shedload of shares in one’s current employer it’s still bad news from a sector diversification POV to hold 40% of my portfolio all on one firm. So goodbye some of The Firm and hello Vanguard Dev World ex-UK – for the simple reason than my HYP is UK and I need to get out more…

    The nice thing about bed-and ISA-ing is that with TD I save one lot of dealing fees, though I still eat a hit of ~ £100 on the turn. It looks like the anonymous trader has got his view heard, and the market is turning south, so I may have jumped the gun. However, at least I don’t have to worry about the CGT, and since this year’s ISA didn’t actually cost me anything I guess I can use the regular account to buy if the correction turns into a rout. Would it be too greedy to want the FTSE down by the 5500 mark sometime this year? It was lower in the 2011 Summer of Rage but I hope that sort of thing won’t happen again. Well, a noticeable summer wouldn’t be bad, but not the rioting for desirable consumer goods.

    10 Jun 2013, 2:50pm
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  • I don’t often agree with Ed Balls, but on pensions he has a point

    The pugnacious Ed Balls delivered himself of the opinion that since the Government is boracic lint, the state pension should be included in Osborne’s cap on welfare spending. And it’s for the Torygraph all hot and bothered.

    Let’s first get one fallacy out of the way. The Grauniad and the Left in general are keen to lump the state pension under the title of benefits, in an attempt to bring it under the general benefits aegis, particularly as it’s the largest area of benefit spending. Take exhibit A, extracted from here

    Benefit spending graphic

    Yowza. Look at the BIG SCARY load of spending on PENSIONS, the BENEFIT SCROUNGERS – YOUR MOTHER!!!

    Not so flippin’ fast, benefistas. Unusually for benefits, to get the State Pension, in general you have to have been paying IN to the system, for 35 years as it will soon be. Unlike, say for housing benefit, which has been artifically inflating the price of housing in parts of Britain, which is the next biggest lump, for which you don’t have to have been paying in.

    So it is different. Something actually got lobbed into the pot. I’m not bright enough to be able to say whether it was anywhere near enough, but I do know that no NI contribution, no state pension. You get means tested pension credit then I believe, if you have no capital. Repeat after me, Guardianistas

    The State Pension is a contributory benefit, unlike nearly all other UK welfare payments

    It’s kind of in the title of the tax that was set up to pay for that and the NHS, though the difference was quickly diluted and chancellors hate allocated taxation. The title was National Insurance – insurance, geddit? In the years before the welfare state was set up, trades established friendly societies, which by taking a small amount from all members, could insure them against illness and death leaving their dependents destitute. Unlike the modern welfare state, however, the friendly societies did send the boys round in the event of a claim to establish whether there were grounds for it, at least according to the exhibit in the Somerset Rural Life museum I saw 😉

    Back to Ed Balls

    Having said that, he’s right to raise the issue. We have all gone on a mahoosive bender in the last 10-20 years, and Britain is nowhere near as rich as we believed we were. We will have to consume less, and material living standards will either fall, or rise more slowly than people have been used to. I’m actually on the optimistic side of the fence there, for the full Chicken Little treatment you can take a look Moneyweek’s The End of Britain and for a less breathless but equally dark prognostication Tullet Prebon’s Tim Morgan seems to be trying to scare potential investors shitless with Project Armageddon – might there be no way out for Britain, one for our American friends titled Armageddon USA with some marvellous depression-era iconography, and just in case you were looking for somewhere else to hide away from the Four Horsemen and the blowing of trumpets at the crack of Doom there’s Perfect Storm – energy, finance and the End of Growth. At least his boss, Terry Smith appears to have taken the hint, switched out the lights and is either building his safe room out of gold bricks while running Fundsmith, or having a quick laugh in the background while he builds his fund.

    Although there’s a case to be made that benefits that people have contributed to should be eroded less quickly than those that aren’t, the Tory triple lock is a brazen vote-winning approach that should be challenged, if only to have the debate. It’s one of the reasons I suspect there won’t be a State Pension by the time I am 67. It’s also, incidentally, one of the reasons that makes retiring and drawing my pension earlier more attractive. I can draw my company pension before 55. One of the key advantages in drawing one’s pension early is that it reduces the income that HMRC will taxes me on, as well as reducing my total income (because it’s paid out for longer). The latter effect is counteracted somewhat by the 25% tax-free pension commencement lump sum. In most people’s cases at The Firm that would reduce their pension, which would be nuts. However, I spotted that one could save this amount ahead of time in AVCs, and thereby avoid paying 40% tax on 1/4 of the total pension amount. This is then eroded by 10% due the the nasty tendency of cash to quietly die in the night, and I will move it into ISAs over the years once I draw my pension. Taxation will probably rise in the coming years, which is why I have emphasised ISAs as part of the mix, because I don’t want to be a tall poppy to that future government.

    But change is coming, because things that can’t carry on usualy have a habit of not carrying on, and Red Ed (2) has done us all a favour in calling it out. I admire him for his honesty (relevant section starts at about 11 mins in)

     

    This loss of living standards is going to be nowhere near as bad as it’s being made out to be, for people who are adaptable enough to rein in their consumer spending. Indeed, if the people who currently do their consumer spending on credit cards could only knock it off for long enough to pay their debts off, they could buy 20% more consumer tat at average credit card interest rates without paying any more – simply by saving up first! If I look back at the Britain I grew up into, Britain is massively richer now in nearly all respects, bar two.

    One is I would hate to be a child in modern Britain. The children I went to school with nearly all lived with both natural parents, and individual freedom in Britain  seems to have been bought at the cost of some societal cohesiveness. It was probably always tough at the low end, but now it seems tough everywhere. However, children have proven to be adaptable and resilient through the rest of history so it will probably come out okay in the wash.

    The other is related – as a child in the 1960s and even 70s  the world was a more hopeful place, technology was going to make things better, the grainy moon landings in 1969 I watched were going to be the precursors of shiny spacecraft going to colonise other plants, with Flash Gordon sort of fins. It didn’t happen – we gave up going to the Moon in the oil shock of the 1970s, and we are now scared that global warming is going to kill us all, and generally tomorrow is going to look like a worse place than today. I am glad that I had a childhood where the adults believed that things could only get better – even if they were wrong…

    Everywhere else, as far as I can see, we are so much better off. Our cars are cheaper in real terms ,they’re more reliable, we have an endless array of gadgets and nick-nacks to occupy ourselves with, communications are cheaper, far richer ,more extensive and faster. Travel is more widespread – I was 35 when I first boarded an aircraft, which probably sounds ridiculous to someone under 35 now 😉 Our homes are heated properly, we have a bewildering choice of entertainment. Healthcare is much better.

    So while Ed Balls is promising less for everyone, I do agree he is right in saying you should look across the whole welfare state, even if I don’t agree with him that contributory welfare are equivalent to non-contributory ones. In return for his inclusion of the State Pension to the welfare spending cap, I would like to see

    • child benefit restricted to no more than two children and no household with > £50k income (to address the shocking keening noise and the unfairness screamers)
    • the winter fuel allowance, bus passes and free TV licence iced from people with more than the average UK household income
    • and for unemployment benefit to have a large contributory component – like in many European countries

    however, since I’m not running for office it doesn’t matter much what I think. However, if National Insurance goes back to its roots and starts to look a lot more like insurance I’m for it.

    7 Jun 2013, 8:55pm
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  • Maplin Electronics – if it’s under £100 and lasts a year that’s as much as you can expect

    Way back in March 2012 Maplin sold me this 7″ TV from Maplin. My main application was lining up security cameras, but I also thought it would be useful for checking the weather forecast when in our campervan. As it was I didn’t realise there is no useful Teletext replacement on digital TV. A smartphone and the weather page on the BBC website is far more practical, unless you’re in parts of Scotland. And then you probably don’t get DTT service either.

    Today I wanted to rig a camera looking at the massive Barn Owl box kindly provided by Suffolk Wildlife Trust at the Oak Tree farm because a barn owl is a frequent visitor, occasionally to be seen at the box and there’s loads of bird crap underneath it, and some owl pellets, or so I am told by people who know about this sort of thing. I get to see this, rather than a blue screen I’d expect with no signal

    Maplin customer service is crap

    One dead Maplin TV that they refuse to replace

    So I take advantage of the glorious sunshine and take a wander through a couple of recs and the park, to it back to the store

    And they refused to replace it or refund. It was the usual runaround, sorry sir, yes, I agree it’s a bit short for the TV to fail but company policy is yadda yadda. They suggested I contacted Maplin Customer Services, where I talked to Kirsty who repeated the story. I educated her as to the Sale of Goods and that this TV was not of suitable quality as consumer durables should last longer that a year and a bit and she more or less said “f*ck you, so sue us” I wish I had a recording, but since I used Maplin’s phone to avoid paying some usurous 0844 charge I couldn’t do that. Next time I will take one of those sucker pickup coils and a recorder.

    I really try and avoid using the phone with big firms. If I have to deal with them then writing a letter is usually quicker and cheaper, plus it wastes less of my time. But if I do have to use the phone then I always record the call as a matter of policy.

    This reminds me that there are added advantages to not buying consumer crap. Not only do you not spend money. You also don’t get the sort of deliberate frustration that companies like Maplin set up to reduce their costs by avoiding their legal obligation to supply goods of suitable quality.

    I remember Maplin from a time when it wasn’t a purveyor of cheap Chinese crap but actually a supplier of useful components. They took a business decision somewhere in the 1990s to get out of the electronics hobbyist market and into the gadget end, and increased their prices to about one and a half times what they should be. And became a damn sight more successful 😉

    Now I can’t really get too excited about the £70, but I sure as hell don’t like being taken the piss of. So I got onto MSE and looked at what I should have done and exactly how to put the letter which will be the next step. I suspect that Maplin take the Ryanair policy of customer service. They spend the money on training their staff to runaround complainants enough  that they give up, and in the end there’s only so much effort I’m going to put into this.

    But it’s a little bit more than rolling over. I’ve taken MSE’s template letter, though I’m not going to threaten legal action fo a £70 TV, otherwise I think the people in Maplin’s complaints centre would be justified in having a titter.

    The official Maplin policy seems to be –

    If it’s under £100 and it lasts more than a year, that’s it, sunshine. It doesn’t owe you anything

    Not only does this sort of shoddy approach contribute to the amount of e-waste, it’s also taking the piss. A TV is not a consumable item. Okay, 10 years is asking a bit long, but five years is a reasonable minimum service life to expect.

     

    3 Jun 2013, 11:21am
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  • What’s all this Investing lark all about and how does it differ from Saving?

    Seems there’s lots of confusion over saving and investing. They’re related, but they aren’t the same. Say you have £10,000. There are three classes of things you can do with this.

    • You can spend it – on yachts, or on charity, or Jimmy Choos or paying off your debts, or buying a few more bricks in your wall, otherwise known as paying down your mortgage 1
    • You can save it, in bank notes under your bed, or in National Savings ILSCS if they’re available, or a bank deposit account.
    • You can invest it – in financial instruments like equities and bonds, or in yourself by training to earn more money, or in your small business buying capital plant or services so you can make more money.

    Everybody knows how to spend money, so I won’t bother with describing how you go about that. Where there seems to be serious confusion, however, is between investing and saving.

    Saving

    You usually save for a defined short-term goal (within the next five years, say). Monevator gives you the lowdown on why you don’t do that under your bed. You know you are saving when you consider there to be a vanishingly small chance of you getting fewer pounds out when you come back for you money than when you left it there.

    Say you want a new TV, or a car. You save for that. You know roughly how much a TV is, you put a few pounds by and when you have enough you go get it. Unlike the 99% who do their shopping early in life, you aren’t screwed. You don’t even need a credit card, though there are good consumer protections reasons why you might want to buy the TV with a credit card even if you do have the money saved.  Either way you get your TV when you want in the way you want and under your own terms.

    It’s not just Stuff you save for. Some people who decide that the school system isn’t up to scratch for Their Darlings save to pay school fees of about £20,000 a child. Some people save for a round the world trip when they retire, or save towards a house deposit. Things you save for you generally –

    • know what your target is to a fair accuracy
    • You save the total amount – ie when you have acquired the goods or services in due course you don’t expect to have any of the associated savings left. You can, of course, save for more than one thing at a time 😉

    Just to confuse things, you also save towards the unexpected and the uncertainties of life. The ermine has an Emergency Fund, scattered across a full allocation of NS&I ILSCs and a couple of Cash ISAs. I haven’t saved this for a particular purpose, and when NS&I tell me the ILSC has come to maturity I leave them be and let them roll it over. Unlike the cash ISA, which like radioactive waste loses its value with a half-life of about ten years these days, the ILSC’s hold their value in real terms. That’s nice in an emergency fund, because emergencies don’t usually get cheaper with time. People who know more than I do say that in the long run cash actually offers a real return ahead of inflation. I’m buggered if that’s been my experience other than the ILSCs.

    Confusingly when people say they are saving for retirement they are usually investing for retirement 😉 So what is that investing lark all about then?

    Investing

    Investing is where you buy an asset that you expect to hold its value and provide you an income or save you money, or you expect it to appreciate in value at a higher rate than inflation. The conundrum with investing is that in some cases the asset is in a marketplace where sentiment ebbs and flows to a shocking extent. In nearly all cases with investing there is some risk that things won’t turn out as you expected. Your stocks may tank, the company may go bust, your small business may not get that order for which you bought all the gear, you may flunk your exams or find the price of the university course was more than your will get from the degree premium because everybody can get a degree nowadays.

    There’s nearly always a judgement call associated with investing, which isn’t there when you are saving. Provided you save less than £85,000 with any one institution you are fairly guaranteed to get your money back unless this sort of thing happens

    You're probably SOL on getting your money back if zombies invade

    You’re probably SOL on getting your money back if zombies invade

    If zombies are on the loose then you may not get your savings back. In most other cases you will…

    Investing is hard to define, but you tend to know it when you see it –

    • there’s an element of risk, often of total losses. Stock market investing is relatively benign there – total losses can happen but aren’t that common!
    • once you have invested, the value of your investment will be volatile
    • some investments are one-way only. Education, both university and those school fees spring to mind. You may not get a 2:1 or the child may be genuinely dim-witted, negating the value of your education investment. The gear you get to fulfil the order may not have more than scrap value if the order doesn’t get placed.
    • You need to save much more than the annual income you derive from the investment portfolio – typically 20 times. The return for that stupendous over-saving is you can sit on your backside and not go to work for the income 😉

    So why on earth do people invest, then. Are they out of their heads?

    It’s because studies show that if everything goes right a well-diversified investment portfolio beats cash in the log run. You look at the graph in this and go “holy crap, I’m putting my money with the hare and not the tortoise”

    There are quite a few ifs in that previous paragraph. Most people have to screw up a bit before they learn the essentials of investing. I’d go as far as to say if you are diversified enough it doesn’t matter that much what you invest in, as long as you don’t fiddle and churn. Diversification also applies in time. Most people  enter the stock market over decades as they save into their pension for retirement, but come out of the market all of a sudden when they buy an annuity. They could use some temporal diversification, perhaps shifting a percentage of their equity portfolio into cash savings over the last five years before retirement, to head off being slaughtered in a stock market crash just before they retire.

    When should you invest, and when to save?

    Save if your time horizon is short

    If your need is within five years, then save. Unless you’re comfortable with the risk of losing half your savings at the end in a stock market crash because you think the chance of having more is worth it. Most people hate losses more than they like gains, so this is a bad move for humans.

    save if your target is low

    If your goal is less than about £10,000 even if it’s 20 years off there’s a case for saving, too. There’s a value in certainty. Yes with investment the rate of appreciation has historically been greater, which means you need to save less to reach your goal. There’s not enough difference between saving £500 a year and saving £300 a year to my mind to make taking the rollercoaster ride of investment worthwhile, plus there are fixed costs associated with investing which eat into your potential gains at the low end. There is a shedload of learning you have to do for investing too, because if you don’t understand the volatility you risk being panicked out of the market at the low-water mark. That is the time to lean in, not run out 😉

    invest if you have a long-term sizable goal

    If your sizable need is twenty years off, then you should consider investing. Children’s university fees would be a candidate if you start when they are born. The total amount is about £50,000 at the time of writing – as a parent you do not have to save up the opportunity cost part 2.

    Two things make this a better candidate for investing. The total amount is worthwhile, and for most people the difference between saving £2,000 a year in a cash ISA and saving £1600 a year in a S&S ISA would make a material difference to their standard of living. I used a real rate of return of about 4% for the S&S ISA and 2% real for cash to come up with those figures. People tell me you can get a 1-2% real rate of return on cash for the long term. If I were saving for this I would personally assign a 0% rate of return on cash, which favours the investing route even more.

    The other advantage of university saving is that the volatility is more acceptable due to the spread out nature of the expense. Say your child is coming up to 13, whereupon you switch from investing in a S&S ISA at £1600 a year to saving (at the higher £2000 p.a. rate) in  a cash ISA. The rationale behind the switch is the volatility of the stock market is such that you need to be in it for more than 5 years to have a good chance of breaking even. Your child will enter university in five years from now, because they go to university at 18. So you are guaranteed have £10,000 cash towards it, even if the stocks fall. Say your stock market investments turn out to be effectively worth £33,661 3. The stock market then has a hissy fit just before your child goes to university and halves the value of your S&S ISA to £15000.

    £25,000 is still enough to make a major dent in your child’s university costs. Plus if you have done your homework, you will observe that you may as well stay in the market – the cash will address the first year of fees. Say your child entered university in Jan 2009 4, which was the most recent low-water mark for the FTSE all-share. That loss would have softened by the next year. University fees are incurred over three years, so they are a good match for a mixed investing/savings approach.

    If the market crash happens earlier, as is likely at least once in the first 13 years then your investment buys more stocks, and is a cause for celebration, not gloom 😉

    invest for retirement

    Retirement is always a candidate for investing. You can expect to be retired for at least as long as you are at work, so unless you can consistently and steadily save half your pay you need the extra that investing can give you. Plus your retirement costs are incurred over a long period of time if you use drawdown, though many people buy an annuity which is a fixed one-off purchase which is a bad match for the characteristics of investing.

    Unfortunately you need to understand why you choose investing over saving. The risk and volatility of investing is gut-wrenching at the beginning, because you are poorly diversified in time and in stocks if you buy individual shares, and still poorly diversified in time if you buy index-trackers as people say you should (the index-trackers take care of equity diversification right off the bat).

    Most people should save first, then invest

    Investing is an old man’s game for your average Brit IMO. In the first part of your working life, money is particularly tight, and the only investment people make is with their pension if any, and their house in some cases, assuming they actually repay the mortgage 5.  Because of these two implicit investments, most people get along fine by ignoring investing, and sticking with saving until middle age.

    If you want to retire early, however, you have to engage with investment. One tough issue with investment is you can only invest ~11k p.a in a tax-sheltered ISA which buys you about £500 worth of tax-free income each year, so it takes an individual about 10 years to buy £5000 worth of tax-free income. You can do a little bit better than that because you compound the income in the accumulation stage, but it’s still seriously rate-limited. You can invest outside an ISA, and for basic rate taxpayers the issues of non-sheltering aren’t apparent in the early stages.

    You have to invest a lot of money to make investing worthwhile

    I’m going to stick my neck out and say investing needs at least £20,000 to make it worthwhile. Before you start, you must not owe any money, other than perhaps a mortgage. No ifs, no buts 6. You don’t have to find that all at once, indeed investing a lump like that all in one go has hazards of its own.

    What I mean is that when you’ve stopped contributing, the total invested should be £20,000 or more in today’s real terms, even if it your plan takes you 20 years to get there.  All too often on Moneysaving Expert forums I see people say I want to invest £500, or even £5000. It’s not going to shift the needle on the dial, and if you can’t find more, there’s a case to be made that the volatility in the stock market is going to deprive you of sleep at times. Save it, and chase the best interest rate you can get. Often that is to be had by paying down loans 😉 As I said earlier, before you even think about investing, clear your debts.

    Sorry. Investing is not for the poor. Widows and orphans should probably stick with saving, and it works better for them because they don’t pay tax on their savings interest, though that is cold comfort at the paltry savings rates on offer at the moment.

    Why do I say you need at least £20,000? Because there is a long, steep and harsh learning curve associated with investing, it needs you to both understand the principles and also to address the enemy within, which easily takes fright at the rollercoaster ride of the fluctuating capital value. Get this wrong and you will lose money and sleep. Some of that 20k will be invested in yourself, in learning what not to do 😉

    Invest like you are never going to spend the capital

    Unless you’re saving for a defined expense like those university fees, aim to spend the income from your investments, not the capital. It’s terribly hard to get a stable handle on the real value of invested capital. If you don’t know the real value of what you have, how can you determine how much of it you can spend without running it down?

    This is the issue that people who keep a chart of their net worth fall into – if a lot of your net worth is in investments then there’s a lot of noise on that signal due to market sentiment. It’s irrelevant, high-roller. In Quicken, I represent my ISA capital as the inflation-adjusted amount of money I have put into the account. When I look at TD Investing’s listing of my ISA it’s a lot higher. All that is telling me is that the world has gone a litttle bit mad and is irrationally exuberant about equity valuation. It won’t last. I’m not going to spend that money. I focus on the income from it, which I can spend (and is usually about 4-5% of the amount I’ve put in).

    Unfortunately you still have to engage with and understand the investing process. Most of the issues with investing you try and get right when you buy, then the less you do the better. However, over long periods things like rebalancing are relevant to keeping things on track.

    It’s Not Fair

    Life isn’t fair, and the Cosmopolitan myth that you can Have It All is toxic. Having one thing usually means foregoing something else. Investing isn’t right for many people. Note that this isn’t purely an issue of what you earn. I earned over the national average wage, but not stupendously more. What I didn’t do was spend as much as most. I have had fewer holidays over my working life than most people. I’ve never been to Ibiza or seen a Spanish beach 7.

    This weekend a couple I worked with jetted off to go on a jaunt in Eastern Europe culminating in a road trip to Venice. I’ve dead chuffed for them, and I think it’s fantastic. But on the other hand he gets to spend forty four weeks of the year in the office, and when the boss says jump, he has to jump, and he has to pay homage to The Performance Management System, whereas I don’t have either problem any more. His choice is right for him, and mine is right for me.

    So if you can’t find that 20k over 20 years, you probably get to spend more over those twenty years, and if that’s what matters to you then great. There’s nothing that great about investing – other than when you sign off your job at the end of the term, you clock out for good.

    Know thyself

    Investing, or saving? Know the difference – it matters. The siren song of Investing can come dear, particularly if your goal or your temperament is more suited to Saving. If you have any debts or you spend more than 80% of your take-home pay Investing is probably not for you. Emergencies, such as being made redundant, tend to happen more when the economy is bad and the stock market is down, and if you are spending a high proportion of your take-home pay you may not have enough buffer to avoid having to liquidate your investments into a down market. In which case you’d usually have been better off saving.

    Many people are drawn to investing by the pound signs on the upside. They need to look at the sharks and the piranhas circling under the water as well as the tropical island and the yachts above the waterline. It’s that evil combination of increased probablity of personally experiencing economic  hard times with stock market lows that makes investing hazardous for people of working age if they can get their hands on what they’ve invested. This is the rationale for tax-favoured pension investment, where you can’t get your sweaty mitts on the money until you are 55. The Government incites you to invest in pensions with the tax benefit, and then denies you the opportunity to get your hands on the loot during your working life. It’s for your own good 😉

    Notes:

    1. some people might regard this as investment; I did when I was doing it.
    2. there are strong arguments to be made that a gift of 50k will make more difference to your child’s future as a deposit for a house rather than paying university fees up front, but that’s not the point of this discussion
    3. I used this compound interest calculator to simulate the real return on adding £1600 per year till the child is 13, compounding at 4%, stopping contributions for five years but still compounding at 4%
    4. I know children enter university in October. For this hypothetical example I’m using the most pessimistic point in the FTAS index, which happened in January
    5. BTLers are a different case where repaying the mortgage comes at the expense of expanding the estate. Presumably if you are a halfway competent BTL landlord, you retain your mortgages and expand your estate. Paying your mortgage off is for the little people like me who are buying the house they live in
    6. in years to come, erstwhile students on the new-style ‘graduate tax’ version of student loans will be an exception to this, particularly if their investing is done in a pension
    7. I hate hot weather, beaches and sun, so it’s no great hardship 😉
     
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