Looking on social media you could be forgiven for thinking that the only sensible way to invest is through an index fund. So many ‘finance gurus’ espouse the simplicity and low cost of just buying into a fund that tracks an index, often the S&P Index, that surely anything else would just be plain silly? For those of you that don’t know, an index fund is a fund that is constructed to match or track the components of a specific financial market. So rather than trying to beat the market, the fund just rides along on its wave. Many studies have shown that this approach can often do as well, if not better, than paying lots of clever financial types to construct an actively managed fund of specifically selected companies, that they believe will perform better than average. The S&P 500 is just one index that a fund can follow. The S&P 500’s full name is the Standard & Poor’s 500 index, which is an index of the top 500 companies in the United States and includes such behemoths as Apple, Amazon, Alphabet (Google) and Meta (Facebook). With big brand names like this you would expect this index to do well, and it does! Although S&P 500 index funds seem to dominate social media discussion, I guess because these top 500 US companies dominate the world stock markets, there are thousands of other index funds tracking all sorts of different markets. So if you want to track the world market or the UK market, for example, you can do this as well. So let’s just look at the S&P 500 briefly again. In recent years it has done very well in comparison to other markets, growing on average at around 10% each year over the last ten years. So this does look like a sensible investment option, surely? The S&P 500 Well yes, it probably is. And whilst you can look at past data to give you an idea of what might happen in the future, in reality, without a time machine, we don’t know for sure what will happen in the next couple of years, let alone the next ten. What do all the finance sites say? ‘Past performance is no guarantee of future performance’, or words to that effect. They say this for a reason; things change, trends come and go, and markets can ‘wobble’.
And this is why, when I invest, I include plenty of diversification in my investments. And when I say ‘diversification’, I’m not just talking about different countries, but also different asset types as well. Because when some of you portfolio is taking a dip, a well diversified portfolio will have another asset type or another geographical area riding high. So index funds; yes they can be great, but if you are going to invest in them, make sure you diversify across asset types and geography when selecting them. Piling all you money into one index fund isn’t necessarily the best strategy. So why don’t I routinely invest in index funds? I believe that when investing you should be clear on your overall objective. If your objective is to grow overall value of your investment over the long term, then an index fund is a reasonable investment option to take. If you want a simple way to grow your portfolio with minimal input, then a group of diversified index funds may just be the thing for you. Set up a monthly direct debit to keep topping them up and watch your portfolio grow over the years. Forget about them, get on with your life and just do a check and rebalance every year or so. But what if you have a different objective? Like I do. I have given up my ‘normal’ day job. I retired, for want of a better term, about 3 years ago now and have since been living off income from my investments. To do this, I moved my investments from index funds into a number of actively managed funds, which do have slightly higher charges. However, on the plus side, these are giving me a regular income in the form of dividends and interest. I currently get just over 4% in ‘natural yield’ on these investments. That is to say, the dividends and interest alone are giving me £4,000 per year (around £350 per month) for every £100,000 I have invested. I can withdraw this as income without touching the original capital. Currently I can manage on less than the yield I’m getting and so some of the excess is being reinvested, as I’m sure I will get some years where the investments won't perform as well. This so called ‘Natural Yield’ approach does mean that you can never be certain of the amount of money you will ‘earn’ each year, but with a bit of planning and monitoring, your investments could provide an income for the rest of your life. As part of my strategy to diversify I have also put money into a number of other investments outside of the traditional equities and bond markets. There are a growing number of opportunities springing up, some of which may be higher risk, but some which actually may be slightly lower risk than many equity markets. The higher risk investment that I have invested some money in to is crypto currency. This is a very volatile market and not for the feint hearted. However, if you are brave enough, then there could be some significant long term gains here. I only invest small amounts here and that is as much through intrigue than anything else. As my confidence grows with time, I may invest a bit more. A slightly less risky option that gives me 5% is through an easy access account called Sterling Boost that Ziglu have recently launched. This is quite a new and innovative product where they converting your money to a stable-coin which is then lent out and you earn a portion of the interest that they get. Stable-coins are less volatile than other cryptocurrencies as they are linked directly to something of known value such as the US dollar, but still have all the advantages of crypto currencies by running on the blockchain. There are also a number of property based companies that I have investments with. These are essentially crowd funded property investments, either buying a part ownership in a property and receiving rental income or by supporting property developers through peer to peer lending. If you want to find out more about these then check out Proptee where you can buy fractions of properties through the magic of NFTs and Kuflink, where you can support property developers by lending money that is fully secured against the property being developed. These types of investments can pay out in the region of 6% -10% and so compare well to more traditional equity market investments. However, these are newer investments and so only time will tell if they were a worthwhile investment or not. Now where did I put that time-machine?
0 Comments
Interest rates on savings are very low at the moment and inflation is rising. So any money in traditional savings accounts is actually losing money in real terms. Money invested in the stock market however, can actually beat inflation and give you a positive return. So why do so few people invest? One reason is possibly that it is seen as complex, expensive and only for the rich; with large sums involved and expensive trading fees through stock brokers. But that isn’t the case anymore as with the rise of modern technology it is now easier to invest than ever before. If you have a smartphone and £100 you can start investing now. Let’s look at two examples. The first is Freetrade. As it’s name implies there are no trading fees through Freetrade. On its basic plan there are no costs whatsoever. They do have other plans that you can move to with a small cost that give you additional benefits. But as a new investor, the basic plan is sufficient. Freetrade allow you to purchase shares and ETFs (exchange traded funds), which are essentially a ‘basket’ of shares with a common theme. This is all done through an app on your phone and it’s all pretty intuitive. I have been using Freetrade for over a year now and it works really well. As you can see below, the return over the last year has easily exceeded a traditional savings account (although there has been more growth than usual following a drop in the market at the beginning of the covid pandemic). If you do decide to sign up to Freetrade you can get a free share worth between £3 and £200 if you use my link below. For transparency I will also get a free share worth between £3 and £200. Check out Freetrade The second investment platform I want to look at is Invest Engine. This one is slightly newer than Freetrade and works slightly differently. Nonetheless it also is very easy to use. Invest Engine don’t currently have any individual company shares to invest in but instead focus on ETFs. They have a select range of around 350 ETFs covering a range of markets and you can either self select which ones you want to invest in or for a small fee (0.25%) they will select for you and monitor/adjust as necessary.
Because Invest Engine are currently growing their customer base, they have an attractive offer for new investors. When you open an account they give you £50 to invest. This gives you a no risk opportunity to learn how the platform works. Once you are happy you can then invest £100 of your own money and if you keep this on the platform for a minimum of one year you get to keep the original £50. On top of this, if you use my link below you will get an additional £25 referral bonus. So for a £100 investment you get £175 without any market movement added in! A new feature just added to Invest Engine is the ‘Analytics’ tab. Here you can see how your money is invested across sectors and regions as well as individual companies. I really like this new feature which really helps you 'diversify' your investments around the world and across different sectors. In order to retire early you need to become ’financially independent”. This means that you need to be able to live your life without the need to ‘earn a living’ through traditional employment. To achieve this there a few clear steps to take and a few key principles to understand. In this article I want to cover some of these steps and key principles as initial ‘food for thought’ for someone who is looking to achieve financial freedom. Even clever people are stupid when it comes to moneyIn schools we generally are not taught about finances. You may pick up a bit from parents, but then they haven’t been taught either and so bad habits and false assumptions are passed on and the lack of understanding is perpetuated from generation to generation. Maybe the truly wealthy are immune to this as they pay an army of accountants to help them look after their money. But for most people, this isn’t an option and if we want to understand money we need to look elsewhere. In the end it is down to all of us as individuals to learn about finances and increase our own ‘Financial Intelligence’. The fact that you are reading this means that you are probably ahead of most people. This article isn’t going to cover everything though. It’s not even going to cover ‘a lot’! It will only skim over a few principles as a starting point. If you really want to improve your Financial Intelligence you will have to do a lot more research, and check out some reliable sources to ensure that what you learn is balanced and accurate. Don't fall in to the 'Debt Trap'!We seem to accept debt as ‘normal’ these days. People talk about how great their credit score is and how much credit they can get on their credit cards as if it’s something to aspire to. But is spending beyond your means really a great way to become financially independent? Or does this just generate the illusion of wealth? Buying ‘stuff’ on credit usually means you are paying interest on top of whatever you have bought, and the interest you end up paying can be quite considerable. If you have high interest debt then this is particularly true. Expensive credit card debt or car loans at a higher interest rate than you can achieve through passive income (see later) will mean that you are taking one step forward and two steps back. One exception to this could be a mortgage debt, if it is at a rate of below 4%. This is because the money you owe through your mortgage might be better utilised as an investment earning a rate above 4%. However, this isn’t clear cut, as paying off a mortgage can be a great weight lifted. The monthly repayments are usually one of your largest regular monthly outgoings, and reducing this can in itself be a great step towards ‘financial independence’. 'You can’t have money, and spend it'Whilst some people in well paying jobs seem to have a lot of money, many of them don’t as they also spend a lot of money. As I was told as a boy, ‘You can’t have money, and spend it’. They may be earning a lot, but they probably have little invested and live from payday to payday in the same way that many others do. They may believe that their primary residence, their home, is where their money is invested, and to some extent this is true. However, to release that money, they need to first sell their home, which isn’t always easy and never guaranteed to turn a profit. A key step to Financial Independence is to start thinking about where your money is spent. Call it a budget, a financial plan or whatever. But you need to start looking. It could just be a sheet of paper with a list of everything you have spent money on over the last 12 months. It's all there, in your bank and credit card statements - get them out, and make a list. Then look what can be cut and where you can save some money. You need to free up some spare money in order to be able to invest. The rich buy assets, the poor buy liabilitiesDid you know, that rich people don’t actually work for money? Rich people get money working for them. This is where it’s important to know the difference between an asset and a liability. There are plenty of complex definitions for these that you can look up on the internet. But in a nutshell, an asset is something that will generate money and a liability is something that will lose money. If you want to become financially independent then you need to focus on buying assets and not liabilities. Use the money you freed up when you did your budget to buy and hold assets. Keep buying them, month in month out. Remember to always ‘pay yourself first’. By this I mean you should be investing this money first before dealing with your other bills. Think about setting up a direct debit each month so that it happens automatically. This is how you get your money working for you. Your assets will produce passive income (you don’t have to work to earn it), and as your assets grow, so does the amount of passive income you earn. Every pound you invest in assets is a pound working for you. Leave it alone and it will continue working for you. Don’t focus so much on how much you are earning from your day to day job. Focus instead on how large your asset portfolio is and how much it is growing. This is your own ‘business’ and you need to look after it first and foremost. So what assets should you be buying? Well, that is up to you. One of the easiest assets to buy these days are funds that invest in shares and bonds on the stock market. This can be done through online brokers such as Freetrade* or Hargreaves Lansdown (other brokers are available). Pound Cost AveragingYou may be aware that the stock market goes up and down and so you often see the phrase that investments may go down and you may not get back as much as you put in. This is something that I believe puts some people off investing. However, historically this has only ever been true when investing for the short term. If you truly believe that owning income producing assets is the path to financial freedom, then why would you sell them? You are in for the long term and when you look at longer term trends, the stock market has done very well. One way to also help with the ups and downs of the stock market is through ‘pound cost averaging’ - by investing on a regular basis, such as monthly, you will buy more when the cost is low and less when the cost is high. This smooths out some of the ups and downs in the market and means that overall you are buying at an ‘average’ cost. Small and often is the way to go! Failing to plan is planning to failWhen you do start to buy assets, don’t just invest based purely on the opinions of others. If you do, you will be pulled all over the place as different people will give conflicting advice based on what they believe your priorities should be. Be clear on what you want to own and why. As an example, my assets generally produce an income in the form of interest or a company dividend. For me that is important as I want a regular income now. If you are currently in employment, and don’t yet need to receive a regular income from your assets, then a different set of assets may be more appropriate, such as high growth accumulation funds (accumulation funds automatically reinvest any earnings back into the fund which results in compound interest). You can always then switch these when your objectives change and you want to start releasing the income. So, have a plan, know why you are investing, what your objectives are, both in the short and long term, and be clear on what you want to invest in. ‘Compound Interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t, pays it’ (Albert Einstein)Most people are familiar with the concept of earning interest. You put money in the bank and they pay you a bit of interest each month. It’s usually pitifully low and doesn’t keep up with inflation and so in reality you are losing money. But that’s another story! Well, compound interest is where any interest you earn is paid back into your ‘savings’ and so the following month you not only earn interest on your original sum, but you also earn interest on the previous months interest. In the short term, this isn’t that significant. However, in the long term, this compounding really makes a huge difference. This means that the money you invest in your 20s and 30s is so much more important than money you invest in your 40s and 50s. Small amounts invested when you are young become surprisingly large when you are older. Compound interest and time are very important concepts for long term investing. In the graph below you can clearly see that compounding the interest over 30 years has nearly doubled the value of the investment compared to just simple interest. Prepare for the WorstTo make sure that your plans stay on track you should always have a contingency plan. Occasionally things go wrong. Your car unexpectedly breaks down, or you lose your job. Being prepared for these events mean that your plans are not thrown into disarray! One way to do this is to have an emergency cash fund. Many people suggest 3 to 6 months of living expenses is the right amount (unless you are retired in which case 1 to 3 years is recommended). But really, again, it is up to you how much you have in your emergency fund. Some of this should be in easy access accounts so that you can use it immediately if needed. But you could have some saved in fixed term accounts to give you a bit more interest (as easy access accounts pay very poor interest rates). One of the tricks that I employ is to ‘ladder’ my savings. As an example, say your emergency fund is £10,000. You could keep £4000 in an easy access account which is likely to be enough for most emergencies that require immediate funds. You could then save the rest in a series of 1 year fixed rate savings accounts, say £500 each month. Then after 12 months, your first fixed rate account matures and £500 is released. This can then be put back into another 12 month fixed rate account if not needed or used as part of your contingency plans if necessary. Each month another £500 is released and so on. Diversify your AssetsDifferent assets will do well at different times. It therefore makes a lot of sense to hold a variety of different assets. If one asset is performing poorly in a particular year, another one will compensate by doing better. Diversification should be on both asset types and geography. So if you are invested in the stock market, you can have assets that hold equities (company shares) and assets that hold bonds (company IOUs). Both of these are also available across the world, and so when the U.S. is doing well, Europe might be going through a slump. There are thousands of different assets available and only you can decide which ones are right for you. But once you have a plan and know what you want to buy, make sure you have enough diversification so that any dips in the value of your assets are smoothed out. So, in summary….Spend the time you need to learn about finances so that you can make the right financial decisions. Pay off your debt and make a budget/financial plan so that you know where you are spending your money and where you can make savings. Buy assets on a regular basis that will provide income over the long term. Minimise risk through diversification and keep an emergency fund in easily accessible cash. At some point, your income producing assets will provide you with enough income that you no longer need to worry about working for someone else. You are now Financially Independent!
Peer to peer investments are an alternative form of investment that have grown over the last few years and are now becoming more mainstream. Essentially they work as a 'crowd sourced' loan for people who want to borrow money. This is usually organised through a 'Platform' which matches people who want to borrow to those that want to invest. Some of these 'platforms' are now so well structured it feels more like depositing money in a bank. However, it isn't the same as depositing money in a bank (which usually has FCA protection up to £85,000), as with peer to peer lending there is no protection - it is NOT saving, it's investing, and there is little protection if things go wrong. Having said that, many people feel that peer to peer investing is less risky than investing in shares, and it can pay more in interest than traditional savings. As always, a key way to mitigate any risk is to diversify. Therefore, peer to peer shouldn't really be seen as an alternative to other investment strategies, but as a compliment to them. So a fully diversified investment portfolio should include shares, bonds and property as well as peer to peer investments. You should also keep some money aside as cash in an easy access account that can be accessed in difficult times (think 2020 and pandemic!). There are a number of peer to peer platforms that you can look at for investing, which allow you to lend to different types of borrowers and diversify across both platform and borrower types. Below I have ranked the four peer to peer platforms where I have the most experience and have highlighted some of the key points about each. Currently only Kuflink is open to new investments. However, this is my number one choice and would be a great place to start if you want to explore peer to peer. 1. KuflinkKuflink are a peer to peer company that focuses solely on lending to property developers. This in itself makes them slightly different to many other, more generalist P2P companies, but what I also like is that they also invest up to 5% of their own money into each development loan alongside the crowd sourced money. For me, this gives me greater confidence that they are truly looking at lending responsibly. In addition, the money lent is secured against the property being developed and usually with a realistic LTV (loan to value - i.e. the loan given is less than could be raised if the developer collapsed and the property had to be sold to recover the loan amount). Whilst the Kuflink platform was built in 2017, the company behind Kuflink have been providing bridging loans since 2011 and they have won numerous awards within the industry. Once signed up to Kuflink, you can choose to let them select the investments for you (auto-invest), or you can select yourself which properties to invest in (select-invest). Within the auto-invest option you can also invest within an ISA wrapper and there is also a SIPP (self invested personal pension) option. I personally invest using the select-invest option as that enables me to choose which property developments I invest in and how much I want to invest in each. I feel this helps me keep control of ensuring a good diversification across properties and it also gives me the option to take my interest monthly which fits in nicely with my passive income strategy. During 2020, Kuflink have continued to lend to property developers and continued to pay interest to developers. In this respect, Kuflink seem to have weathered the pandemic better than most and so my faith in them as a business has remained high. Currently I am earning around 6.8% interest each month, but this can be boosted to just over 7% if you opt for annual payments rather than monthly. This level of interest, along with loans secured against property and the ability to diversify across many property developments across the UK has made me position Kuflink as my number 1 peer to peer platform for 2020. If you decide to invest in Kuflink, by using my referral link you could receive up to £4,000 cash-back: -> go to Kuflink 2. Lending WorksLending Works is a very simple and easy to use peer to peer offering which lends to individuals with unsecured loans of up to 5 years. Diversification is built in as your investment is split across a number of different loans. In addition, Lending Works has a 'Lending Works Shield' which provides 'first-loss cover' across all of it's loans. This 'Shield' is funded by the borrowers as part of the interest they pay on their loans. Then if anyone does default on their payments, this shield can be used to cover the due payments to lenders. Lending Works advertise the fact that no lender has to date lost any capital. Apart from the simplicity and easy to use website, another great feature of Lending Works is that you can set your capital to be re-lent and any interest to be paid out. This means that you can keep your money invested and earn a regular monthly passive income through Lending Works. Lending Works advertise interest rates of up to 5.4% from lent money which can be held within either a general account or within an ISA wrapper. However, during 2020, Lending Works have found the pandemic a challenge. They stopped lending money out earlier this year which has meant that repaid capital has accrued within accounts. This money has been available for withdrawal and no money has been lost (so far). It does mean though, that overall interest for the year has fallen below advertised rates and is currently closer to 3% rather than the pre-pandemic 5.4%. They plan to start re-lending to borrowers in January 2021. Lending Works have recently had an investment company invest heavily in them and their platform. This can only be good news for Lending Works as a company and I believe that as we move out of the pandemic, and we start to get back to normal, they will remain a good option for passive income generation. If you decide to invest in Lending Works (once the freeze on new investments is lifted in January), by using my referral link you could receive £50 cash-back: -> go to Lending Works 3. Funding CircleFunding Circle lends to small businesses which is different to the other P2P lenders listed here. Money invested in Funding Circle therefore increases your diversification as you lend to a different type of borrower. Also, to help with diversification, Funding Circle split your investment across a number of different businesses. For example, if you invest £2,000 they will split that across 20 small businesses so that you end up lending no more than £10 to any individual business. The interest rate that they advertise you can expect includes any expected defaults. So unlike Lending Works, there is no 'shield'. Losses are expected and built in to their model. Funding Circle advertise an interest rate range of 4.5% to 6.5%. My investment is currently returning around 5.9% which I believe is reasonable especially considering the difficult year we have just had. Funding Circle is another P2P lender that is currently not lending investors money out to borrowers. This is because at the moment they are involved with the government CBILS (coronavirus business interruption loan scheme) lending programme and this isn't something that can be invested in through individual (retail) investors. This means that any repaid capital coming in to your account isn't re-lent and so this can be withdrawn on a regular basis if you want. If you want to invest via Funding Circle once they start accepting new retail/personal investments then you can find them here -> go to Funding Circle 4. ZopaZopa advertises itself as the 'World's First P2P Platform' and highlight that they have been in business now for 15 years. If nothing else, this should give you a certain amount of confidence about how they run this type of business. Not only have they weathered the 2020 pandemic, they also weathered the 2008/2009 financial crisis. Zopa lend to individuals in the same way as Lending Works do. They don't however have a 'shield' to protect investors but build in defaults to the advertised rates that you can earn. In reality, this means that the rates you can earn through Zopa are lower than many other P2P lenders and currently advertised as between 2% and 5.3%.
Recently, Zopa have also launched as a bank with one of their first offerings a credit card. How their bank offering will affect their P2P business isn't really yet known, but currently they are saying that they will be run as two separate businesses side by side. Zopa have continued to lend during 2020, but have been more careful to whom they lend to and thus waiting times for any investment to be lent out are now running to over a month. This is quite a long time for your money to not be earning anything, sitting in a queue, waiting to be lent out. As we move into 2021 and the pandemic becomes history, then this situation is likely to change. If you want to invest with a company that has been around the longest and weathered two financial crises, then Zopa may be a good starting point for you. If you want to invest with Zopa, use the following link -> go to Zopa |