Tortoise Happy

Before you begin investing, you might be worried about making mistakes and losing money. I know I was, but I decided at some point I’d have to bite the bullet and just get started.

I started small and with money I could afford to lose (though obviously didn’t want to lose). I have made a few mistakes that I’ve shared below. You’ll see they’re not worth avoiding investing for but hopefully you’ll be able to avoid them.

Mistake #1- Investing in a gilts fund

My first 2 investments were in a UK FTSE 100 tracker fund and a 10 year UK government bonds (gilts) fund. I chose the gilt because I was nervous of investing and gilts are talked about as being low risk. I didn’t understand that they were bought and sold at different values.

The thing is, my retirement age is 30 years off. It would be awesome to be in a position to retire early, but if I need to work, I’ve got a lot of life left in me (hopefully!) So I can afford to take risks, especially as I used a ‘small’ tester pot of funds to learn with.

I decided to sell at a loss so that I could transfer the money into something with some actual potential. It was a lesson well learned and a good move to make! No gilts in sight in my Stocks and Shares ISA anymore!

Mistake #2- Human error!!

Owing to the fact that I am an idiot, my second error was accidentally picking the wrong fund in a drop down list. It’s too long ago to remember what I had been intending to choose, but after the panic subsided I realised I’d inadvertently diversified my portfolio and at the time of writing it’s this US focussed passive fund that has made me the biggest gains. 🙂

However, it could have gone the other way, so just be doubly sure you know what you’re selecting before you hit confirm!

Mistake 3- Choosing the popular option too late

When I started investing, biotech funds were all the rage. They’d returned 30+ percent for 2 consecutive years and I figured I’d be chuffed with even half of that. I should not have just gone for something that had done well in the past. Sure, it could have paid off, but unfortunately it plummeted just after I’d purchased. 2 years later, it has made a small return so holding on can work out well in the longer term. I would have been better putting a smaller chunk of money into this fund, rather than seeing pound signs and getting greedy!

Mistake 4- Dilly-dallying

I had my penny drop moment about investing around 2 years before I got started and lost out on a lot of growth over that period. I’d love to say I should have started 5 or 10 years ago but sometimes it takes time to recognise the right route. Once you’ve recognised it though, it’s best foot forward along the path. The sooner you start the journey, the longer period you can benefit from the stock market.

Was it worth it?

You betcha! Don’t get me wrong, going in gungho can lead to much bigger mistakes than I’ve made. But if you take a measured approach, take it one step and a time, avoid the pitfalls (or climb out of them quickly!) along the way, I’m sure you’ll realise it was worth it too.

Where are you on your investing journey? Have you made any big mistakes? What cautions would you give a newbie investor?

Investing presents a conundrum. It is both a way to grow your wealth and a way to lose money.

It is true that you could invest money in a company or fund and the value could fall. If you sell when the value of your investment has fallen, you will have lost money.

However, investing is less risky than you may think

You can make rational decisions that make investing less of a risk.

Diversification

Lets get back to basics.

If you owned a company that produced only snow shovels, you’ll get customers when it snows.

If you owned a company that produced snow shovels and sun hats, you’ve diversified your business. You have something that will sell in the winter months and something that will sell in the summer months.

What would be even better is if you owned a company that produced snow shovels, umbrellas, gloves, sun hats, wooly hats, ice cream, sun cream, t shirts, etc. That way, you’ll have a product that people need, whatever the weather.

You should look at investing in the same way. It may be tempting to invest in a company that you like the look of or recognise, or to invest only in UK funds, but this doesn’t help you diversify.

I’m pleased with the performance of my UK fund at the moment, around 20% over the last 2 years. However, I’ve had over 40% growth from a US and a Pacific fund, which I wouldn’t have, had I stuck rigidly in my comfort zone.

Drip feeding

I drip feed my investments to smooth out market volatility. It basically means not paying a shed load of money in on a good day, only to lose a huge swathe of it’s value the next.

Say you had £100k (I don’t, by the way, but lets do some wishful thinking!), if you invested it all on the same day and the market nosedived tomorrow, your 100k will obviously fall and it can take a long time to recover.

However, if you ‘drip fed’ £5,000 per month for 20 months, you might have bought at some high points and some low points, so this smooths the risk too.

Don’t be blinded by past performance

It is easier said than done not to get carried away and invest in a fund that is doing phenominally well. It could be a brilliant move, or you might have missed. the boat.

I made this mistake 18 months ago by investing AXA Framilgton Biotech. It was all the rage on Money Saving Expert and had grown by something like 40% in one year and 30% in the following year. I was hooked. I invested a lump sum and almost straight away, the fund value dropped. Over the time, the fund value has been worth around 16 to 25% less than what I bought at.

I have hung tight- selling low is a bad move- and it has paid off as the fund has recovered and is starting to grow a little. Had I not gotten carried away by what everyone was talking about, I would have chosen a more boring, practical choice and more than likely grown my money much more.

Don’t try and time the market

I was nervous about investing when the stock market was so high, but followed the advice that time in the market is better than timing the market, and it’s really paid off. Investing should be seen as a long term endeavour. In the words of Warren Buffett:

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”

Follow the advice of Warren Buffett

Warren Buffet knows a helluva lot more about investing than me. When I’m on the verge of an irrational investing decision, sage advice from Warren Buffett has a habit of changing my mind.

Do you have other ways for reducing risk in your investment portfolio?

I personally choose to invest in funds. They make it easier to invest in lots of companies and therefore reduce my risk. There’s a few things to know about funds, which will help you decided what to invest in.

Income or Accumulation funds

Most funds have an income version and an accumulation version. An income fund is one that pays dividends into your online account, so you can withdraw them and spend them or invest them elsewhere. An accumulation fund is one that pays the dividend straight back into the fund automatically.

As I am investing for my future and want my funds to grow as much as possible, I choose accumulation funds.

Passive or active

An actively managed fund is one that is managed by a person, who sells and buys shares within the fund based on what they believe will be good decisions. The fee for an acitively managed fund is higher than a passively managed fund, as the human element costs more.

A passive fund is the opposite; it’s a fund that tracks a market with no human intervention. The fees can be as low as 0.1%.

In theory, you might get a higher return from an actively managed fund because a human is able to forecast a potential positive or negative event and trade accordingly. However, nothing is guaranteed in the stock market, and as well as paying a higher fee, it’s possible that your investment could fare worse.

I predominantly choose passive funds. However, I do invest in a fund of ethical companies. This was one of my first choices of funds to invest in. I figured if I lost all my money, it would be in companies trying to make the right decisions.

Ongoing charges

It’s worth paying attention to the ongoing charges of funds, because as your balance grows they can really eat into your profits. Ongoing fund charges can be as low as 0.1% and I’ve seen some above 5%. The fund charging over 5% fell by 20% in 2015 but grew by 80% in 2016, which is pretty phenominal growth. But that doesn’t mean it will continue, and you could face a loss on top of your 5% charge.

Geographical/ sector

The up and coming post about diversification will talk more about geographical region and sector. In essence, you can choose funds that focus on a specific market, such as the UK, US or pacific. In terms of specific sectors, this could be energy, financial services or healthcare.

If you choose a fund focussed on a specific region, there will be a variety of passive funds to choose from. However, if you choose a specific sector, these are normally actively managed.

You can achieve a spread of sectors my choosing multiple funds, as top companies in countries around the world will span a number of different sectors.

How to choose?

A difficult question to answer! I always use this fund selector tool from TD Direct investing when I’m doing my research. It’s a great way to get an idea of what funds there are, what the management fees are, short and long term performance, etc.

 

Now that you know a bit about different types of investments, you need to know how to acutally get your money into investments. That’s where platforms come in.

So, what is a platform?

Platforms are to investing what travel agents are to holidays. Just like Thomson the travel agent will sell holidays by lots of travel companies (like first choice, thomas cook, kuoni, P&O, haven holidays), the platform you choose will enable you to buy funds from a huge choise of fund providers.

Fund providers are like the travel companies. Travel companies will have a range of holidays that they package together for you to buy. There are lots of travel companies and what they offer may be similar to others. There are also lots of fund providers and they construct a range of funds that are invested in different companies and are managed in different ways. Don’t worry, a ‘more about funds’ post will be coming soon!

How do you choose a platform?

Choosing a platform can feel like hard work; there are so many to choose from and they all have different charges.

By happy coincidence, thisismoney have just published a table comparing the different charges of various platforms. Personally, I invest with TD Direct investing, who I chose for the low platform fee and no admin fee under £5,100 for making monthly payments. I really like their fund selector tool. I don’t have experience of other platforms, but TD Direct are reasonably easy to use, the staff tend to be helpful and efficient and nothing has gone wrong.

 

Check out the comments on thisismoney’s site as this will give you insight into what other investors have experienced.

If you already invest, what platform do you use, how did you choose and would you recommend them?

This page will help you understand the tax implications of investing.

Money that you make investing is normally subject to tax. I do all my investing in a Stocks and Shares ISA so that neither of these taxes are due, but if you have more than the ISA allowance to invest, you may need to report your returns to HMRC.

There are two different taxes to be aware of; Capital Gains Tax and Income tax

Capital Gains Tax

When you buy an asset (part of a company is considered an asset) and sell it for a profit, the profit is subject to Capital Gains Tax. You have an annual tax free allowance, so you’ve got to make a lot of profit before being taxed.

You can also deduct any losses you have made from any gains, to reduce your tax liability.

For example:

If you invested £50,000, and the investment was worth £70,000 when you sold it, £20,000 would be subject to capital gains tax rules. The original investment of £50,000 is not subject to Capital Gains Tax, as it is only the profits which are taxed.

If you also invested £20,000, and this investment was worth £15,000 when you sold it, you have lost £5,000. This £5,000 can be used to offset the profit of £20,000, so that tax is only payable on £15,000 if the investments were both sold within the same tax year.

You need to report how much you have made if it exceeds the amount you are permitted each year, which means you’ll need to calculate it each year. If you complete a Self Assessment Tax Return for any reason, you’ll also need to report it every year.

Although this may not seem a big deal when you start investing because your profit isn’t likely to exceed the amount allowed before tax is due, the idea is to invest and grow your money over the long term. So you might have no chance of exceeding your annual allowance in the short term, but 30 years from now it could be quite expensive!

I haven’t included the Capital Gains Tax allowance in this article as it is subject to change, but more information can be found here.

Income tax

Just like with your wage or with interest payments, any dividends you receive will be subject to income tax. Again, you have an allowance that you can receive before you need to pay tax.

Check out the government website for more information on the allowance for dividends.

Tax efficient investing- Stocks and Shares ISAs

I do all my investing in a stocks and shares ISA. They are not quite tax free but any tax due is taxed at source before it reaches you.

However, any gain you make or dividend payment made to you is tax free and doesn’t need to be reported anywhere.

This takes away the headache of tax, as long as you’re investing below your annual ISA allowance. In my opinion this is a brilliant arguement for starting small sooner, rather than waiting until you have larger sums to invest later.

For the 2016/17 tax year, you can invest up to £15,240 in ISAs, and for the 2016/17 tax year, you can invest up to £20,000 in ISAs.

You can invest in the majority of individual stocks and shares, funds, gilts, bonds and etfs within an ISA.

This page explains how different investments work. There are a number of ways to invest including:

• By picking stocks and shares in individual companies
• By investing in a fund
• By investing in bonds or gilts
• By investing etfs

Here’s a bit more information about different investments work.

Picking individual stocks and shares:

If a company is a PLC, it offers shares to members of the public- you and me. That means that anyone can buy a proportion of a company.

Here’s a simple example of how shares work. Let’s say you buy 1% of a company for £10. (1% of a company would obviously cost more than this, but this keeps the maths simple.)

If the value of the company grows by 20%, your share that you paid £10 for would be worth £12, making a £2 profit if you sold your 1% share.

The company may choose to pay a dividend out of it’s profits. If it paid a 5% dividend once per year, you’d earn 50p plus you’d still own 1% of the company (and hopefully get a dividend again next year too).

The value of companies can also fall. If the value of the company falls by 50%, your £10 share is only worth £5, and you would make a £5 loss if you sold it. Bear in mind, you don’t make an actual loss until you sell. Share prices rise and fall, so it may recover and soar in value.

If the companies goes bump, that’s basically your money gone and no chance of getting it back.

It’s not a good idea to put all your money into one company for this reason.

These calculations are all theoretical to indicate the impact on your investment in various circumstances.

By investing in a fund

This lets you invest easily in lots of different companies. A fund collects the money of lots of different investors (so your £10 joins with mine and everyone elses’ investments) and is spread across lots of different companies. Your £10 could be split across 100 different companies. Some might do well, some might do badly. There are likely to be periods when the majority do well (resulting in gains for you), and when the majority do badly (resulting in losses for you). Don’t forget, you could see a fall in your investment followed by gains (and vice versa). Selling will guarantee your loss, so don’t sell at the first sign of trouble.

One or more companies could go bump. But the likelihood of all companies within the fund going bump is much slimmer than one on it’s own. Therefore, the risk of loss is lower.

Bonds and gilts

The UK government (and other governments around the world) will sometime issue what are known as government bonds, or in the UK, ‘gilts’. When you invest in this way, you are effectively  lending money to the government for a fixed return.

Government bonds and gilts have a specified term (such as 10 years) and a specified return (such as 2%). They’re generally considered low risk because the chances of the government going bankrupt are considered pretty slim (in spite of our frightening level of national debt!)

They have lower risk than funds and individual stocks and shares, but they also tend not to have as high a returns.

In theory, when stocks and shares do well, gilts are a bad investment, and vice versa. Holding a proportion of your investment in gilts is widely considered a good way to reduce risk in your portfolio.

Gilts can be bought and sold, just like funds. If gilts have risen in value since they were issued, they cost you more to buy.

For example, if the original investor has bought £100 in gilts with a 2% annual return, and people perceive them to have greater value, that £100 in gilts could cost you £120. The original investor no longer has the gilt, but has £20 more than he paid. Although you now hold the gilt, you will only receive 2% on the original value, i.e. £100, even though it cost you £120 to buy.

In the same way that governments can borrow money from investors, companies can also issue bonds to investors.

ETFs

This stands for exchange traded funds. My understanding of these is extremely limited, so rather than give you the wrong information, you’d be better consulting an alternative source!

Does this help you to understand the basics of stocks and shares, investment funds and government and corporate bonds? Do you already invest and what do you have in your portfolio?

 

Welcome to this beginners guide to investing. If you have no experience of investing yet, this is a great place to start.

Investing if full of concepts and terminolgy that seems really complex and off putting. The answer to one question can lead to several others. Before you know it, you’ve spent a few hours reading and are still none the wiser.

If you’re at the start of your journey in learning about investing, you’re probably not going to feel like you know enough after one weekend of reading one blog. I hope this will give you a good grasp of the basics so that you feel encouraged to read more and eventually make the step into investing.

This really is a beginners guide and I’ve tried to cover the basics… if you’ve done some reading already, this might be too basic. It’s to give you beginners out there the confidence you need. If something isn’t clear, feel free to ask a question and I’ll do my best to answer it as simply as possible. If I don’t know the answer, I’ll tell you that straight.

Just to let you know, I started my investing journey with around £1,500. I personally felt more confident starting with a relatively small amount than waiting until I had more to invest when more would be at stake. You can start with less, normally £500 for a ‘one off’ investment or £100 per month for a regular investment.

What this covers:

Is investing too risky for you?

A common perception. My ‘penny drop moment’ and a series of arguments for why it’s not as risky as you might think

How different investments work

This article explains some of the common types of investments you can make.

Paying tax on investments

An explanation of capital gains tax and income tax and how to legitimately avoid these

Choosing a platform

You’ll need to know what a platform is and what to look for

More on funds

You’ll know what a fund is after reading the article above on investments. There’s other stuff you’ll need to know about funds before you start though.

Making investing less risky

There is risk with investing and this might be what has stopped you investing so far but there are lots of ways to reduce the risk of losing money

My journey and mistakes I’ve made

I’ve made some mistakes and I’m going to share them with you. You’ll see they’re not worth avoiding investing for but hopefully you’ll be able to avoid them.

Finding the confidence to invest

By the time we get to this article, hopefully you’ll know loads. I’ll give you some final tips to give you the confidence to invest.

Don’t forget, you can subscribe to the blog to get new articles straight to your inbox or pin this for later. You can also tweet or share on facebook to help other beginner investors too!

There was a time when I was so scared of losing money that I flat out refused to think about investing. More than once I said that I would never, ever invest in the stock market. Some people are so confident, they see investing as a guaranteed win and make reckless decisions. I was so fearful that I saw it as a guaranteed loss. Until the penny dropped. If this sounds like you, you might not be ready to invest yet. But please don’t write off investing entirely. Just like olives, I think you can acquire a taste for investing. Perhaps my penny drop moment will help you take the next step.

The next step is research, potentially more difficult to overcome than fear of the stock market. I knew I had to invest and make my money work for me but for a long time research threw up more questions than answers. There were about 18 months between the time when I knew I had to invest and the time I felt I understood enough to make the leap. To be honest, a key part of this understading was recognising that I was still learning, and it was better to tread cautiously with a small pot of money than not tread at all.

Finally the leap into investing, possibly the best financial decision I’ve ever made. I have made some small mistakes, one of which has been financially profitable. On the whole, I feel much more confident about my future.

If you are at stages one or two, I hope I’ll be able to help. Coming soon is my guide to investing for complete beginners. It tries to explain the basics that you start to take for granted once you understand them. A bit like how you take for granted that the reason ice melts because of heat, or plants need light to photosynthesise. You have learned new and unfamiliar concepts before and you can now.

Interested? Subscribe to the blog to get new articles straight to your inbox or pin this for later. You can also tweet or share on facebook to help other beginner investors too!

Where are you on your investing journey?

Are you frugal or a spender? And do you accidentally or deliberately spend and save?

You hear all the time about how consumer driven our society is. And with £77bn spent on Christmas in the UK alone, it is hard to deny. Being frugal can feel like something we have to try really damn hard at. Spending, on the other hand? Easy peasy!

When you’re balancing a tight budget, trying to save for a deposit on a house or towards retirement, or just trying not to add to the amount of crap you already own, it feels like hard work to be frugal and stop spending. We pay for convenience, so it’s no wonder.

It’s quite possible that you’re already accidentally frugal in lots of ways. I’ve been racking my brains over the last week to work out where I’m accidentally frugal, accidentally spendy, deliberately frugal and deliberately spendy. Here’s what I came up with…

Accidentally frugal

I rarely wear make up or have manicures. It’s not a deliberate choice, it just never seemed important.

I enjoy getting my cost per wear or use down on the things I own, it’s like a fun game. Why and how could I feel happy about spending £100 on a dress worn once, especially since when I spend that amount of money, it is on something that makes me feel a million dollars?

Water in a bottle. I love this naturally frugal way because it used to be something I did to be deliberately frugal. Several years of doing something deliberate and I’d nearly forgot I do it. Pretty much wherever I go, I’ll throw a sports bottle of water into my bag. Handy if I ever need to take a tablet too!

I don’t like clutter. Clutter is something that I’ve probably put up with whilst having the space to hide it away. But when you’ve used all your hiding places, it becomes all to obvious. I admit I have a long way to go with decluttering. However, I can’t help but think ‘where will I put this’ whenever I’m purchasing something. It’s a great way to spend less!

I assume things will last a long time. When I was growing up, things lasted a long time. I have no desire to buy a vacuum cleaner or a washing machine and be repurchasing 2 years down the line. My sofa was allegedley built to last 5 years. Well, we’re in year 6 and, as any normal person might expect, it still works as a sofa. I don’t see what could change anytime soon.

Deliberately Frugal

Batch cooking. I know this will save time and money in the long run. However, in the moment you are doing it, it takes more time and generally creates more mess to clean up. Which is a pain when you just want to cook and eat something. I do batch cook now and then, but it’s a deliberate effort.

Wrapping in a blanket when it’s cold. Now this bit isn’t deliberate… But keeping the heating off definitely is!

Food shopping with a list. Although it doesn’t take much effort to write the list, it only takes a couple of weeks without a list to get out of the habit and wing a load of random stuff in the trolley. If you don’t already, you definitely need to. Which brings me on to…

Meal planning. Again, it’s quite quick and easy when you’re in the habit. But it’s even easier to be lazy and just jump in the car on your way to the shops. I’m stupid enough to go shopping without a meal plan or shopping list but come home feeling chuffed that I saved 30p taking my own bags. A good example of being penny wise and pound foolish

Insurance renewal. It always amazes me how much we save every year just by shopping around for insurance. I’m happy to spend a boring hour to save £50 personally!

 

Accidentally spendy

Food shopping without a list or when I’m hungry. Sometimes circumstances mean that you find yourself needing to shop without a list or when you’re hungry. In my experience, better planning would have prevented it. When you don’t have a list or shop when you’re hungry, it’s very easy to keep piling food in the trolley that you don’t really need.

Gifts. We have a category in our budget to cover Christmas and Birthday gifts, but sometimes I see something that I can’t help but buy, especially for my nieces!

I’m lazy where it comes to taking action to get better offers, like interest rates on my savings accounts, which amounts to being accidentally spendy.

Deliberately spendy

Board games. We often buy board games for one another at Christmas and Birthdays, but will occassionally buy them during the year too. Whilst they often cost £30 to £40, we play as often as we can as a couple, with friends and with family. We find it a really cost effective hobby; once the game is bought, it provides hours of replay time and we do this rather than eating out or meeting friends in the pub!

High value items. If I’m buying something new, I don’t want to replace it every 12 months. We research any home items that we buy, such as the vacuum cleaner, camera and even our latest saucepan because we want to be happy with our purchase and not have to purchase again for as long as possible.

Travel. I love travel, I think most people do. I would much rather not have a single day trip, cinema visit, or meal out for a whole year if it means I have the money to travel instead. When I do so, I research thoroughly and plan where we want to spend our money and what’s important to us.

 

What have you learned about yourself?

Has this list made you realise you are more or less naturally frugal than you thought? I realised I am naturally more frugal than I’d given myself credit for in the past!

Since the economic crash in 2007 and 2008, there has been a lot more belt tightening. Lots of people had no choice but to be frugal. Others adopted frugality to protect themselves, pay down debt, and get themselves into a less exposed financial position.

Frugality means different things to different people, and that meaning has evolved, as language tends to. Or perhaps it is our perspective that has changed.

Frugal is defined as

“the quality of being frugal, or prudent in saving; the lack of wastefulness”

At one point, the lack of wastefulness meant denying ourselves the things we desired. More recently, there is a growing realisation that frugality is freedom from the stuff we previously desired.

You knew all that, I just wanted to set the scene.

 

The accidental and deliberate sides of frugality

I’m always interested in the ways people save and cut down their spending. Undoubtedly, everyone has different levels of frugality and people enjoy different aspects of being frugal. And then a thought occurred to me. There are ways in which I am naturally frugal, that I do without giving a second thought. I hadn’t cottoned on to this before because it’s part of my natural, everyday behaviour. A natural, automatic choice. I am frugal by accident.

Then there are ways in which I’m deliberately frugal. Ways that I learn from others, that I conciously make time to do, because I know the action will save me money in the long run.

And of course, spending

The same is true for spending. There are some circumstances where I am accidentally spendy. Without writing a list (a deliberately frugal action) my food shopping has a lot of accidental spendiness in it. My wardrobe has things that it doesn’t need to have, many examples of accidental spending.

Of course, there are ways I am deliberately spendy. These are things I deliberate over and budget for. Sometimes, there is overlap- deliberately spendy can also be deliberately frugal if you’re looking for a high quality item that will last a long time. Other times, it can be a spend on something that’s important to you. (cheeky wave to all fellow travel lovers!)

Reducing accidental spendiness

Whenever I realise that I’ve wasted money, I am disappointed with myself. So what I’ve decided to do is put some thought into the ways that I am accidentally frugal and accidentally spendy, and the ways that I am deliberately frugal and deliberately spendy.

I hope appreciating some of my naturally frugal tendencies will make me less hard on myself when I’ve had a spendy day, week or month. I’m hoping they’ll show me some ways that I can be more deliberately frugal. I’m interested to see how many of my natural frugal habits have always been natural and how many have become natural over time. And I’m hoping to conquer, little by little, some of those accidentally spendy ways.

But, who knows? I guess we’ll have to wait and see!

What do you think? Are you an accidental frugalista, deliberately trudge your way to frugalism, or an anti frugal consumer monarch?