Email to a Never-Before Self-Investor

Following a few beers with friends a week or two back, I sent this email to them the following morning, after the conversation had briefly turned to investing. They have some spare money coming in from their jobs, having made a decision not to move to a larger house (their current house is magnificent and already large enough IMHO), and both being fairly frugal folks. At the moment they invest money in a fund through a broker, but are considering other options.

The email I sent them is below and to repeat the warning below, please TREAT THIS WITH A PINCH OF SALT, IT ISN’T ADVICE! I’m not an expert in equity investing, and as it tries to make clear in the message, I’m learning as I go. Some names and details have been removed for privacy.

“Guys

Following up from last night’s drunken mumblings, I thought I’d present slightly more sober mumblings this morning…I should start anything like this with a stern: you probably ought to be buying advice from an IFA. It’s not small amounts of money we’re talking about, it’s you who’d lose if the investment didn’t work out (not me, apart from potentially losing good friends), and I have zero qualifications in any of this. In other words, please take what follows with a pinch of salt.

Although most of our money comes in from rental property, I’m not sure that’s the right thing for you guys as it means:

  • Having to shove a huge amount of cash into an investment, rather than being able to start smallish with a grand or two to build confidence
  • Houses, even ones managed by a competent agent, are a pain in the backside still. You’re legally responsible for the safety aspects of the place, and I’m not sure that’s something you want
  • Houses are very expensive to trade (you can buy £100,000 worth of shares for about £11 – it would cost a bit more in fees to buy a house)
  • Houses are highly illiquid – takes an age to buy and sell. Shares can be bought and sold in minutes

I’m sure an IFA would recommend splitting investments across a few different types of asset class, so having some of your money in property (which you kind of already have with your home), shares, bonds, cash and maybe some other more exotic stuff. We’re very roughly 45% property, 45% equities (mostly in our pensions but now with a sizeable chunk that is self-managed) with the rest in cash and premium bonds.

So, what we decided to do was to start buying shares inside our yearly ISAs. We decided to go for passively-managed index funds – funds which buy shares in companies logically grouped together on indices such as the FTSE 100, S&P 500 etc. They tend to be fairly large companies on the whole.

  • We went passive, as various studies show that (on average) actively managed funds fail (over the long term) to outperform the index they’re trying to beat.
  • Active funds tend to charge about 1%, and since the real return on these things is about 4%, they’re taking 25% of your profit. Nasty, especially when you know the point above.
  • We went for shares as we’re comfortable with the higher level of risk versus cash (which is currently losing value because interest rates are lower than inflation), and we’re expecting to hold the shares for at least ten years plus.
  • We also hold a large enough cash/premium bonds emergency fund to help us avoid being forced to sell the shares at a loss during a downturn. We’ve used premium bonds as we understand and trust them, not because they’re a great investment – they return about 1 to 1.5% a year

We now currently own a portfolio of Vanguard Exchange Traded Funds (ETFs), which themselves own shares in several thousand large, medium and small-sized companies around the world, although we are heavily weighted towards Europe and North America. The companies operate in multiple markets and industries, they help us avoid downturns in any one of them. The ETFs allow you to buy a small part of a large range of companies cheaply. To buy one share in each of the FTSE 100 companies would cost quite a bit (especially as you pay a fee for each trade). The ETFs enable you to buy a share in the FTSE 100, so you are buying part of a share for each company and only paying one trading fee.

Some perceive this as ‘mediocre’ investing, as you’ll never outperform the market this way. But you should never significantly underperform it either, and over the long term (10 years), markets generally creep upwards as companies innovate (well, some of them, ahem) and create more and more services and products to flog to more and more people.

Cutting to the chase, this is how we did it (there are probably better platforms than the one we use, and they probably cost less, we’ll get around to researching that one day):

  1. We logged in to our online bank accounts and requested a Stocks and Share ISA each (not much hassle, no tax to pay and some banks now offer just an ISA which covers cash and shares – sadly ours doen’t). Cost nothing. Wait a couple of days and they’re there for you.
  2. Once the ISA was set up we requested a Share Dealing account each of us. This costs us £10.50 per quarter per account – I’m sure there are cheaper platforms.
  3. We did a load of research into which funds to buy (this is a good source of info: http://jlcollinsnh.com/stock-series/ – I’ve more links if you want ‘em). We came to the conclusion Vanguard’s funds sounded good (and they cost less than 0.4% of the fund value per year to own, compared with 1% or more for active funds), and read through the key info documents.
  4. We started buying roughly £2500 chunks of a range of Vanguard funds: FTSE 100, S&P 500, FTSE 250, All World, High Yield, Emerging Markets, All Developed World, Japan, and Asia Pacific. The trades are all done online in the share dealing account, and cost about £11 each.
  5. We haven’t bought into any bonds other than premium bonds. Why? Because bonds are used to try and balance out stock market crashes, and because we don’t plan to sell for a good few years, we can afford to ignore any crashes. Also bonds currently pay out very little, and the values go down when interest rates go up, which has to happen at some point. I don’t claim to understand bond funds, but we’ll probably start getting into them at some point in the coming years.
  6. Each 3 months the funds pay dividends back into the share dealing account, minus the fund costs. So we see roughly 1.5% a year in dividends. We save these up and use them to buy more shares.
  7. The only shares we’ve sold were our ones from a previous employers share scheme, we don’t plan to sell any of the ETFs for, I dunno, ten years maybe. Our aim is to invest, not to ‘be traders’.

We’ve been slowly building up our ETFs since March 2014, buying a few grand’s worth here and there. We’re in a bull market at the moment – shares are going up – and we’ve made a (theoretical – it means nothing until we sell) 29.88% gain overall on our ETFs, including the re-investment of dividends. Ideally there’d be a rather hefty crash just before buying into the funds, but that’s nigh-on impossible/really and truly impossible to predict.

It’s taken a few years to get comfortable with the idea of self-investing in shares, and we’ve not invested anything we can’t afford to lose. It sounds mad, but we could lose all £xxk without changing our current lifestyle, as we’re not taking any income from it at the moment. I would be right royally pi**ed off of course, but it still kind of feels like a game, despite it being real money. I think of it like this: I could easily have blown that amount over the years on fast bikes, cars, track days and race tuning, and that money would be gone forever. **Poof**! At least now we have a good chance of the money being available to us, and a good long term chance of it increasing in value.

The game’s becoming more important though. As the portfolio of funds gets bigger it gains more significance for us. But also we need to consider how we want to continue our investments in future: do we sell one or more of the houses? If we did, how could we replace the rental income? Do we draw down pensions when we can get at them? Again, if we do that, where do we invest the money? At the moment, the answers feel like more ETFs, so we could end up with almost everything we own in self-managed funds of shares and bonds. Gulp.

Cheers, J”

4 thoughts on “Email to a Never-Before Self-Investor

  • August 27, 2017 at 8:46 pm
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    Mediocre is really Passive investing, you save on the TER as you don’t pay an investment manager. However in the same way the last financial crisis crept up and caught most people off guard the FT did run an article a week or so back on whether ETFs were the next financial crisis. Think about it, your portfolio is up 30%, you pay for passive investing, fund managers don’t like that as they don’t earn as much so they would love to see ETFs bring down the market. There is an old adage, quit when you are ahead! It may be time to reduce exposure from 45% to 25%.

    • August 28, 2017 at 7:55 am
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      ‘Mediocre returns’ (was that phrase coined by active fund managers?) work for me. I don’t need more than 4% real returns from any investment. Trying to get more has, in the past, prevented me from investing at all. Mediocre returns have, for me, enabled an extraordinary life, I’ll take that.

      The rest is all market timing which I don’t believe to be possible. Yes, the markets will probably crash again replicating past falls. When will this happen? Literally no one knows. Our entire investment strategy is to buy and hold, for at least 10 years, for equities and property, although we do keep an eye on things. This will smooth out the effects of market spikes and troughs.

      ETFs might cause the next crash, as might repackaged toxic car loans or a thousand other things. We invest in physically-backed equity ETFs (no synthetic) in the larger indices spread across the world. Beyond this, other types of ETF are beyond my comprehension.

      Cheers, Jay

  • September 4, 2017 at 4:51 pm
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    Few quick questions:

    Is there a strategic asset allocation underpinning your ETF purchases?

    Have you experienced a bear market since being invested in equities?

    Are all your ETFs Vanguard?

    How does your overall ETF dividend yield (1.5%) compare with your (real, i.e. after costs) BTL yield?

    • September 4, 2017 at 5:49 pm
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      Hi Rhino

      Good questions.

      1. We opted for physically-based equity passive index ETFs. To start off there wasn’t much of a strategy. We just bought a range of whatever Vanguard ETFs we could buy through our share trading account. Later on we started to follow something like an Own the World equities portfolio, so we’re spread around globally and by market capitalisation, although are still heavily weighted towards the US. We own no bond ETFs, or REITS, and are mostly in large and mid cap. We’ve not aimed for any specific industry.

      2. In housing, yes. In equities, nothing more than a 10% drop in some of the funds, just after we bought them, plus a 50% drop in a single company share we bought thinking the company would do well (lesson learned – the company is doing fine, but the shares were massively over priced). I’ve seen the various predictions of a crash from gurus like MMM and Kiyosaki, but just when is this big crash coming? As ever, no-one knows with certainty when, where or why it’ll happen.

      3. All but one Black Rock one. I have pondered the sense in all being in Vanguard, although various FI bloggers who know more than I do seem to see no issue with it, and I’ve read jlcollins stock series which gives me some sense of hope that the demise of Vanguard would not be the demise of me. How much I trust this remains to be seen. I suspect Ju and I will keep ourselves spread across asset classes (houses/bonds/ETFs/cash) for a good few decades, and will consider more Black Rock et al as needs to be enable sleep at night.

      4. Real, after all costs rental yield on our properties is about 4% – excluding any capital gains, including voids, mortgage, repairs, management costs, and maintenance. Our mortgage costs are low, by the way, as we’ve a low leverage, handy for not worrying about interest rate rises, but maybe not so smart in the sense we could be earning a little more on the money we’ve sat in the paid-off places.

      Cheers, Jason

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