Checksies

Money things to read, money things to do.

Hello

Hi, this is Checksies. It's about how to do money. It's written by @annagoss and @rod, who are not financial advisors. This is issue number 6. Feedback welcome. If you're enjoying Checksies, please do tell your friends to sign up here.

Reasons to invest

Or: don't keep all your money in cash

TL;DR

Checksies #1 had our money recommendations on a (big) post-it note: Have an emergency fund. Start saving for your retirement and other goals. Invest in global stock market index trackers and global gov bond index trackers, and in a ratio that suits your goals and appetite for risk (maybe 70:30 if you were 30 y.o.). Keep an eye on the costs. Stay patient. If you have a mortgage, consider over-paying it to get it out of the way. Get advice from a chartered financial planner because everyone's circumstances are different so this isn't Investment Advice with important capitals.

Having options is good

We've talked lots about emergency funds and about pensions so far. After you have those set up and you're putting money into them regularly, what's next? This time we're talking about saving and investing, and why getting into the habit of doing it will pay you back in the long run.

You want your money to be useful in lots of ways. As well as money for every day stuff, you might want to buy a house, or buy that bit of land, or go on a 1-year sabbatical, or be able to say "I quit" to that horrible boss, or retire comfortably, or a dozen other things. You want to have options. Investing is a way of paying yourself first, before you give your money to someone else in exchange for stuff, in order to keep your options open in the future.

Cash is good, to a point

You could put some money aside and keep it in a bank account. The good thing about cash savings accounts are that they can be zero risk (because up to £85,000, they're guaranteed by the government). Cash is also magic because it's very easy to get hold of and use/spend if you need it.

What you should keep in cash: * your 3-6 month emergency fund * money you need to live on month to month * money that you cannot afford to risk losing, eg if you're planning to use it as the deposit on a home you want to buy in six months * but not your retirement fund (unless you're retiring tomorrow)

How you should keep it: * In a cash ISA so you don't pay tax on the interest * Or a current or savings account with high interest (consider switching bank to get a good interest rate on your current account). Some of these might offer higher interest rates than the cash ISAs. * but not under the mattress :)

But there are problems with cash. It's hard to make your money grow because interest rates are quite low. Worse, it might actually lose value over time thanks to inflation, which is the rate at which prices of things increase over time. (In the UK in Apr 2018 inflation is 2.5%, so on average, things that we buy cost 2.5% more than this time last year - and your pounds are constantly losing "purchasing power" at that rate). So those cash ISAs and savings accounts would need to pay you 2.5% interest just to avoid your money to avoid dropping in value - most of them pay less 😞.

What helps us grow our money more than cash?

Some ways to get more growth

Putting your money into things that aren't just cash lets your money do some of the work so that it's not just you on the saving grindstone.

That's because often, putting your money into the stock market or into bonds will return more than putting it into a cash savings account or cash ISA. You want it to keep growing, bit by bit, like a snowball being rolled around a garden, the snowball collecting more snow, and that new snow grabbing even more snow, until the tiny snowball eventually becomes a chunky, beautiful snowperson (this growth-upon-growth is called compound interest, and it's a magic thing. We'll do a Checksies dedicated to compound interest soon).

Investing in stocks and bonds

We could sum up all of this issue with this by Claer Barrett, writing in the FT: "One sage piece of investment advice that I would pass on to anyone is that regularly saving small amounts into the stock market over the long term is the best way to achieve steady growth in investments and ride out peaks and troughs. Ideally, this should be done tax-efficiently through a pension or ISA, all of which are designed to take regular monthly savings."

What you should invest in is determined by your circumstances, needs, appetite and capability for bearing risk. But here's our rough take on it:

This diagram doesn't tell you exactly what to do (sorry. That's deliberate because it's a massive simplification of the range of things you can do with investments, it's no substitute for talking to an IFA, and most importantly we don't know anything about your circumstances, timescales, needs, hopes, appetite and capability for bearing risk.) But the diagram might help you think it through.

If you need the money soon

If you need that money soon, or if the risk of it ever losing any value at all is excruciating, you keep it in something like cash. But remember, it's probably losing a bit of value the whole time, thanks to inflation.

If you don't need the money for ages

If you don't need the money for a loooong time, or if you're happy to take some risk to achieve better growth, then you keep it in something like company stocks. You could research companies, work out which ones would make the best investments, and then buy their shares - but that takes a lot of time and is very hard to do well, so you might get it wrong. An easier way to do that is buy an index tracker fund - these invest in a basket of companies across a sector or geography. If it was us, we'd invest in Fidelity's Index World Fund P or Vanguard's FTSE All-World ETF. (Here's how to buy them inside a pension, the same platforms will also have ISAs, which are good if you are investing up to £20k per year and don't want to wait until you're 55 to get the money)

If you're somewhere in between

In between are government and corporate bonds. A bond is where you lend money to a government or company for a set period of time in exchange for interest. These are super safe if you buy high quality ones - where you're pretty sure the organisation you're lending it to will pay you back. US or UK or German gov debt are good examples. Your investment in bonds won't grow as much as stocks do but they're usually less "volatile" than stocks - the price doesn't go up or down as much. Bonds go in your portfolio to be a "minimum risk asset" that dampens the risks and volatility of the stock market. The easy way to do it is buy a bond fund. If it was us, we'd invest in Vanguard's Global Bond Index Fund.

Balancing bonds and stocks

It makes sense for most investors to have a mix of stock market and gov bond index trackers. Why? So that the stocks parts gives you long-term return (higher growth but also higher risk) and the bond part gives you safety (lower risk). A useful rule of thumb: put your age into bonds, and the rest into stocks. So if you're 35, you might put 35% into gov bonds, and 65% into the stock market. But this is just a guide. If that sounds risky to you, put more in bonds, but bear in mind that the long-term growth might be lower. If you need more growth, or laugh in the face of risk, put more in stocks.

The easiest way

There's an easier way to balance these things than doing it yourself. You can buy a tracker fund that contains a stocks part and a bonds part. * If you're in your 20s or 30s, you might buy Vanguard's Lifestrategy 100 or Lifestrategy 80. Buy the Accumulation version ("ACC") which reinvests dividends - it'll grow more than the Income one ("INC") which pays dividends out to you. (Lifestrategy 100 is 100% stocks and is for people with a higher appetite for risk or a long investing life ahead of them. Higher risk usually means higher growth. Vanguard Lifestrategy 80 is 80% stocks and 20% bonds - the bonds are there to even out the risks of the fund's value going up and down wildly. If in any doubt, talk to a financial advisor!) * If you're in your 40s or 50s, you might buy Vanguard Lifestrategy 60, again the Accumulation version ("ACC") which reinvests dividends. * If you're in your 60s, talk to a financial advisor.

More on Vanguard Lifestrategy here. We like the Vanguard Lifestrategy funds because they're globally diversified across stocks and bonds, and they're low cost. They're a good place to start.

Why different Lifestrategy funds for different age groups? It's about your "risk appetite". If you're in your 20s you have a long investment life to even out the ups and downs, so you might take on more risk. A key thing: we don't know how you feel about risk, so you should talk to a financial advisor.

We like the easiest way.

So you might end up being a shape on that diagram. Here's @rod's: a little bit of cash, some gov bonds, mostly stocks.

What else can you invest in?

Your own home is a form of investment

Investing in your own home is a good thing because you need to live somewhere, so you're probably going to be paying rent to someone or paying a mortgage to a bank. If you're paying a mortgage, it's a monthly cost that you'll need to meet into the future, and it has a risk of going up if interest rates rise. Paying your mortgage's monthly payment gradually eats through that, and when you're done, you own the property outright and have no further payments to make - yay.

Paying off your mortgage quicker than you need to ("overpayments") means that you'll reduce your total cost of the mortgage because you'll be borrowing a smaller amount of money in future, or you'll be borrowing for fewer years, or both. You can usually over-pay 5-10% of the mortgage balance each year. So when Today-You pays off the mortgage a bit quicker you're saving Future-you some money. Thanks Today-You.

Investments to be wary of

There are so many other things that you can invest in - buy to let property, commodities, actively managed stock funds, bitcoin, P2P lending, your friend's startup, things with clever tax loopholes, this sure thing that someone at the pub mentioned, and so on.

But we don't recommend them because they typically have bigger risks, or a wider range of outcomes, or more price volatility, or high fees and transaction costs, or need you to be a proper expert, or are hard to get your money back if you need it. If you do invest in them we suggest doing it with great care and only a small % of your assets - say, 5% or 10% at the most.

We could write a book about this. If you need a recap, see the tl;dr up top. If you're able to do any of this, you have our respect; you're helping make life easier for yourself in the future.

You can tell us what you'd like to see us cover @checksies or by replying to this email.

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Small print

We're not independent financial advisors, so this isn't financial or investment advice. Before spending money on financial products, you should talk to an Independent Financial Advisor. The ones you want are qualified as "Chartered Financial Planners", and you can find one here. We're in the UK, which means we don't understand anything about advice, money or tax in other countries. We have biases. We hold shares in whatever Vanguard thinks is appropriate. We may also hold shares in individual companies, for instance our employers. We're trying to work out what's best to do, just like you are. Look after each other everyone.