Summary: why invest, how much should I start with, when should I top up, what can I invest into, what am I investing into through platforms, choosing a platform & things to consider, what is my exposure, risk appetite, which platform, strategies… let’s go!
1) Why Invest?
The spending power of cash is literally made weaker by inflation
Participate in global wealth creation
In a capitalist society this is route 101 in wealth attainment & preservation
2) How much should I start with?
Entirely depends on what you can afford. Funds below £500–£1000 might be used in a better way, see point 2 here
The whole point of investing is to get the best return, and that doesn’t always mean investing it…
Small amounts may be better put to work in a different way i.e. learning new skill that will generate more income
There are costs associated with investing which could eat up your returns on small amounts and make it much harder to actually make money
The costs are getting smaller but even still, your upside would be negligible and due to timing risk it’s perhaps better to put it to work in a different way or just let it stack!
3) When should I top up?
Top up your fund or stocks+shares isa regularly as a way to save
Remember there are costs associated with investments so depending on what you’re investing in, only chunks might make sense
Time risk: markets go up and down so avoiding buying at the highs is important (though you may not care if not sophisticated investor and in the long term it could smooth out)
4) What can I invest into?
Traditional Investments are split into asset classes: stocks, bonds, commodities such as metals and oil, currency and derivatives (which are mathematical agreements which get their value from the behaviour of something else)
They all having different characteristics, risk profiles and serve different functions
There are also investment rules depending on the investor and assets country i.e. a UK taxpayer cannot buy individual US stocks without having a US bank account and filling certain regulatory forms. In developing countries like China it is even harder. So products like exchange traded funds (ETFs) are used to get desired exposure.
5) What am I investing in through platforms?
As retail investors, it’s not always easy/cheap to buy/sell assets so this is where exchange traded funds (ETFs) come in
ETFs are essentially pools of money that track the value of specific markets and are split into small enough pieces that can be purchased way easier and cheaper. It also benefits from real time prices just like a single stock
So it looks, smells and behaves like a stock except it more likely represents the value of a collection of assets rather than just one instrument
Most stocks/shares platforms buy ETFs for your portfolio as this is the cheapest most efficient way
So for instance if you use Nutmeg, Wealthify or Moneybox, you basically bought a bunch of ETFs that track different pools of assets
Photo by Philip Veater on Unsplash
6) Choosing a platform, things to consider
Should be easy to use and have an easy communication style, chances are you’ll be using it for a long time
Some have minimum investment periods, some don’t. Some have minimum investing amounts, some don’t
FCA regulated: DO NOT INVEST YOUR MONEY THROUGH ANY INDIVIDUAL OR COMPANY WHO IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY this is like the golden rule seriously, if someone promises you crazy investment returns and has no credibility whatsoever, alarm bells should be ringing
FSCS Protection: the financial services compensation scheme protects up to £85,000 of your money if the company you invest with goes bust (check the platform participates)
ISA compatible: yearly ISA allowance is £20k so make sure the platform lets you use it
Costs: most platforms tell you how much they charge as is a regulatory requirement, for instance nutmeg charges 0.75% of your portfolio value per year for managed portfolios and as low as 0.25% for fixed allocation portfolios. The more you invest the cheaper it is.
Generic or specific: some platforms like nutmeg offer generic and diversified funds which is a good way to get started but more experienced people use Hargreaves Lansdown or similar in order to get specific exposure to certain industries/countries/themes etc
7) What is my exposure?
Whatever you buy, the key is understanding your exposure otherwise it’s easy to get finessed
Once invested, you are now a participant in the financial market not just the financial system and therefore your money is exposed to all the risks that affect the underlying assets that sit in your portfolio i.e. politics, economics, algorithms and other markets participants etc
Hence, you should be generally aware of what is going on or at least be able to check whenever you wanted
Some platforms give monthly reports of the state of the market and explain why portfolios (your money) are up or down
Nizzynomics gives a weekly interpretative run down of the current state of play. Information like this great for knowledge building and understanding the behaviour of your portfolio and investments
There are tons of cheap/free resources out there so no excuses in keeping in the loop!
8) Risk appetite
This is measured in different ways by different platforms but generally stocks are more risky than bonds and less developed countries are more risky than developed ones
So choose what kind of exposure you are comfortable with and learn the risks (holla nizzynomics)
9) Which Platform?
The retail finance industry looks to be going in one direction, fee-free. Asides from the user experience, fee structure and platforms do not differ hugely in their core offerings. The main difference you’ll find is some make portfolios for you and others don’t so your expertise will probably be the driving force.
If you want to compare the nitty gritty of investing platforms, fellow LSE alumni moneysavingexpert does a bunch of cool comparisons on tons of stuff money related. Finimize have a bunch of user reviews on their platform too.
We’re more into the risk side of things after the journey has begun but here’s our take:
I’m new to this:
Nutmeg is a great example of a modern investing platform which is simple to use and guides you through the process from setting up to deploying your money and kicking things off. We prefer it to the others, the costs are in line with the going rates and it sits our style. There will be other opinions to do your research.
I’m already active:
If you don’t already use it,Hargreaves Lansdowne is a great fund supermarket where you can find ETFs and funds that target specific exposure to certain countries, strategies or markets. They do a good job of presenting all relevant information
I have professional experience:
Interactive Brokers has a broad global asset class library of single securities and you can use algorithms for smarter execution. Good for portfolio analysis, hedging, risk management & trading as you can view all securities in one place. More useful for larger portfolios of multiple £’000s which you construct yourself .
No matter your level, you may still want to use the simpler platforms like Nutmeg as they are good ISA wrapped direct debit enabled saving tools that get you generic market exposure.
Funds vs Single Security
Buying a fund is a cheaper way to get exposure to a desired strategy compared to buying stocks individually. For example, if you have £1000 and want to buy 10 stocks, it may cost you up to £12.50 in brokerage fees. That’s 1.25% just to buy it, you’d still have to sell it and pay 1.25% . So you can see brokerage costs can really eat into gains and make losses even more painful. Might be better off buying a diversified fund.
Again, in time tech-enabled platforms will shrink these costs down to zero. Robinhood is already flourishing in the US and Freetrade is gathering steam in the UK. Watch out for Revolut’s fee-free execution soon too. Then, it won’t cost anything to buy stocks.
10) Strategies
When it comes to picking strategies, as opposed to using broad market funds and platforms that make portfolios for you, you need to have some sort of technical knowledge and/or experience. Otherwise it’ll be shooting in the dark and you won’t know your risks. Especially as a lot of modern techniques require specialist technology to implement. Also, stay clear from leverage unless you know what it is and its implications/associated risks.
Fundamental vs Technical
The old age war: this has been revisited countless times so we won’t add value by repeating, check here for a nice wrap up. Professionals generally use a combination of both and have access to way more information to build and interpret better valuation models.
Putting what you’ve read into practice, fundamentalists usually look at economic information to decide whether assets are undervalued, overvalued or fairly valued. That’ll help determine whether they buy, sell or hold. The other interpretation is to look at whether assets have significant growth potential (riskier but higher potential returns) or have stable economic features like steady cash flow (lower potential returns but less risky). Using technicians strategies requires learning chart analysis and the relevant interpretations (maths/stats based). Technical analysis is a great tool in the toolbox but we would not use it on its own, blind to context and a whole bunch of other stuff.
Photo by Hasan Almasi on Unsplash
Smart Beta
Modern portfolios tend to be constructed with this in mind. It focuses on core risk factor components which allows investors to put together baskets of securities with weightings different to the standard ones (i.e. instead of FTSE100 index). This allows for an alternative returns profile than the general market. For example, a money manager may think dividends are the driving force of returns in a market so constructs a basket which weights stocks according to dividend size. Many hedge out the other factors in order to be absolutely pure. See some other factors here:
style (value, momentum)
country
sector
dividends
quality (good vs bad company health)
size (big vs small companies)
volatility
momentum
Systematic
Simply put, these are mathematically defined strategies (heavy statistics) that takes the human element out of investment decision making. They are models that run themselves pretty much, monitored by a human.
Long Only vs Long/Short
Professionals buy (long), sell and short sell (short). We’re not even going to entertain short sale strategy talk right now, it really should be left to institutions and professionals due to the technicalities and risk level. Retail platforms hardly even facilitate it.
Long/Short funds employ relative value strategies, sell the expensive thing to buy the cheap thing and lock in the difference type stuff.
Long only funds are the kings of buy & hold. They research which assets they want to own which offer good value and hold them for a long time. They tend to average into positions over time and add more when unjustifiably weak. This is perhaps most similar to how individuals look to invest for themselves.
No doubt we will revisit this topic again at some point, it really can be a complex one requiring numerous hacks at breaking it down. Stay plugged in.
Peace out
@nizzynomics
Until next time 🥂
(written by a 26 y/o London based investment banker)