2021-01-26

Put your money to work for a better future


two surfers walking on beach. credit sacha verheij

Saving for the future using a savings account, is a safe but inefficient way of accumulating wealth at the best of times, but with low interest rates, your money is doing very little for you. 

There is a better way. Make your money work harder through investing. It does not matter how little you have - a few £ or $ invested on a regular basis will do. What matters is time, and when you are young, you have lots of it.

Like some of you, I started out with absolutely nothing and I've lived through economic hardship. I started investing in the late 90's, made rookie mistakes, seen booms and busts but I've also made money and today I'm significantly better off, financially, due to the actions I've taken. 

Baby Yoda says "Sounds complicated, I'm not a financial whizz"

You don't need to be a financial whizz. Investing is easy compared to 5 or 10 years ago - but like anything else, you do have to put some effort in to get the best results. Today you can invest from your phone, get the information you need to help you decide what to invest in for free and there are no fees or minimum balances to eat away at your hard earned cash. 

Baby Yoda says "Sounds risky, I don't want to lose my money"

Yes, there are risks with investing especially if you have short term needs. If you plan to save for a year or more - then consider investing. History shows that medium to long term investing will deliver more gains than your savings account. 

To illustrate why investing makes sense, take a look at these charts, the S&P and Nasdaq (US markets) and the FTSE 100 (UK market), from the year 2000 to 2020. 

Chart showing growth of S&P from 2000 to 2020.

Xhart showing growth of Nasdaq from 2000 to 2020

Chart showing the rise and fall of the FTSE 100

You can see the dips from the market crashes (2001, 2008, 2016 (UK), 2020. If you sold during those periods, you could have lost money, depending on when you started investing. 
However, look at the long term trends indicated by the pink line. If you had not sold in any of the crashes you would have regained and made up your money with time. 
In 2020, the crash occured in March and by July, anyone who had invested in the market previously (or post the crash) would have been taking profits as the markets bounced back. If you had invested right after the crash, then you would have made a considerable amount of money - depending upon where you invested it. 

3 do's and don'ts to remember at all times

Before you are ready to invest, consider these three do's and don'ts.

Do

  • Do invest in your 1. health (mind and body), 2. relationships 3. wealth (in that order).
  • Do invest to suit your age and objectives. Young? invest in equities (shares) and real-estate to create wealth. Much older (or rich)? invest in bonds, gold, art to preserve wealth.
  • Do invest with a logical mind. Understand what you are buying and why you are buying it and when you want to sell it.

Don't

  • Don't let anyone else manage your finances. Only you should control your future.
  • Don't invest if you have debts. The interest on debt, like loans or credit cards, is guarenteed while any money made through investing is not.
  • Don't let emotion control your actions. Don't be too quick to act (buy or sell) or you may be regretting it for a long time.

Baby Yoda says "Sounds good, where do I start?"






Investing in equities, that is, shares sold on the stock market, can be accomplished through several methods. Each option depends on your circumstances and comfort.

A table showing the different levels of investment experience and the suggested means of investing.


Index Tracker

One of the simplest methods of investing is a basic index tracker - an investment that tracks a market, like the charts shown above. Index trackers are funds that consist of many different stocks, providing instant diversification in one simple, low-cost investment. For example, SPDR (symbol SPY) is a fund that holds stocks in 500 companies like Apple, Amazon and Facebook. You don't need to buy individual shares to own a piece of Apple or Tesla! 

Instead of trying to outperform a particular stock market, index trackers track its performance. As these funds are passively managed (there's no analysts or fund managers to pay) their costs are extremely low or zero in many cases. If you're in the UK, tracker funds can be held in an ISA. (Tracker funds can also be held in a pension fund as well).

Exchange Traded Funds (ETF)

An ETF is a fund that tries to outperform a specific index or market. As these are actively managed by an analyst or fund manager, buying or selling equities into or out of the fund, they incur charges but those charges should be minimal compared to the gains. Historically ETF's had a mixed track record with some performing worse than a basic index tracker. Recently there have been a number of actively managed funds that have been deliverying better than average or spectaular returns - such as ARKK, QQQTQQQ or VGT

If you are just starting out with investing, the general concensus is that Index trackers or ETF's are your best bet to begin with. Jim Cramer, a long time investor recommends that you invest in an ETF until you have raised $10,000 before buying individual stocks yourself. (Wise advice I wish I had early on when I had started out). Funds tend to focus on specific themes, such as clean energy or electric vehicles, so if you are interested in an area, but don't want to risk putting your money in a single company, this is a good way to invest.

Dividend stocks

Would you believe that some companies pay you for owning their stocks? Companies like Coca-Cola, Johnson and Johnson and Target pay a dividend, thats cash to you and me, for every share you own. These companies are considered "stable", that is, their share price is not going to sky rocket or plummet, because their growth is more predictable. In the UK most companies pay dividends twice yearly but in the US many companies pay every quarter. There are companies who have paid out dividends consistently for many years - these are known as Dividend Aristocrats. Over time, dividend stocks are a great way to accumulate wealth without the worry of rising or falling share prices - infact lower prices are better for you at dividend payout time if you use the dividends to automatically buy more assets of the same company. I will write a follow up post about dividend investing as this is a good option for a cautious or conservative investor.   

A word about Tax - yes you need to read this bit..

Last year (2020), many new investors were caught out because they started trading and were unaware of the taxes incurred when trading. If you are of taxable age, there are two types of taxes you need to be aware of. 
  • Dividends you receive will be taxed as income at your income tax level. 
  • Profits you make from the sale of assets (ETFs, Index trackers or individual shares) incur capital gains tax (CGT). (Losses result in a CGT reduction).
If you are in the UK, you do not pay capital gains tax on ISAs or PEPs and you have a tax-free capital gains tax allowance  of £12,300 and then CGT is charged at either 10% or 20% of gains depending upon your tax band. 
In the US, capital gains tax is charged at different rates depending on how long you hold equity before you sell it and your income level.  
Selling any asset, held for less than a year, incurs short term capital gains tax and is taxed based on your income level (rates range from 10% to 37%).  
Long-term capital gains tax rate is 0%, 15% or 20% depending on your taxable income. For example, if you earn less than $40,000 a year you will pay $0 in long term capital gains tax. 

If the thought of paying tax on your gains worries you - then wait ! It's a nice problem to have. 
Here's a basic calculation if you are in the UK:

Your taxable income is £20,000. 
You made £12,600 in profits from your sale of assets. 
Your CGT allowance is £12,300.

To calculate the tax owed:
Deduct the CGT allowance from your profits. £12,600 - £12,300. 
That leaves £300 to pay tax on in our example. 
To get the tax rate, add the £300 to your taxable income (£20,000 + £300). 
Because £20,300 is less than £37,500 (basic rate tax band), you pay CGT at 10% of the £300.

This means you’ll pay £30 in Capital Gains Tax. 
£30 tax on £12,600 is pretty cool eh? 

When you are starting out in your career, investing makes a lot of sense as you are likely to be in a lower income tax band and have more time to buy and sell assets at a lower tax rate. 

Now that you understand that CGT is taxed at a lower rate than income tax, in most cases, the question you should be asking yourself is - "should you work extra hours in overtime to earn extra money racking up a larger income tax bill or should you be spending more of your time investing and taking advantage of capital gains?" 

So why is investing attractive right now?

There are many reasons to get into investing right now, but here are the 3 reasons that compelled me to write this post (other than wanting you to get started in securing a better future for yourself):

1. Climate change and shift in tech, services, industry and agriculture required to address it. 
2. COVID - the market crash and recovery provides many opportunities to invest at a discount
3. It has never been easier or cheaper to invest through commission free mobile apps  

Climate change is disrupting 
  • the car industry. For the first time in 100 years the electric car is now considered the future for personal transportation.
  • the energy industry with a shift to clean energy sources (solar, wind, hydrogen etc).   
Disruption in any market provides you with an opportunity to invest with potentially high profit - for example Amazon disrupting the retail market in the early 2000's.

Right now interest rates are at historic lows. You might not understand why that is important (other than it means you earn peanuts on your savings account) - but it means that governments can borrow money to fund large scale projects, such as infrastructure development or to hand out subsidies in areas that require investment - such as electric vehicles or clean energy.  We need governments to invest to help protect our future. We know that climate change is real and it will require many different approaches to address. That much is certain - and where you have certainty you have an opportunity to invest and make money while supporting a good cause.  

How can you start investing ?

Before you install and app and start trading I should point out something that I will cover in detail in a future write up. When purchasing anything, by default most apps will purchase at a market rate - unless you change the purchase option. DON'T purchase at the MARKET rate!  You cannot guarentee what that will be - despite the price listed on the screen - you will often get the next best price someone is willing to sell at - not the one you want to purchase at. So at least for now, if you do make a purchase use a LIMIT order only. This says that you will only make a purchase at a specific price.

Rather than recommend a specific app I recommend you read the following reviews of apps and decide which app your prefer based on your circumstances. (I don't use any of the UK apps as I am based in the US).

Things I didn't write about, but will in a follow up post 

1. Basic trading
2. Dividend investing

In the meantime check out .. 

Investopia (a good general resource to study)



 

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