A vast number of people do not invest in the stock market for a multitude of reasons. For some, they believe it’s just too risky or that they don’t have enough to invest. For many others it’s simply too confusing, there’s too much choice and there are so many factors to take into consideration. Essentially,many people don’t know where to start in the scary world of investing.

This article will cover what I consider to be the the simple basic steps to get started:

• Reliable Information
• Stock Market Crashes
• Stocks & Shares ISAs
• Index Funds
• Asset Allocation
• Active vs Passive Investing
• 100% equities
• Investment companies
• Workplace Pensions

Disclaimer: I’m aware this is a sensitive topic. To be clear I’m not an expert or a financial advisor. Anything I say should not be taken as financial advice. This is my own personal experience of investing in the UK.

Reliable Information In The Vast Infinity Of The Internet

Often there is a constant stream of news articles reporting on the stock market falling or predicting the next recession. In fact a google search with the term ‘recession in 2019’ returns 72,000,000 results in 0.46 seconds.This is not very helpful for potential new investors.

When you first start researching where to put your money it’s hard to know where to start. The internet is a great tool but an infinite space of information, which makes deciphering the vast amount of investment information a challenge. This is why I’ve decided to write about my investing experience so far and where to start with zero knowledge.

The FIRE Community

The FIRE community is a great amalgamation of investing information. However much of this information is based on the United States and is also Vanguard-centric. I’m not complaining about this but it does require a little translating for people in the UK. For example, terms such as 401ks, Traditional Roth, Roth IRA, 529s, etc. are often used. So this is my take on investing and FIRE in the UK.

#1 Do NOT Try To Time The Market

Many people my age are familiar with the last stock market crash. Personally, I finished university at a time when youth unemployment was around 25% (compared to 10% at this point in time). In fact, the overall employment rate is the lowestsince 1975.

My experience has shown me that the market is volatile and you may get back less than you put in. At least that’s the way anecdotal evidence paints the picture. However, most people only lose money in the market because they try to time it. People get nervous and sell when the market is down and buy when it’s trending up so people miss the best days of market performance. Evidence shows that if you missed the 10 best days of the FTSE All Share Index between 1986 and 2016, this could have halved your investment return. It’s not about timing the market its time in the market.

#2 Reinvest Your Dividends

In fact, even if you invest in an index that does underperform over a period of time, evidence shows that if you continue to reinvest your dividends your returns will be significantly better. For example,if you would have kept your money invested in the FTSE 100 in 1999 the capital growth rate by 2017 would be just 1.1%.

However, taking into consideration reinvested dividends from the index, the return increases to an annualised growth of 4.6%. The total return difference for the whole period would have been 20.4% without reinvestment and 119.3% with reinvestment. Just one demonstration of the effects of compounding.

#3 Invest In Index Funds

This is why I invest in Index funds which is a type of mutual fund constructed to match an index such as the S&P 500. Index funds are self-cleaning so when a companies performance drops they can drop out of the index and be replaced with better ones. Two examples of this are Capita who was demoted from the FTSE 100 and Carillion who was demoted from the FTSE 250.

Let’s look at Carillion in more detail. If you would have invested in Carillion as an independent stock you would have gone from holding shares worth 192GBX on 07/07/17 to 56GBX by the next week (14/07/17). By mid-January 2018 your stocks would be worth nothing, as they ceased trading. However, if you would have bought into a FTSE 250 index or the FTSE All share, you might not even have noticed or at least you wouldn’t have had to worry.

Remember To Use A Stocks & Shares ISA

One of the first things I knew I had to do was optimise my savings against the tax man. One of the first things I did in the process of setting up my investments was to find and select a fund that could be included in a stocks and shares ISA.

This means that you pay no tax on the fund contents, the fund earnings, and withdrawals from the fund. I can pay up to £20,000 each financial year into this account without hitting the tax threshold. Of course, the tax on this money would have already been deducted from your gross salary.

#4 Know The Difference Between Active vs Passive Investing

You may be thinking that having an actively managed fund that is managed by a great fund manager would resolve the issue of bad stocks. However, the evidence is to the contrary and fund managers actually lag behind the index that they are benchmarking against. Warren Buffett has been so confident about this, that he bet $1,000,000 that the S&P 500 would outperform a collection of hedge funds. Guess what? He won. Then donated the money to charity.

There have been some high profile cases of actively managed funds, such as the Woodford flagship fund, which have underperformed the market over consecutive years, losing investors money. These actively managed funds are calculated to have an average expense ratio of 1.4% vs 0.6% for a passively managed fund. This might not sound much but on £200,000 the annual fee would be a £1,600 difference. Over 10 years that’s £9,200!

#5 Selecting An Asset Allocation

Initially when I started investing my asset allocation was very ‘balanced’ in terms of a mix of aggressive (equities) and defensive (bonds) assets. I followed Fidelity’s pathfinder approach on their website. This helped me to set up an Investment ISAand helped me choose the asset allocation that was appropriate based on my risk tolerance.

It helped to explain what my money was going into in terms of asset allocation, counties and company size (e.g. large caps). I could then invest a lump sum that I was comfortable with, in addition to a monthly payment of £50 or above on a payment schedule. An affordable monthly payment is also good from a pound cost averaging perspective.

This all felt very comfortable and all of the above was amendable at a later date. As it turns out I did later change my fund to a more ‘risky’ 100% equities fund. I added further lump sum investments and increased my monthly direct debit.

There are three main asset classes; cash, bonds and equities and each serves a different purpose.

Cash: The main purpose of cash is stability. The issue with holding money in cash is that you can potentially lose money against inflation. The inflation rate has averaged 2.57% between 1989 and 2019 but peaked as high as 8.5% in 1991.

Bonds:These represent a loan made by an investor to a corporate or government body. Bonds are usually considered low risk and the more moderate returns reflect this. These are usually used in asset allocation to smooth out volatility. There is a great article on Physician on FIRE on bonds. One of the key points is that although they may reduce volatility, they also reduce investment gains overall. The later is crucial for portfolio success.

The risk involved is related to the inverse relationship between bonds and interest rates. Rising interest rates can push bond prices down. The other issue is that a bond’s issuer can stop making payments if unable to repay the principle.There are some instances where the assumption that something is low risk can be to a portfolio’s detriment.For example, the USS pension scheme continued to invest in UK Gilts. Due to the poor performance of these Gilts, the valuation of the fund has been reduced requiring further investment from people currently paying money into the scheme.

Equities:These are shares issued by a company and are the asset that historically has produced the best returns. However, this comes with risk and a share price can go up or down depending on the company or the market performance. Investing in individual companies, in particular, can be very risky, so stock diversity is crucial.

#6 Understand Your Investment Time Frame

You may have heard sayings such as hold a percentage of stocks minus your age. If this was true I’d be holding well under 80% in equities by now and I’d be limiting my investment returns. It’s been shown that the 100% equities strategy, in the long run, outperforms bonds and cash in any kind of mix. Therefore, holding 100% stocks is the best way to maximise returns. Although you must have the stomach to watch the market corrections and crashes which you will see a number of. Confidence in the logic and maths is crucial.

I’ve already accepted that I could potentially be investing at the peak of the stock market before it crashes again. Sooner or later I have to take the risk. When we look at an index such as the S&P, history shows that this index hasn’t lost money over a 15-20 year period but that isn’t to say it won’t in the future.

Evidence suggests that holding a higher percentage of stocks even at retirement age can result in a high portfolio success rate.Even when holding a 100% stocks, portfolios had a 98% success rate over 30 years when the withdrawal rate was 4%. Although there is more volatility, this is outweighed by the investment gains from stocks

#7 Select An Investment Company

As mentioned, I started with Fidelity as they seemed the most user-friendly, accessible and transparent of the companies. This was in terms of finding a fund that was geographically diverse, cost sensitive and diversified to an extent, in terms of large and mid-caps. You can read more about my investments by reading my financial plan.

The cost of the fund perhaps could be better but for an ‘ongoing’ annual charge of 0.25% and an annual transaction charge of 0.07%, this seems quite reasonable. There is then a standard annual service fee of 0.35%, which every Fidelity customer pays.

However, there are a number of investment companies you can choose to put your money in. I’ve looked into a number of companies including:

• Fidelity International
• Vanguard UK
• Hargreaves Lansdown
• Black Rock

#8 Keep Topping Up Your Workplace Pensions

I was investing a good few years before I started my stocks & shares ISA. This was in the form of a workplace pension fund. Many companies allow you little autonomy in what you invest in or the expenses. The downside is that you could be stuck in a default pension fund that has a higher allocation of lower risk assets than is often optimal.

The result of this can be returns of up to 3% less a year. Regardless of this, it’s now the requirement for a workplace to pay a minimum contribution of 3% to your pension by law. This is essentially free money and some employers pay more, mine currently matches up to 6%.

My current employers also use Black Rock and Fidelity. Which allows me a great deal more visibility and control over my pension. One of the first things I did was to switch away from the more costly default options with a high allocation of defensive assets to two very simple low-cost index funds.

The only problem with investing via a workplace pension is that you cannot access this until 55. Which doesn’t really help anyone aspiring to retire early. On the other hand, workplace pensions can be tax efficient if they are part of a salary sacrifice scheme. This means your pension is taken out pre-tax so you end up paying less national insurance, tax, and student loan.

You can then withdraw a lump sum of 25% tax-free when you retire. However, you will pay tax on the following withdrawals.Taking the above into consideration I only match up to the employer contribution. I imagine when I get my tax free lump sum this will be reinvested into my ISA account.

Final Thoughts On Investing

I am hoping I haven’t bombarded you with yet more complicated information on investing. My key message was simply intended to bethat you don’t need to be scared of the stock market.

Thereare many myths surrounding the stock market stoked by personal anecdotes and the media.However, when you look at the numbers many of these myths are dispelled. In my mind,this is necessary to make a start in the seemingly scary world of investing. This certainly holds true for me.

I found breaking the ice a crucial step with investing and setting up a direct debit to Fidelity was a key step in this. The overwhelming amount of information can be a barrier to investing so by simply removing one barrier at a time it can dissolve this illusion of investing being an insurmountable challenge.

The Cost Of Inaction

I believe it’s crucial to start investing because the cost of inaction is so high so I’mhoping that in some small way this article has helped. Regardless of what investing stage you are at, I would love to hear your thoughts, so feel free to comment.

Have you experienced the same problems? What barriers to investing have you experienced? What’s your personal journey with investing? Alternatively, what do you feel is stopping you from investing?

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