Back To Basics: The Complete Beginner’s Guide To Investing

To many people the reason why you invest is blindingly obvious but if everyone knows, then why isn’t everyone doing it? Many people don’t realise how important investing is – and if you’re new to this channel you might be one of them. Others might simply be overwhelmed and don’t know how to begin despite wanting to.

Well, you’re in the right place. Today, we’re going back to basics with a complete beginner’s guide to investing. We’re covering:

  • Why you need to invest
  • What returns you can expect
  • Whether you should do it yourself or have someone do it for you
  • When you should go with a Stocks & Shares ISA, SIPP, General Account, or LISA
  • Which platform you should invest with
  • What investments you should buy
  • Where you can do research
  • And how much you can lose and how safe your money is.

If there’s anything that’s unclear, please let us know down below and we will do our best to help you out.

Alternatively Watch The YouTube Video > > >

Why You Need To Invest

“If you don’t find a way to make money while you sleep, you will work until you die” – Warren Buffett. A very poetic and sombre thought but very true, nonetheless.

There are many different reasons why somebody might invest but generally most people invest with the intention to have their money make more money. Hopefully, one day you can invest enough so that you can stop trading your time for money through working a job and can retire. The more you invest and the better return you get, the sooner you can retire if you wish.

Maybe retirement is not even on your radar yet but we’re betting that you’d like to make more money, so you can buy more of the things you want, so in this case why not get your money working hard for you.

And if that’s not enough to convince you of the benefits of investing, then maybe this more depressing fact will. The annual inflation rate in the UK jumped to 3.2% in August 2021 and is set to continue climbing to a predicted 6%, so if you don’t invest you will be fighting a losing battle and your money will be constantly falling in value in real terms. Wealthy people have always invested, and you should too!

What Returns Can You Expect?

Unfortunately, short-term expectations about how much money you can make investing can often be totally unrealistic. You might have heard that someone made a killing investing in a particular stock or in Bitcoin, or whatever it might be, and was able to retire in their early twenties. The fact is that these success stories are few and far between – almost mythical.

Someone asked me whether it was worth investing as they’d seen you could start from £1 and someone they knew had made £1,000. It is indeed very easy to make £1,000 investing but it’s never going to happen from a single £1 investment.

The good news is that you could very realistically make £1,000 in a single year if you invest £10,000 or more. Over the last 30 years, the S&P 500 – which is the 500 largest US stocks – has returned 10.4% per year on average. For 19 of those 30 years the return exceeded 10% and 4 of those years exceeded 30%.

It’s really important to understand that your investment returns will almost certainly not be in a straight line. Some years will have devastating losses while others – as we have seen – will make you epic profits. Investing is a long-term game, and you’ve got to think of investing as a lifestyle choice and something you will do forever.

The other good news is that while peoples’ short-term expectations are unrealistic, you will probably underestimate how much money you can make in the long-term. With a 10.4% annual return over 30 years, just a single £10,000 investment would morph into over £193,000. You could very easily become a millionaire by investing if you decide you want to.

Should You Do It Yourself Or Have Someone Do It For You?

Broadly speaking you have 3 choices:

  • Option 1: You can do it all yourself, which will be the cheapest option and the most fun. With some investing sites and apps, you can now even invest for free. You will also have the widest choice of investments when you do it yourself and this is what we do.
  • Option 2: You can go to a financial advisor, and they can do it all for you, but this is very expensive and we’re certain you can do a better job yourself if you spend a little time learning. Usually, this option is reserved for high-net-worth customers who have at least a couple of hundred grand to invest. This option is likely to be only worthwhile for those who have complex tax planning to consider and for those whose finances are far more complicated than a normal person.
  • Option 3: You could use a robo-investing service. On the whole these are reasonably priced and will assess whether an investment is suitable for you and carry out the investing on your behalf. If you’re the kind of person who will never feel comfortable doing it yourself or you’d simply rather not have the hassle, then robo-investing would be a good shout.

Which Account Should You Invest In?

Before you choose your investment platform, which we’ll look at next, you should first choose what account types you want to use. These include Stocks and Shares ISAs, SIPPs, General Accounts, LISAs, and a few others. We think everyone should probably have a Stocks and Shares ISA, and a SIPP and here’s why.

A Stocks and Shares ISA is a tax efficient account that allows you to invest without paying some taxes such as capital gains tax, and some dividend taxes. Think of it as a wrapper that protects your investments from the taxman. You can sell your investments and access the money at any time, so this is likely to be your main investing account. You can only invest £20k a year as it stands right now, and you can only pay into one Stocks and Shares ISA each year.

Another popular account is a SIPP or self-invested personal pension. These are awesome for consolidating old workplace pensions into, give you enormous freedom in what you can invest in, and tend to be very low-cost. However, if you’re employed and saving into a pension you will likely want to prioritise your workplace pension as you get employer contributions with this, which you are unlikely to get with a SIPP.

As SIPPs are just a type of pension you won’t be able to access the money until age 55, and this is likely to rise in future.

With General accounts you have total freedom; you can open as many as you like and invest as much as you like. Any investment gains or dividends you earn though will be liable for tax.

A Lifetime ISA is an unusual account in that it’s used for either your first home or for retirement savings and has strict access limitations. If you are considering using a LISA we urge you to read our full LISA guide here.

Talking of guides, we have guides and best-buy tables for most of the stuff we’re talking about today, so check those out here.

Which Investment Platform Should You Choose?

If you’re a beginner we’re guessing you want to pay as little as possible in fees – at least until you have learned the ropes. The more expensive platforms tend to have better service and a bigger investment range, but you do pay for this.

We’ve got a thorough comparison of the best ISA platforms here, so head over there if you want to read up some more. For now though, let’s briefly look at a few of our favourite commission-free investing platforms that let you choose your own investments.

InvestEngine is currently our favourite. They offer a growing range of ETFs (more on what ETFs are in a moment) and they have zero charges. There are no set-up fees, no dealing fees, no account fees, and no foreign exchange fees. There are no fees from them whatsoever on the do-it-yourself side of the platform, which is awesome.

InvestEngine only offers ETFs, which we think is ideal for beginners because it keeps things super simple, and they’ve just added a feature that breaks your ETFs down by countries, sectors and companies, so you can see exactly what your portfolio is invested in.

We work closely with InvestEngine and new investors who use our link will get a £50 bonus when they deposit £100 or more. Full details are listed on the MU Offers page, linked to here.

Our next favourite is Trading 212 but at time of filming they are closed to new investors. They will eventually be reopening but we don’t know when this will be. Trading 212 is almost free, but they do charge 0.15% in foreign exchange fees.

Trading 212 has an incredible range of stocks and ETFs considering it’s a commission-free app. But be careful which account you sign-up for; Trading 212 also offer CFDs – which is a type of derivative. We think beginners should avoid CFDs completely due to the high chance of losing all your money. As we already mentioned, an ISA is probably your best bet.

When they do reopen to new customers again, you’ll be able to get a free stock valued up to £100 with our special link (full details on MU Offers page) – join the waitlist now and secure your free stock with this link.

Freetrade is another of our favourite commission-free apps. They too have a great selection of ETFs and stocks and have zero charges when you trade. However, out of the platforms we’ve mentioned in this video they do have the highest fees as they charge small amounts for an ISA account at £3 a month and have a larger foreign exchange fee at 0.45%.

New customers who use our link will get a free stock worth up to £200 (full details on MU Offers page).

If you don’t want to invest for yourself and intend to use a robo-investing service instead, check out the written guide on robo-investing here.

In short, our favourite robo-investing platform is also InvestEngine, one reason being that they are the lowest priced at just 0.25%, which is insanely cheap compared to all the competition. FYI, they offer both a DIY service (which is free) and a robo-investing service (for a rock-bottom fee).

And Nutmeg, the market leader, has a competitively priced option at 0.45%, which is their ‘Fixed Allocation’ style. Welcome offers for both of these are also on the MU Offers page.

What Should You Invest In?

We’ve covered a lot of ground so far, but now you need to decide what to invest in and there’s a lot of noise everywhere leading unsuspecting noobies down the wrong path. Beginners often associate investing with buying Bitcoin, but cryptocurrency is pure speculation and highly volatile. It might be okay to speculate with a very small percentage of your money, but the bulk of your investments should be in funds containing global stocks and maybe some government bonds and gold.

Also, much of the excitement of investing comes from buying individual stocks and getting rich quick, and that is probably why many of the investing apps gamify investing. If you boot up an app like Freetrade or Trading 212, they place popular stocks and trendy themes in prominent positions within their apps. You can’t blame them because that is likely what most of their customers want.

Avoid the top movement tables and trends, avoid speculative punts on stocks, and avoid any investment which gives 3x exposure using leverage. And as a beginner avoid shorting, which aims to profit when something goes down. We think beginners should ignore all this noise and build a portfolio of ETFs that track global stocks. An ETF is simply a fund that holds a collection of securities such as stocks.

For example, the Vanguard FTSE All-World ETF (VWRL) invests in stocks from all around the world and contains almost 4,000 stocks including for example big names like Apple, Amazon, Nestle, and Toyota. An investor who builds a portfolio like this is placing their trust in the economic growth of the world’s biggest and best companies.

Our personal choice and what we invest in ourselves is what we call the Ultimate Portfolio, which contains just 5 carefully selected ETFs which have been chosen for their low cost, tax efficiency, and general awesomeness.

Where Can You Research Investments?

When investing in ETFs you can’t beat the website JustETF.com and the ETF provider’s own websites. JustETF.com has a free-to-use ETF screener that allows you to filter down so you can find ETFs in areas that you want to invest in. But before taking the plunge we always check out the ETF provider’s own site to examine further. Some of our favourite ETF providers are iShares, Vanguard and Invesco.

If you’re investing in individual stocks, you really need to analyse stock data and be able to screen stocks for good fundamentals. We use a site called Stockopedia, which is truly fantastic but it’s not cheap. Fortunately, we have arranged with them a 14-day free trial followed by a 25% discount for new customers through this link.

The best free site is Yahoo Finance but it’s worlds apart from the premium sites like Stockopedia!

How Much Can You Lose And How Safe Is Your Money?

Investing is risky and you could lose all your money but invest wisely across a diversified portfolio of ETFs and this is highly unlikely.

The largest crash for the US S&P 500 in modern times was the global financial crisis from 2007, which saw losses of 57%. Looking back to 1929, the Great Depression witnessed a crash of 86%, but a lot has changed since then with far better regulation of financial markets, so we doubt it could ever be this bad again.

If you invest in individual stocks, you could very likely see even bigger declines than what we just looked at and it’s a very big possibility that an individual stock might never recover. If you invest in a broad index fund such as an ETF tracking the world you have history on your side, which has seen valuations only ever increase in the long-term.

In terms of how safe your money is with your chosen platform, it should be protected by the Financial Services Compensation Scheme, which protects your investments up to £85,000 but do check. Your platform also has to segregate customer money from their own.

Note, that the FSCS doesn’t protect you against picking a dud stock but rather protects against platform failure.

There’s a lot more we want to cover but are conscious that it might be too much detail in a beginner’s guide. We hope you have found this guide useful and if you did get value consider subscribing to the email list here.

As a beginner investor, what were your biggest investment fears? Join the conversation in the comments below.

Written by Andy

Featured image credit: SkazovD/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

An 8-Step Plan For Surviving A Crash (& Making Huge Profits From It!)

Whether or not the next big crash is just around the corner, is years away, or is happening right now, you can’t do much about it. You can’t prevent it; you can’t predict when it will happen, or by how much the markets will fall.

All you can do is take steps to ensure your portfolio survives; and thrives.

In this post, we want to share with you our 8-step plan for surviving a market crash, that we’ll be following. Not only should you survive it, but come out far richer than you were before. Let’s check it out!

FYI: Moneyfarm have recently lowered their minimum investment to just £500, and when you sign up via our special link they’ll give you the first 6 months without fees on account balances between £500 and £5,000.

Alternatively Watch The YouTube Video > > >

Pre-Crash Step 1: Portfolio Health Check

This step involves getting your house in order as much as you can before the proverbial hits the fan. First, check your holdings are not too heavily weighted towards any one industry or worse, one company. In 2008, the banking sector’s neck was on the line. In 2020, it was hospitality and travel.

Maybe the next crash will be tech. Or energy. No-one can know beforehand, so you just need to be well diversified.

If you can’t withstand a downturn because maybe you’re approaching retirement, you can even build a portfolio that is designed to weather bear markets. You can buy defensive stocks, many of which pay dividends; hold more government bonds; own gold; or buy an annuity. The trade-off for this safety is that these portfolios are likely to underperform in bull markets.

You could for instance hold a chunk of your portfolio in the Xtrackers MSCI World Consumer Staples ETF (XDWS), with an OCF of 0.25%. This filters for large & mid cap developed world companies which provide goods and services considered essential. Look at the top holdings: these guys aren’t going anywhere in a recession. People still need to eat, wash, and smoke regardless of the economy.

It’s common amongst stock investors to apply stop-losses to their shares. A stop-loss will automatically sell your shares if the market price falls below the stop-loss price you set.

But when the market crashes, all of your stocks will likely go down regardless of their individual fundamentals, including your defensive stocks like food companies, and broad geographical ETFs that you’d never want to sell. We would not use stop-losses on these investments.

Pre-Crash Step 2: Plug The Holes In Your Home Finances

Be sure you are comfortable enough with your home finances that you wouldn’t feel the need to have to sell your investments during a crash to pay the bills.

If that sounds like you, maybe sell some positions while the sun is shining, so you don’t have to do it mid-storm.

Or better still, long-term you could even structure your career so as to have a recession proof income, such as by becoming a doctor or a teacher. A stock market crash often comes hand in hand with recessions and job losses, so consider if your job is essential.

Step 3: When The Crash Comes, Do Nothing.

So, you turn on the news, and the markets are crashing. Everyone is selling, banks are withholding credit, and companies are going bust left, right and centre.

The best thing you can do (other than breathing into a paper bag) is nothing. At least not immediately.

Crashes typically take months to hit the bottom – you have lots of time to think before you act. The stock market crash of 2020 took 33 days to fall by 34% from the all-time-high to the bottom. Plenty of time to come up with a plan of attack.

But the Corona Crash was a flash-in-the-pan compared to the much more serious stock market crashes of the modern era. The Dotcom Crash took two years to climb down from the pre-crash high to the bottom, from Aug 2000 to Sep 2002. And the Subprime Mortgage Crisis took one and a half years from Oct 2007 to Feb 2009.

If you’ve been building up a large investment pot over many years, a hasty decision to sell when the markets are down could set your portfolio back by years or even decades. There are some events that you just can’t come back from. So, take your time, do nothing in haste, and move on to Step 4.

Step 4: See Through The Noise

The grim-faced commentators on the news will be reporting the crash from the assumption that their viewers have just lost a lot of money, and many will have done, because in a panic they foolishly sold their investments, even their diversified ETFs, and realised their losses. They saw the market plummeting and thought they’d better do something.

But you chose to do nothing. You held the line. You realise that you own just as much of the world economy with your global ETFs now as you did the day before the crash – it’s simply that the world is now temporarily worth less. All is well. You can move on to Step 5.

Step 5: Manage Leverage On The Way Down (If Applicable)

If you’re using any leverage to invest, you’ll no doubt have been making epic returns during the good times, but when the market is crashing we’re willing to bet your fingernails get bitten almost to the bone with panic.

If you are using leverage to invest, keep a close eye on it during a downturn that it doesn’t balloon out of control, and be ready to deleverage if need be. Adding new money monthly as you earn it during a lengthy recession is one way to do this.

Selling leveraged positions in a downturn is usually an extremely costly decision because you’re selling at a magnified low. Leverage enhances price movements in both directions.

Step 6: Buy, Buy, Buy!

Once you’ve composed yourself, you need to try and see the crash as we do, which is as a major opportunity. Unless you’re about to retire or are really highly leveraged, a stock market crash is about the best thing that could happen to you.

A young investor who sees their £10,000 portfolio slashed to a £5,000 portfolio in the mother of all crashes should pop open the champagne – so long as they did their prep. £10k is also largely irrelevant in the grand scheme of things, as one day presumably you’ll be counting your portfolio in the hundreds of thousands, and the buying opportunity is more important.

A falling portfolio doesn’t matter if you’re not about to retire.

That’s stuff which you bought in the past, and as long as the investments were high quality and well diversified it should one day recover back to its pre-crash price and then some. What matters is what you do now, and with prices at irresistible lows, it’s time to go all-in and buy up as much of the world’s assets as you can while they’re on a fire sale.

You likely won’t ever get a better buying opportunity in your lifetime.

We drip-feed any spare cash into the market as it’s earned monthly, called pound-cost averaging. It’s the right thing to do since trying to time the market means cash lies around potentially for years making no returns – but pound-cost averaging means there’s unlikely to be any spare cash available for investing when a market crash comes along.

We know this isn’t everyone’s cup of tea, but we’ll be better prepared for the next crash now because we know a lot more about available sources of credit for investing – in other words, using leverage.

Any new leverage that you take out while prices are cheap is a potential opportunity to make some killer returns, as and when the markets recover. This is not an excuse to overstretch yourself – only use leverage if you understand the risk.

Step 7: Rebalance

If you invest in a range of asset classes like stocks, bonds, gold, property and so on, a significant crash in the stock market is a good time to rebalance your portfolio.

In a crash, bonds and gold are likely to have shot up in value, while your stocks and property will be valued very cheaply.

Let’s keep it simple and say your portfolio was made up of 70% stocks and 30% bonds before the crash. Market values may well have shifted such that your stocks now make up 40% of the value of your portfolio and bonds 60%.

In this case, it’s logical to sell half your bonds, and use the proceeds to buy stocks. You now have many more stocks to take advantage of the market climbing up again. The bonds have already done their job on the way down.

Step 8: Don’t Worry About Missing The Bottom

If you missed out on the bottom and have spare cash to drop into the market, don’t fall into the trap of thinking you’ve missed your chance, hoping for a double-dip that never comes.

It’s guaranteed that many of your mates down the pub will be doing just this.

They think it’s only worth investing at the very bottom, and since they missed their chance, they’re now waiting for it to happen again. But it probably won’t. Don’t worry about not getting the perfect price – a good price will more than do.

Don’t Be Like Everyone Else

The reason people lose money when the market crashes is that they panic and sell. If you’re investing in highly diversified index funds or similar, all you really need to do is hold your nerve and do nothing, and you won’t lose money long-term.

But we intend to do better than that and use crashes as springboards to bounce our portfolios to new heights, and to do that all we need are these 8 steps.

How are you preparing for the next crash, or are you just ploughing on regardless? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: TeodorLazarev/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Why Stocks Soared While The World Burned | The Covid Bull Market

For a couple of years that have been so bad, it’s hard not to wonder why the stock market has been so good.

As lives were lost around the world, and millions of people were put on the unemployment list due to actions taken to tackle Covid-19, the global stock markets soared – none more so than the S&P 500, which for the last year has acted as though it is immune to bad news.

Everywhere, there is chaos.

  • On the streets, tensions about race are boiling over.
  • On the M25, selfish eco-protesters bring Greater London to a halt in an ever-escalating war on climate change.
  • Australians are beaten by police for leaving their homes and shot at with rubber bullets.
  • In the White House, Biden schemes to raise the corporation tax rates not just in the US, but on companies around the world in a G7 deal.
  • And lockdowns everywhere have inflicted irreparable damage to businesses.

Meanwhile, millions of investors continue to plough money into stocks because the charts keep moving higher and higher. The difference between the actions of the stock market and the reality of real life has rarely been starker than in 2020 and 2021.

Today we’re looking at the various reasons why the stock market continues to soar in bad times, and the lessons we can learn from some of the stocks with the most interesting stories to tell from the pandemic.

Alternatively Watch The YouTube Video > > >

The Bulletproof S&P 500

The market was rocked in March 2020, as stocks plunged for about a month, but then something strange happened.

Even as the media was losing its head over the covid-19 virus (and this has not changed 18 months later), and as America burned from street protests, and as millions of people were laid off and businesses shuttered due to government lockdown policies – the market just recovered and then boomed as though nothing had changed

An outgoing president seemingly refusing to accept the outcome of an election (supposedly the market’s nightmare scenario), and then the Capitol building being stormed in what the media reported as a “coup”, did not stop the S&P from soaring. At time of filming, it’s just below an all-time-high at around 4,500, well off the top of this chart

It’s a far cry from the start of the pandemic, when billionaire hedge fund manager Bill Ackman went on the airwaves to warn that “hell is coming”. Maybe it did for many – but not for him, nor for investors generally.

How can it be that food banks are overwhelmed and people can’t afford heating or even housing, while stocks are hitting all-time highs? Let’s now look at what can be learned from the bull market of the last 18 months.

Lesson 1: What Goes Down Doesn’t Always Bounce Back

Investors, like everyone else, were initially in denial about the realities of Covid-19 when it first began to take hold globally in early 2020. Indeed, in Jan and Feb 2020, the market continued to record all-time highs.

What we saw then was that while stocks often rise slowly, they also fall fast. Once the world caught on to what Covid-19 might bring as countries like Italy were ravaged, stock prices collapsed, wiping off 34% percent of the value of the S&P 500 from mid-February to mid-March.

We’re all familiar with the sudden rebound that then happened for most stocks, but some were not so lucky. Exxon Mobil is an example of a stock that fell, and stayed down.

While the stock market as a whole enjoyed a bull run in the second half of 2020, fossil-fuel energy companies floundered, after a brief hopeful recovery that I took full advantage of at the time, telling investors to Buy, Buy, Buy!

The woes of Exxon and the Oil & Gas industry teach us the importance of not holding faith in a commodity or industry just because it’s previously always done well.

A unique unforeseen event like a global lockdown can change everything. People didn’t need Oil & Gas when they were not travelling to work or going on holiday, but the resulting fall in share prices were perhaps short-sighted –  oil prices are slowly coming back, though they have not yet reached their pre-crash peak.

Lesson 2: Central Bankers Wield God-Like Power Over Stock Markets

At the start of the crash, no-one had any idea of what the future looked like, how deep the crash would be, or how long it would last for.

But extraordinary measures taken by America’s Federal Reserve and similar central banks in the UK and elsewhere reassured financial markets and investors that major corporations would not be allowed to fall apart.

Most analysts point to the actions of the Fed in the US as being the most important factor in restoring confidence during market turmoil, since America holds around 55% of the value of the world’s companies and many economies around the world are impacted by the success or failure of America.

In March 2020 they announced a series of big support packages, including saying they would buy both investment-grade and high-yield corporate bonds (basically, it would lend to businesses, whether they were risky or not). Stock prices immediately about-turned and started marching upwards.

In the words of Invesco’s chief global market strategist, “The Fed can be very, very powerful, almost omnipotent, when it comes to the stock market.” Some companies were able to capitalise on the soothing words of the Fed more than others.

Boeing stock didn’t recover at first, as questions still hung over the viability of its operations, but with the markets in a giddy ecstasy over the Fed’s interventions, Boeing was able raise $25bn of cash from the markets in a corporate bonds issue, allowing it to avoid the need for government help.

Boeing’s smashing success in getting itself out of a hole financially, and the resulting rise in its share price, was mirrored by a few other companies including Nike, who’s stock price gained 35% in a week following a $6bn bond issue. Its stock price has not stopped climbing since.

Stake, an app that specialises in trading US stocks, are giving away free stocks to new customers – including Nike stocks, which are currently trading at around $150 each. If you want to invest in US stocks and pick up a free share in one of Americas great companies, just follow the link here and fund your account within 24 hours.

Lesson 3: Some Bulls Run Faster Than Others

The S&P 500 bottomed out 33 days after the crash started, and since then has continued to climb, powering ahead of its pre-crash highs.

While growth was mostly strong across the board, some industries did much, much better than others. Technology companies – which make up a significant chunk of the value of the stock market – soared on the back of remote working and the need for better entertainment and communication tech in the home.

A representative stock of the tech boom is Apple. It’s responsible by itself for much of the growth of the S&P 500, since Apple makes up 6% of the value of the index and has itself grown by 156% since the bottom of the crash.

The point here is to be highly diversified, so you own the industries of the future, whichever they turn out to be. You can’t know before a major economic event what the specific circumstances behind it will be.

This time it was a virus, which killed oil and promoted tech. The next one could be a war that promotes defense stocks like Boeing, or a shortage of an essential raw material that promotes mining stocks. Or an event we can’t even imagine.

Lesson 4: ‘Temporary’ Keeps Being Redefined

Back in spring of 2020, the markets were confident that within a year, the pandemic would be over. Of course, it wasn’t.

But the general attitude remains that within months, life will be back to normal. People who believe the pandemic will be over within 12 months have been in a majority throughout the pandemic (which has in fact been ongoing for well over a year), other than a brief couple of months of pessimism prior to the vaccines being announced.

Even in June 2021, more than half the UK population believed everything will be back to normal within the next 12 months.

This optimism for a speedy return to normal has run throughout the pandemic.

American Airlines, representing the struggling aviation industry, fell and flatlined after early signs of recovery when it became obvious in early Summer 2020 that summer holidays would, after all, be cancelled.

But the vaccines, announced in November 2020, led to a steady climb of recovery, until Spring 2021, when the markets were faced with the cold hard reality of another summer without travel.

What the story of the airlines underlines is that stock prices swing on human emotion – when things looked hopeful prices rose, and when looked bleak they stagnated or fell.

No doubt if there are lockdowns in 2022 people would be hailing 2023 as the year when things get back to normal!

Lesson 5: 2021 Could Have Looked Very Different

The lucky timing of the vaccine announcements in late 2020 gave the stock market a booster shot of confidence that 2021 would be an incredible year of reopening and growth, with markets going into overdrive again from that point onwards.

The company responsible was Pfizer, the pharmaceutical giant that released the first covid vaccine. Interestingly, the news in November 2020 that Pfizer had come along to save the world only resulted in a temporary increase to its share price. It’s only now, in late 2021, that Pfizer’s share price is benefiting from its ongoing role in the pandemic.

Companies that provide the people with what they want tend to be rewarded with share price growth. And in a world where viruses may now cause more havoc, the desire to own big healthcare companies in your portfolio has surely grown.

Lesson 6: Where America Leads, The World Follows

It looks like the US is poised to emerge from the pandemic before much of the rest of the world, by spending its way to an economic recovery that many less affluent countries cannot afford. But opportunities remain for economic growth longer-term in the emerging markets, which right now are being ravaged by the pandemic.

Stocks like Nvidia, whose revenues come predominantly from emerging economies, may benefit from an economic recovery in those regions. The emerging markets have faltered in 2021 while the developed world led by the US has seen runaway growth.

With vaccines becoming more and more available, we think emerging markets will catch back up with the developed world, and companies with strong exposure to the emerging markets may stand to do rather well in the coming years.

Lesson 7: Where Else Could Investor Money Go, Anyway?

With interest rates, and hence bond yields, so low, investors don’t really have a more lucrative alternative asset class to put their money in. This is helping to keep the stock market buoyant.

As long as interest rates stay low, it’s stocks all the way!

It’s Hard To Think What, If Anything, Will Spook Investors

A big one could be when taxes are inevitably raised both in America and in the UK. Increasingly our governments are going after investors’ wealth. Biden in the US is keen to tax capital gains and corporate profits to the hilt, and Boris in the UK has recently increased dividend taxes, and said corporation taxes will increase to 25%.

Invesco comments again, that they “think on a short-term basis, we could see a sell-off if there is a risk [of a tax rise] that appears imminent, but we have to recognize that all current risks are being cushioned by this incredibly accommodating Fed. … It’s a powerful upward force on stocks that can counteract the downward forces.”

The Stock Market Is Not The World

The past 18 months have been a wild ride for both the economy and the stock market, but in different directions.

It’s clear that the stock market is not representative of the whole economy, much less society. The stock market represents one piece of the economy — long-term future corporate profits — and so long as there is confidence in those being high, the stock market will be too.

What’s your view on the rising markets, and will stocks continue soaring? Join the conversation in the comments below, and don’t forget to bag that free stock with Stake, worth up to $150!

Written by Ben

 

Featured image credit: Adirach Toumlamoon/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Best S&P 500 ETF For UK Investors (And How To Choose Yourself)

Hey guys, in today’s post we’re going to help you pick the best S&P 500 ETF to invest in for UK investors. There are many different ETF providers (such as Vanguard, iShares, Invesco, plus many more) each offering multiple S&P 500 ETFs. With so much choice, how do you know which is best?

Should you be investing in accumulation or distributing ETFs? Which fund domicile should you pick? Why does this S&P 500 ETF have a vastly different price to another similarly named one? What’s the difference between physical and synthetic replication? Should you choose a hedged ETF or not? Where do you go to research ETFs?

We’re not just going to tell you what our favourite S&P 500 ETF is because what’s right for us might not be right for you. We’re going to answer all these questions and more to give you the knowledge to pick the right S&P 500 ETF for your portfolio. Let’s check it out…

Alternatively Watch The YouTube Video > > >

To invest in any ETF, you’re going to need an investment platform. If you head over to the Best Investment Platforms page, there we have hand-picked our favourite investing platforms and put together a comprehensive cost comparison table.

Also check out the Offers page to get free stocks worth up to £200 with investing apps like Freetrade and cash welcome bonuses of £50 when new customers sign up to investing platforms like InvestEngine.

Why You Need An S&P 500 ETF

The S&P 500 is the leading index of US companies, making up about 80% of the market cap of the US and about 47% of the world’s market cap. Or in other words the constituents of the index are vital to every investor’s portfolio.

The S&P 500’s popularity as an index also means that there is huge demand by investors, which has led to a price war amongst the companies producing index trackers. As a result, you can invest in an S&P 500 ETF for almost free of charge.

Which S&P 500 ETF Is Best?

Our favourite is the Invesco S&P 500 ETF (SPXP), because it has excellent performance, is enormous with £8bn in assets, and has a rock bottom fee of just 0.05%, tight spreads, is listed in London, trades in GBP, is accumulating – and is synthetic.

This is a very popular ETF, so it is likely that it’s available on most investment platforms. The one downside to this ETF though is the market price, with each share currently priced at around £600.

In these circumstances it can very handy if your investment platform offers fractional investing. InvestEngine is one such app and as mentioned they are currently giving new customers a £50 welcome bonus when you sign up via this link.

Where To Begin Your Research?

First things first, we pretty much start all our ETF research using the ETF screener at justetf.com. It’s a super powerful tool that’s free to use and allows you to filter down on different criteria to find ETFs you can then research further. In this case we’re looking for S&P 500 ETFs, so we can select that index from the dropdown. Bear in mind if you’re looking for a hedged version or an equal weight version these will be listed as a separate index.

There’s big list of ETFs available and actually there’s even more than what is initially shown in the ETF screener because each of these will have multiple listings with different listed currencies and on different exchanges. We exclusively stick to those on the London Stock Exchange and stick to those traded in GBP where we can.

Which Currency Should You Choose?

Each ETF can have several currencies associated with them. Many people are exposed to currency risk without realising it because of confusion when it comes to the currency labels applied to ETFs. Just because an S&P 500 ETF is listed in pounds does not mean you have avoided exchange rate risk between pounds and dollars. This is about to get complicated, but we’ll do our best to clear this up.

Fund currency or base currency refers to the currency that an ETF reports in and distributes income in, which for most S&P 500 ETFs will be in USD. Your investment platform will convert any income you receive into pounds but will likely charge you an exchange rate fee for doing so. More on this shortly.

IUSA listings

Then there is the Trading Currency. Looking at the IUSA ETF as an example, if we look at the Listings section, we can see a bunch of listings on different exchanges and the currency of each. For this particular ETF there are two listed on The London Stock Exchange – one in dollars and one in pounds.

Because your investment platform will likely charge you FX fees you want to go for the one in pounds to avoid that fee. The trading currency has no impact on the returns of the ETF once they have been converted back into pounds.

And finally, there are currency hedged ETFs. These are designed to eliminate (as much as possible) currency risk. Hedged ETFs will normally have the term ‘GBP Hedged’ in their names, but always check the product’s factsheet or webpage to make sure.

Personally, we don’t use hedged ETFs because we think over the long-term currency movements don’t really matter too much. Hedged ETFs are often a little more expensive than their unhedged counterparts but for S&P 500 hedged ETFs they are still excellently priced.

Fund Domicile

Where your ETF is domiciled is super important. Typically, ETFs are domiciled in Ireland or Luxembourg due to tax reasons. Where possible we almost always pick ETFs domiciled in Ireland because Ireland has a tax treaty with the US whereby the dividends paid by US companies are only taxed 15% rather than 30%. But pick a synthetic ETF and that tax comes down to 0%.

Replication Method: Physical vs Synthetic ETFs

Okay so that last point was probably very clear until we mentioned the word synthetic. The goal of each ETF is to replicate its index as closely and as cost-effectively as possible and there are a few different methods that an ETF can use to achieve this.

The first and most straightforward is physical full replication. These literally buy all the stocks in the index, and hence it’s fully replicated.

Another method is Physical Optimised Sampling. This is where an ETF only invests in some of the stocks in the index as they determine this is all it takes to replicate the performance. This might be done to lower costs. In most cases we’ve seen these ETFs will buy the majority of the stocks in the index and sometimes even all of them. They may miss some of the tiny ones that have almost zero impact on the index.

We’re not big fans of Optimised Sampling because you don’t really know what and why certain stocks are missing. Before investing in this type of ETF do check that the past returns are in line with the index by looking at the tracking difference. Any major difference or wild yearly swings should be a red flag. It’s also worth checking the number of holdings in the index by downloading the index factsheet (search google for this) and comparing it to the number of holdings in the ETF. The closer the better.

And finally, there is Synthetic or Swap based replication. The ETF doesn’t buy the exact stocks within the index, instead it owns a different basket of stocks or securities and swaps the return of this basket with an investment bank or banks for the return of the index.

The advantages of doing this is it can be cheaper, and it avoids certain dividend withholding taxes such as those collected by the US. So, in the case of an S&P 500 synthetic ETF, they have a performance enhancement over their physical counterparts.

Typically, the S&P 500 yields 2% and the tax is 15%, so the improvement is 30 basis points every year. That is in our opinion not to be sniffed at and is why this is our favourite method of replication whenever it enhances performance as in the case of US stocks.

However, not all synthetic ETFs are created equal, and they do carry more risk than a physically replicated ETF. If you don’t understand them, we suggest you avoid them. If you’re interested in learning about how synthetic ETFs reduce counterparty risk, here is some bedtime reading.

Distribution vs Accumulation

Either you choose an ETF that distributes the dividend to you or one that automatically reinvests the cash within the fund. With accumulation funds you don’t receive more shares but instead the value (and the share price) of the ETF increases.

If your intention is to reinvest the dividend into the same fund and you’re investing within an ISA, then it makes financial sense to opt for an accumulation fund. S&P 500 funds are very likely to have their fund currency in US dollars and so will distribute their dividends in dollars. Your platform will convert this to pounds and will likely charge you an FX Fee for the privilege.

Moreover, if you have to manually reinvest the income yourself, then you will have to pay the bid offer spread and possibly trading commissions. Long story short, accumulation funds will save you money.

Despite the small savings, if you’re investing outside of an ISA we suggest going with the distributing type because otherwise it can get very complicated for tax purposes. You could end up paying tax twice with accumulation funds. Dividends rolled up into accumulation units are known as a ‘notional distribution’. They are taxable in exactly the same way as income units.

As we invest in ETFs primarily through an ISA, the only time we’d want the dividend paid out is if we needed to live on that income.

UK Reporting Status

You want to make sure your ETF has UK Reporting Fund Status otherwise you will have to pay up to 45% tax on the gains. You can check this on the ETF factsheet and webpage. As we only ever invest in London listed ETFs, all the ETFs we have ever looked at have had UK reporting status but it’s worth double checking.

OCFs, Tracking Difference, And Spreads

ETFs should be very cheap because you’re not paying for an expert fund manager, and S&P 500 ETFs are especially cheap. A good place to start for the least amount of effort is to choose an ETF with a low Ongoing Charges Figure (OCF).

However, it’s important to note that the quoted fee is not necessarily what you pay. ETFs will not match the index return exactly and the difference is known as the tracking difference. The difference between the index return and the ETF return is the real cost that you incur.

That’s the theory. In practice, what we do to find the best performing ETF is to sort them by their 3-year performance on justetf.com. Towards the top happens to be our favourite, the Invesco S&P 500 ETF.

Another thing investors want to keep an eye out for is the size of the spread when you buy and sell. A big spread is bad. A general rule of thumb is that the larger the fund size, the lower the spread due to increased trading volume. Most of the S&P 500 ETFs have billions of dollars of assets under management, so this is probably not a major concern, but it’s definitely something you might want to check for any other ETF.

We check spreads using Hargreaves Lansdown’s website for free and you don’t need to be a customer. Bang in the ticker in the search box and scroll down to the Costs section. The indicative spread is listed here. For our favourite, it is tiny at just 0.03%.

Does The Price Of An ETF Matter?

This is a common question we get asked. The market price of an ETF is not important. What matters, is the percentage change in the ETF price. If the index goes up 10%, you want your ETF to also go up by 10%.

The price of an ETF will usually correspond to its Net Asset Value (NAV). The NAV equals the value of the ETF’s securities and other assets, minus its liabilities, divided by its number of shares.

There’s a great article on justetf.com that explains it very well, linked to here.

Finding The Best S&P 500 ETF For You

Now that you’re armed with the necessary knowledge you can use the ETF screener on justetf.com to find the best S&P 500 ETF for you.

The best S&P500 ETFs

Some of you may still feel you need your hand holding, so to finish off we’ve put together this table with our favourite S&P 500 ETFs for various circumstances. The tickers are all for the GBP versions listed in London.

If you’re new to investing and are not 100% sure what you’re doing, we think you won’t go far wrong with Vanguard and iShares. Most of their funds are huge, competitively priced, and are in most cases physically replicated, which many investors feel more comfortable with. The last 2 in the table are hedged ETFs.

What’s your favourite S&P 500 ETF and why? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: Imagentle/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Best ETF Portfolio: Now You Can Invest In The Ultimate Portfolio For Free

Back in late 2020 we designed a portfolio that we called The Ultimate Portfolio. As the name suggests it was a portfolio that would passively beat the global market and be easily managed. It was built for our purposes, but it was also put together in such a way that anybody could take it and adjust the allocations to fit their own view of how the world economy would develop.

The Ultimate Portfolio was built with simplicity in mind, but more than that – it was built to avoid nasty dividend withholding taxes as much as reasonably possible.

In this post we’re going to give a recap of what the Ultimate Portfolio is and look at how it has performed. We’re going to look at why you should be investing in this portfolio, the best platform to invest through, and lots more.

The response to the first video was so enthusiastic that we’ll also dedicate some time at the end of this post to answer many of the questions that we’ve received about the portfolio since the original video. Let’s check it out…

Alternatively Watch The YouTube Video > > >

What Is The Ultimate Portfolio?

For a full rundown be sure to watch the original video or read the article after this one, which we’ll link to in the description below. In that video/post we really deep dive into the portfolio and look at country and sector allocations, which we won’t repeat today. Let’s now jump into the portfolio to get an overview.

The portfolio in excel

The main part of the portfolio consists of 3 equity ETFs. The first and biggest holding is in the Invesco MSCI World ETF (MXWS) and we have it make up 64% of the equity allocation. This gives exposure to the large and mid-caps of the developed world, and is dominated by the US, which is of course the largest stock market in the world. This specific world tracker has some unique qualities, which makes it stand out from all other ETFs, which we’ll get to soon.

The next ETF is the iShares MSCI World Small Cap ETF (WLDS) which in our portfolio consists of 18% of the equity allocation, and the third ETF is the iShares Core MSCI Emerging Markets IMI ETF (EMIM). We have also allocated 18% of the equity to this fund, a slightly heavy weighting which is a play on China and India doing well over the coming decades.

We personally think that the portfolio benefits from some precious metals and think both the iShares Physical Gold ETC (SGLN) and iShares Physical Silver ETC (SSLN) are great, low-cost investments for achieving this. We now allocate 8% and 2% of the overall portfolio to these respectively.

In our own portfolios we also have small allocations to Peer-To-Peer Lending and some individual stocks, and I have a large percentage allocated to Buy-To-Let property, but the Ultimate Portfolio of ETFs is the core around which we’re now building our Freedom Funds.

We also used to have an allocation to Cash in our investment portfolios, extra to our emergency savings, but we’ve changed our minds about holding cash as an individual asset class. As Ray Dalio says, “cash is trash”.

Cash was originally in the portfolio to allow us to buy more stocks if there was a crash, but we now have better knowledge about using leverage, so prefer to go down this avenue if and when an opportunity arises.

The Best Investment Platform For This Portfolio

When we first announced this portfolio there was no way to invest in it with zero trading fees, but things have thankfully changed since then. InvestEngine, have since burst onto the scene and injected some much-needed competition, and better still they listen to their customers.

A few months back we reviewed InvestEngine and we collated a bunch of ETFs requests that you guys wanted to be included, and we’re thrilled to announce that InvestEngine have already made available many of these, including all the ETFs in our Ultimate Portfolio. Keep the requests coming guys!

With InvestEngine you can build a portfolio of fractional ETFs for FREE using their DIY service. That’s right, you can now invest in the Ultimate Portfolio with zero platform fees with InvestEngine. You just set the percentage allocation for each ETF, and you’re done! And rebalancing your portfolio is as simple as couple of clicks.

InvestEngine is the only free trading platform right now that is available to new customers that has all of the ETFs of the Ultimate Portfolio denominated in pounds sterling, making it the obvious choice for people wanting to follow our strategy.

If you want to give them a try, new users will receive a £50 welcome bonus if you use this link.

How Has The Ultimate Portfolio Performed?

Portfolio performance by ETF

Here is how each ETF has performed in each of the last 5 years and we’re really happy with those returns, with some massive profits coming from the developed world – both the large and the small caps.

The Emerging markets has disappointed this year so far and so has gold and silver, but remember this is a long-term strategy that is designed to capture growth wherever it happens in the world, and in the last year that growth was in the developed world. Precious metals’ poor performance was probably to be expected after an incredible 2020. In 2020 our gold ETF was up 20% and our silver ETF up 41%.

The beauty of a portfolio like this is that you don’t need to spend much time monitoring the portfolio and trying to second-guess the markets. So, we’re not going to analyse in any detail why the emerging markets has been doing poorly this year, but we know it’s driven by China.

According to the BBC, the slump comes after a series of crackdowns by Beijing on its technology and education industries.

Let’s now focus on the equity component of the portfolio and compare it to Vanguard’s FTSE All-World ETF (VWRL), which is a great benchmark for what an investor could get with zero effort.

Portfolio comparison to a benchmark World Tracker (VWRL)

The Ultimate Portfolio is neck and neck with the Vanguard ETF, with a slight underperformance in 2019, and 2021 ytd, but it performed better in 2020. The slight underperformance in 2019 and 2021 ytd is massively driven by the weak returns in the emerging markets. The largest position, the Invesco MSCI World ETF – which only holds developed world stocks despite the name – has beaten the Vanguard ETF for 4 consecutive years.

To be fair the allocation we have chosen is more forward looking, purposely weighted towards the Emerging Markets, but you don’t need to use the same percentage allocations as us. We think emerging markets and small cap stocks will do better over the long-term. If you don’t agree with us, no problem, simply adjust the allocation as you see fit.

Why This Portfolio?

There are so many great things about the portfolio: First, it’s super simple. There are just 3 equity ETFs and 2 further ETFs if you include gold and silver. This means it’s much easier to manage and keep track of, and if you’re not using a free trading app, then a small portfolio like this can save you a tonne in trading commissions. This simplicity also means you can easily change the allocation to whatever you want.

The portfolio does not mix and match index providers, with all 3 of the equity ETFs tracking MSCI indexes. This means we’re not crossing index providers and doubling up or omitting some stocks. This happens because each index provider categorises countries and market caps differently.

The Ultimate Portfolio is also super cheap (see table above). The OCF for the equity in our allocation is just 0.22% which coincidentally is the same as the Vanguard FTSE All-World ETF we looked at earlier. This OCF comes down a fair bit if you reduce the allocation to Small Caps, which the FTSE All-World ETF doesn’t have.

Better still, the Ultimate Portfolio has huge tax benefits that other portfolios don’t. The Invesco World ETF, which makes up the bulk of the portfolio, is synthetic. Synthetic ETFs avoid dividend withholding tax from a small number of countries such as the US. Index investors have been unforgiving when it comes to fees, and we think taxes should be treated with the same contempt.

The portfolio covers 99% of the market cap of the world and can be as passive as you like it to be. You can invest in this portfolio and forget about it and go and get on with your life while your money grows.

Or alternatively, you can use it as the core of your portfolio and bolt on any investments you want as satellites. Some people like government bonds, so could easily bolt on an ETF for this such as the iShares Global Government Bond ETF (SGLO), just like we have done with precious metals. If you want to add a thematic ETF, again, this is easily done! Likewise, if you think crypto is heading to the moon, then by all means invest in this also.

Alternatives If You Don’t Trust Synthetic ETFs

We think the distrust of synthetics is way overdone and stems from a lack of understanding. The synthetics we use do hold physical stocks, but swap the returns with investment banks for the returns of a specific index – in this case, the MSCI World index. At the end of the day, the ETF holds a basket of quality collateral. The Invesco ETF currently has Amazon, Intel, Google, Facebook, Berkshire, and so many more incredible stocks physically held behind the scenes.

Moreover, the SWAP counterparty risk is spread over multiple investment banks, which further reduces any risk. And finally, if you’re somebody who feels safety in numbers, then the Invesco ETF has you covered – the ETF has $3.2bn of assets under management.

If, however you still think there is excessive risk, then there are plenty of physical ETFs tracking the same index. One option is the HSBC MSCI World ETF (HMWO), which actually costs a little less at just 0.15%. Another is the iShares MSCI World ETF (SWDA) costing 0.20%.

Why We Pick Accumulation ETFs

Eagle eyed viewers may have noticed that the Ultimate Portfolio consists of accumulation ETFs, rather than distributing. This is done deliberately because we’re using an ISA and we will be reinvesting the income anyway. There is a slight cost advantage of using accumulation ETFs. If you have the income distributed and reinvest manually you have to pay the bid/offer spread each time.

If we weren’t using an ISA and were using a general account instead, we would probably go for distributing ETFs because it’s easier to differentiate between capital gains and income, which makes for less of a headache when calculating tax.

Your Questions Answered

Now we want to take some time to answer your questions about the portfolio from our previous video.

First question: “Is it worth setting up a portfolio like this if you already have a Vanguard portfolio and is it worth keeping both?” We personally would not be running too many portfolios. It’s pointless when they’re all doing similar things. All you’re doing is incurring more fees. It’s better for you to build the best portfolio you can and watch it like a hawk. I personally have this portfolio in my ISA and a different one in my SIPP.

The question is, “do we have alternative suggestions for the Invesco ETF because their investment platform doesn’t offer it.” They’re asking whether the Vanguard FTSE Developed World ETF will do.

We wouldn’t let the tail wag the dog. If you want to invest in this portfolio (or any for that matter) and your platform doesn’t offer the ETF or stock, then we would seriously consider changing platforms. Having said this, you shouldn’t pay over the odds to gain access to a specific investment. As we said earlier, we wouldn’t mix index providers because of the overlap or omission of stocks. FTSE is different to MSCI.

The question is, “do you feel this portfolio offers you enough exposure to the bond market and other commodities like agriculture, oil etc?” This portfolio has zero exposure to bonds and its only exposure to commodities (other than gold and silver) is through mining stocks that are part of the 3 equity ETFs. If you want exposure to something just bolt it on.

“For a beginner would you still recommend Vanguard and if so, what fun is best?” Top comedy award goes to the reply from Chris, advising the best fun is when you go to Disney Land.

Assuming the original question was a typo and really meant fund, we obviously think the funds in the Ultimate Portfolio are best. But having said this, we love Vanguard because they charge competitive prices across their entire fund range. If we were building an entirely Vanguard portfolio it would probably be 85% Vanguard FTSE Developed World (VHVG) and 15% Vanguard FTSE Emerging Markets (VFEG).

“What is the dividend yield of this portfolio?” As we’re in the building-wealth stage of our lives we focus on total return and not just the dividends. The Invesco ETF is synthetic and so there is no dividend, and the other ETFs are accumulation, so no yield for these either. In all cases, the dividend you would get is factored into the total return.

Jim says he “thinks the US exposure is a bit high”. We can totally see his point. The US market looks so expensive right now, but we think this is where the majority of the best companies in the world are, so want it to have enormous exposure to these. However, having said this, because we have slightly overweighted the Emerging Markets compared to a typical world index we’re not as heavy in the US as we might have been.

“Gold and Silver, if you can’t touch it you don’t own it. You can also hide physical from the tax man, even when you are dead.” Finished with a cheeky smile. Okay, so we don’t condone tax evasion but it’s a very good point regarding the precious metals. The argument is that paper gold and silver can easily be taken away from you by corrupt governments and other malevolent people.

The way we see it, because we’re investing relatively small sums into the gold and silver allocations of this portfolio, there is too much cost and hassle to own physical gold. Owning the physical might be something we consider when we’re genuinely rich. The paper metals in the portfolio are at least doing a job of protecting us somewhat against economic downturns.

What do you think of the Ultimate Portfolio? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: ESB Professional/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Retire 6 Years Earlier With Lifecycle Investing (Diversification Across Time)

Hi guys, we’ve got a really interesting post in store for you today. It’s about an investing concept put forward by two Yale professors that has changed our approach to investing and how we perceive our investment risk. We think it will do the same for you too. Every so often there is a ground-breaking development in the investment world that shakes the very foundations of what we think we know – this is one of those times.

Forget everything you’ve ever been told about portfolio diversification and the dangers of using leverage to invest. In their book called Lifecycle Investing they proved using stock data going back to 1871 that by employing leverage to gain more exposure to stocks when young, individuals can achieve better diversification across time, known as temporal diversification, or time diversification.

Time diversification you say. How about that? I bet you previously had only ever considered diversification as across different asset classes and number of shares.

The Yale professors show that buying stocks on margin when young combined with more conservative investments when older dwarfs the returns of standard investment strategies. The expected retirement wealth of a time-diversified strategy is 90% higher compared to target retirement funds (such as Vanguard’s) and 19% higher compared to 100% stock investments.

The expected gain would allow workers to retire almost six years earlier or extend their standard of living during retirement by 27 years.

In this post, we’re giving you an overview of the leveraged lifecycle investing strategy and how we are implementing our own modified version of it from the UK. Let’s check it out…

If you’re looking for the best investment platforms, we have hand-picked our favourites and put together a comprehensive cost comparison table here. Also check out the Money Unshackled Offers page to get free stocks worth up to £200 and cash welcome bonuses of £50.

Alternatively Watch The YouTube Video > > >

The Theory: What’s The Strategy All About?

In their early working years, people should invest on a leveraged basis in a diversified portfolio of stocks. Over time, they should decrease their leverage and ultimately become unleveraged as they get closer to retirement.

This idea is built on the most important lesson in finance: the value of diversification. It’s widely accepted by most – and is in fact the central message by us on this channel – that investors should diversify over many stocks and over geographies. We have always suggested broad diversification using index funds and ETFs.

What is missing is diversification over time. The problem for most investors is that they have too much invested late in their life and not enough early on.

Unless you somehow come into a lot of money early in life – perhaps through an inheritance – your risk exposure is likely to be very tilted towards the end of your working life. In practise this means that in your early years (20-40) you have relatively little money invested compared to what you will likely have in your investment account when retiring (60+).

The problem with this bog-standard investing life path is that market movements in those early years are largely irrelevant to your overall lifetime wealth as you have so little money invested. A 60% loss in your twenties, or however much it might be, may feel like a decisive blow at the time but based on your lifetime wealth it’s inconsequential. And then market movements later in life are significant because your investment pot is big.

To overcome this issue the Yale professors are telling people to buy stocks using leverage when young i.e. borrow to invest in stocks.

They make an excellent point that this is the typical pattern with property, where the young take out a mortgage and thus buy a house on margin. Over the course of their life, they then pay down the mortgage and therefore reduce leverage. They propose that people follow a similar model for equities.

Your goal is to control more of your lifetime target equity value as early on as possible. Let’s repeat that. Your goal is to control more of your lifetime target equity value as early on as possible.

How Much Leverage

If your portfolio was leveraged 20 to 1, as is sometimes done with property with 95% LTVs, the risk would be significant. The authors propose a much more sensible maximum leverage of 2:1 and are only proposing this amount of leverage at an early stage of life. This way, investors only face the increased risk of wiping out their current investments when they are still young and will have a chance to rebuild.

The authors also stated that the market needs to move 10% before you should worry about rebalancing. If the market rose, you should consider buying more to bring that leverage back to 2:1. If the market were to fall and therefore your leverage increased you should sell off positions to bring that leverage back to 2:1. We take issue with this last point which we’ll address shortly.

Suggested Lifetime Path

If you are destined to save 1 million dollars (or pounds in our case) over the course of your lifetime, and a 60/40 split between stocks and bonds suits you, then ideally you should have $600,000 worth of exposure to stocks and $400,000 exposure to bonds for your entire life. If we treat all of your future lifetime savings as a kind of bond, then your focus should be on maintaining $600,000 exposure to stocks.

The problem is that while you are young and have modest savings, you don’t even have $600,000 in savings. The authors’ answer to this is leverage.

However, because they recommend limiting leverage to 2:1, you still wouldn’t be achieving $600,000 of exposure to stocks for your whole life, but it would be closer than any other commonly-advised investing strategy.

For example, say a young investor can save $10,000 per year, he would use 2:1 leverage to bring his effective exposure to stocks to $20,000. The following year, he saves another $10,000, which brings his exposure to stocks to $40,000. $40,000 isn’t perfect but it’s closer to the required $600,000 exposure than the unleveraged position would be.

With this approach, your investing life has 3 phases:

(1) 2:1 leverage until stock exposure reaches the right level, or approximately the first 13 working years. Forget the common 60/40 asset allocation of stocks to bonds. This is a 200/0 allocation.

(2) gradual deleveraging, but still owning no bonds until your portfolio holds more than you need exposed to stocks, or approximately for the next 14 working years.

(3) holding a mix of stocks and bonds for your last 17 working years. You should have no leverage at this point.

How To Invest With Leverage

The authors don’t stop at a theoretical plan. They lay down a few different tools that investors have to achieve the required leverage:

(1) The first possibility and their preferred method is the use of deep-in-the-money call options. They recommend LEAP Options as these have expiration dates that are longer than one year away, and typically up to three years. However, these are very complicated, and in the UK they are not very common. None of the major investing platforms here offer Options but our understanding is that some smaller brokers do.

(2) Another possibility is to buy stock indexes using a margin account at somewhere like Interactive Brokers. This source of leverage is probably the most straightforward as you essentially build a portfolio with both your money and borrowed money from the broker, but the interest rate is likely to be higher than the alternatives.

(3) The next approach put forward is to buy S&P 500 futures, but the authors point out that due to the high minimum amounts required to start investing in futures this won’t be possible for most people. However, as we’re based in the UK, we can invest in futures using a spread betting account, which is illegal over in the US, so would not have been considered by the authors.

We are able to invest in S&P 500 futures for practically zero cost, tax-free, and with a low minimum investment. If you’ve not seen some of our spread betting videos/posts before they’re certainly worth checking out next, links here and here.

(4) The final approach is to use leveraged ETFs, but the authors are somewhat dismissive of these as they constantly reset their exposure on a daily basis. This constant resetting means they do not track the index over a long period of time. This could be to the investor’s advantage or disadvantage. We’ll probably do a video on leveraged ETFs at some point soon, so signup to the MU newsletter and/or subscribe on YouTube so you don’t miss it.

Our Main Criticism

While their ideas are built on sound logic and extensive data analysis, the thought of selling our positions as the market falls to bring the leverage back down to 2:1 runs contrary to good investing practice of buying low and selling high. In this case they’re suggesting buying high and selling low.

We fully understand the need to do this with their exact strategy because otherwise the volatility of the stock market will eventually cause you to get wiped out.

During the financial crisis of 2007 to 2009 the S&P 500 dropped by more than 50%. If you were 2:1 leveraged at the beginning and allowed the leverage amount to increase as markets tanked, you would have said goodbye to your entire investment pot.

Other People’s Objections

We’ve seen one argument that states that it is quite likely that someone loses their job at the same time as the stock market tanks. Crashes often coincide with increased unemployment, so we agree this is a possibility. This unfortunate set of circumstances causes them to sell some of their investments to live on at the same time that the value has been decimated.

We don’t recall if the authors dealt with emergency funds, but this seems like an easy solution to the problem outlined. Everyone should have investments earmarked for retiring and a separate pot of cash earmarked as an emergency fund.

Perhaps the main reason why this strategy can fail is due to human psychology. Imagine that your investment pot has been decimated. This leveraged strategy says you must get back on the horse and continue investing with 2:1 leverage with your future earnings. But in reality, it’s highly unlikely that the average investor would have the guts to do this as their experience knows only pain. How many people could remain rational in such circumstances? Far too many would sell everything and swear off stocks for life.

What We’re Doing

The notion of diversifying across time has changed how we invest, but we won’t be investing exactly in line with this strategy. We’ve never been averse to using a bit of leverage as our regular readers will know but after reading the book, we realised that we we’re significantly lacking in the leverage department. We now consider ourselves to be dangerously underleveraged!

What we’re doing as demonstrated in our spread betting videos is investing in the S&P 500, long-term treasury bonds, and gold using futures in a 60/30/10 allocation. The portfolio itself is using 3:1 leverage, so really, it’s a 180/90/30 allocation – theoretically less risky than a 200/0 stocks to bonds allocation as suggested by the authors, as bonds and gold should run oppositely to stocks in a market crash. This significantly reduces the risk of a wipe out. We won’t be selling in desperation if the market falls a little.

Based on our backtesting, which included troubled times such as the financial crisis of 2008, we would never have been wiped out – although this is no guarantee of the future.

With our asset allocation at 3x leverage – 180% stocks, 90% bonds, and 30% gold – our stocks are almost leveraged in line with the leveraged lifecycle strategy. The stocks provide the growth, while the bonds and gold provide the portfolio stability.

For total transparency neither of us will be leveraged 3:1 across our entire net worth. That is just the amount of leverage used within our spread betting accounts. Across my entire portfolio I will probably settle at no more than 2:1 leverage and then derisk as I age.

I’m building this up very slowly each month, so psychologically I won’t really know how I feel about being this leveraged until sometime in the future.

What do you think of being 2:1 leveraged in stocks while you’re young? Is our strategy better? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: kitti Suwanekkasit/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

A Deep-Dive Into Warren Buffett’s Portfolio!

Hey guys, in today’s post we’ll be looking at Warren Buffett’s portfolio. Warren Buffett through his company Berkshire Hathaway has consistently been one of world’s best investors. If we all want to become better investors it makes sense to listen to the very best, and perhaps we should take inspiration from what they invest in.

Over in the US, institutional investment managers with at least $100 million in assets under management are required to disclose their equity holdings on a quarterly basis. This is publicly available and can provide insights into what the smart money is doing in the market. Today, we’re going to reveal the portfolio and look at the big positions in a little more detail. Let’s check it out…

Want to make easy money for minimal effort? Check out our Guides to Matched Betting, a risk-free technique to profit from the free bets and incentives offered by bookmakers. It can make you £500+ every month for less than an hour a day of effort.

Alternatively Watch The YouTube Video > > >

Why You Should Care What Buffett Buys

Ordinary folks tend to buy index funds like the S&P 500 because they probably don’t have a stock picking edge. But Buffett is no mere mortal – Berkshire Hathaway has delivered investment gains that have left the S&P 500 in its dust. But don’t take our word for it. Let’s look at the actual numbers.

Each year when Buffett’s company issues the famous shareholder letter, we get to see exactly how Berkshire Hathaway has stacked up against the S&P 500.

Since 1965, the S&P has returned 10.2% annually. Buffett has returned 20% – almost double. This would be impressive over 5 years, but he’s been smashing the leading US shares index for almost 60 years. That’s a whole other level of awesomeness.

The true magnitude of that outperformance is not clear when we only look at annual returns, so let’s look at the overall gains. Make sure you’re sitting down for this because it’s unreal.

Overall gains from 1964 for the S&P 500 are 23,454%. Very impressive until you hear that Berkshire returned 2,810,526%.

If you had invested just $1,000 into the S&P 500 you would now have $236k. Had you invested that same $1,000 in Berkshire, you would have over $28m.

We think this nicely demonstrates the importance of getting high returns and not settling for anything mediocre. One way to match Buffett’s returns is to simply buy Berkshire Hathaway stock. Investors interested in buying into Warren Buffett’s Berkshire Hathaway have two options: Class A stock (BRK-A) and Class B stock (BRK-B).

The Class A shares have never experienced a stock split and are currently priced at $431,000 per share. The Class B shares, currently priced at $286, were created to allow ordinary shareholders to buy shares directly as the class A shares were clearly out of reach.

Today, apps like Stake (new customers get free stock here) allow you to buy in fractions anyway, so this might not be as big of a problem as it once was.

One big reason to buy Berkshire stock, rather than buying its holdings individually yourself, is that Berkshire owns numerous companies outright – meaning they’re not traded publicly, so you’ll never be able to replicate Berkshire in its entirety. But by concentrating on the individual public stocks, you may even do better! With that being said, let’s look at the portfolio.

#1 – Apple (AAPL)

Apple is by far the largest holding for Buffett, comprising 42% of the portfolio. Berkshire Hathaway owns approximately 907 million shares in the tech giant, worth $134 billion at the time of this video and is a stake of 5.5% of Apple.

Their shareholding is actually down from its peak as Buffett pocketed $11 billion by selling a small portion of their position, which Buffett later admitted was probably a mistake on his part.

Warren Buffett and Charlie Munger have spent just $36 billion to acquire their stake in the technology company from 2016 till 2018.

Buffett says that Apple has developed an ecosystem and level of brand loyalty that provides it with a competitive moat, and that consumers appear to have a degree of price insensitivity when it comes to the iPhone. While Buffett has famously avoided tech stocks, he has said that Apple is a consumer products company and that he understands consumer products businesses.

Apple’s revenue for 2021 is expected to be $366bn up from $275bn in 2020, and its net profit is expected to be $94bn up from $57bn.

Apple Revenue By Category

Its revenue by product category is highly concentrated towards iPhone sales with approximately half of revenue coming from this product. A positive trend is the growing services business, which includes the likes of Apple Music, the App Store, iCloud, and Apple Pay.

Although it would be remiss of us to not point out that Apple has taken some flak with its practices around the App Store and its payment system. Future revenues could be hurt by lawsuits. Just now, Apple has agreed to let developers of iPhone apps email their users about cheaper ways to pay for digital subscriptions and media by circumventing a commission system that generates billions of dollars annually for Apple.

#2 – Bank Of America (BAC)

In number 2 position is Bank of America, consisting of 13.6% of Buffett’s portfolio. Buffett owns more than 1 billion shares, which is a stake of 12.3% and is worth $43bn.

Buffett’s interest in this company began in 2011 when he helped solidify the firm’s finances following the 2008 economic collapse. Bank of America is the 2nd largest bank in the US and 8th largest in the world. Its 2021 revenues are forecast to be $88bn, up from $85.5bn in 2020, and its net profit is expected to be $28.1bn, up from $17.9bn.

A major signal in 2020 from Buffett showing his fondness for Bank of America was that he sold shares of nine different financial stocks, including big sales of JPMorgan Chase, Wells Fargo, and Goldman Sachs, while simultaneously buying more Bank of America.

#3 – American Express (AXP)

American Express is the second financial services company to make Buffett’s top five list, consisting of 7.9% of the portfolio. With 152m shares to his name – worth $25bn – Buffett has a 19.1% stake in the company.

Buffett first invested in the financial services company in 1964 through a former partnership. In 1963, American Express was in the middle of a serious scandal, but Buffett’s instincts were to ignore the temporary noise and use the unrest as an opportunity to invest in a great company. He purchased a 5% stake in American Express amid the scandal fallout, resulting in one of his early investment successes.

According to business insider, Berkshire first invested in American Express in 1994, and spent $1.3 billion to establish its current stake, meaning it has scored a roughly $25 billion unrealized gain in under 30 years.

American Express is a leading issuer of personal, small business, and corporate credit cards across the United States and around the world.

American Express is one of the few companies that issues cards and has a network to process card payments. Visa and Mastercard have processing networks but don’t issue cards. With multiproduct capabilities, American Express generates revenue from both interest-earning products and network processing transaction services.

American Express has built a strong brand that resonates with affluent customers – and therefore has an economic moat, which is probably why Buffett likes the stock so much. Although this data is a little dated, those who use American Express as their primary card spend the most per month on average — around $1,687. Meanwhile, those using Visa, Discover, and MasterCard as their primary cards spend less than half that amount — at $843, $737, and $639 per month on average, respectively.

#4 – Coca-Cola (KO)

In 4th position and making up 7% of the Berkshire Hathaway portfolio is Coca-Cola. Buffett holds 400m shares, valued at $22.2bn, which is a 9.3% stake in the beverage company.

Warren Buffett bought more than $1 billion in Coca-Cola (KO) shares in 1988, an amount that was then equivalent to 6.2% of the company. The purchase made it the single largest position in Buffett’s Berkshire Hathaway portfolio at the time.

Coca-Cola has an iconic name and global reach creating an economic moat around its business. Coke has an incredibly far-reaching distributor network and retail relationships that protect it from encroachment by competitors. No competitor is ever likely to appear and take away Coca-Cola’s market share.

According to the Motley Fool, since 1995 to 2019, Berkshire has earned about $7 billion from the dividends alone on the Coke investment. This far exceeds the purchase price of the shares, which only has a cost basis of $1.299bn.

While Buffett still characterizes Coca-Cola as a “very good business”, he admits that the consumer backlash against sugary sodas has put a dent in its armour.

During an interview on CNBC in 2018, Buffett said of Coca-Cola, “It doesn’t look as good as it did 5 or 10 years ago.” Nevertheless, Buffett says it has the best distribution system in the world, which should serve the company well as it expands into energy drinks and comes up with new products. In 2019 they acquired Costa Coffee for $4.9bn.

Coca-Cola has incredible operating margins at 26%. According to Stockopedia this is ranked highly in both the wider market and the Beverages market.

You can probably see why Coke is so profitable. They mix a bit of sugar with carbonated water and you end up with a great product that doesn’t need to have billions of dollars spent on development each year.

#5- Kraft Heinz (KHC)

Another giant company. The Kraft Heinz Company is the third-largest food and beverage company in North America and the fifth-largest food and beverage company in the world, with eight $1 billion+ brands.

The company has experienced troubles in recent years, with the share price plummeting from a high of over $96 in Feb 2017 to just $20 in March 2020.

According to CNN, Investors are growing concerned that the company focused too much on cost cutting following the 2015 merger of Kraft and Heinz and not enough on finding new, innovative food products that younger consumers would actually want to buy and eat. The share price has rebounded somewhat but does the lower share price provide a good buying opportunity?

Despite the troubles, Buffett still seems to maintain faith in the company, holding 326m shares of Kraft Heinz, worth $11.7bn. This puts Kraft Heinz as number five in Berkshire’s portfolio, consisting of 3.7%, and a huge ownership stake of Kraft Heinz at 26.6% of the company.

Kraft Heinz might appeal to dividend investors as the company is currently yielding 4.4% and with forecast net profit expected to exceed $3bn per year over the next 2 years, the dividend looks well covered at 1.68 times.

Everything Else

The top 5 stocks make up around 75% of the portfolio. Think about that. Just five stocks make up the vast majority of Buffett’s public portfolio. He’s made it so simple to copy him, and hopefully, his performance.

Buffett's Full Public Portfolio

There are another 41 stocks as seen here that make up the rest. Some of the positions are so small (relatively speaking of course), you have to wonder why Buffett even bothers with them as they will make little impact on overall returns.

What do you think of Buffett’s portfolio and will Berkshire Hathaway be outperforming the S&P 500 over the next decade? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: New Africa/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Step-By-Step Guide To Our Spread Betting Futures Strategy With CMC Markets

Hey guys, we recently created a blog post and video showing how we’re using spread betting to invest in a portfolio of financial futures with 3x leverage, so that in theory we make killer tax-free returns over the long-term.

Our strategy essentially applies all the basics of long-term index investing that we know historically has produced an 11% return and leverages the portfolio to maximise our profits – theoretically making 33% annually less any financing costs.

The response to that first video has been amazing, with so many of you pleading for a step-by-step guide to our spread betting strategy. Well, we don’t like to disappoint, so in this post we’re thrilled to be sharing with you exactly how we’re spread betting with financial futures.

There are several spread betting platforms you could use but we’ll be using CMC Markets to demonstrate exactly what we’re doing. Throughout this guide we’ll be using the term “bet” as this is the industry language, but this is really a misnomer for our strategy as we’re actually making an investment.

If spread betting isn’t for you but you still want to invest in indexes the good old-fashioned way, on our site we have handpicked our favourite investment platforms, linked here. Plus, don’t forget to grab your free stocks, which can be found on the Money Unshackled offers page, linked here.

Alternatively Watch The YouTube Video > > >

Let’s kick off by highlighting the dangers of spread betting. As per the warning on CMC Markets’ website: Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Honestly, we think most people lose because they haven’t got the foggiest what they’re doing. Even with the help of this guide we don’t think any novice investor should be doing what we’re about to show but if you understand the risks and want to make big potential profits let’s dive right in.

Step 1 – Decide What You’re Investing In

We’re building a portfolio that is weighted 60% S&P 500, 30% US Treasury Bonds, and 10% Gold. In the last post we discussed why we’re doing this; in short, this will significantly reduce volatility compared to a leveraged 100% S&P 500 portfolio. This is super important as volatility is the enemy when using leverage.

If you’ve not seen the first spread betting post, linked here, you might want to read that next as it will explain the reasons why we’re doing all this in more detail.

Our method of spread betting disregards most of the available instruments on spread betting platforms, most of which are more suited to day trading and have high fees. The 3 instruments we are investing in are amongst the few that are suitable for long-term leveraged investing, due to their incredibly low spreads, and because they are futures there are no overnight fees, common on other spread betting instruments.

Step 2 – Choose Your Platform

The next thing you guys will want to do is to choose your spread betting platform. You want to make sure that they at least offer each of the instruments that we’ll be investing in; equity index futures, bond futures, and commodity futures, or more precisely the S&P 500, US Treasury Bonds, and Gold.

You’ll also want to make sure that the spreads are super tight. Each instrument will have different size spreads, so comparing platforms can be extremely difficult.

Unlike an ISA you can have as many spread betting accounts as you like, so if you later change your mind, it’s no problem.

And lastly, you’ll want to make sure that the margin required for each instrument is as low as possible. For example, most platforms will give you 5% margin for S&P 500 futures. This means you can take out a position 20x bigger than the amount of cash you deposited. For US treasuries CMC Markets will offer 3.34% or 30x leverage, whereas many other platforms only offer 20% or 5x leverage.

We did not scour the entire market in meticulous detail but from the research we did carry out we found CMC Markets to provide the best service and the lowest costs for what we need.

Step 3 – Calculate How Much To Bet

With normal investing you can simply key in the amount of money you want to invest, and it will buy the required number of shares automatically. However, with spread betting you need to place a bet per point movement – you’ll then need to work out what notional value or exposure this is.

Unlike other spread betting brokers we’ve used, CMC helpfully displays this in the order ticket, so you can use trial and error to calculate the right bet size if that makes it easier for you, but we think it’s important to understand the mechanics of what is going on.

CMC bet size examples

In this example, we’re placing a bet of £0.20 per point on the S&P 500. The value of the point is indicated by the last large number on the order ticket– so in this case it’s the first decimal place. This is not intuitive at all but unfortunately that’s the way it is. This bet has a notional value of £8,947.

The maths is as follows:

Take your bet of £0.20 and divide by 0.1. Remember 0.1 is the value of each point for this instrument. Then multiply it by the value of the index. Currently the S&P 500 is 4,473.68, so we get a notional value of £8,947.

This is quite complicated so let’s look at doing the same for US Treasury Bonds. In this case let’s place a bet of £0.30 per point. The last large number is to two decimal places, so we divide £0.30 by 0.01. Then you multiply this by the instruments value, which is currently 165.783. This gives a notional value of £4,973.

We might as well go for the hat-trick and show gold as well. Here we’ve got a bet of £0.50 on gold. The last large number is a whole number, so we take £0.50 divide by 1 and multiply by 1,803.35, which is the current price of gold. This gives us a notional value of £902.

A challenge with our spread betting strategy is building a diversified portfolio because of the relatively high minimum bets. On CMC Markets, the minimum bets are:

  • S&P 500 – £0.10 per point, which is currently a notional value of £4,475.
  • US T-Bond – £0.10 per point, which is currently a notional value of £1,657.
  • Gold – £0.50 per point, which is currently a notional value of £903.

Remember these figures don’t represent the amount of cash you need to deposit, because we’re going to get to these large amounts using leverage.

You can see the minimum bet size and notional values for yourself for any instrument on CMC by opening an order ticket for the relevant instrument and keying in the number 0 into the £/pt box and hitting enter. It will default to the lowest allowed bet size, which is a neat little trick.

We’ve created an excel spreadsheet that will help you work out the right asset allocation, linked here. To make it as simple as possible the only cells you should change are those highlighted in yellow.

Allocation in spreadsheet

You can keep changing the size of the bet for each instrument until you get the right allocation. If your leveraged pot is less than £9,000 (so £3,000 of your own money if you’re using 3x leverage) you might struggle to get the exact target allocation. In this example we’ve got it close enough. The more you invest the less of an issue this becomes.

Step 4 – Deposit Some Money

You now need to fund your account, and this could not be any easier. Click the big blue button at the top that says ‘Add funds’ and follow the prompts. Deposit by card and the funds will be available in an instant.

To reiterate in case you’re not absolutely clear yet, this cash will sit in your account as collateral, and won’t physically be used to “buy” any investments with. You can place bets more or less regardless of how much cash collateral you have on account, but to do it as per our strategy you will want to calculate the correct cash amounts for your bets.

With a £8k to £9k notional position being about the smallest amount needed for our portfolio allocation you’ll need to deposit just £3k of cash to be around 3x leveraged.

Step 5 – Place Your Bets

Auto Roll-Over setting

Before placing your first investment first check the order settings for futures are set to automatically roll your contracts onto the next quarter, otherwise they’ll get closed out. We’re investing for the long-term, not just one quarter. It should be set to Auto Roll-Over’ by default but to check go to ‘Settings’ and then ‘Order Settings’. Make sure ‘Forwards Settlement Behaviour’ is set to Auto Roll-Over.

To place your bet you need to open up an order ticket for each instrument. You can do this by clicking products, then selecting whichever one you want. We’ll click ‘Indices’ and then search for SPX 500. For some reason when spread betting the index is often called ‘SPX’, ‘US 500’ or ‘USA 500’.

SPX 500 search list

Notice that one of the search results is a cash bet – we don’t want that. We’re investing in futures – in this case the September contract. Whenever you’re placing your bet, the contract will be dated for an upcoming month, so the fact we’re buying the September contract isn’t important. Click on the ‘Buy’ price and this will open the order ticket.

Order ticket

Double check the name in the ticket is the right instrument, and if you’re happy enter your bet amount. Make sure ‘Market’ order is selected, and then click ‘Place Buy Market Order’. A warning message should appear. Click ‘Place Buy Market Order’ again to complete. You can then repeat this exact same process for T-bonds and gold.

Positions

You can view your open positions by clicking on ‘Account’ near the top and then ‘Positions’. Here you’ll be able to see the stakes you have bet, the notional value at the time of placing the bet, your minimum margin requirement, and your unrealised profit. Each time a futures contract is rolled over, or whenever you sell and rebuy, this profit or loss will be realised, so rather than show as profit here it will instead be reflected in your cash position.

Step 6 – Record What You’ve Just Done & Monitor Leverage

We like to keep a transaction log of what money we’ve deposited, our profit, and the amount of leverage we’re using. You’ll find this in the same Excel file we mentioned earlier, linked to here.

Each month, we intend to invest new money but even if for whatever reason we don’t, we will record something on this log because as a minimum we want to monitor our use of leverage. If the leverage falls below our intended amount (in our case 3x) due to market movements, we will place more bets to bring that leverage back in line. We are probably happy to allow leverage to hover between 2.5x and 3.0x.

Instructions in how to complete this log can be found within the spreadsheet.

Step 7 – Invest Monthly (Optional)

We’re using the same principles with spread betting as if we were buying ETFs. By this, we mean we’re not trying to time the market and instead we’re just regularly investing into our portfolios.

Earlier we mentioned that you would need about £3k to start. If you were to bet the minimum each month you technically would need £3k every month. Most people obviously don’t have this kind of money on an ongoing basis, but we have a little workaround.

Close ticket

All you need to do is close your existing position by clicking the cross next to the instrument in the ‘Positions’ window, and then click ‘Close Buy Position’ from the order ticket that pops up. Once closed, you can then place a new buy order. By doing this you rebuy whatever you just sold plus a little extra. The spreads on these instruments are so thin that this workaround will only cost you a few pence each time you do it.

As your portfolio grows in value you might not even need to do this workaround as new bets placed will begin to have a smaller and smaller impact on the overall allocation. For instance, rather than having to buy all 3 instruments each month in the 60/30/10 allocation you might only have to top up gold for example, which only needs a few hundred quid.

Final Points

That’s all the steps you need to get started spread betting using our long-term leveraged index strategy, and we hope you found this post useful.

Do bear in mind that this strategy is extremely risky because of the amount of leverage we’re using. If you want to implement it yourself but with less risk, you can scale back the amount of leverage used to maybe 2x or less, or allocate even more to bonds than stocks for example.

What do you think of using leverage? Are the scare stories worth listening to or are they overdone? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: Andrey_Popov/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Runaway Inflation – Will The ‘New Normal’ Ravage Your Portfolio

Since 2008, major central banks have pumped over $25 trillion into the global economy, with over $9 trillion in response to Covid-19 alone. Around half of that has come from an America that is addicted to money printing, doubling their magic money tree from $4trn to $8trn during the pandemic.

These are astonishingly huge sums. The thinking goes that all that extra money sloshing around, along with record low interest rates, may have already pushed stocks to unsustainable highs. But is this the calm before the storm?

The UK consumer price index, which measures the cost of a typical basket of goods and services, flew up from 2% in July to 3.2% in August, and it’s forecasted to keep climbing.

In America, the Biden money-printing could “set off inflationary pressures of a kind we have not seen in a generation,” wrote a prominent figure in Biden’s own party. Bank of America estimates that the U.S. government will have spent $879m every hour in 2021. The results could be devastating.

The shut-down of the global economy and subsequent policy responses have us teetering on the brink of a period of runaway inflation. Whether or not it happens will depend on the competency of Western politicians to fight it – the same politicians, incidentally, who got us into this mess in the first place.

So, assuming they cock it up, what impact will runaway inflation have on your investments and home finances? Let’s check it out…

And the end of the article we cover the best investments to defend against runaway inflation, along with the best places to buy them. Offers for all of these investing platforms are available on the Money Unshackled Offers page.

Alternatively Watch The YouTube Video > > >

Panic In The UK

There are lots of reasons to be startled by the latest inflation figures. A CPI of 3.2% in August not only puts it at the highest level in nearly a decade, but the month-on-month change from July to August is the biggest increase since the CPI was introduced as a measure of prices in 1997.

That’s high, but fine if it’s a temporary thing. We know the world has gone mental recently, and crazy economic statistics are becoming the norm in 2021.

But what if it’s not temporary? There are still inflationary pressures heading down the tracks, including a massive shortage of truck drivers set to result in food shortages and increased prices over winter. There’s even talk of Christmas dinner being cancelled for all but the wealthiest of families due to the shortages. All this continuing pressure on prices may cause high inflation to become “sticky” – meaning it hangs around for the long-term.

It’s now looking like the best outcome would be inflation rising to just 4% by the end of 2021. And that’s double the target rate of inflation desired by the UK’s central bank.

Across the board, prices are rising far faster than usual. In the past few months, the wholesale price of electricity in the UK has almost quadrupled from £40 to £160 per Mwh, spiking in the past fortnight to the highest level on record.

It is widely predicted that due to a shortage of gas and greater reliance on expensive green energy that we are facing further sharp increases in both electricity and gas bills in the coming months.

The Bank of England warned earlier this year about a “nasty surprise” coming our way. They’re right to be worried. An inflationary spiral, where prices rise ever higher, is what inflamed the economic instability and high unemployment in the 1970s, an ordeal which took many years, if not decades, to recover from.

House Prices Through The Roof!

The CPI measure of inflation doesn’t include the cost of buying homes. If it did, we would see a far higher figure for inflation.

The latest house price inflation data runs to July 2021, and shows house prices up a massive 8% annually, reported as a good thing by the press because that’s down from an even higher 13% in June.

“Ah, but this is due to the meddling of the UK government in temporarily relaxing stamp duty”, I hear you say. But that’s not the whole story.

Over in America, the median sale price of a home rose 22.9% in the year from June 2020 to June 2021, smashing all records. And this obviously has nothing to do with relaxing stamp duty in the UK.

The so called ‘new normal’ of home working, combined with low interest rates, has massively increased the demand for homes.

Where before 3 or 4 people would be content in a house share, they all now want their own space. But new houses are not being built fast enough.

These same economic forces are at play in the UK. House prices are creeping up, and up, and up, stamp duty holiday or not.

Is Inflation Good Or Bad For Investors?

Inflation means the prices of things go up… so good if you own assets… right? Well, inflation typically refers to the price of consumer goods, not investment assets, and is in fact one of the main reasons you need to invest – to try and beat inflation. A higher rate of inflation makes that task more difficult.

There is inflation itself; and then there is the government response to it.

If inflation gets too high, governments will try to squash it back down. This could include raising interest rates or cutting back on the money printing… or both. Doing either is bad for investors.

Increased Interest Rate

Increased interest rates are bad for leveraged investors, such as landlords with mortgaged properties, because their loan interest costs go up, and there are fewer people in the market who are able to afford to take on debt to buy your assets from you, reducing their market prices.

Increased interest rates are bad for owners of stocks too, because the businesses they are invested in have increased costs of borrowing, reducing profits, and with them, dividends and stock prices.

Cutting QE

It’s widely accepted that ridiculous levels of quantitative easing are responsible for record high prices in the stock and other asset markets.

Pumping cash into the economy makes cash less attractive, and pushes up the prices of assets like stocks, bonds, property, gold, crypto, and so on.

To fight inflation, central banks could claw back some of their money printing. When they magic money from thin air, central banks like the Fed typically lend it to the government in return for government bonds. In 2019, the Fed was selling down their holdings of these securities, reducing the amount of cash in the economy. They would need to try doing something similar now if inflation got out of hand.

Taking cash out of the economy would make cash more attractive again, moving money out of stocks and other investments and reducing their market prices.

High Inflation Impact On Stocks

High inflation itself also drives down the profitability and growth potential of companies, and hence share prices. Fewer customers can afford to buy products, and the costs of materials and labour go up.

And if inflation suddenly goes from 2% to, say, 4% very quickly, investors will want a higher return to compensate. The stock market will likely drop as a result to give investors that extra value.

Is Inflation Ever Good For Stocks?

Inflation is not all bad. Some inflation can be beneficial. Mild inflation is generally good, because it’s a sign the economy is growing, and businesses can raise prices.

“When examining S&P 500 returns by decade and adjusting for inflation, the results show the highest real returns occur when inflation is 2% to 3%,” says Investopedia. That’s about where we are now. So, a modest amount of inflation is in fact a good thing.

High Inflation Impact On Investment Property

We’ve mentioned how a government response to inflation could push up interest rates, putting the boot into the ribs of hard-pressed property investors and homeowners alike.

But the run-up period of inflation before this will likely send your properties’ prices soaring.

As an owner of multiple properties, I’ve been rather enjoying the recent double-digit inflation in the housing market. But it must be a bitter pill to swallow for new investors.

This initial inflationary boost to your equity may provide a cushion that helps to counteract any negative fallout if interest rates do go up.

Savers May Be Glad… At First

Savers may initially rejoice at a raising of interest rates, as they watch their high street savings account go from a 0.5% rate of interest to perhaps a 2% rate of interest.

That joy will turn to ash though when they realise that inflation in the shops has gone up by more than this, meaning their actual real returns are EVEN MORE negative than they were before. No matter how high inflation gets, central banks can only increase interest a LITTLE, or risk collapsing the economy.

Presumably cash savers are 100% reliant on their job for their income too, as opposed to investors who may own passive income generating assets.

We are all familiar with the pathetic 1% annual pay rises in the UK. When inflation is 5%+, but wages are stagnant, how will cash savers be able to keep building their wealth?

High Inflation Impact On Bonds

Holders of fixed income securities like bonds do poorly in a high inflation environment, because that fixed income has less and less purchasing power, driving down the price of bonds. Higher interest rates on newly issued bonds drives down the value of existing bonds as their lower coupons are less attractive.

How To Defend Against Rampant Inflation

So, stocks overall do poorly in a high inflation world, as do bonds, as does cash, as does property. So where exactly can we store some of our wealth to help defend against runaway inflation?

Many investors, including us, believe gold offers protection from long-term inflation. Gold is a store of value: its supply is limited, unlike cash which can be magicked in and out of existence.

Also, its history doesn’t lie. We see below how the gold price shot up in response to inflation in the 1970s, then loosely tracked it. In 2008 there was a massive correction in gold’s favour when people lost all faith in cash following the 2008 crisis and the resultant quantitative easing. During the pandemic, gold has shot up again when the banks once more fired up the printing presses, ahead of the inevitable inflation wave that is now hitting us.

We buy gold through the iShares Physical Gold ETC, and it’s free to trade on platforms like Freetrade, Trading 212 and InvestEngine. If you buy your gold through any of these platforms, new customers will get free shares worth up to £200 or a £50 welcome bonus.

Cryptocurrencies like Bitcoin, in theory, should do the same job as gold. They have similar qualities to gold in that there is a limited supply, and they are beyond the reach of meddling central bankers. But unlike gold, we can’t prove this hunch with a nice historical graph because, well, there is no history!

New users to Coinbase, one of the most popular crypto trading platforms, will get some free Bitcoin when you sign up using this offer link.

You can also hedge against rampant inflation by investing in certain stocks that benefit, or at least are not disadvantaged, by a high interest, high inflation environment.

These include:

  • banks like HSBC and Lloyds (who love it when interest rates on their loans can go up);
  • big blue-chip stocks like Coca Cola that sell everyday essential products and have little in the way of debt;
  • quality high-dividend stocks like British American Tobacco, who have a history of growing their dividend in real terms.

Grab a free trial subscription to Stockopedia here to get a full analysis of these stocks, and thousands more. The link also gets you a 25% discount on a paid subscription.

Are you worried about runaway inflation? Or are you upbeat about the economy? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Brian A Jackson/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

Saving A House Deposit Or Building Your Investment Portfolio: Which Comes First?

Getting onto the housing ladder is becoming increasingly difficult. In fact, latest figures show only 50% of all 35-44 year olds had a mortgage, down significantly from 68% in 1997. When this dataset is next updated by the ONS, the decline will no doubt be even worse.

At the same time, people in their 20s and 30s are becoming more aware than ever of the importance of investing for their futures.

Unfortunately, the state pension is unlikely to exist in its current form for them, and gone are the days of final salary pensions. If you’re not investing from a young age, your future is looking grim.

Investing and home ownership are both worthy financial challenges to tackle, but the 2 goals are conflicting. How can you save up for a house deposit, AND invest adequately for your future?

Which target should you prioritise first? The roof over your head, or avoiding a miserable retirement?

Today we’re going to try to solve this problem facing the majority of young people, on which goal to tackle first from a financial perspective. Should you save for a house or invest in the stock market?

And if you’ve already saved up for a home, has the missed opportunity of many extra years of compounding investment returns done irreparable damage to your investing potential?

If you’re new to investing and want the professionals to manage your money, a great option for hands-off investors is to open a Stocks & Shares ISA with Nutmeg. They also offer Lifetime ISAs to help with saving for a house deposit.

New customers who use this special link will also get the first 6 months with ZERO management fees. If you’d rather manage your investments yourself, check out our hand-picked range of ‘do-it-yourself’ Stocks & Shares ISAs, here.

Alternatively Watch The YouTube Video > > >

A Growing Problem

The dilemma facing young people about whether they should start investing or save for a house deposit is getting more obvious with each passing year.

Firstly, investing is now more accessible than ever. You can now invest on many platforms without fees, and with minimum investments as little as £1. Information about the stock market is plentiful, is easily accessible and is free on places like YouTube.

Investing has been made omnipresent and accessible to the point that anyone can pick up a phone and buy some stocks.

This openness has removed a barrier that previously would have stopped most people from even considering investing, and made young savers think that maybe they should be abandoning the decades long attempt to build a house deposit and build a financial future through stocks instead.

However, at the same time, the prospect of ever owning a house is receding into the distance. House prices have gone up by an average of 5.2% over the last 20 years.

Why is this a problem? Because that is MUCH higher than wage inflation, which has averaged just 2.8% a year over the last 20 years. Incomes are not keeping up with the rate that house prices are increasing.

While you’re saving, house prices are going up in real terms. So more and more it feels like if you don’t try and buy a house right now, you’ll never get a better chance.

Why Not Do Both? Couldn’t You Whack Your House Deposit In The Stock Market?

Seems reasonable right? You’ve got a lump sum of cash just sat there idling in the bank while it slowly gets added to from your saved wages. Why not take it out, invest it, and get to your goal quicker?

Many people do this, and there are certainly success stories – but the same can be said of people who put it all on black on the roulette wheel.

The stock market can go up as well as down in the short to medium term, so we would not advise anyone to put their house deposit into the stock market unless you don’t plan to buy a home for at least 5 years, and preferably longer.

Otherwise, there’s a good chance you could have lost money on your house deposit at the point when it’s needed. It’s therefore usually best to keep the 2 goals separate.

3 Reasons To Save For The House Deposit First

#1 – A House Can Be An Investment

Your home is not an investment in the traditional sense of the word – a house costs the owner a fortune to maintain, and any capital growth can’t easily be accessed unless you decide to sell up and live on the streets.

But there ARE ways you can make the house turn a profit, by charging other people for the use of your assets.

The usual thing to do is to get a live-in lodger or two, or do Airbnb. A couple of lodgers paying rent could easily cover the cost of your mortgage and eliminate your biggest cost of living – a great investment.

But you can also rent out your driveway for day commuters; let someone park a mobile home or trailer on your land; or lease out your garage, attic, and spare room for storage space.

A house can also be a great investment if you geo-arbitrage it. This is when you intend to sell up the house in the future and move to a less expensive area.

Maybe you’ve managed to get on the housing ladder in London and can afford it due to your high London banker’s salary, but could see yourself retiring to Yorkshire. You might one day liquidate a £1m townhouse to buy an equivalent sized semi in Leeds for £300k.

#2 – The Emotional/Cultural Need

For most people in this country, home ownership is a defining feature of whether or not you’re a proper adult. This is an aspect of British culture, where 63% own their homes. This is down from 71% in 2004, when buying a house was much easier.

On the continent they are not as fussed as we are about this. The Germans and Austrians quite like to rent, with only 51% and 55% respectively owning homes. The Swiss care even less about home equity, with just a 42% rate of home ownership.

On this channel we don’t think whether you own a home or not defines you as an adult – having an investment portfolio and choosing to rent is just as valid a life-choice. Nor do we buy into the myth that renting is dead money: check out this article next on the merits of buying vs those of renting.

But if you’d sleep better at night by keeping up with the Joneses, then buying your home first is the right choice for you.

#3 – Investment Returns Don’t Matter So Much Initially

If you’ve got 2 or 3 grand and you’re stressing about where to put it… don’t. Your investing returns are likely to be miniscule in terms of pounds and pence, compared to what you’ll be able to make one day when your pot is much larger.

When you’ve got a decent sized house deposit built up, this might be a different story. If you’re enjoying this content, give us a big like to let the YouTube algorithm know that this video rocks! You can also show us some appreciation with the new Super Thanks button below.

1 Big Reason To Focus On Investing: The Compounding Boost Is Insane

First-time buyers now need an average of £59,000 to get on the property ladder, a 2021 report by Halifax bank has revealed.

That’s up £12,000 from the previous year. This is the national average: in London, first time buyers need an average deposit of £133,000!

Those numbers are huge, and represent many years of saving hard. How many years? A lot. ONS data tells us that of people between the age of 22 and 29 years, about 40% have not yet managed to save anything at all, while around 10% have savings of between £2,000 and £3,000. Only around 25% have saved more than £6,000.

And £6,000 is the also average savings for people aged between 35 and 44. Clearly saving for a house deposit is now a decades long task for most people.

These are decades that you can’t afford to be wasting sitting out of the stock market. Let’s assume money flows naturally to you, and it takes you only 10 years to save for a house deposit, from age 20 to age 30. You save £6,000 a year towards a £60,000 deposit.

Example 1 – Buy House First (Save During 20s)

Here’s how much money you could have when you retire at age 60 if you only started investing into the stock market at age 30, once you’d sorted the house deposit. Keeping it simple we’ll assume you continue to be able to invest £6k a year, or £500 a month, at 6% after-inflation returns. This gives you £500k at retirement, enough to draw an income from.

Example 2 – Invest Instead & Never Buy A House

Now here’s what happens if you choose never to buy a house, and you’d been able to start investing in the stock market from age 20, with an extra 10 years of compounding: you retire with £1m at age 60. The money you had put away in your 20s accounts for HALF of your ENTIRE retirement wealth. That’s the power of compounding over time.

Example 3 – Invest First (Invest During 20s, Save For House During 30s)

If you instead decided to delay buying your first home until you were 40, what effect would that have on your investment pot? Well, you’d be able to invest for that important first decade, which following on with our example provides £494k of after-inflation net worth to your retirement funds.

You then take a decade off from investing between age 30 and 40 to save for a house deposit. Your initial investments are cooking away merrily during this time.

Bear in mind that your required house deposit will likely be higher by then. If houses increase in value by 3% above inflation annually over 10 years, your required house deposit would move from an average £59,000 to £80,000 in REAL terms; a third higher. And a higher house price likely means higher mortgage payments and a reduced ability to invest.

Then you resume investing at age 40, and are able to build up to a further £231k over the next 20 years from your contributions plus growth. This assumes your mortgage repayments didn’t increase.

This amount takes you twice as long to attain, for half the end value of the money you invested in your 20s, again demonstrating the importance of investing early in life. You could end up with £725k, much higher than the £500k you would have got by saving for a house first. But even though your investments are larger, you’d still have a small outstanding mortgage at age 60.

But It’s Good To Own Property, Right?

Unless you’re planning to access the equity in your home by moving to a cheaper city or downsizing later in life – most people don’t – the growth in your house’s market value doesn’t really matter for your finances. Only the size of your initial deposit matters.

You’ll always need a roof over your head – you can sell your house for more, but your next house will cost more too as a result of the whole property market going up together.

Our Preferred Order

Before you set money aside each month for your house deposit, earmark some for investing on a small scale. If you can afford to save £500 each month in total, maybe you just invest £100 of that.

The goal is to learn while the stakes are low, with a large enough amount for you to care about how the investments perform, but not enough to get in the way of your other objectives.

You should always have an investment account even if it only holds a few hundred quid, so you can spend your formative years figuring out the stock market. Like anything worth doing, investing takes experience and time to perfect.

Ramping up your commitment to investing earlier means you get to experiment and make mistakes while your pot is small and it matters less. Once you’re older with a family, a mortgage, and responsibilities, you’ll be too scared to start once you have more to lose.

With your remaining savings you can save for the house deposit if that goal is on your dream-list. When the house is bought, every spare bit of cash you have should be going into building your investments. Nobody cares more than you do about your retirement, least of all the government. Your future finances have to be YOUR priority.

Which do you think should take priority – saving for a house, or building a freedom fund? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Dean Clarke/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday: