Are Your Investments Protected If The Investment Platform Fails?

If we forget the performance of our investments for just one moment, and instead let’s look at how safe your stock market investments are, should the investment platform or fund fail.

The first question we need to ask is are our investments protected at all if the investment platform fails?

There no point making an absolute killing on your investment if you would lose the lot should the investment platform go bust.

Many of you reading will either have or will have massive investments pots. If you’re anything like us and hoping to achieve financial freedom, then you will be building up an enormous investment pot that will generate you an income while you enjoy life – the way life is meant to be! You’ll never enjoy it fully if you are always worried about losing it.

You might not have put much thought into how safe your investments are because you may have assumed that the UK government wouldn’t abandon you if the investment platform did go bust. Surely, they wouldn’t?

Or perhaps you know that your investment pot is below the FSCS limit and therefore you think you’re safe. Well… it’s not that simple!

We’re not financial advisors – just investors! – but we did carry out a lot of research to corroborate all of the points in this video. It would be worthwhile doing your own due diligence before applying this info to your own portfolio, but everything we do say is believed to be accurate at the time of writing.

This article is about protection for stock market investment platforms – Peer to Peer Lending is not covered by these rules.

Editor’s note: Investment platforms are giving away free stuff! Open a new investment account on any of the many platforms listed on the Offers page, and scoop up freebies including cash back of up to £100, free stocks worth up to £200, or management fees cancelled on your portfolio!

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Financial Service Compensation Scheme (FSCS)

The FSCS is the protection scheme that will likely save your bacon should your investment platform or fund go bust. It’s essentially a completely free insurance policy as it’s funded by the financial service industry.

Actually, its not really free because it’s funded by levies on authorised firms and they will of course pass those costs on to their customers via their fees. So, you indirectly pay for this protection.

Taken straight from the FSCS website, the FSCS exists to protect customers of financial services firms that have failed. If the company you’ve been dealing with has failed and can’t pay claims against it, they can step in to pay compensation.

In 2008 they recovered £20 billion, so based on that history we can consider it to be reliable protection.

The FSCS scheme is meant to protect your investments up to £85,000 if the platform fails - note that it doesn't cover P2P platforms

The First Thing You Need To Do

Before making any investment, you need to check that your investment provider or adviser is authorised by the Prudential Regulation Authority or the Financial Conduct Authority to carry out the type of regulated activity that FSCS can protect.

How Do You Check?

If you’re going with a well-known company like Interactive Investor you can just assume it is, but to check it’s very straight forward and it’s better to be safe than sorry. Every company that is regulated will say it somewhere on their site but obviously don’t trust that because any company that is hoping to defraud you would pretend to be.

To check properly yourself you need to find their FCA’s reference number. If we use Interactive Investor as an example, they publish their FCA number on their Disclosures page – a page only people as sad as us would care to visit.

Take that number and bang it into the FCA’s site to check yourself, and boom! – there you have it. This is a firm that has been given permission to provide regulated products and services.

Companies like Freetrade tend to be very transparent about their authorised status and protection. Freetrade have a dedicated page detailing this and even link straight to the FCA’s page:

How Much is Protected by the FSCS?

Your investments are protected up to £85,000 per eligible person, per firm. This seems like a paltry amount, but this protection works alongside other protections, so in practice the protection is much higher.

According to an article from MoneyWeek magazine, their conclusion was that if your investment account is worth twice the FSCS limit, losses would be very unlikely. And even if it was ten times the limit, the risks are probably still low. Let’s now look at why this is the case.

Client Money and Asset Rules

Investment platforms are required to separate client money and assets from their own resources.

This is a crucial piece of protection because they are not permitted to use client money and assets in operating their own business.

Your investments (including any uninvested cash) are ring-fenced and in event that the platform became insolvent – they would be unable to touch your investments or money. However, if the platform did become insolvent the appointed Administrator is entitled to claim their costs for distributing client money and assets from the client money pool.

We wouldn’t worry too much about this though as any money you lose as a result of this would be covered by the FSCS up to a limit of £85,000 per client.

From what we have seen from past broker failures (Beaufort Securities, Pritchard Stockbrokers, Fyshe Horton Finney, SVS Securities), the FSCS protection on top of pooled client money has been adequate compensation for almost all clients.

Only we are sad or crazy enough to read through a platform's FCA registration details

What About Funds and ETFs?

This subject has the potential to cause confusion, but we’ll summarise in simple terms. Most ETFs are not domiciled in the UK and tend to be in Ireland for tax purposes, but this throws a spanner in the works.

Many popular ETFs on the London Stock Exchange (such as the Vanguard FTSE 100 ETF VUKE) will be authorised in Ireland.

So, what does this mean? Firstly, it means that your collective investments domiciled outside of the UK are NOT protected by the UK protection scheme.

We did lots of research here to try and determine whether the Irish equivalent protection scheme covered Irish domiciled ETFs but could not find anything conclusive – with various sources contradicting each other.

From what we found it seems that Irish ETFs are NOT protected by the Irish equivalent of FSCS.

The saving grace is the ring fencing rules and if we quote some Vanguard documentation:

“In practice, for all UK and EU authorised funds, the underlying investments must be held separately from the fund manager by an independent trustee or depositary. With both Ireland and UK authorised funds, in the event that a fund provider defaults, the underlying investments will remain intact.”

In any case the Irish equivalent protection scheme is pretty lacklustre anyway, with the maximum protection a dismal 90% of your loss up to a max of just €20,000 per investor.

The best protection may actually be the ring fencing rules

How Can You Reduce Risks?

The larger the investment firm the safer your money should be. The firms themselves are likely to be more profitable and therefore safer.

For many of the big platforms you will be able to check them yourself as they are publicly listed companies, such as AJ Bell and Hargreaves Lansdown. You will want check their accounts, history of its key people and news about its past activities. These checks won’t be as easy for private firms.

The bigger the platform the more the FCA will monitor its activities and hopefully therefore reduce the chance of mismanagement.

As your investment pots grow into the hundreds of thousands, you might want to start purposely splitting your money across multiple platforms for added peace of mind.

This currently is a nuisance, in part because you benefit from reduced fees on larger investment pots, but we see a time in the not too distant future when platform fees are eliminated.

Should You Be Worried If You Have Less Than £85k?

The short answer is yes you should be partially concerned. You won’t lose any money as you would be compensated, but to reclaim the money from the FSCS could take many months. At time of writing they are saying it will take 7 months to reimburse claims relating to investments.

There is an opportunity cost of having your money tied up for that length of time. You may need the money to live, there might be a crash in the markets that you need to take advantage of, or you may miss out on huge growth in the markets.

At least you will be compensated for the amount lost due to broker failure. Don’t forget that this compensation is not to protect you from poor investment performance.

But on the whole, don’t worry about too much – it’s almost always better to hold investments than to not – and cash is riskier to hold in our opinion because you don’t get the ring-fencing protection that an investment gets.

The protections are there should the worst happen. Until then, keep investing with confidence.

How do you reduce investment risk associated with broker failure? Let us know in the comments section.

Oil is Low – Buy Buy Buy! | Best and Easiest Way to Invest in Oil

Oil prices have collapsed in 2020 following the outbreak of the corona pandemic, down a mega 63% since the start of the year at time of filming in April.

The West Texas Intermediate oil price has just fallen through the floor. At time of filming it was around $23 a barrel – incredibly cheap when we consider it was at $135 in 2008, its historical high. We filmed this video mid-April, and by release date it had fallen even further… into historic negative territory! Buy Buy Buy!

Below we cover why Oil prices are so low, the easy ways you can invest in Oil, and how we just invested in Oil the MoneyUnshackled way – layering in cashflow and diversification into this classic growth asset.

Editor’s note: Invest in Oil while getting a freebie – investment app Freetrade are giving a randomly chosen free share to each new customer who opens an account using the link on the Offers page – it could be worth up to £200, and all you have to do is open an account and top up by £1 – what are you waiting for?!

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Why Oil Prices Are So Low

2 things happened in early 2020 to push Oil prices to record lows – The Oil Wars, and about 2 weeks later, the coronavirus and resulting lockdowns.

The drop in demand from recession and lockdown would normally be enough to reduce oil prices, but the price was artificially lowered further by the activities of a major global player in the industry, Saudi Arabia.

The Saudis decided that they didn’t like the way Russia were looking at them at an Oil conference in March 2020, and announced that they would flood the market with cheap oil – a form of mutually assured destruction for both economies.

At time of filming, Trump had just backed an international deal to get prices back up, but the next day they’d actually gone down further!

"You lookin' at me?" The Saudis took issue with the Russian delegation

Oil as an Asset

Oil fits into the core of our investment portfolios. The core is reserved for cash flow generating assets like rental property, Global dividend-paying ETFs, and high interest Peer-to-Peer Lending, and Oil stocks are the biggest and most dependable dividend payers out there.

Oil itself is a commodity, and we also hold these in our core portfolios as they help us to Own Inflation and so Own The World.

We’ve previously mentioned that commodities like Oil and Gold might make up 5-10% of your total portfolio.

Oil, as a commodity, is a growth asset – meaning it doesn’t generate cash flows, so you invest in it because you believe the price will grow.

Whereas shares that go up and down in price still pay dividends – it’s nice to get regular cash injections from your dependable shares holdings regardless of the ups and downs of the market, but your commodities do not pay you a cash tribute.

So, by investing in oil commodities we are banking on the assumption that oil prices will go up in the future. Now let us tell you 3 easy ways to buy Oil, and which is best.

Oil sits in the Core of our portfolios

The Different Ways You Can Buy Oil

#1 – Invest in Oil Directly with an ETC

The purest way to invest in Oil – outside of actually buying a barrel and storing it in your garage – is through an ETC (Exchange Traded Commodity).

We decided this one was as good as any other: the WisdomTree WTI Crude Oil ETC (CRUD) which has an OCF of 0.54%, at the top of the fee range that we consider to be acceptable.

This Crude Oil ETC works like an ETF in that it tracks an index – the WTI Crude Oil price index in this case, and we can see that it has fallen around 63% from $9.0 to $3.6 since January 2020:

WisdomTree WTI Crude Oil ETC (CRUD)

To buy this ETC, you need to have an account on a premium investment platform, such as Interactive Investor.

The free trading platforms Freetrade and Trading 212 Invest have too small of an investment universe to offer this.

Interactive investor is the platform that Andy holds the vast majority of his portfolio in, because it is relatively cheap if you hold a large portfolio, and in our opinion is the best of the premium platforms.

There is no way to invest in Oil directly through the free platforms. But there are extremely close – and in some ways better – proxies to investing in Oil directly, which they do offer.

#2 – Buy Oil Stocks

With any good investment platform including the Freetrade app, you can invest in BP, Royal Dutch Shell, ExxonMobil, and a whole bunch of other Oil companies.

Oil companies’ share prices tend to move in the same direction as world Oil prices, though movements are not necessarily on exactly the same scale.

While crude oil prices fell 63% YTD, an index of the top oil companies (World Energy Index) fell 42% – still a huge drop. By comparison, the FTSE 100 fell only 23% over the same time period.

The reason an index of oil companies hold their value better than the oil price is because many of them are absolute goliaths in the stock market: cash-rich mega-companies.

They are accustomed to the crazy twists and turns in the oil price, and are well protected with their gargantuan cash reserves.

They are so stuffed full of cash that they find it easy to adapt to tough market conditions by cutting their investment expenditure, and have incredible dividend paying records.

That’s the beauty of investing in Oil via company proxies – companies pay dividends and can smooth out returns.

Shell has managed to deliver an uninterrupted and uncut stream of dividend pay-outs since World War II – ExxonMobil haven’t missed a dividend in 138 years.

The Oil companies won’t allow themselves to end up like the fossils that they burn

Staying Power

We expect they really are too big to fail. The Oil companies of today will be the hydrogen and fusion companies of tomorrow.

Those sandal-wearing hippies who harp on about the evils of the Oil giants fail to understand that it is these very Oil giants who are investing the most cash into new clean energy alternatives.

The Oil companies won’t allow themselves to end up like the fossils that they burn.

It won’t be Greta Thunberg who turns the world green – it will be BP, ExxonMobil, Total and Shell.

#3 – Using an ETF

This is the best way in our opinion. ETFs are diversified, low-fee, and mostly track indexes that can be easily monitored.

To invest in Oil companies, we’d invest in an ETF that tracked an index of global Oil companies.

The index that we want to track is the MSCI World Energy Index. The ETF I invested in is called the SPDR® MSCI World Energy UCITS ETF (WNRG), which has an ongoing charges fee of just 0.3%.

This ETF is listed on multiple stock exchanges, but we’ll pick one that’s traded on the LSE.

Here’s the listing of holdings within this baby:

The World Energy Index Top 10 holdings

It’s near perfect for what we’re trying to achieve, stuffed full of Oil super-giants from across the world.

In one neat little package this ETF tracks Oil as closely as it is likely possible to get by using stocks rather than tracking the oil price.

It is an accumulating fund, which means that all the dividends are collected from those legendary dividend-paying companies and reinvested into your fund’s value as they arise.

The index dividend yield at March 2020 is an incredible 8.28%! No matter the ups and downs of oil prices, you’re still getting an amazing boost to your investment off the bat, even if some companies in the index do cut their dividends during the current recession – we expect many will not.

An Oil ETC is unlikely to compete with this ETF’s growth power that comes from layer upon layer of accumulating dividend pay-outs, boosting the underlying value from the Oil assets.

To buy this ETF, you again need to use a premium platform like Interactive Investor.

An Oil ETC is unlikely to compete with this Oil ETF’s growth power

Portfolio Tip

Remember not to put all of your eggs in the Oil basket – If you’re buying ETCs, we say that commodities shouldn’t take up more than 10% of your portfolio.

If we include Oil stocks and ETFs, we wouldn’t put any more than 15% of our portfolio in Oil and prefer to diversify across sectors. 

Will you be taking advantage of Oil’s historic lows? What platform are you buying on? Talk to us in the comments section!

Written by Ben

Vanguard | Invest In Which Global Tracker Fund | Vanguard LifeStrategy vs Vanguard FTSE All-World ETF

On this site we’ve talked a lot about the importance of owning the World when you invest. But there are many ways to achieve this, and we ourselves utilise many of these methods.

We recently released a very popular video on the Stock Market Crash and briefly mentioned a Vanguard global fund I was using to capitalise on the cheap stock prices. There’s a compelling argument that the only equity fund you need is a total world equity tracker.

It seems that some of you who watched that video were interested in knowing why we had chosen The Vanguard FTSE All-World ETF (VWRL) over a Vanguard LifeStrategy fund or even over our own handmade World ETF portfolio.

This is perfectly understandable considering we often mention the LifeStrategy fund as a great way for beginners (or the uninclined) to own the World.

There are loads of global funds available to investors and even Vanguard themselves offer several, which all appear on the face of it to do the same thing.

This obviously isn’t particularly helpful when all you want to know is what you should be investing in right now. The enormous choice just clouds our judgment. Under the hood, most of these funds are very similar and any difference is minute enough to probably bear little importance in your decision making.

In this article we are going to mention what we invest in and why, explain the difference between The Vanguard FTSE All-World ETF (VWRL) and a Vanguard LifeStrategy fund, why we might invest in each and what truly matters when looking for a global tracker fund.

Editor’s note: Take advantage of the stock market crash with a boost when you open a new investment account using one of the links on the Offers page! Freebies include free shares, cash bonuses, or money off your fees.

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What We Invest In?

Let’s start this video with disclosing which global tracker funds we invest in and when, and then we’ll get to the reasons why. While our portfolios are not identical, they do follow the same design methodology.

The bulk of Andy’s SIPP is invested in The Vanguard LifeStrategy 100% Equity Fund and Ben will be soon consolidating all his pensions into a SIPP in this very same fund. So, our pension investments will be pretty much the same.

Regular followers will know that we prefer to invest the majority of our money in accessible accounts such as a Stocks and Shares ISA or general investment accounts – that means not in Pensions and Lifetime ISA’s which tie up your money until you are too old to enjoy it.

For these accessible investments we both build our own World portfolios consisting of a core of about 6 ETFs – 1 for each major region – US, UK, Europe, Japan, Asia Pacific and Emerging Markets.

Andy also invests a portion of his wealth with the Robo-investing platform Nutmeg, which itself creates its own World portfolio.

And in addition to this has recently been buying The Vanguard FTSE All-World ETF (VWRL) during the recent Stock Market panic.

So many strategies for Owning the World

Why We Invest in These?

#1 – Vanguard LifeStrategy 100% Equity Fund

First and foremost, we think the Vanguard LifeStrategy 100% equity fund, or even its Bond variations, offer excellent one-stop shops for owning the World. It does however overweight the UK with about 23% of the fund, which a normal world tracker would not do.

In fact, this is one of the things we like most about it. We are obviously UK based and an income in sterling is very important to us. Technically this home bias means the LifeStrategy funds are not really global trackers as it’s based on Vanguard’s own proprietary view.

With that said it does hold investments in all the major global markets and does it all for an extremely low cost of just 0.22%.

This makes it perfect for our pensions as we don’t want to be managing a portfolio that we cannot access for decades. Vanguard handles all the rebalancing while you get on with living life now.

This also makes it a perfect ready-made portfolio for those who can’t be bothered to manage investments but perhaps know enough to be able to assess their own risk appetite.

We aren’t financial advisors so don’t offer an advice service but will point people in the following directions:

One aspect of the LifeStrategy fund, which we feel is important, is its type – it is an Open-Ended Investment Company or OEIC, which is the most common but not necessarily our preferred fund type. That accolade goes to the Exchange-Traded Fund (ETF).

An OEIC only has 1-day pricing, so you don’t know the price you pay until when the order is executed.

We love ETFs so much because they offer live pricing; so like Stocks & Shares you know the price you pay before the order is executed. Which leads us nicely into:

#2 – The Vanguard FTSE All-World ETF (VWRL)

This ETF holds an incredible number of stocks – 3,365 at time of filming, which is a representative sample of the World’s listed companies.

Unlike the LifeStrategy fund, which in one way was actively managed by Vanguard, the FTSE All-World ETF seeks to track the performance of the FTSE All-World Index. This index includes approximately 3,900 holdings in nearly 50 countries, including both developed and emerging markets. It covers more than 95% of the global investable market capitalisation. Now that truly is a global investment!

So, why is Andy investing in this ETF over his usual self-built portfolio? Firstly, for simplicity. It’s so easy to buy and regularly monitor just one fund. He’s still continuing to invest in our own World portfolio on a monthly basis, but can more easily monitor the price of this ETF during the global crash.

We have confidence in World markets long term

We are always optimistic about the long-term future of the World economy, so it makes sense to put your money in a World investment that is market-capitalisation-weighted.

That means if Microsoft make up 2.6% of the Worlds capitalisation then 2.6% of your money is invested in Microsoft.

That also means that a very small amount of money is invested in companies that you have never heard of, which is awesome. But at such small percentages of the fund they will have practically zero impact on the fund’s performance.

You have to wonder whether that level of diversification is necessary but at least it doesn’t cost much at all. The OCF is the same as LifeStrategy at 0.22%, so cheap as chips as we would expect. 

Another reason Andy’s choosing this fund over the LifeStrategy right now is that he’s been investing quite frequently and free investments apps such as Freetrade don’t offer OEICs but they do offer ETFs including, yep you guessed it, The Vanguard FTSE All-World ETF.

This has allowed him to buy regularly without incurring trading fees, which is awesome. By the way Freetrade are giving away a free stock to new customers if they use our special link, which can be found on the Offers page. You need to use the link to qualify for the offer.

This fund also distributes income on a quarterly basis, which we love as we like to see income flowing into our pockets regularly – I mean who doesn’t?

The LifeStrategy range distributes income yearly if you buy the income share class and offers a similar yield of around 2% – probably because they hold much of the same underlying holdings.

LifeStrategy is a bit UK focused - but the UK is awesome, so is that such a bad thing?

Granular Detail

Okay so you’ll be glad to hear we’re not going deep dive into each fund in this video because most of you will switch off but for those that want to do this themselves some good resources include Vanguard’s own site. Morningstar is another fantastic site, and so is Hargreaves Lansdown. Have fun.

What Matters When Looking for A Global Tracker Fund?

3 key things:

#1 – Make sure it tracks the World – many fund providers will give a fund a misleading name, so it’s worthwhile to check the detail. Quite often they will just track the developed World and even miss out big guns such as China.

#2 – Diversification – Always check how many holdings it has. The more the better as this will represent more of the World even if the percentage in the smallest holdings become seemingly insignificant. You can’t accurately track the World if the fund doesn’t own the World.

#3 – Cost – Our viewers know that fees are vitally important. Don’t pay high fees unnecessarily and remember that the higher the fees the less well it will do at tracking the World!

Do you invest in the World and if so, how? Let us know in the comments section.

Why You Should Care About A Stock Market Crash

A stock market crash affects all of us, whether we invest or not.

Your non-investor mates in the office don’t care about the recent market crash, because they don’t educate themselves in personal finance; but we’re sure you know better.

In this article we show the ways that both investors AND investors are affected by a stock market crash – just like the one we are in right now.

Editor’s note: Take advantage of the stock market crash with a boost when you open a new investment account using one of the links on the Offers page! Freebies include free shares, cash bonuses, or money off your fees.

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“I Don’t Invest” – Of Course You Do!

Let’s touch briefly on pensions.

Almost everyone who works invests in the stock market without knowing about it via their defined contribution pension.

£600bn is held in defined contribution pensions – simplistically, if a quarter is shaved off the stock market, £150bn of our pensions just went “poof”.

However – don’t be too alarmed by this. By the time you retire the current slump will likely be forgotten.

Though worryingly, most let experts manage their pension pot for them; and experts are stupid.

Experts can’t help but fiddle, and during a financial crisis will try, but likely fail, to improve the situation.

Ideally your pension will invest in market trackers that do not require experts to manage, in which case you simply ride out the current market slump.

Be wary of pension fund managers

If You’re Over 50

People approaching retirement are in more trouble. As  you approach your agreed retirement age, pension managers  will de-risk your portfolio by selling shares and buying bonds, liquidising losses.

The “experts” will do this for you. Thanks experts.

If you are planning on buying annuities with your pension pot, the worst time to do this is during a crash.

Your pot will be a lot smaller than it could have been, and so will be the annuity income that you lock in for the future.

But if you’re not bothering with annuities and plan simply to live off your portfolio’s dividends – like we would – the stock market will eventually recover so your income will likely go up once the crash is over.

Ok that’s pensions – but that’s way off in Future Land – what about right now?

Non-Investors

Ignoring pensions then, if you “don’t invest” in the sense that you have neither a stocks portfolio, investment property, nor high interest bonds or Peer to Peer Lending, you should be deeply concerned right now that you have earned the disrespect of everyone in the investing community for continuing to NOT invest during the biggest bargain sale on the stock market in the last several years.

You’re making a conscious decision right now to stay poor; to have your wealth and your health affected by staying sat at your office desk for the next several decades; to miss out on being able to retire relatively young and make life about having fun – all by refusing to take advantage of low, low prices.

Ok, maybe it’s just that you don’t know how to get started? If that’s all it is, don’t worry! Investing has never been easier.

Mobile phone apps and the internet remove all possible excuses for not having a shares portfolio – for a full explanation of how I opened an investing account and immediately set up a balanced and diversified portfolio of thousands of shares in the global market, go put the kettle on, make a brew and settle down to watch half an hour of our World Portfolio playlist.

Investors and Non-Investors

Interest Rates

The stock market doesn’t directly affect interest rates – however, when governments and central banks see markets crashing, they also can’t help themselves but to fiddle.

Indeed, this is what we’ve just seen, with the Bank of England having just slashed interest rates from the lofty heights of 0.75% to 0.1%.

The simplest mechanism a country can use to prop up a falling market is to lower interest rates – the cost of borrowing. This tends to encourage spending by the population, which in turn boosts company profits and share prices.

Usually the stock market has fallen for a reason, like the current health scare, and the stimulus from lower interest rates is introduced to combat that reason – but governments don’t like to see their stock markets falling in any case, as it self-perpetuates panic and a country’s stock index price is seen as an indicator by us consumers as whether we should be panicking or not.

Mortgages and Savings Accounts

Falling interest rates don’t really matter anymore for savings accounts – they were so pathetically low before anyway. You weren’t getting rich from your savings account.

Anyone with a mortgage will be celebrating the stock market crash however, as the resulting slash to interest rates could save them hundreds a month.

Savings Account interest rates were so pathetic before anyway

Peer to Peer Lending

We are massive fans of Peer to Peer Lending, and have partnerships with many providers that you can check out on our website to give you cash back bonuses when you sign up.

But will these high interest investments be giving out lower interest rates now that central banks have lowered rates?

We assumed they would, but we’ve received emails from many Peer-to-Peer Lending platforms this last fortnight saying that they will not be reducing their interest rates – that it will be business as usual. I guess time will tell.

We think they’re seeing this as an opportunity to attract new customers, as the difference in return between pathetic bank savings accounts and P2P high interest investing is now more stark.

 And maybe that justifies them being still able to offer the same high rates.

Jobs

Many companies will be smashed into oblivion by a major stock market crash, as wider economic panic dries up sales to a level where they have to close down. This leads to redundancies.

Flybe was the first major company to go down this time around, and in the weeks since there have been reports of branch closures at banks and lots of mid-sized companies going tits-up.

If our employers were to tell us we had to be let go, we’d shrug it off because years ago we decided to be investors; and have built up portfolios that we can live off.

But many choose NOT to be financially free and instead choose job “security“, and sadly these people will have little protection during a jobs-cut. Hopefully their qualifications allow them to get another job quickly.

An Employee - dependant on his employer

What to Do to Protect Yourself from A Falling Stock Market

#1  If You Have A Portfolio Already

Don’t sell – investing is a long-term game, and a loss is only a loss once you crystallise it by selling. Buy more while the price is low!

#2  If You Don’t Yet Invest

Start! Buy now while prices are low, and capitalise on hysteria in the markets. Non investors are scared away from the stock market during downturns, when they should be paying the most attention.

#3  Don’t Panic About Your Pension Falling – unless you’re nearing retirement age

If you’re retiring soon, take control of your pension and make sure the “experts” aren’t selling off your wealth at just the wrong time. And be wary of annuities.

#4  Don’t Settle for Low Interest

Consider taking refuge from the stock market volatility in more stable Peer to Peer Lending platforms for high interest monthly income now.

Always remember to invest across platforms to minimise risk.

#5  F-Off Fund

Build up a F-Off fund, or “emergency fund”, so you can better cope with a job loss.

#6  Diversify Incomes

Take steps now to diversify your income streams away from just the one job, with interest, dividend or rent paying investments and side hustle home businesses, and you’ll be better prepared to deal with a crash when it happens.

How are you feeling about the stock market crash? Disaster, opportunity, or irrelevance? Tell us in the comments below!

What to Do When Stocks Crash – Don’t Panic

Stocks and shares are constantly going up and down in value. If you can’t stomach this volatility, then you need to keep away…well away. But if you do this you will regret it. Having your money invested in the stock market is the easiest way to make your money work hard for you, rather than you having to work hard for money.

We wrote this during the beginning of the Coronavirus stock market crash and time will tell if it was a flash in the pan – or conversely – far worse. Either way we are confident that this is just another minor blip on the stock market’s march to ever greater heights and gives you an awesome buying opportunity. Price volatility is your friend if you are brave enough to strike.

Keep Calm and Buy More

We don’t know whether stock markets will be down further in 1 years’ time but in 5 years’ time it’s likely to be higher, in 10 years it’s almost certain to be higher and in 20+ years it’s practically guaranteed – and you will of course have collected some juicy dividends along the way.

And in a way it’s these dividends that reduce the risk of investing. The FTSE 100 hasn’t had the best 20 years, which is why it’s so important to diversify and why we have always encouraged world-wide investing as seen in our ‘How to Own the World’ series. Other indices around the world have fared much better over this time period, which highlights just how important it is to own everything.

Anyway, we’ve done some serious analysis on the FTSE 100, and our findings demonstrate that selling after a crash is the worst thing you can possibly do. Let’s check it out…

Editor’s note: Don’t forget to check out the Offers page where we have hundreds of pounds of cash bonuses that you can snap up when you sign up to any of the investment and P2P Lending platforms listed – including on the Nutmeg robo-investing platform; one of the easiest ways to buy into and take advantage of the low market right now! 

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FTSE 100 Over the Last 20 Years

Below is the FTSE 100 for almost 20 years, which shows a pretty bleak picture. But it at least shows that that after every crash it does eventually climb above its previous high.

And to be honest unless you had bought in at the peak of the market it’s not a problem at all.

And by buying regularly, known as pound or dollar cost averaging, you average out your purchase price meaning your average purchase price is never the top of the market.

FTSE 100 Price History Over 20 Years

By this logic a big price fall such as what we’ve seen in February 2020 due to Coronavirus gives us an incredible buying opportunity. It is this reason why Ben and I are always ready to pour more money into the market, which is exactly what we have been doing recently.

The market had crashed by about 10%, so we buy a little. If the market continues to crash, and we’re very happy if it does, then we will buy big. We consider a 10% fall to be a nice gesture from the market but 20% or more is a time to splash the cash big time. Everything is on sale!

The problem many people face is the emotional hurdle that a stock market crash creates, which is why many successful investors automate their investing. I take advantage of Interactive Investor’s free monthly investing service, so I don’t need to worry about exact timing. But I also buy big when everyone else is panicking.

If we look back at that FTSE 100 graph, we can see that it always recovers when people realise that it’s not the End of the World. We’re just showing you the data we could get our hands on, but we know this story goes back until the beginning of time – or at least the beginning of the FSTE 100.

FTSE 100 Total Return

Over time we know that dividends, particularly when reinvested, are the biggest drivers of investment performance. So worrying over short-term price fluctuations is completely unnecessary.

FTSE 100 Total Return

Above we’re looking at the FTSE 100 vs. FTSE 100 Total Return Index for about 7 years. Total return means that it also factors in the effect of dividends reinvested. From this graph we can’t really see too much. It appears that the Total return index just perfectly tracks the main FTSE 100 line.

However, we want to see relative performance so a technique we can use is to rebase the graph. Each line now starts at the same point, which will show us the real story.

FTSE 100 Total Return - Rebased

We can now see that although the Total return line still mimics the FTSE 100, it quite quickly powers ahead and therefore the impact of small price fluctuations become less important as the end point is leaps and bounds ahead of the starting value and your original investment.

This is a key reason why we can both handle large price declines comfortably because we know that just by being invested in the market it is going to make us lots of money in the long term due to the power of dividends compounding our returns. We wish we had been able to show you a longer time period because the gap compounds even more and would become enormous but unfortunately, we couldn’t get our hands on the data.

Nevertheless, even in this 7-year period the difference is still significant with the FTSE 100 showing a return of just 10% but the FTSE 100 TR index returning around 50%.

Why Selling Immediately After A Crash is Stupid

Neither of the graphs we’ve looked at so far really demonstrates the size of the crashes and speed of recovery.

The next graph shows the week-on-week percentage movements of the FSTE 100. What we can see is that whenever we see a period of sharp decline, this is always followed by a quick reversal soon after.

FTSE 100 Weekly Movements - Comebacks After Crashes

What we can see is large drops around 2001 relating to 9/11 and huge drops around 2008 due to the financial crisis. Then there’s a crash in 2011 due to the debt crisis. The last 20 years is littered with crashes and we’re sure the Coronavirus crash is just another blip on the graph as all that proceeded it have been.

What shocked us the most from this graph is the speed of the reversal in the weeks that followed a crash. The end of September 2001 saw the FSTE rally 10.59% in one week.  In 2008 there was a week where it climbed 12.72% and another week shortly after rallying a further 13.41%.

The graph shows this pattern throughout the 20-year period. We’re betting the same will happen again now and in future.

If you sell immediately after the crash, you will miss out on these incredible price rallies. Shockingly people have very short-term memories and previous impending dooms are long forgotten.

When putting together this graph we had to look up the reasons for the crashes as we couldn’t remember either, but at the time they would have been all front-page news predicting the end of the World!

When Markets Crash, They Always Get Back Up Again

What About Individual Stocks?

We are very confident that overall markets will continue to climb until the end of time. However, we cannot say the same about individual stocks. The financial crisis saw the destruction of the banking sector and on the most part it never recovered.

When an index such as the FSTE 100 falls that’s fine by us but individual stocks fall and often never bounce back. Stocks have their own unique characteristics that can mean they become permanently damaged by whatever caused the price to decline.

For example, travel companies have had a particularly tough time recently. Who knows what a Pandemic could do to the long-term prospects of a travel company? A ban on travel could cause losses to spiral and the company could go bust before any chance of recovery. The difficulties of predicting the outcome is a major reason why we both limit our involvement with investing in individual stocks.

What You Should Do About The Crash

#1 Do Nothing

Assuming you own well-diversified index trackers, do not sell. If you’re the type of person who has an itchy trigger finger, then sometimes the best thing you can do is just not monitor financial news and these events will blow over before you even notice.

See the Opportunity in the Noise

#2 Buy Buy Buy

If you’re a little braver like us, then start buying when everything is on sale. As we’ve just seen in the graphs, very large downwards swings don’t happen very often. Make sure you’re ready to take advantage when they do. It is times like this which give stocks a huge advantage over less liquid asset classes such as property because you can take advantage of lower prices before they rise.

#3 Rebalance

Big swings will often leave your portfolio out of line with your intended allocation. This might be the time to rebalance. What this does is move money from the assets that have performed well, which perhaps have little room to grow, and allocates more to the past underperformers, which may have better opportunities.

How do you react during a stock market crash? Let us know in the comments section.

Written by Andy

ETFs Destroy All Other Investments – ETFs vs Stocks and Funds

Regular visitors to the site will know that most of the money that we invest in the Stock Market is done so using Exchange Traded Funds – more commonly known as ETFs.

But why do we rave about these awesome financial products so much? And why do we put so much of our money in ETFs over other investments such as Stocks, Bonds or even traditional funds?

We think that ETFs have contributed to much of the improved accessibility of investing in recent years due to their extremely low costs and transparency. The first ever ETF was launched only as recently as 1993 in the US, and it took a further 7 years for the first ETF to be listed on the London Stock Exchange.

Since then, money has been pouring into these products, and for good reason – they’re awesome! You may have seen our video series on ‘How to Own the World’, where we essentially bought into every single major listed company in the World. We did this with these little beauties.

Editor’s note: Don’t forget to check out the Offers page where we have hundreds of pounds of cash bonuses that you can snap up when you sign up to any of the investment stock market and P2P Lending platforms listed, including sign up bonuses on platforms that trade ETFs – Nutmeg, Freetrade and Trading 212!

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What is an ETF?

We’ll get into the reasons why ETFs destroy other investments – but first what is an ETF?

An ETF (Exchange Traded Fund) is simply an investment fund that is traded on a stock exchange similar to shares. Most ETFs will track an index in an attempt to mirror its performance.

An index is a measurement of a section of the stock market like the FTSE 100 or the S&P 500. The FTSE 100 is the index composed of the 100 largest companies listed on the London Stock Exchange (LSE).

These companies are often referred to as ‘blue chip’ companies, and the FSTE 100 is traditionally seen as a good indication of the performance of the UK economy. In the UK whenever you hear about the Stock Market on the news, they will be referring to the FTSE 100.

An ETF will allow you to mimic as closely as possible the performance of the index. So, a FTSE 100 ETF should pretty much return the same as the largest 100 companies in the UK.

This is awesome, particularly for small individual investors like us because it allows us to not have to worry about stock picking or fund manager performance. We can sit back, relax and get awesome investment returns for an incredibly low fee.

ETFs try to copy an Index as close to exactly as is possible!

There are several ETF providers in the UK, the most popular being iShares and Vanguard who both offer numerous ETFs, which you will be able to buy and sell through any decent Investment Platform. Some other providers include SPDR, Xtrackers, HSBC, L&G and WisdomTree.

Just to get a taste of how much money is invested in ETFs, the iShares S&P 500 ETF alone has assets under management of over $40 billion!

Why ETFs Destroy Other Investments

#1 – Access to Your Money

You can sell at any time during market hours, but of course the price you get will depend on market conditions at the time. But unlike traditional funds such as OEICs and Unit Trusts, ETFs offer minute-by-minute pricing because they trade on an exchange like a stock.

This also means that when you buy an ETF you know the exact price you will pay – but this can’t be said for when you buy a traditional Fund such as a Unit Trust. This is because when you place your order for a traditional Fund you don’t know what the price will be when it is executed – during the day the price may change.

This can even make ETFs appropriate for investors who trade more frequently, but we advocate long term investing.

The live prices of an ETF make them superior to open-ended funds in this regard because you can access your money immediately. OEICS and Unit Trusts only have daily prices and orders are processed daily. By the time you can get your money the price may be far lower than you were happy with.

Buy and Sell ETFs any time duruing stock market hours! You can't do this with managed funds...

#2 – Diversification

Just one ETF can give an investor enormous diversification that is not possible if they were to invest in individual stocks themselves. In a single purchase you can with some ETFs gain a position in thousands of stocks and/or bonds.

Diversification is key to spreading risk and is considered essential in the world of investing. As we mentioned in our World Portfolio series – see Episode 2 below – we advocate owning the world, and ETFs are the easiest way to achieve this.

Some people criticise diversification but, in our opinion, only a fool doesn’t diversify to some extent.

Individual stocks often fall and then never recover, whereas this can’t be said about the whole stock market. The market has periods of decline, but the trend has always been up over the long term. You can invest in the entire market by investing in certain ETFs.

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#3 – Lower Fees

ETFs which are passively managed have far lower fees compared to managed funds. A managed fund has to pay an expensive investment manager and trades more frequently, so therefore has higher costs. This portfolio turnover increases the transaction costs that a fund incurs, which is ultimately passed back to the investor.

At Money Unshackled like to keep fees down to an absolute minimum, and some ETF fees are almost non-existent. If we use the iShares FTSE 100 ETF as an example, the OCF is just 0.07%. That would be a fee of just £7 on a £10,000 investment.

There is also no stamp duty when you buy an ETF whereas Stamp duty on UK individual shares is 0.5%. These charges don’t sound like much but really add up when you build and rebalance a portfolio, and the effect only compounds over time.

# 4 – Huge Choice

There are literally thousands of different ETFs to choose from. You are bound to find one that tracks something you’d like to invest in.

Our preferred approach is to build a core portfolio using a handful of ETFs that track the world market.

We then like to supplement it with additional investments that we feel give the portfolio a little boost, such as REIT ETFs or ETFs that give us exposure to smaller companies, which we expect to grow faster.

For inspiration a good tool to use is the website justETF.com, which has a very useful ETF screener allowing you to filter down until you find an ETF that you like the look of.

We start with a core of world market ETFs and add "satellite" products around the edges

#5 Transparency

When we construct a portfolio, we like to know exactly what we are investing in and because ETFs track an index, they are totally transparent. You can easily see what the underlying holding are, but this just isn’t the case with managed funds. Usually you can only see the top 10 holdings.

This is a major problem because how on earth can you know what your exposure is? If you invest in 10 different managed funds – and each one holds some of the same shares – you could be massively over-exposed to these few stocks without even knowing it.

Luckily not a problem with ETFs!

In summary; ETFs are so damn awesome.

Do you agree with our view on ETFs? Or do you think there are better ways to invest? Let us know in the comments section below.

Top 10 Investing Mistakes Beginners Make in the Stock Market

Many beginner investors are keen to start investing because of the easy money that can be made. And rightly so! Those who have watched our videos before will know that it is far better to put your money to work than to work hard yourself.

Without exception the only way to make serious money is to invest. Look at any rich list and you will see a bunch of people who made significant sums in some form of investing – most commonly from stocks and property.

Unfortunately to start investing without educating yourself is a recipe for disaster – You WILL lose money. It’s imperative that you not only learn how to invest but also learn from your mistakes. Better yet, learn from other people’s mistakes, so you don’t make them yourself.

Warren Buffett has 2 rules:

  • Rule No. 1: Never lose money.
  • Rule No. 2: Never forget rule No. 1!

Editors note: Don’t forget to check the Offers Page and grab FREE shares worth up to £200, plus £50/£75 CASH-BACK when you open new investment accounts through the sign-up links there.

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Investing mistakes will cost you money but why is it so important not to lose money? Some of you might be thinking that it’s okay to lose money because eventually stock markets will recover, and you’ll get your money back and more.

Let’s demonstrate this mathematically:

Say you invest £10,000 and lose 50%. How much does it need to grow to get back to square one? 50% maybe? Wrong!

To grow your remaining £5,000 back to £10,000 would require 100% investment return just to get back to where you started. The more you lose the bigger the investment return that is required to recover.

Some people are even tempted to buy stocks that have crashed by say 90% because they think that it was once worth so much more.

Imagine if you owned one of these stocks and you are unfortunate enough to see it crash by 90% and have held whilst you lost all your money. To get your money back it would now need to grow by 900% – nothing short of a miracle!

Now that we’ve demonstrated why it’s so critical NOT to make mistakes, we’re now going to look at the Top 10 investing mistakes beginners make in the stock market…

Don't diversify and THIS could be you!

Mistake Number 1 – Not Diversifying

Diversification is absolutely essential to protect and grow your wealth. Beginners often fail to diversify due to lack of money, lack of knowledge or over-confidence in their ability.

These days lack of money is no excuse as ready-made diversification is easily achievable through the purchase of a Fund or ETF.

Unfortunately, many beginners dislike funds and are drawn into the excitement of picking stocks but in doing so, they almost never achieve the diversification that is so vitally important.

Lack of knowledge often leads to an investor believing they are diversified but the reality suggests otherwise. For example, a UK investor may rather foolishly only be invested in UK stocks. If the UK suffers a downturn, that investor will soon realise they had not diversified properly.

True diversification is across different geographies, asset classes, sectors, and stocks. Diversification doesn’t just protect against losses though – it boosts the chances of you achieving the investment returns that are expected.

I’ve personally made this mistake myself. For years I was overly exposed to the UK and I failed to get the enough exposure to the essential US market.

As a result, I missed out on some tremendous growth. Whatever the reason, lack of TRUE diversification is likely to hurt you.

During a downturn your portfolio will behave very differently - so be prepared!

Mistake Number 2 – Copying Other People

Everyone’s situation is different, which is why a Regulated Financial Advisor must first assess your unique situation before giving advice. This fact is often overlooked though when it comes to beginners who just want to copy someone.

We are often get asked what investment platform we use or what we invest in. There’s nothing wrong with these questions per se, but these questions terrify us because it is clear that most of those who are asking are going to blindly follow whatever we say. Our situation is different to yours and yours is different to the next guy.

It’s much better to understand the reasons why we do something rather than just what we do. For example, if you only have a few thousand pounds to your name it’s not useful knowing which investment platform we use because we are not in the same financial position.

Or if you are approaching old age retirement, it would potentially be dangerous to blindly follow our investment strategy because we are probably willing to take on more risk than you are.

Long story short – Don’t blindly follow other people, but understand why they do something.

Mistake Number 3 – CFD Trading

We covered this in a recent video about Avoiding CFD Trading, which is certainly worth checking out (see below).

Essentially, due to high fees and leverage 82% of CFD clients lose money, so beginners should pretty much always avoid this type of investing.

Unfortunately, these CFD brokers have large marketing budgets and have some really enticing adverts which lures noobie investors to their peril.

Beginners often come across these brokers first and wrongly think this is investing in the traditional sense – it isn’t. Best to avoid them and learn how to invest on a proper investment platform first.

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Mistake Number 4 – Holding Losers and Selling Winners

Many investors sell their best performing stocks to realise the gain, despite the stock still having potential for growth.

But worse still, many people are unable to sell a loser. Preferring to hold until total collapse of the share price. There is too much emotion in the investment, and they make all the wrong choices.

Even if the Loser slowly recovers, how long have you had to wait and what did you miss out on? Many investors incorrectly believe that what goes down will go back up. This is a misconception and is often not the case.

Mistake Number 5 – Buying High and Selling Low

Everyone knows what they should do – Buy low, sell high. But people tend to do the opposite, and this is not a contradiction of the previous mistake.

When stocks crash, they become fearful and sell and likewise they buy when everyone else is, when the price is highest. The best thing you can do is ride out any crashes and perhaps buy more if the prices are cheap.

Do your research and know what you're buying

Mistake Number 6 – Trading Too Frequently

Novice investors incur substantial fees by trading too frequently. Usually they are trying to make short term gains or are just bored and therefore often come out worse due to high fees.

Consider this, you have the trading fees to buy and then to sell, you have stamp duty and you have the bid/offer spread. In case you don’t know, you can’t actually buy at the stated share price.

There is something called a bid/offer spread, which is the difference between the buy and the sell price. This bid/offer spread, and stamp duty on UK shares are unavoidable even on “free” investing platforms. Our point; trading frequently is too costly.

Mistake Number 7 – Over Confidence

Some people think they are better than everyone else.  Why some people think they can put in no investment appraisal and yet still outperform the market is beyond us.

We’re not saying you can’t beat the market because you can, but many beginners think they can pretty much just take a wild punt and outperform the professionals.

We regularly get asked about timing the market or whether a certain stock looks good. We love to talk about anything to do with investing but the reason we do better than most is not because of awesome skills but because we avoid these mistakes.

Don't think you're better than everyone else - you're not!

Mistake Number 8 – Not Starting or Starting Too Late

Investing works best when it has time to work its magic. The true power of compounding takes years. We’ve heard every single possible excuse why people don’t invest. All too often people prioritise short term gratification over their long-term future.

£10,000 invested for 35 years earning 8% will be worth £148,000. £10,000 invested for just 10 years earning 8% will be worth just £21,600.

Don’t wait to invest; Invest and wait!

Many people don’t start because they think their tiny sum of money isn’t worth investing. They fail to realise that the best way to learn is when their pot is small. If they save a large amount first, then they will be too fearful to start investing because they have a lot more to lose.

Mistake Number 9 – Short Term Horizon

The ability to sell shares at any point, what we refer to as liquidity, often leads to people thinking they can invest for the short term. But in reality, prices are so volatile in the short term that it’s way too risky.

Some short-term traders may make money, BUT you will almost certainly do better with long-term investing. This being for at least 5 years, and better yet 10 plus.

Mistake Number 10 – Buying Last Year’s Winners

People have a tendency to review the historical record and assume that it will repeat. Sometimes it might, but it might not.

When making an investment decision you need to look at the future and not just the past. If it was as simple as looking at history, we would all be millionaires.

What investing mistakes did you make or are still making? Let us know in the comments section!

 

Written by Andy

WHAT WE ACTUALLY INVEST IN – Portfolio Breakdown – Sectors and Geographies

Here it is, investors – the breakdown of Ben’s personal stocks and shares portfolio by Geography and by Sector, in what we’re sharing with you now as the current Money Unshackled World Portfolio. The £ amounts are different, but the % weightings are the same.

Viewers of our World Portfolio series will know the importance of diversifying your wealth across the entire globe, giving yourself the best chance to benefit from exposure to growth markets and ride a wave of global prosperity.

The World Portfolio that we constructed in episode 2 of this World Portfolio series from just 7 core ETF index tracking funds invests in all the key global geographies, and across all major sectors including financials, health, technology and energy.

It also has holdings in REITs, so you benefit from an exposure to commercial property markets; and in the expanded version, commodities, the stuff that underpins inflation.

Today, we’re peeling back the cover on the Money Unshackled World Portfolio on Freetrade, and showing you EXACTLY what you are investing in when you buy these 7 core ETFs, as a percentage of your portfolio. Then we’ll tweak the portfolio by adding a further 5 satellite ETFs to make this baby pop.

We’re so pumped for this one! Let’s check it out…

Editors note: The video version of this article is the third in a series on the Money Unshackled World Portfolio, which we’ve built on the zero-trading fee platform Freetrade. If you want to emulate the World Portfolio then sign up to Freetrade with our link on the Offers Page. By using this link you’ll get a free stock worth up to £200!

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World Portfolio Overview

To recap on episode 2, we had selected 7 ETFs on the Freetrade platform that nicely covered the World in as few ETFs as possible, keeping the balance between simplicity and portfolio weighting:

Let’s see how that translates into an actual portfolio. Throughout this article, we’ve used a portfolio size of £2,000 as an illustration, but of course this portfolio would perform similarly if your pot was smaller or bigger than this.

You’ll notice that because we’re buying actual units, and not just talking theory, that the total is a little different to £2,000 – as close as we could get while keeping the weighting we wanted.

The real world necessity of buying units makes our actual allocation slightly different to target allocation – but do we really know if 35% or 33.9% was the right weighting to pick until decades from now anyway?

And check out that weighted average Ongoing Charges Figure for the whole portfolio! At just 0.11%, this simple world portfolio is a fraction the cost of even the legendary Vanguard Lifestrategy funds, which would clock in at 0.37% if you include the Vanguard platform fee. Of course, Freetrade has no platform fee, and no trading fees.

We looked under the bonnet of each of these funds to see what actually was inside them. For example, 4% of our UK FTSE 250 fund (VMID) is geographical exposure to the US, not the UK, and 25% of the Europe fund (VEUR) is geographical exposure to the UK.

Geographies – Basic Portfolio

This is the portfolio of 7 ETFs broken out by Geographical region. You see we have applied the actual weightings from earlier, and the figures in the table are as a percentage of the portfolio. Down the left here is true split by country and region within our portfolio.

Look at Europe for example, just below the arrow 12%. This means that 12% of our whole portfolio is in European countries, despite what ETFs we bought. 11.7% of this is coming from the dedicated European ETF, even though VEUR is 16.1% of the portfolio, and there’s some European exposure in the VMID and VUSA funds too.

When we were setting out the ETF weightings, we purposely chose to buy 15% of the Europe ETF and an equal 15% across the UK ETFs –because we wanted more of our money in the UK than in Europe – knowing that there was some UK hiding in the Europe fund.

So here’s what we’re really investing in by Geography. Pretty good spread. Now let’s look at Sectors.

Sectors – Basic Portfolio

Now this is what we were really interested in – you can get an idea of what geographies you are invested in by the fund names, but not the sectors.

We wanted to find out the true weighting by sector in our portfolio, so we could tweak it to reflect our predictions for the future.

Above is the split by sector on the Money Unshackled Basic World Portfolio of 7 ETFs. Now we can see the detail we see things like how the USA ETF has the bulk of portfolio’s Tech sector exposure, and also with Financials, while the bulk of our REITs are in the Asia Pacific ETF, and most of our Consumer products exposure comes from Emerging Markets. Awesome!

Above is our Basic Portfolio summarised by Sector. It looks good but we’d like to be able to tweak it. So let’s do that!

We think healthcare will be a crucial sector as the World’s population ages and gets richer, so we want to boost the weighting there. REITs might be considered low at 4.3% – we want to boost that to around 10%. And there are no commodities in the portfolio other than proxies.

We want some gold in our portfolio – not too much as gold pays no dividends, but gold is money in its purest form and is a good recession hedge. We’d also like some exposure to Oil, Gas and other energy commodities, but we get this in proxy via the Energy, Utilities and Basic Materials sectors, which already make up nearly 15% of our portfolio.

The Expanded Portfolio

The beauty of using a free trading platform like Freetrade is that you’re not constrained to having to stick to the simplicity of just a handful of ETFs like you would on a traditional platform – the fees aren’t there to stop you.

Normally platforms charge trading fees per ETF, fund, or share; so you would want your portfolio to be simple and compact.

Freetrade removes such obstacles and means we can add on some so-called satellite ETFs which orbit around our core World portfolio without incurring any trading fees!

Right. Let’s do some tweaking!

We wanted to boost REITS, boost Health, and add Gold, so we’ve added 3 ETFs to the portfolio. We are also interested in Small Caps – which are small listed companies – as they have the best growth potential, and we want to make sure we’re invested in the Technology of the future so we’ve added a Robotics ETF.

To fit new funds into the portfolio we need to tweak the target allocations

The core portfolio has been squeezed to 77.5% of the total, leaving 22.5% of room for the satellite funds in dark pink. This in turn changes our Actual Allocation when we go to buy the Actual funds.

This weighting can be changed and isn’t set in stone, but a small tweak to change the sectors can have unintended consequences on the geographies, and vice versa. We’ve carefully balanced the allocation to get the best out of both as we’ll come to shortly.

And look at that weighted portfolio cost! It’s bigger than before but still miniscule at only 0.17% – it’s barely there at all!

Geographies – Expanded Portfolio

Let’s look at how our fiddling has affected the geographical split.

ISP6 is the Small Caps ETF, and it is all in the USA. Next, IWDP is our REITs fund and is also predominantly US located, as is IHCU (the health fund) and RBTX (the Robotics fund). For this reason, we slashed our core USA ETF down by 12% in our Target Allocation to make room for these satellite additions to the US region. The SGLN fund tracks the price of Gold, and is not in any specific geography.

Now look how this compares to our Basic portfolio of just 7 core ETFs.

USA is pretty much the same, but now includes Small Caps and doesn’t only include the large S&P500 companies as before.

The other regions are pretty much the same too, Asia Pacific down by half but this region of the world which includes developed countries Australia and New Zealand is perhaps less interesting than the Emerging Markets, which have gone up a bit. And we now have Gold commodities in our portfolio!

As gold’s value is fairly speculative and it doesn’t pay dividends, we don’t want more than 5% in our portfolio, but it’s worth holding a little bit.

Bitcoin and Crypto Blockchain ETFs are not yet available on the free platforms, but Gold acts similarly and is in many ways a safer proxy. The famous Bitcoin boom that got everyone so excited happened in 2017 – in the past – and yet people still want to jump on the bandwagon.

If you wanted to invest in Bitcoin or other cryptocurrencies, you could buy some outside of your main ETF portfolio.

Sectors – Expanded Portfolio

Of the new funds, we see that the Small Caps (ISP6) are spread across all sectors. We see that IWDP is indeed a REITs fund, and contributes 6.3% of REIT awesomeness to our total portfolio.

The Healthcare fund (IHCU) does what it says on the tin, and Robotics (RBTX) contributes 3.2% to the Technology sector.

To summarise:

Our tweaking has meant the technology sector has come down a bit but largely held at over 20% of our portfolio. It fell because we had to reduce the core USA ETF (VUSA) to accommodate the satellite funds, as the USA would be too much of our portfolio otherwise. And most of the world’s tech is in US companies.

We replaced some of this lost technology with Future Tech in the form of Robotics companies, which we find more exciting for growth.

We boosted the Health Care sector by nearly 2.3% of our portfolio to account for the aging population, and we bumped REITs up to nearly 10% of the portfolio.

REITs are awesome as they have performed better than average stocks recently and pump out cash dividends – we felt the Basic portfolio was lacking at just 4.3%. Better to have closer to 10% we think. And of course, we’ve added Gold commodities.

What – No Bonds?

Most ready-made portfolios like 4 of the 5 Vanguard Lifestrategy funds and many of those sold by financial gurus include bonds. We hate bonds.

Frankly they’re boring, they rarely perform as well as equities, and their function as a cash flowing asset can be substituted with Peer-to-Peer Lending, which pays great interest and has chunky sign up bonuses.

Plus bonds in a portfolio are another layer of complexity when you’re trying to carefully tweak your equities by geography and sector – far easier to say “this collection of ETFs is my equities portfolio”, and “this separate cash over here pays me interest in Peer-to-Peer accounts”.

Bonds bore us - Peer-to-Peer Lending is far more flexible and controllable

Conclusion – A World Owning Portfolio

So there you have it – what we’ve just walked you through actually reflects my personal portfolio – the £ amounts are different, the percentage weightings are the same!

If you want to copy the portfolio and Own The World, feel free. We put hours into balancing this baby, but now all the work is right there, done for you. We’d love to know if you intend to use this portfolio, so please let us know in the comments below.

Just download the Freetrade app using the link on the Offers Page, where you’ll also be given a free share worth up to £200 when you use the link and open an account by depositing £1 or more; and start owning the world!

 

Written by Ben

Retire Wealthy – Vanguard SIPP is Coming to The UK

The announcement that Vanguard are finally going to offer a personal pension, otherwise known as a SIPP, in early 2020, is potentially game changing for those building a retirement pot.

SIPP’s have long been a great way to invest for old age with fees being moderately low for many years, but with the introduction of the Vanguard SIPP the industry will potentially be turned on its head with ground-breaking cuts to the cost of retirement investing.

You simply have no excuse anymore if you don’t retire wealthy.

In this article, we thought we’d take this opportunity to highlight what Vanguard will be offering with their SIPP and to talk about how we save for retirement with the goal of retiring wealthy. Let’s check it out…

Editors note: Don’t forget to check the Offers Page and grab free shares worth up to £200 plus £50/£75 cash backs when you open new investment accounts through the sign-up links there.

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What is a Self-Invested Personal Pension (SIPP)?

In one way the Vanguard SIPP is not much different to any other SIPP. And by that we mean it will allow you to invest in a tax-efficient way for your retirement. A SIPP is not particularly exciting, but they do have a few cool features:

Firstly, they allow your money to grow without the greedy taxman taking a huge slice. Over the years this tax-free status will allow your pot to grow unhindered to hopefully unimaginable heights.

Secondly, you will also get tax relief on your pension contributions. In effect this means the government will pay into your pension if you do.

As an example, this table shows that basic rate taxpayers would receive an additional £2,500 if they contributed £10,000 themselves or even more for higher earners.

Sounds amazing- where do we sign up? But hang on! The main downside to any pension is that you cannot access the money until at least aged 55 and this will be increasing. Most probably into our 60’s for our generation.

The fact that your money is inaccessible until your older age is bad but meddling governments have and will continue to increase this age. We don’t trust governments.

The Western World including the UK is walking blindfolded into a financial catastrophe caused by excessive debt. It’s been heavily speculated that a future government will have no choice but to dip into this tempting pot.

What is the Vanguard Personal Pension (SIPP)?

The Vanguard SIPP has the same pros and potential downsides as what we just discussed but at least they do it all with rock bottom fees.

Their platform fee will be just 0.15%, which is much lower than all the existing investing platforms. That’s so low we feel it’s worth repeating. They will only charge 0.15%.

Moreover, it does not charge you to buy and sell funds or ETFs, meaning you won’t incur further trading costs as you do with the majority of other platforms.

You will be able to invest in any of the Vanguard Funds and ETFs, of which there are 76 at time of writing. And if you are a regular viewer of our YouTube channel you will know that Vanguard funds are some of the best available on the market.

You will of course incur the inbuilt fees from the funds, but these are also extremely low cost.

It’s worth pointing out that you will not be able to invest in non-Vanguard funds or invest directly in stocks. Perhaps check out the AJ Bell SIPP if you are keen to do that but it is more expensive.

It's just so flippin' cheap!

Is a Personal Pension right for you?

When investing for retirement it is almost always a good idea to first use any matched contributions offered by your employer. This is because you will essentially get a 100% immediate return due to your employer paying in as well as you. Then of course you get the government tax-relief on top.

It’s great to see that Vanguard are even encouraging this and this is something we certainly support.

This then leads us onto whether you should be investing additional retirement savings into the Vanguard SIPP. This is only something you can decide. If your plan is to retire either at or after the minimum age from which you can draw your pension, then this would probably be an excellent choice, particularly if you’re a higher or additional rate taxpayer.

What Do We Do?

Whatever anyone else does, doesn’t necessarily make it right for you, but we want everyone to live a more fulfilling and enjoyable life starting today, so we’re always more than happy to share what we do in the hope that it might inspire others.

Neither of us add additional money to old age retirement savings over the matched amount that our employers will pay.

We feel that money in our hands today can be invested more wisely so that it can start generating us an income now or at least much sooner than the state dictated retirement age.

This benefits us in a number of ways:

  • We get the 100% top-up from our respective employers
  • We get the tax-relief
  • This acts as a plan B should our plan A of achieving financial freedom today fail
  • The money that we don’t put into a pension is put towards our business and investing ventures
We're thinking of making Vanguard the provider for our SIPPS - will you?

But that doesn’t mean that we don’t use SIPPs. Andy invests in a SIPP because he has consolidated several pension pots accumulated over the years from changing jobs.

He doesn’t invest additional monies into it for the reasons just outlined but finds it a great way to manage his pot rather than having retirement money all over the place in old and more expensive workplace pensions.

With Vanguard entering the SIPP scene he’s seriously considering transferring his SIPP to them because he currently has about 75% of his SIPP invested in Vanguard funds. The question to ask is whether it’s worth paying more platform fees across the entirety of his portfolio in his current SIPP provider, for the sake of the small allocation that he has invested in non-Vanguard funds – probably better to use the Vanguard SIPP.

This is Ben’s plan when the Vanguard SIPP arrives – he has numerous pensions dotted around, and wants to bring them all together under a single low-fee umbrella.

If you have changed jobs and accumulated many different pension pots perhaps you could also consider consolidating it all with Vanguard. Before we finish let’s take a look at what’s on offer:

Vanguard Funds and ETFs

Vanguard offer a great range of funds and ETFs that cater for pretty much any experience level. For those that want to invest and forget they could look at the range of Lifestrategy Funds that cost just 0.22% or the family of Target Retirement Funds costing just 0.24%.

Alternatively, you could opt to be a bit more selective and construct your own portfolio. We like to build a World portfolio, which can easily be done using what Vanguard have on offer.

Do you think the Vanguard SIPP is a game changer for retirement saving and will you be moving your pension to Vanguard? Let us know in the comments section.

Property Shares – Should You Invest in REITs vs Investing in Property Directly

Investing in property is a national obsession in the UK, and any way we can make that easier for investors to achieve gives us warm feelings inside.

That’s why today we’re talking about investing in property through REITs (Real Estate Investment Trusts), what they are, how you can invest in them, and whether it’s ultimately the right thing for you.

The most obvious way to invest in property would require you to raise a huge deposit of at least £20,000 to buy one house or commercial unit on a mortgage. An investment in the most popular UK REIT on the other hand can be achieved for about £6.50.

Knowing how to invest in property is a major gap in many investor’s knowledge, and any properly diversified world portfolio should have at least some exposure to bricks and mortar.

How do you get started invested in REITs? Let’s check it out!

Editors note: Don’t forget to check the Offers Page and grab free shares worth up to £200 plus £50/£75 cash backs when you open new investment accounts through the affiliate links there – including alternative ways to invest in Property!

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Equity REITs

This article is about Equity REITs, which is the type that normal people can buy into without needing to be well connected or a millionaire.

An equity REIT is a Real Estate Investment Trust – a company that you can buy shares in – and that company owns (and in most cases operates) income-producing properties.

The types of property within a REIT are generally commercial property such as offices, apartment buildings, warehouses, hospitals, shopping centres and hotels.

Also, within the past 3 years there have been a number of UK Residential REITs listed on the London Stock Exchange.

These investment vehicles offer an easy and diversified route to investing in residential property, as an alternative to Buy-To-Let, targeting returns of 8% plus!

The type of assets you might find in a REIT

How REITs Make Money

REITs own properties which they lease out to other businesses, collecting rent. In this way the company generates income which is then paid out to shareholders in the form of dividends.

REITs must pay out at least 90 % of their taxable income to shareholders by law—and most pay out 100%!

How to Invest in a REIT

Because equity REITs are public limited companies, you can buy shares in them just like any other company on the stock market – and there are some sweet buys out there right now.

Two of our favourite UK REITs on the FTSE are British Land (BLND) and Tritax Big Box (BBOX).

British Land is a London-centric portfolio with a 5.5% dividend which looks sustainable, while warehouse behemoth Tritax offers a 4.5% dividend and includes as commercial clients the likes of Tesco, Unilever, and even Amazon.

Those massive warehouses you see on the side of motorways? Likely to be owned by Tritax!

Regular followers of Money Unshackled know that we like to do our investing via ETFs where possible, to maximise diversification and minimise fees. Well, you’ll be please to know that REITs are available via ETFs!

Property inside a REIT inside an ETF

REIT ETFs

Exchange Traded Funds are collections of shares, usually highly diversified, that trade on a stock market like a company, meaning you can buy shares in it.

When you buy a share in an ETF of REITs therefore, you are buying in one transaction into multiple REIT companies, which in turn each own multiple commercial properties. Ultra, ultra-diversified property investing!

The top UK ETF for commercial property REITs in our opinion is the iShares UK Property UCITS ETF (IUKP), which includes – amongst many others – holdings in both British Land and Tritax REITs.

iShares is in our opinion one of the two best ETF providers in the UK alongside Vanguard, and tend to keep fees low. This ETF has a distribution yield of 2.95% and has returned total gains on average of 8.7% per annum over the last 10 years.

As an ETF it has an ongoing charges fee, which as a property fund is higher than a typical ETF which invests in normal stocks: at 0.4%. We assume this reflects the lower demand for REITs and the higher complexity of this type of fund. Expensive – but we think, a price worth paying.

This ETF is available on our favourite zero-fee trading apps Freetrade and Trading 212, and you’ll find links to set yourself up on these platforms on the Offers page. Use these links to get a free share on sign-up!

Residential REITs

Residential REITs

Most REITs invest in commercial property, big office blocks and warehouses used by big companies. A little-known fact is that there are now a few REITs that deal specifically with residential properties.

Residential properties are houses and apartments like the one you live in, rented to ordinary people who live there and pay their rent to a property company.

As we alluded to above, there are now a number of UK Residential REITs listed on the London Stock Exchange.

These alternatives to Buy-To-Let are in some cases targeting returns of 8% plus, without any of the stresses that come with being a landlord.

The Residential Secure Income REIT (RESI) gives shareholders exposure to UK house price movements combined with steady rental income streams.

Returns are passed to you, the shareholder, in the form of a target annual 5% dividend and total returns expected to exceed 8% per annum.

UK Residential REITs vs Buy-To-Let

The returns on Buy-To-Let are still way better. This makes sense from an effort-in/return-out point of view, as buying a few quid’s worth of REIT shares is far simpler than saving a £20,000 deposit, project managing a renovation and sourcing and managing tenants.

But the main reasons Buy-To-Let gets better returns are Leverage, and that they are Undiversified. Let’s take leverage first.

REITs are great for steady rental income as long term leases are standard

Leverage

A standard Buy-To-Let will be financed 75% by debt – a mortgage – with a 25% deposit from the buyer. This means that any growth in the property value will be multiplied by 4 in returns to the investor.

A £100,000 rental property that grows by 2.5% to £102,500 is a return of £2,500; that is, £2,500 return on the £25,000 deposit the investor actually paid for the house. A 10% return – and that’s before rental income profits, which could easily be another 10% on top.

Interestingly, the Residential Secure Income REIT aims for a 50/50 debt to equity ratio, so profits should still be leveraged – but in this case only by a factor of 2.

Diversification Averages Out Returns

Diversification from a REIT means you are getting the returns from many average properties. A properly researched Buy-To-Let that you’ve put some effort into setting up yourself could easily make you better than average returns.

However, you have the risk that it is a single unit; and could yield zero rental income if the property were empty.

Get a £50 bonus when you open a Loanpad account through our link on the Offers page

Tax Benefits of REITs

Taxes on Buy-To-Lets are varied and can be in many ways manipulated to suit your own personal circumstances, but REITs have some tax benefits too.

REITs benefit from a benign tax regime. For example, UK REITs don’t pay corporation tax or capital gains tax on their gains from property investments!

Rather, investors are taxed on the distributions as profits of a UK property business, treated as income tax rather than as a normal dividend receipt – typically taxed before you receive it.

Considering dividends from normal companies are always after-corporation-tax, REITs being able to avoid being taxed pre-dividend is a win for most investors.

Getting Started

Understand the specific REIT ETFs and individual commercial and residential REITs we’ve reviewed and get started by adding this asset class to your portfolio – and why not get started investing in UK property ETFs on a zero-fee platform like Freetrade – and get a sign up bonus on when you use the link on the Offers page. And while you’re there, check out other ways to invest in Property like Loanpad, who’ll give you a £50 sign up bonus when you use our partner link. You’re welcome.