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…

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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

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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…

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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:

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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:

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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:

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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:

Go To YouTube Channel

The 3 Essential UK Dividend Stocks For Any Retirement Portfolio

You guys know we spend a lot of time searching for the perfect investment portfolio that will get us to retirement, but also keep us there. There’s only space for quality here – all killer, no filler.

We want the best index funds, the best properties, and… the best individual stocks. This article is looking at the stocks that we think are suitable for holding from today right through to retirement, whenever that might be for you.

These stocks need to be evergreen – they need to be companies with strong roots and staying power. But they also need to be powerful dividend stocks for the stability and cash flow they provide – UK dividend stocks specifically so we can avoid nasty foreign dividend withholding taxes.

And ideally, they’ll be in essential industries – even better, near monopolies with impenetrable barriers to entry for potential competitors.

We think we’ve found 3 such stocks that fit the bill. Let’s check it out…

Much of the research for this article was made possible due to our subscription to Stockopedia, the premium stock picking research and analysis tool for investors. Try Stockopedia for yourself with a free 14-day trial at the special offer link here, which also gives you a 25% discount off your membership if you decide it’s for you.

Alternatively Watch The YouTube Video > > >

Essential Retirement Stock #1 – British American Tobacco (BATS)

Tobacco, you say? No way! That’s a dead industry! Hear us out.

This company is one of the best we’ve seen in a long time and has been top of our list for a while now. Its finances are killer, and we’ll get to those in a bit. Spoiler alert: it has a sustainable 8% dividend!

But its current finances mean nothing if it’s not going to be around for your retirement. Let’s address those concerns first.

At the start of this piece we hinted at 4 criteria for any retirement stock. These are:

  1. Essential Industry;
  2. Barriers To Entry and an Economic Moat;
  3. Strong Roots – a large cap stock with staying power;
  4. and Kick-Ass Dividends!

Ideally the stock will be reasonably priced too, but that’s not so much of a concern if you’re holding it forever and it pays a good dividend.

So does BAT tick all the criteria boxes? The first one was Essential Industry, and it is indeed essential to the many tobacco addicts around the world! Its customers are physically compelled to keep buying its products.

There is a reasonable worry for shareholders that the number of smokers is declining globally.

This chart from the World Health Organisation shows that more countries are in the “declining usage” side at the top of the chart, than the “increasing usage” side at the bottom. Note that these are percentages of adults in each nation, but population sizes are forever expanding which will offset this decline to some degree.

They are already diversified as one of the world’s leading vaping and e-cigarettes producers as an alternative to tobacco, which is maybe the future of the company long-term. There also exist opportunities to expand into cannabis in the countries which it becomes legal in, which we expect will be a fair few over the coming decades. BAT have indeed just acquired a £126m stake in Canadian cannabis firm OrganiGram.

As for Barriers To Entry, who else could possibly compete with BAT? It’s illegal or difficult to advertise smoking products in most of the big markets BAT sells in including the UK, USA, Europe, Australia and NZ and much of Asia, which means this already established giant can exist unopposed by new entrants to the market.

BAT doesn’t need to advertise anyway – their brands are well established in their markets and saving all that money on marketing means they can pay out a bigger dividend. They rake in money, and they pay it straight out to you.

It has Strong Roots, present in 180 markets with 150 million daily consumer interactions from a dedicated pool of customers providing steady cashflow. BAT has been around since 1902 and has a market cap of £61bn.

Looking more closely at its finances now, its dividend yield is around 8% and forecast to grow, but we can see that this is not an anomaly – it’s actually at a sustainable level.

That’s because its dividend cover is consistently over 1 – anything over 1 means it can easily afford the dividend, and is the case for at least each of the past 6 years, with this forecast to continue.

The dividend yield looks overly inflated because the shares look oversold, which we’ll take a look at in a sec.

In 2017, it bought out the second largest tobacco company in the US, Reynolds American, a major landgrab invasion to grab an even higher stake of the American market. BAT have taken what is theirs, as global tobacco kings.

This left them a load of debt – but they are committed to paying this down a bit every year and have been doing so. Their revenue and profits are massively up since the acquisition.

BATs finances look so solid it appears they haven’t even realised that there’s a pandemic going on – profits just keep on growing!

Despite all this positivity, the price of BAT is ridiculously cheap. Its 12-month future forecast PE ratio is 7.8, Stockopedia showing us that this compares very favourably with the industry and with the wider market.

The EV to EBITDA, which is a slightly more accurate indicator of price as it factors in debt, is 9.6 – still very cheap. BAT is clearly under-priced when you add in the sustainable dividend.

The market has decided it doesn’t like BAT – its share price has plummeted over the last 5 years – probably due to overdone fears haunting the tobacco industry. Despite these fears, 21 institutional analysts are saying it’s a Buy.

We think this jewel of the British crown has been overlooked in favour of trendy new socially responsible stocks and green technologies. But don’t write tobacco off if you want to earn big, long-term dividends.

Essential Retirement Stock #2 – BAE Systems (BA.)

OK, we’ve invested in lung cancer with a tobacco company, now let’s buy some guns and bombs…

Seriously we didn’t plan it like this, but it seems to be that the so-called Sin Stocks are the ones to buy for long-term dividend success.

If we’re talking morality though, we like to remind ourselves that smoking tobacco is a personal choice, and without a well provisioned military to defend us we’d all be speaking German.

BAE Systems is one of the UK’s main arms, security, and aerospace companies, but it’s reach is much bigger than Britain. It has a global presence, being the largest defence contractor in Europe and ranked third-largest in the world based on 2017 revenues.

When China starts raining fire down on the West, we’ll be glad that BAE is there to have our backs.

BAE’s customers are national governments, supplying the essential bits and bobs for their armies, navies and airforce.

They’re also heavily involved in cyber defence for nations, which is going to be a growing problem for the world to deal with as advances like quantum computing come into play.

They have a big Barrier To Entry in they are practically a monopoly provider for some of the world’s richest countries. Let’s look at their finances to see if they have staying power.

Stockopedia was red-flagging a potential liquidity risk for us to research further. On inspection, it’s because its debt has shot up in the last couple of years.

This is fine because we know that its revenue comes from governments, most of which are able to magic money out of thin air from their central banks. They won’t be defaulting on their contracts. Total debt is only 2x annual profits – not high by any standard.

BAE has been supplying governments with weapons since 1902, surviving much worse than a bit of covid related liquidity worries.

Their revenue is growing consistently, as is net profit. As are dividends, and dividend cover. A yield of 4% and forecast to grow is good, and it is sustainable. This is company that’s not going anywhere, other than up.

And like BAT, they have an incredible Stock Rank in the 90s (of 100), cheap PE ratio for their industry and a cheap EV to EDIBTA ratio. In fact, BAE is more cheaply valued than all but one of its international peers in the defence sector.

Essential Retirement Stock #3 – National Grid (NG.)

National Grid is the definition of a stock with an Economic Moat. How could it have any competitors? It owns pretty much all of the electricity delivery networks in the UK.

Its cables, pipes and pylons criss-cross across the country, an essential part of the system that delivers power to all our houses and businesses: from power source, to lightbulb.

National Grid enables our economy to function. We’d go so far as to say that without the assets it owns, there is no economy. That’s a big tick for Essential Industry.

Its cables do not discriminate between green power and dirty power either – it is transporting electricity, which makes your TV work the same no matter the source. This means dependable revenue and stability for its share price.

That said, work is constantly ongoing to keep the network fit for purpose in a cleaner energy future, and to keep expanding the grid. It’s selling off its gas pipelines and buying up more electricity assets in recognition of the move away from fossil fuels.

Projects include 24 miles of new tunnels deep under London to ensure reliable electricity supplies for the next 120 years; it’s also just finished a new 3-mile tunnel under the River Humber to transport 25% of Britain’s remaining gas needs.

They’re also building the world’s longest undersea electricity cable to connect the UK to clean hydro power direct from Norway’s fjords, and a boat load of new revenue for its shareholders.

It has operations in the US too in New York and New England to diversify its income streams – in fact 45% of its operating profits came from its US operations in the year to March 2021.

On the face of it, National Grid has ridiculous levels of debt, at 18x its net profits. But it’s not a normal business model – its revenue is completely steady and predictable, and the company’s services will be required for many decades, even centuries to come. It has no liquidity problems as a result of its debt, with average current and quick ratios and a decent interest cover.

Dividend yield is rock solid at over 5% and forecast to grow, with dividend per share creeping up and forecast dividend cover expected to be comfortable.

It’s probably not a great time historically to buy into this stock, with an average PE ratio, and a really bad EV to EBITDA ratio relative to its industry.

But can we really compare National Grid to any other company? It’s got a monopoly in the UK – and there’s nothing else quite like it.

Frankly, this is one of those times when the price shouldn’t really matter too much, as long as the dividend yield is acceptable to you, which at 5%+ it likely will be. This stock is one to hold forever and grow fat on the dividends.

Who Wants More Stocks?

If you liked this post and want even more stocks, then let us know down in the comments here or over on YouTube. There were too many stocks to cover here and give proper justice to them all.

Or, filter for the best stocks using the tools on Stockopedia. If you want to expand your portfolio of UK dividend stocks, go grab yourself a Stockopedia subscription and start digging. Remember, the first 14-days are free with our special link and it’s 25%-off thereafter.

What do think are the best stocks to retire on and why? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Matt Gibson/Shutterstock.com

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

Go To YouTube Channel

My Plan To Grow My £200k Portfolio To £1m In Under 10 Years

In a post back in May, I showed how my portfolio had grown to £200k over 5 years, starting from almost nothing.

Now I want to talk about my plan to grow that £200k to £1m over the next 10 years or less. It’s already up to £254k since that last article, thanks to the property market – a good start!

This won’t just be about what I’m doing. It will be packed full of tips and key steps to take that you can apply to your own financial journey.

There are a lot of ways to get to £1m in 10 years, but the plan outlined here is one that literally anyone can do if you’re willing to take your investments to the next level.

That’s right – a super high salary isn’t required, nor do you need to wait a lifetime for compounding returns of 4 or 5% to take their course.

This is a fast, sensible route to riches that I’m taking, and that you might want to consider taking too. Let’s check it out!

ETFs are the bedrock of my stocks portfolio. With InvestEngine you can build a portfolio of fractional ETFs for free. Just set the percentage allocation for each ETF and you’re done – say goodbye to spreadsheets! And rebalancing your portfolio is as simple as couple of clicks. New users to the platform will receive a £50 welcome bonus if you use this offer link.

Alternatively Watch The YouTube Video > > >

Getting To £200k – A Recap

The first £200k of my Freedom Fund was built over 5 years mostly from cash contributions from salary savings, and from home equity release on my house. Together that made up around 2/3rds of the portfolio’s value.

Actual returns from my investments contributed the other 1/3rd of the value to that initial portfolio.

In the early stages of your Freedom Fund’s life, your contributions from your salary will have far more of an impact than your returns on investment.

Enormous percentage returns don’t really matter all that much at this stage: a 20% return on £1 is still just 20p. You will be able to grow your portfolio at a steady rate just by adding new cash.

Why The Next £800k Needs A New Approach

Soon, those monthly contributions from work will become almost inconsequential. In fact, right now I’m adding barely anything from my salary from Money Unshackled, and my portfolio is still growing fast under its own weight, simply from compounding.

Cashflow from rent payments on my properties goes into the stock market, and the market values of the properties and the shares are growing like mushrooms.

New money from your salary will be a nice little extra boost at this stage in a portfolio’s life, but it’s not a requirement if your investing returns are high enough. We can demonstrate this nicely using the Money Unshackled Early Retirement (FIRE) calculator.

The blue cumulative contributions bars are quickly outstripped by compounding returns as the years go on.

Left to grow in index funds or ETFs without any further contributions or effort, £200k would still get to £1m, but over a couple of decades. ETFs will always be a major part of my portfolio, but I will need to pull all the levers that I’ve learned about during my investing career to maximise my returns to get me to £1m in under 10 years.

What’s In Our Toolkit?

There are 4 main components that we consider appropriate for building a Freedom Fund. These are:

  1. Contributions from salary or other earned income;
  2. Cash from extracting equity from your own home;
  3. Index investing in the stock market – this is our bread and butter, and will use ETFs held in Stocks & Shares ISAs and SIPPs; and
  4. Leveraged investments in both stocks and property.

To grow rockstar wealth in under 10 years I’ll need my salary contributions, ISAs and SIPPs to be supported by the power of home equity release and, very importantly, by leveraging.

Leveraged investment property already makes up a significant chunk of my portfolio – going forwards, leveraged stock market indexes will do too.

The Plan

The following is based on real numbers from Ben’s current and forecast future portfolio. The Returns On Investment are based on the following assumptions:

  • Inflation of 3%: all numbers are after deducting inflation.
  • 5% pre-inflation annual growth in the property markets, which is at the low end of historical average UK house price rises going back to 1952. Adding in leverage from mortgages, capital growth ROI is increased in this portfolio to 17% pre-inflation.
  • Rental income is based on what I actually receive now.
  • Investments in Stocks & Shares ISAs and S IPPs will grow by 8% pre-inflation.
  • Leveraged stocks, bonds, and gold in the portfolio will grow by 18% pre-inflation.

We also assume a smooth ride in the markets, for ease. In reality, it’s more likely there will be really good years and some bad years, maybe even a crash followed by a recovery.

So, here’s my smoothed-out forecast route to £1 million:

The orange headed columns are all property related. We don’t want to bog you guys down in too many numbers, so we’ll just point out the interesting things. There’s the opening and closing sizes of the Freedom Fund each year, while the numbers in-between are the various additions to the pot each year.

There’s Cash From Savings, which starts off at zero and assumes monthly salary will grow by a moderate £300 each year. As we are business owners rather than employees, this is a very conservative assumption. It should easily grow faster than this. That’s lesson #1 – work for yourself!

Now let’s talk about what’s happening with property investments in the middle there. My eventual goal is to have the option of selling my properties in the final years of the plan if, as I suspect, government meddling makes it more and more tiresome to operate as a landlord.

In the final years, property is gradually sold off rather than all at once, to take full advantage of the annual capital gains allowance. Rental income and capital growth go down as a result.

You get stung by capital gains tax on rental property, because HMRC fail to account for inflation. So even if you had only made an inflationary gain each year – and hence nothing in real terms – you’d still be taxed as though you had made a big gain when you eventually sell the property.

Cash is funnelled from the sales into other assets, which has a net zero overall impact on the value of the portfolio since I’m already accruing for capital gains tax. In the earlier years, I’m able to take cash out of the properties by remortgaging them. In one case, I plan to remortgage my own home and injecting that cash as fresh money into the Freedom Fund.

I don’t mind having a slightly higher mortgage as a result, if it means I can buy investments that pay me an annual double-digit rate of return.

We don’t include the values of our own homes in our Freedom Funds, as they can’t be spent. But if you extract cash from your home in a remortgage, that cash is fair game to be invested and then included here.

So, where’s that cash from the property equity release going? It’s primarily going into ETFs in my Stocks & Shares ISAs, and into Spread Betting.

For a full introduction to our method of doing spread betting check out this article/video next, where we explain what we’ve been doing to make killer returns!

Here’s why this portfolio grows so quickly over the next 10 years, from August 2021 to August 2031:

The light and dark green segments are the leveraged assets; light green for rental properties, and dark green for spread betting (which is leveraged stock, bond and gold market indexes). As I sell off the properties, they are being replaced with spread betting investments. This keeps leverage in the portfolio throughout.

The leverage, and hence the risk, is intentionally decreased though as a proportion of the overall portfolio over the period. The unleveraged ISAs and SIPPs right now make up 31% of the portfolio, while by the end they make up 45%.

The leveraged assets start out at 4x leverage as they are almost all mortgaged properties with 25% deposits, but leverage falls to 3x by the end – our current preference for spread betting.

In practice, I will be reducing my leverage much further than this towards the end if I’m doing well – volatility should ideally be reduced when you reach your goals. I almost certainly will reduce my leveraged assets to around 1.5x or less when the portfolio hits £1m, making the overall portfolio around just 1.25x leveraged.

As well as reducing leverage as I go, I’m also reducing effort. By the end, all my portfolio will be manageable from a web browser, at just a few clicks per month – no more tenants; no more calls from agents; no more mortgages to manage.

Of course, I always do have the option to just keep the properties, but I don’t need to.

Andy’s (MU co-founder) plans are similar to mine, but he’s using spread betting from the outset as his source of leverage, instead of investment property. The returns are expected to be not too dissimilar, but could be considered higher risk, since there’s a chance the debt could be called in if it’s managed poorly – in what’s known as a margin call. Crucially though, it’s almost completely passive to manage.

How Pensions (SIPPs) and ISAs Slot Into This Plan

I’ll still be building up my Stocks & Shares ISAs – the holdings won’t be leveraged but they’ll be safe. No matter how much the market falls (outside of all-out nuclear war), I will always own these positions as the market can’t fall to zero. Despite the magic touch that leverage provides, an ISA is still my favourite tool for growing and holding wealth for this reason.

The ISA is the reliable base layer of the portfolio, that I will feed with cash from elsewhere in the portfolio until it matches the size of the leveraged assets (see right-hand side of bar chart above).

Our SIPPs hold all the pension money from our previous jobs, and neither of us are touching our SIPPs for now, until it becomes advantageous in the future to filter money from our business holdings through a pension.

For our age group, the likely age at which we could access our private pensions is 58. As we’re planning to retire a decade or two before this, the question must be asked whether we should be including SIPPs in our Freedom Funds at all.

In both our cases, it can – if you’re young, a pension should only be considered part of your current wealth if it is a relatively small-to-medium sized chunk of your overall net worth, such that you have other pots to draw an income from between now and retirement.

If a pension is where you’re holding most of your wealth, it can’t help you much while you’re young!

Also see this article for a much more in-depth analysis of how Stocks & Shares ISAs work alongside pensions to allow you to retire at any age.

Will you speed up your own investment journey to riches, or are you content to wait it out? Join the conversation in the comments below!

Written by Ben

 

Featured image credit: Andrey_Popov/Shutterstock.com

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

Go To YouTube Channel

How We’re Making 33% Annual Returns With Long-Term Spread Betting

Since 1978 – that’s 43 years – US stocks have returned roughly 12% per year. Not bad, but future returns are expected to be lower than this – maybe around 8%, maybe less. We here at Money Unshackled are not content with measly returns. No way! And if you’re like us you’re going to love what we’ve got in store for you today.

**EDIT 29th Sep 2021: The Step-By-Step Guide for putting the below into practise is now live! Read it here.

In this post we’re going to show you what we’re doing to make huge returns in the stock market with minimal effort. Our strategy is to take index investing to the next level, by investing in a portfolio of index futures using spread betting.

Don’t worry if you’ve no idea what any of that means, we’ll explain all the key things over the next few minutes.

Seriously, stick with us on this one – this is a lifechanging long-term investing strategy that might sound complicated at first, but give it a chance and it might just make you a millionaire in a fraction of the time that normal index investing can. Let’s check it out…

If spread betting isn’t for you but you still want to invest in indexes the good old-fashioned way, check out our handpicked favourite investment platforms here.

Alternatively Watch The YouTube Video > > >

Why We Started Spread Betting

If you want to get rich in the stock market you only have a few different levers you can pull:

(1) Wait longer for compounding to work its magic – This is not an option for us as we want financial freedom now. Retirement at old age is unacceptable to us and probably for you as well.

(2) Cut back and invest more – Again, not something we’re prepared do any further. We’ve already got well streamlined budgets and don’t waste that much money anyway.

(3) Earn more money elsewhere so you can invest more – Yes, we’re trying to do that within reason but achieving this is obviously not easy and we refuse to work all hours under the sun.

And (4) Earn a higher Return on Investment (ROI) – Most people cannot beat the market by stock picking, and so aiming to track the market using index funds is likely to give us the highest return we can get. We’re already doing this.

However, if we were to use leverage, we could amplify our ROI. The problem is that in the UK you can’t easily borrow money to invest in the stock market. But borrowing to buy property is both expected and relatively accessible for all. Whenever leverage is mentioned in the context of the stock market, it is almost always talked about negatively and you’ll be discouraged from using it. We think the naysayers are wrong!

Here in the UK the main ways to invest in stocks with leverage is with CFDs and spread betting but you only have to visit a brokers site and you’ll see that around 70% of investors lose money. Not very favourable odds!

The main reason people get burnt using leverage is because they have no idea what they’re doing and get too greedy. Done properly though there are big profits to be made!

And better still, spread betting is exempt from both capital gains tax and stamp duty. CFD’s are similar but any gains are however subject to capital gains tax. Therefore, we see no reason why anybody in the UK would trade CFDs when spread betting is available.

What Is Spread Betting?

Spread betting is a popular derivative product you can use to speculate on financial markets – such as forex, indexes, commodities, or shares – without taking ownership of the underlying asset. Instead, you’d be placing a bet on whether you think the price will rise or fall.

Spread betting is generally referred to as a short-term way to trade but if you look beneath the surface, it provides an excellent means for long-term investing. This is literally a hidden gem as nobody is talking about spread betting in this way.

With normal investing you buy a set number of shares, but with spread betting you bet an amount per point. Say you bet £10 per point on the S&P 500, and it was currently at 4000. If the index rose to 4400 it has gained 400 points. You bet £10 per point, so your profit would be £4,000.

When spread betting it’s really important that you understand the notional value or exposure of that investment. In this example we may have placed a bet of £10 per point but the value of our investment was £40,000 (£10 x 4000 index value). If we’d started with £40,000 cash in the platform, our £4,000 profit would be a 10% ROI.

Other than its tax-efficient status, spread betting can be used to invest using leverage, which means you only need to deposit cash equal to a small percentage of the full value of the position. Each platform and instrument will have different margin requirements but typically for the S&P 500 it is 5%. This means that you only have to deposit 5% of the value of the open position, allowing you to trade with 20x leverage.

In our example, the notional value was £40,000, so the minimum deposit is just £2,000. So, we could have used leverage to get the same £4,000 profit as before but from just a £2,000 investment – a 200% return.

In practice, for what we’re doing, we won’t be using anything like this level of leverage. Using this amount will almost certainly put you on the fast path to being broke, as any fall in the index value will put you below the margin requirement – leading to a margin call.

A margin call is the term for when the equity on your account – the total capital you have deposited plus or minus any profits or losses – drops below your margin requirement. You will either have to deposit more cash, or risk your positions being automatically closed.

One fantastic feature of spread betting is that there is no exchange rate risk. With a normal investment in an S&P 500 ETF, it could go up 10% from 4000 to 4400 but if the exchange rate moved against you by 11% you would still lose money. Not so with spread betting.

It doesn’t matter because you are placing a bet per point. Regardless of what exchange rates have done, the index has gone up 400 points. Hopefully that makes sense but if not just trust us.

The Money Unshackled Spread Betting Portfolio

At first, we considered solely investing in the S&P 500 index, but volatility and investing on margin do not play nicely together.

Fig.1: Portfolio returns backtest

We ran some back tests for the past 43 years. The max drawdown was 51%. Ouch! A max drawdown is the maximum observed loss from a peak to a trough, before a new peak is attained.

Assuming that history will repeat, a huge drawdown like this means that we can’t use much leverage – not even 2x before getting wiped out. Even when we don’t get wiped out it will be a hell of a roller coaster – one we could do without!

So, we had to do something that was even surprising to us – we have built a portfolio of stocks, gold and bonds, that significantly reduce volatility and the maximum drawdown.

The target portfolio is 60% S&P 500, 30% long-term US treasury bonds, and 10% gold. A traditional 60% stocks / 40% bonds portfolio would historically have provided a similar return, so it’s not a bad alternative.

However, with all the money printing that’s going on and enormous national debts that countries are drowning in we personally think the portfolio will benefit from a touch of gold.

The stocks, bonds and gold portfolio has a max drawdown of just less than 27%, which means we could use 3x leverage and never have to worry about a margin call: 3 x 27% gives an 81% worst case historical fall, which keeps us safely out of the danger zone, which is around 95%.

Let’s stop there for one moment to remind everyone that this is based on 43 years of data. Future results could be worse than this, and if you copy what we’re doing you do so at your own risk!!!

If that concerned you, one way to reduce risk significantly is of course to just drop that 3x leverage to 2.5x, or 2x, or even less, but potential returns would fall too. Over time and as we age, we see ourselves reducing our use of leverage to less than 2.

The 100% S&P 500 portfolio does have the best compound annual growth rate of just under 12% but our more balanced portfolios have compound annual growth rates of around 11% but crucially with less risk.

The Sharpe ratio is a genius metric that shows the additional amount of return that an investor receives per unit of risk. As you can see in the table, the balanced portfolios have much better Sharpe ratios.

If history does repeat itself this 3x leveraged portfolio would return around 33% less any costs, which on our portfolio are negligible. If we invested £10k over 10 years earning 33% our portfolio would be worth £173k. Or unleveraged, earning just 11% the portfolio would be worth just £28k – a massive £145k difference!

That’s why we’re so keen to increase our return on investment. A good return can literally be life changing!

How To Start Investing

The mechanics of spread betting are ridiculously complicated and if you don’t have solid investing experience and the patience to learn you should avoid doing this. Period! With that said, I picked it up within about a week of making my first deposit. As with anything I find it best to learn by doing.

The first thing you will want to do is choose a spread betting platform. All the comparison guides online are of barely any use because they’re all geared towards short-term speculating and often compare platforms based on factors that aren’t relevant to this long-term investing strategy.

We will be investing in Financial Futures and two platforms we have found to be excellent for this purpose are CMC Markets and IG. I have used both and find them great for what we need. Their spreads on the instruments we’re buying are wafer-thin, which means it will barely cost anything at all.

We have found IG to be ever so slightly easier for beginners, but CMC Markets is our preferred choice as they give us more leverage on US treasuries. This is handy as it gives us a little more beathing space, so we can better avoid a margin call if the market tanked.

With typical spread betting strategies, you don’t need much money to get started, but to follow our long-term investment strategy you will need at least £2-3 grand.

Fig.2: Minimum portfolio on day of writing

Unfortunately, each instrument has quite a high minimum bet size and we’re trying to build a diversified portfolio. So, to invest in each of our assets with the right allocation we end up with a portfolio with a notional value of around £9.0k. At 3x leverage we need to deposit a third of that – so £3k.

This particular post is not meant to be a tutorial in how to actually place your spread bets but we’re working on a step-by-step guide, so keep your eyes peeled for that.

How To Manage The Leverage Properly

As we touched on earlier, we suspect that most people lose money spread betting because they don’t understand or underestimate how even a small swing in the stock market can wipe out a portfolio when it’s leveraged.

We’ve demonstrated that with our strategy, 3x leverage is about the most that should be used when making that initial investment. However, as the portfolio grows in value your leverage is reduced, and similarly if the portfolio falls in value your leverage is increased.

For example, say the notional value of your portfolio is £9,000 and you originally deposited £3,000, and so were 3x leveraged. If the portfolio doubled in value from £9k to £18k your equity is now worth £12k (£3k + £9k profit). Now your portfolio is only 1.5x leveraged (£18k/£12k).

Instead, if the portfolio had fallen by 20% from £9k to £7.2k which is a loss of £1.8k, your equity would now only be worth £1.2k (£3k minus a £1.8k loss). Now your portfolio is 6x leveraged (£7.2k/£1.2k).

Each time we invest, new contributions will be at 3x leverage. As the portfolio grows and our leverage falls, we will reset the leverage back towards 3x by investing some of the gains.

However, if and when the portfolio falls in value, we will not reset the leverage. This means that at certain times we might find ourselves at 5x, 10x or even 15x leveraged, while we wait for the market to recover and spring us back to our starting leverage. That’s the plan anyway. My heart will be in my mouth I’m sure if this happens.

Invest In Index Futures Contracts – Not Daily Rolling Cash Bets

When investing in an index via a spread betting platform you will typically have the choice between two different products: a daily rolling cash bet or a futures contract. In general, rolling daily cash bets tend to be used by traders looking for short term positions, and the futures contracts by those looking to take a longer-term view.

With the daily cash bets, you have to pay a financing charge for holding it overnight. Most spread betting platforms charge around 2.5%+LIBOR. However, for what we’re doing paying this is unnecessary. Long-term investors should use futures contracts because you don’t pay overnight charges with them.

Instead, futures contracts have an interest charge baked into the price but crucially it’s incredibly cheap and far cheaper than what you could get yourself anywhere else such as a loan. The embedded interest charge is known as the implied interest rate and will be close to the risk-free rate. The risk-free rate is assumed to be equal to the interest rate paid on a three-month government Treasury bill, which is currently near 0%.

If you’re new to Futures contracts this is probably super confusing. There’s no way we can explain everything you might want to know in this post, so we recommend doing some of the free courses on cmegroup.com. A good place to start would be their Introduction to Futures course, linked to here.

One thing you do need to understand about futures is they have expiry dates – normally quarterly. As they approach expiry, we’ll be automatically rolling them over to the next contract, and your spread betting platform can do this for you automatically.

Do You Receive Dividends?

When you invest in futures you won’t physically receive a dividend payment, but the expected dividend is factored into the price. Because you don’t receive the dividend the futures are priced under the current index price.

As the futures contract gets closer to the expiry date, the value of the index and the futures contract converge on one another.

We hope you’ve found this post useful and hopefully we’ve clearly demonstrated how we’re making bank using spread betting. If there’s anything that you want us to expand on let us know down in the comments and we’ll do our best to help.

What do you think about investing with leverage? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: Rawpixel.com/Shutterstock.com

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

Go To YouTube Channel

6 CRITICAL Mistakes You’re Making With Your Stocks & Shares ISA

So you’ve got an Stocks & Shares ISA or are thinking of opening one. It can be tempting to just crack on, build a portfolio of reasonable looking stocks and funds, and not put too much thought into what’s going on behind the scenes.

Did you know your ISA investments are probably still paying over the odds in tax? That’s because your investment choices play a large role in how much tax you ultimately pay.

You’re probably also paying over the odds in fees – particularly FX fees. Again, this can be easily avoided if you know how.

People are mismanaging their ISAs in all sorts of ways, including misunderstanding the £20k limit and even cutting their potential portfolio size in half due to dividend complacency.

In this article we’re looking at 6 common but critical mistakes people are making with their Stocks & Shares ISAs, along with what to do to avoid them!

If you’re looking for a new ISA provider, a great option for hands-off investors is to open an ISA with Nutmeg. Just deposit your money and Nutmeg does the rest for you – no investing knowledge required.

New customers who use this offer 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 > > >

#1 – You Still Have To Pay Some Taxes

Let’s kick off with the elephant in the room; tax. It’s what ISAs are for, to make your money invisible to HMRC. But ISAs do not make your investments completely tax free. They do protect you from the main ones of capital gains tax and dividend income tax, so are important to have, BUT there are some sneaky taxes that are still able to creep in.

If you make yourself aware of these, then you can make better investing decisions about what you’re buying within your ISA.

If you’re buying UK shares you will be stung by a 0.5% stamp duty tax with every purchase. This is a transaction tax, so one way to limit the impact of this is to hold your shares for the long-term, instead of trading in and out of your position. If you’re buying and selling frequently, each time you BUY it’s another 0.5% hit to your returns. If you’re only making, say, 8% growth in a year, that’s a significant tax.

Another way around stamp duty is to buy some international stocks instead. But these attract other taxes, such as the dividend withholding tax.

Many countries including the US and most European countries impose this tax on your dividends, which is taken before you’ve even received them.

We use synthetic ETFs like the Invesco S&P 500 ETF (SPXP) to avoid US dividend withholding taxes, and if you’re buying US stocks directly these don’t attract stamp duty either. US stocks still attract sales taxes, the largest being the Section 31 Fee or SEC fee, but you might say this is negligible at just 0.00051%.

But all of the companies you are investing in are paying corporation tax. So, you can’t avoid all tax – you can just try to make decisions that limit it. Remember, tax is just ONE element of portfolio planning, as part of your overall consideration of Total Return.

#2 – A Global Approach Might Mean High Foreign Exchange (FX) Fees

We always say to take a global approach to investing, but there are ways to do this which have no FX fees, and other ways which can have quite nasty FX fees.

What you probably shouldn’t be doing is frequently trading international stocks, such as US stocks, in your ISA.

Freetrade charges a 0.45% FX fee on stocks listed in foreign currency, i.e. not in pounds. Hargreaves Lansdown charges 1%. Interactive Investor charges 1.5%. Trading 212 charges 0.15%.

For the full listing of how much each of the most popular platforms charge for FX and all other fees, follow the link to the table on the Best Investment Platforms page.

The way we get around FX fees is to buy the bulk of our portfolios in ETFs, which we make sure are listed in pounds. Regardless of an ETF’s quoted currency, the underlying stocks in it can be from anywhere; for instance, S&P 500 ETFs listed in pounds invest in the top 500 US companies without you being charged an FX fee.

Note, we’re currently only talking about FX fees – you’re still exposed to exchange rate risk.

If you want to frequently buy and sell US stocks, you shouldn’t have to change your behaviour just because of silly FX fees. The answer might be to use a specialist app like Stake, which is designed to trade US stocks from the UK and solves the FX problem.

With Stake, your pounds are converted to dollars once at the point that you deposit cash into the app, rather than every time you make a trade.

This should save you a fortune in FX fees if you trade frequently. The app has no trading fees either, so you can buy and sell US stocks to your heart’s content.

Stake have a sign up offer for those interested, where new users will be given a free stock worth up to $150 when you use this offer link.

Stake doesn’t offer ISAs, so you can have a Stake account for trading US stocks, as well as an ISA elsewhere for your other investments. Just make sure the FX benefit outweighs any possible tax hit.

#3 – Don’t Fall Foul Of Capital Gains Tax (CGT)

It’s possible that you also hold investments outside of your ISA. These will be liable for capital gains tax if they exceed the annual allowance, currently £12,300. There is a clever tax strategy called Bed & ISA which means you can use your capital gains allowance on non-ISA investments without having to sit out of the market for 30 days.

The strategy involves selling your non-ISA investments, and buying the same investments again but within your ISA. Normally you’d have to wait 30 days before you could buy the investment back, otherwise it doesn’t count as an official sale in the eyes of HMRC, but using an ISA dodges this rule.

Investors with a large position in a stock or fund might choose to sell part of it to realise gains up to the capital gains allowance limit, so they are benefitting from their annual tax-free allowance.

If you don’t use the CGT allowance, you lose it, and you might otherwise end up being stuck with a larger gain in the future that’s above the tax-free limit.

#4 – Don’t Stop At £20k

ISAs have a £20,000 deposit limit each tax year, but there’s no reason to let this number dictate your investment goals. There are other ways to avoid paying tax on your investments even after you’ve hit the £20k limit.

The first is to ensure you are using your whole family’s allowances. This includes your spouse, and maybe your kids.

Your spouse also has a £20,000 allowance, and each kid gets £9,000. An average 2 child household therefore qualifies for £58,000 a year of ISA allowances.

Beyond this, each adult gets a £12,300 capital gains allowance and just a £2,000 dividend allowance. Because the dividend allowance is much smaller, it makes sense to put all of your high-dividend stocks and funds in the ISA and allow your growth stocks to be the ones that fall outside of your ISA limit.

Assuming annual growth of 8% on your non-ISA investments, you’d need over £150k before it even became an issue, or £300k as a couple.

Beyond THIS, tax can be avoided on investments by using spread betting, which can be used like an unlimited ISA for long-term investing if you know what you’re doing.

So an ISA is only one tool in your tax-fighting arsenal. But do make sure you are using your full £20k allowance if you can – if you don’t use it each year, it’s gone.

#5 – Don’t Follow The Herd: Portfolio Balance Is Everything

All the free trading apps are geared towards individual stocks. So is the media – look at any finance news and it will be about how Apple has done this, or how Gamestop has done that.

Rarely will you hear that the MSCI World Total Return Index has climbed by 26% in the last year, even though it has.

You could be investing in an ETF that tracks this index, or a collection of ETFs like the offering on Nutmeg which tracks the world in a similar way, instead of messing around trying to beat the market by building a portfolio of trendy stocks.

Make sure your ISA investment platform offers the range of assets that you need. Have you considered if you want to invest in REITs, which hold commercial property? Some ISAs offer these, others don’t.

Or investment trusts like Scottish Mortgage, which have an excellent history of outperformance – again, some ISAs offers these, and some don’t.

Do you care about actively managed funds? You won’t find these on the free trading apps.

Whatever you invest in, you need to consider how everything in the ISA comes together to create a balance of risk, return, diversification and perhaps a little fun.

You can be too cautious by over-investing in bonds, just because many investing gurus say you should have a load in your portfolio. But in this age of super low interest rates should bonds really be in your portfolio? Is the 60/40 portfolio outdated?

Likewise, you can be too risky if you only invest in individual stocks, or if your stocks are all in similar industries.

Remember your Pokemon training: a team of Fire types is useless if you come up against a Blastoise. And a portfolio of tech stocks is useless if tech crashes.

“Don’t follow the herd” also means “switch off the news”. Making investment decisions around events like Brexit and Covid might be too short-term, unless you’re picking stocks with the intention of making short term gains.

#6 – Don’t Let Cash Fester In Your Account

Some investors might intentionally choose to hold some cash in their ISA to max out their £20k allowance, even if they are not yet ready to invest it. That’s not what we’re talking about here. That’s a smart strategy.

What you should avoid is allowing your ISA’s dividends to remain stagnating as cash while you’re trying to grow your wealth.

Many ISAs will have the option to reinvest your dividends automatically into the markets. Robo investors like Nutmeg will just do it for you as part of the service.

Reinvesting all dividends will let compounding get to work for you properly. You’re really shooting yourself in the foot if you’re withdrawing your dividends before you’re ready to live off them, as it massively hinders growth.

The difference between an 8% return with reinvested dividends and a 6% return without them is enormous over 30 years. Starting with £100k, it’s the difference between a £600k final portfolio and a £1.1m portfolio.

Are you using your ISA to its full potential? How much will you be paying into it this ISA year? Join the conversation in the comments below!

Written by Ben

 

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You Won’t Believe What New Investors Are Doing!

Hi guys, here at Money Unshackled we love investor surveys. We’ll take any chance we get to delve into the mindsets and behaviours of fellow investors, and Freetrade recently carried out just such a survey. In this video we’re looking at the responses from over 2,000 investors.

We’re particularly interested in this set of data because, as we’ll soon show you, Freetrade’s userbase are similar in age to us and our YouTube audience.

Also, this is hot-off-the-press information and includes the opinions of both experienced and first-time investors – many of whom have had incredibly good fortune to start investing since those March 2020 Covid lows. Without further ado, let’s check it out…

First, we want to give a big shout out to Freetrade who carried out the survey and sponsored the video version of this post. Freetrade doesn’t charge any commissions when you trade, and has thousands of stocks and ETFs available, including the FTSE 100, S&P 500, and so many more.

Sign up from as little as £2 using this special link and you’ll be given a free share worth up to £200!

Remember, as with all investments, your capital is at risk – the value of your portfolio can go down as well as up and you may get back less than what you invest.

Alternatively Watch The YouTube Video > > >

First-Time Investors Or Experienced?

Until the dawn of commission-free trading apps like Freetrade investing was seen as an activity that was mostly for the wealthy. It was too cost prohibitive to begin building a diversified portfolio of stocks, and it astounds us that in the UK the old heritage platforms still continue to stick to their outdated business model of charging on a per-trade basis.

So, with this said it comes as no surprise that Freetrade has amassed an army of 800,000 customers, up from 600,000 in March 2021. This is phenomenal growth for a company that only launched its first app at the end of 2018.

According to the respondents in the survey, a whopping 59% are first-time investors and have joined Freetrade to kick off their investing journey. Just 41% are joining Freetrade with existing experience.

When you think about it this statistic is insanely high. With a typical investor likely to be investing for decades throughout their life, in normal times you would expect these percentages to be the opposite and overwhelmingly in favour of those with previous experience.

Our hunch is that while the old heritage platforms continue to grow their users slowly, the commission-free apps are hoovering up the new generation of investors in their droves. Users of the heritage platforms may be stuck in their ways.

UK Retail Investors – Who Are They?

Here are the age ranges and the overall gender split. It comes as no surprise to us that men make up the vast majority of investors, consisting of over 76% vs 23% for women.

Freetrade state that the reason fewer women are investing is partially caused by the inequalities in pay between men and women. We disagree!

Investing apps like Freetrade have all but eliminated fees, so if the take-up of investing still remains low amongst women, then we suspect it is something more innate than just a difference in salaries. Freetrade is proof that anyone can invest from as little as £2, without fees. So why should size of salary cause a significant difference?

If we look at a study like this one of YouTube video categories it is clear that some subjects are favoured by either men or women. Men and women simply have different interests.

Anecdotally, out in the real world we meet loads of guys who have a keen interest in talking about the stock market, but personally have found women as a whole are far less interested.

Next, on to age. 61% of the surveyed users are under 35 years old, with 40% being between 26 and 35 years old. This is probably to be expected and comes as no surprise to us. That age group have started to make some good money from their jobs and so have more disposable income to invest. They are probably also keener to invest through an app than perhaps older generations who might prefer a web-based interface.

One interesting point was the living situation of the respondents. 45% of respondents are owners of their property, 24% rent, and 20% live with parents.

Considering the young ages of Freetrade’s investors and the fact that home ownership is known to be shrinking in that demographic, we’re surprised that almost half of the survey respondents own their own home.

Unfortunately, the survey results do not mention investors’ employment earnings. But if 45% own their home we suspect that many of their customers are doing rather well financially.

Freetrade’s mission is to get everyone investing and there’s no doubt they are doing a great job but based on this statistic it would seem they might be helping more middle earners than those right at the bottom. Perhaps the message that anyone can invest from as little as just £2 needs more time to filter through.

Key Reasons Why UK Investors Start Investing

45% want long-term financial stability and the key reason was wanting peace of mind knowing they were building their savings, and another 30% wanted to retire early. Respondents were able to choose more than one answer, so there will be some crossover.

We don’t think there is any better reason than these to start investing. It’s not a coincidence that wealthy people take deliberate action to grow wealth and end up wealthy.

In 20 years or so, their peers who didn’t invest will no doubt claim that these investors got lucky or have some excuse why they didn’t get started themselves. But the reality is these investors took deliberate action today to invest to take care of their futures!

A worrying number of people – 19% – said they invested because they were bored in lockdown.

These sound like the sort of people who see investing as akin to gambling and are looking for a thrill. We can imagine that these guys are probably the sort investing in meme stocks and looking for that quick win.

The markets have been very kind to all investors since the Covid crash and delivered unprecedented growth. Therefore, even those who have had no idea what they’re doing have come out the other side smelling of roses.

Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.”

What Are The Main Goals For UK Retail Investors

49% want more disposable income to support their lifestyle. This is a great reason to invest but we reckon that many people have unrealistic expectations. Building up a portfolio that supports a lifestyle, or at least partially, takes a lot of money and a lot of time. When we say this, we absolutely don’t want to deter people from investing because every little bit put aside helps.

The 4% rule gives you an idea of what you can withdraw each year without running down your pot. So, for every £10,000 invested you could withdraw £400 per year. On its own this won’t change your life but build that investment pot over time and that 4% can you set you free.

36% said they were investing for fun and had no goals. To be fair we also partially invest for fun. Who doesn’t like making money? 34% said they were investing for a property. We’re not sure this is a good idea unless the property purchase was many, many years in the future or they don’t mind waiting longer if the stock market fell. Stock market investing is way too volatile for money that is needed in the short-term.

How Do DIY Investors Research What To Invest In?

46% spend a couple of days researching an investment before pulling the trigger, 32% spend less than a day, 19% spend more than a week, and 3% spend months researching.

This is probably a little simplistic because if we look at our own behaviours, we spend no time thinking about investing when its business as usual. For instance, our monthly investments into ETFs take no consideration time whatsoever. We know exactly what we’re buying, when we’re buying, and how much we’re buying!

On the other hand, when it’s a new investment strategy, like when we first started investing in synthetic ETFs, or using leverage to enhance returns, it took us weeks of detailed research.

46% were investing with Freetrade at least once per month. Most people are paid their wages monthly, so we would have assumed this was the most popular response. 22% said once every few months.

16% said they have only invested once or twice. These don’t sound like the type of people who are prioritising their wealth building. 14% said they invest at least once per week. We don’t think many people can successfully day trade, so long-term we’d expect this group of traders to lose money.

Here are the research channels being used and the percentage of people who use each channel. Unsurprisingly, Google is the most popular with 78% of people using it to get their information. Next up is the financial media at 48%.

Generally, the financial media can be a great source of information. But you also need to be wary of sensationalist and fear mongering stories. If you believed all the hype in the media, you would be selling everything due to an imminent crash caused by future inflation, a tech bubble, and tensions between the US and China. The next day you would be throwing everything at GameStop as it’s going to the moon.

Social media comes in at 40%. It’s interesting that they’ve grouped Reddit with useless social media sites Twitter and Tiktok. Reddit may indeed have idiotic subreddits but there’s also some brilliant ones, so we won’t tar them all with the same brush.

Data services and research services come in at 36% and 23% respectively. Data services includes sites like Yahoo! Finance and Stockopedia, and research services includes the likes of Seeking Alpha. Every investor who is investing in stocks should be using these kinds of sites. The sheer amount of quality data and research that you get is incredible and we highly recommend them.

And finally, YouTube comes in at just 3.5%. Shocking! As we primarily deliver our content through YouTube our audience are part of this elite group and obviously know where the best content is!

A Senior Analyst at Freetrade said, “Social media can make the headlines for the strangest of reasons but dismissing these platforms means ignoring the truly valuable educational content young people are finding on them.” He must watch Money Unshackled!

What Do Retail Investors Have In Their Portfolios?

We’ve saved the best until last. 95% said they invest in individual companies and only 50% own ETFs. While this doesn’t surprise us, we don’t think most investors should be buying stocks directly. Or at least they should limit it to a small part of their overall portfolio, which is what we do. We’re not told what their portfolio allocations are so there’s no way of knowing but my gut feeling is these investors are too exposed to some of the so-called trendy stocks.

We have long banged the drum that ETFs should make up the core of every investor’s portfolio. If you watch our videos, you probably own ETFs yourself. A shocking number of people – 45% – own Crypto. Freetrade doesn’t offer crypto, so presumably this is bought elsewhere, but this is a very speculative asset that most normal people probably shouldn’t own due to the real risk of losing a tonne of money.

If you do invest in Crypto it’s probably best to limit your exposure to a small part of your overall portfolio. Also, this volatile asset contradicts the main goals for retail investors that we looked at earlier. 34% were saving towards a property purchase and 24% to help raise a family.

As always, we hope you found this post interesting and don’t forget to go grab your free share on Freetrade using this link.

Where do you do your investing research and why? Join the conversation in the comments below.

Written by Andy

Featured image credit: Prostock-studio/Shutterstock.com

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

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