Where do you start? My plan for this article is to break down some different types of investment and then lay out Katie and my strategy so you can see what we do. This is by no means investment advice rather it is an article exploring options and sharing my approach.
What can you actually invest in?
There are so many different things you can "invest in". Some of them are actual investments that provide a solid return on investment and some of them are just gambling. How do you know the difference and where should you put your money?
After reading Rich Dad Poor Dad I knew that I wanted to buy assets that produced a return and I knew I wanted to buy my time back. The one in that book that he speaks about at length is property. I had a very bad experience with stocks and shares when I was younger with my Dad that had really put me off investing in stocks and shares so my early strategy revolved entirely around property.
Let's look at the options and discuss each one a little bit (read the disclaimer at the bottom of the article as well)
In the UK there are numerous property TV shows about doing up properties and there is a real buzz around property. On average in the UK property doubles in value every 9.25 years (this is UK wise so is shorter in high growth areas and less in others) and people get very excited about property and see it as a safe investment because you actually own the building! A couple of things to think about when buying property:
Illiquid versus liquid
Property is an illiquid asset. What I mean by that is when you buy an investment property you have a lot of money tied up in the property and if you want to sell it then it is going to take a while to get that money out. The money is not very liquid and easily accessed.
Units of 1
Property is very binary if you are individually investing. You have to save and buy in units of 1. You can't really buy £10 of a house. When you buy an investment property you are going all in and buying an entire property for £100,000+
Easy to understand
Property is a lot easier to understand than a lot of the other asset classes because we have all lived in or rented one so we have experience of this. This makes it easier to understand the economics of capital appreciation (how much the house goes up by) and rent each month.
When you buy a property most people do it with a mortgage. This means you are leveraging your money with the banks/building society's finance. Leverage is a double sided sword. If the property price goes up you see all the profit and if it goes down you see all that downside too! We can explore leverage in another article later
Other ways to invest in property
Real Estate Investment Trusts (REITs) is another way to invest in property without investing the whole amount. You buy a share of the REIT with other investors and then you own a small percentage of the properties that the REIT holds and get a return on that percentage. This is a way to invest without having to build up an entire house deposit to do it yourself.
Your own Home
In my opinion the home you live in is not an investment because it costs you money every month. I do not see the flat I live in as an investment because it has a lot of my money tied up in it and it is costing me money every month. You can turn the home you live in into an asset by renting out a room, converting the outhouse into an Airbnb and generating an income from it.
Passive versus active
A lot of people talk about property as a passive income source and I want to suggest that property is not a completely passive investment. Imagine a scale from passive to full time activity; on the full time activity end of the scale is starting a business, this takes a massive amount of energy and on the other end of the scale is you do nothing but collect the income. Property is not completely passive and takes energy and time.
For us we didn't want to pay the estate agent management fees and lose 10% of our profit so we manage our 2 properties ourselves which means we do a bit more of the work and collect a bit more of the profit. Last night our tenant messaged us that they are having a problem with their tap and I need to go and fix it (this is not completely passive!)
Alan & Katie's strategy
We currently own 2 studio investment flats that are rented out. We manage them ourselves and rent them out. They provide a rent return each month and have been a good investment. We are considering selling them though as we are travelling more it becomes more difficult to manage them when you are on the road. We bought both these flats before I understood more about stocks and shares and if we took the money out we would put it into a low cost Vanguard Index Fund
That was a lot about Property! Next up stocks and shares!
Stocks and Shares
Way back when I was maybe 19 or 20 my dad was investing some of his money. He got a financial advisor to come round who showed up at our house in his flashy convertible car and persuade my Dad and I to put our savings into a high tech management fund that had been performing with good returns for several years now. I had £7000 which was my entire life savings at that point and was enough for a house deposit so I was choosing between buying a hose and investing in stocks and shares.
I invested in the stocks and then a few months later the 2001 stock market crash hit and my fund went from being worth £7,000 all the way down to £1,200. I lost nearly all my life savings. I want to swear about it now just thinking about it.
I eventually sold the fund for £1,400 4 years later. it never recovered.
This experience put me off ever investing in stocks and shares again. I was firmly in the camp of DON'T DO IT!
Until I started to invest in my education. I read many books on investing and many blogs and I have learned a lot. There are basically 3 ways you can invest in stocks and shares:
1. Pick individual stocks and shares
This is where you pick a company you like the look of and invest your money solely in that business. So you might say that you think Apple is going to do well in the future and you invest your money in that business. This is risky as any business might fail and you could loose all your money. It is also saying that you have a crystal ball and know which businesses are going to do the best.
I have realised I am not well enough read and not willing to invest the time to learn which stocks and shares to pick so I don't do this.
2. Actively managed funds.
This is where you say I am not clever enough to pick stocks and shares so I am going to hire someone to do it for me. So you pick a fund that has a fund manager with a good track record and then he invests the money for you into different stocks and shares. In return for this the fund manager gets a percentage of your money normally between 1-5% and he/she gets this no matter whether the market goes up or down. So they get paid even if you lose money.
Sounding good? This is the one I picked with my dad.
According to the book Money Master the Game by Tony Robbins 96% of these funds fail to out perform the market. What they sell you on is the fact that they can pick the best stocks and outperform the market. The reality is that there is hardly anyone in the world that can actually outperform the market
3. Index funds
Index funds where created by Jack Boogle as a way of investing your money across the whole market. So when you buy some of an index fund they don't pick stocks they buy a small percentage of everything. So you get a small percentage of Apple, Google, Nike and all 3600 companies floated on the American market.
Because no one is actively picking stocks or moving money around and these stocks just track the market they tend to have a very low fee associated with it. For example the Vanguard Index funds can have fees as low as 0.05% in the UK to invest with them. This is certainly cheaper than actively managed funds.
Katie and Alan's strategy is to invest in Vanguard index funds. Nearly all our money is invested in the global developed world index fund with Vanguard.
I have realised that I am not smart enough to pick stocks and shares and neither are most fund manages so I don't bother and I just track the market.
Learn more before investing
Most of what I have learned about investing in the stock market has come from two books.
The bit I wanted to leave you with here is that you can start investing from £100 a month with Vanguard and even lower with other companies. You don't need to save a fortune to invest you can start small and build from there. I am going to write more about how to save and invest later but for now you can get going with very little.
This next bit is not a recommendation it is just a statement of fact about my strategy for investing and what I do. All I am reporting is what I do with my savings. I buy 1 index fund mainly and it is:
Vanguard FTSE Developed World (ex UK) equity index fund - accumulation
What this means is it is a global fund where you buy stocks and shares from all the developed countries around the world. I buy the accumulation fund so the dividends it pays are rolled back in because I want it to keep growing.
We can explore this more in another post but I wanted to share the punchline with you straight away
You can invest your time and energy in starting your own business. This is the least passive investment of all and creates you a second full time job to start with.
You could also invest in a startup company that you find in the UK. I think this is highly risky as the national average survival rate for startups in the UK is 53.7%. This means the business you pick has a 50/50 chance of surviving 3 years.
Not a risk I am willing to take at the moment.
Gold and other stuff like that
You could invest in gold or other natural resources. This is an option but I don't know enough about it to talk coherently. So I am going to leave it there and say it is an area that we do not invest in and makes me feel particularly nervous.
Crypto currency and other things.....
A lot of people are very excited about this at the moment and it has the promise of huge returns. Every time I hear about it at the moment it makes me feel like it is a scam, especially the people plugging it as an investment.
For one of the best articles I have seen on investing in crypto-currency and why you should avoid it at the moment read this by Mr Money Mustache
Cash in the Bank
Cash in the bank is a devaluing asset. What I mean by that is at the moment inflation is higher than the interest you get in most bank accounts. So every year you leave your money in the bank it has less buying power than it did before.
So by leaving your money in the bank it is devaluing every year. This is safe place to put your money but it is not an investment that will provide good returns.
There are so many different ways to get started investing and that makes it overwhelming for most people (including me for many, many, many years!)
These investments are also covered in warnings (as they should be) saying that you might lose all your money! If that doesn't put a few people off then I don't know what will!
It took many years for Katie and I to come up with our investing strategy which is currently Vanguard Index Funds. We take what money we can save and we put it in ISAs, SIPPs and taxable accounts to buy Vanguard index fund.
I am planning more articles on how actually to choose which place to invest your money in and how practically to do it. It is the practical steps that are so important. But we have to through the options before we get to the practical steps.
I think the key to getting started in investing is to keep it simple and take the small steps you can each month. When I started I was overwhelmed by trying to learning everything. It wasn't until I read Jim's book The Simple Path to Wealth that is really clicked and I started to make massive progress.
Keep it simple, keep it low risk, keep it diversified and GET ON WITH IT!
Please write me a comment below as I would LOVE your through and I will add to this article and edit it based on what you think and what thought it inspires with you. Please do let me know what you think...……...
Disclaimer: Shit happens
I am sharing with you what I have learned about investing over the last 10 years I have been actively involved in the game. It is important to remember that investments might go up as well as down and your money is at risk with nearly all of these. You can loose all your money investing and it has happened to me and my family. This is not something you get involved in lightly without doing your own research. I don't want you to trust me I want you to go out and do your own home work. This article is meant to inspire conversation and get you started on the journey to investing wisely.
When choosing which of these investments to go with there is a lot to consider including the time frame you are investing for. Please think through all these different things before diving in. I am going to develop more guides to this as I go to help.
Where do we go from here?
My aim is to help you get to financial independence and create your own passive income. I want to help you buy back your time so you can do whatever you want with your life. This is a big mission and we will get there one step at a time.
Let me know your thoughts below
I built this website to share the life lessons I learn along the way, the cool stories, the adventures, the amazing people and everything I learn from all the stupid mistakes I make! If you want to keep up to date then stick your email in below. I promise to never share your email address or spam you! Alan