Investing

Portfolio

OK so it’s time for HowToSaveCash to nail his colours to the mast and let you in on what the HTSC portfolio looks like. I’m going to update this page on a monthly basis as well as post monthly updates to show the progress the HTSC household is making on achieving their net worth goal. The portfolio will be in percentage values, as it makes absolutely no difference to you, dear reader, whether the HTSC goal is to have a net worth of £10, £100, £10,000, £100,000 or £1,000,000.

HTSC Portfolio – July 2018

Here’s a sexy pie chart which gives an overview of the portfolio.

Here’s the breakdown of what is in the portfolio.

Overall Percent
Cash 17
Stocks & Shares ISA  50
Fund Name Percent
Vanguard LifeStrategy 80% Equity  Fund – Accumulation 100
SIPP  25
Fund Name Percent
Vanguard LifeStrategy 100% Equity  Fund – Accumulation 100
Work Place Pension (Aviva) 6
Fund Name Percent
Aviva Pensions BlackRock Aquila UK Equity Index Tracker S6 20
Aviva Pensions BlackRock Aquila US Equity Index Tracker S6 45
Aviva Pensions BlackRock Aquila European Equity Index Tracker S6 20
Aviva Pensions BlackRock Aquila Pacific Rim Equity Index Tracker S6 5
Aviva Pensions BlackRock Aquila Japanese Equity Index Tracker S6 5
Aviva Pensions BlackRock Aquila Over 15 Years Gilt Index Tracker S6 5
BrewDog Shares 2

Notes 

The Aviva pension is an auto-enrollment work place pension that Mr HTSC was signed up for some time in 2016/2017. The funds in the pension are ones that have been manually selected since being enrolled. The default fund that was chosen was an actively managed, high fee fund which just doesn’t sit well with the ethos of saving cash, so it was changed for the 6 index funds listed above.

Yes, Mr HTSC invested in BrewDog some years ago and happens to benefit greatly from the discount received in their bars and online shop for being a share holder. Yes, I know, spending money on beer is not a basic need but hey, you have to live a little right? For those wanting to know more here’s a link Equity For Punks.

 

Investing – Keeping an eye on fees

One of only a few variables you can control when making your spare cash work harder is fees. Unfortunately fees come in all shapes and sizes when looking at brokerages and funds. So I’m going to keep it simple and go over brokerage fees in this post.

Rule One: Keep fees to a minimum

Rule Two: Don’t forget rule one.

Brokerages are split into 2 camps when it comes to charging fees. Some charge a flat fee per quarter or year and some charge you a percentage of your portfolio value.

As for which broker you should use, generally, if you do not see your investment stash being worth more than £40,000 in the next 4/5 years then go with a percentage fee broker. If you see your investment portfolio value rapidly increasing it may be worth going with a flat fee broker straight away.

Platform Fee Example

We’ll use a portfolio value of £10,000 for the following examples. The examples will include the cost of 12 fund purchases over 1 year.

Hargreaves Lansdown (Percentage)

Here’s what Hargreaves Lansdown are currently offering when it when comes to their Stocks & Shares ISA charges: HL Fees

HL

Calculate annual fee: £10,000 x 0.0045 = £45

Total Annual Cost: £45

There are no dealing fees when dealing funds on HL so a monthly fee is all you will be paying. Just divide that annual amount by 12 for the monthly cost.

Lloyds Bank Share Dealing (Flat Fee)

Here’s what Lloyd’s are offering on their Stocks & Shares ISA: Lloyds Bank

lloyds

Annual fee: £40

Fund dealing charge: £1.50

Annual dealing fee: £1.50 x 12 = £18

Total Annual Cost: £58

As you can see, the percentage broker is the cheapest when the portfolio is worth £10,000. However, if you do the same calculations with a portfolio worth £40,000, the flat fee broker is the cheapest option.

Here’s a very simple breakdown of the fees that you should be mindful of when choosing a broker:

  • Brokerage platform fee (is it a percentage or flat fee)
  • Dealing fees (some platforms don’t charge for dealing funds but do individual stocks)
  • Exit fees

As always Monevator has done an exceedingly good job of taking the hard work out of choosing a broker: Monevator Compare Broker Table

 

Investing – Index Trackers

Hopefully you haven’t lost the will to live and you’re super excited about the prospect of your spare cash working hard for you. In a previous post I explained what a stock and a bond was.

First things first, what’s an index? You may or may not have heard of the ‘FTSE 100’. This is an index that is based in the UK and it’s a group of the UK’s top 100 companies based on market capitalisation (no worries if you don’t know what this means, here’s a nice explanation: Market Capitalisation ).

A list of the companies in the FTSE 100 can be found here: FTSE 100

As the previous blog post explained. Investing in just one company is as risky as it gets when buying stocks (unless you can set aside a large proportion of your time researching the company and I’m talking about analysing annual reports, investigating the company’s industry and what economic and global factors could affect the company’s profits in the future) and for the majority of investors like you and me, being able to spread our hard earned cash over many companies is probably the best way to go.

This is where index trackers come in. Instead of buying 1 company’s stock, you have the option to buy all 100 companies in one go by purchasing a unit from a fund.

Fund Basics

  • Funds sell units (not stocks).
  • Each unit is made up of the value of the group of stocks from the index that it’s tracking
  • There are 2 varieties of units
    • Income – These pay out distributions directly to you
    • Accumulation – These use the dividends paid by the companies in the index to buy more stocks on your behalf

A more in depth look at the different between income and accumulation units can be found here: Income vs Accumulation

Here’s a quick run down of looking at a fund’s page: Vanguard FTSE 100 Index

  1. This tells us that this tracker follows the FTSE 100 index and it’s the unit type of income
  2. This is the cost of 1 unit (you don’t have to buy them in whole units). The ‘Change’ tells us the change in price from the previous day
  3. This is the number of stocks that unit price comprises of
  4. This is the Ongoing Charge Figure. More on fees later
  5. How risky the unit is out of 7. 1 being the least riskiest and 7 being the riskiest

Here’s an example of why buying a unit from an index tracker fund trumps buying an individual stock:

Investor A buys 10 shares in Company A.

Company A’s shares will fluctuate on a daily basis and in the worst case scenario the company may eventually go bankrupt, in which case investor A loses all of his cash.

Investor B buys 10 units in a FTSE 100 index tracker

The index tracker unit price is going to fluctuate on a daily basis, however unlike investor A, if a company in the FTSE 100 was to go bust, the unit price will drop but the investor is still invested in 99 other companies. The only way investor B would lose his money is if all the businesses in the FTSE 100 went bust.

Units do pay out distributions (much like stocks paying dividends). When these are depends on the fund but you should be able to see from a funds website, how often it distributes money to its unit holders.

As well as stocks, you can invest in bond funds too. Another example is Vanguard’s UK Government Bond Index Fund. This fund buys Government bonds of varying lengths of maturity.

Now you might be thinking. Great! I don’t have to put all my spare cash in one company, I can buy an index tracker unit and effectively buy into 100 different companies. Plus, if I don’t fancy too much risk with companies, I can buy a unit in a Government bonds index tracker because hey, when did the Government last go bust?

Fantastic, now your on board with index tracking, there is just one last bit I want to show you. There are many stock market indexes around the world. The S&P 500 (US), Nikkei 225 (Hong Kong) and FTSE All Share (London) are just a few.

Now what if there was a fund out there that followed all these different indexes, so not only was your spare cash invested in many companies but these companies were all over the globe. Well there are and one of the cheapest funds you can purchase is from Vanguard: Vanguard LifeStrategy 100% Equity

If you take a look at the portfolio data tab, you’ll see this is actually a fund of funds, which is giving you global diversification. Just think, when you’re sleeping, your cash is still working away.

They also do a whole bunch of other funds which are split between a globally diversified portfolio and Government/Corporate bonds, Vanguard calls these LifeStrategy funds.

I personally have chosen to buy the Vanguard LifeStrategy 80% Equity fund. This means that if you were to invest £100, £80 of that would be used to be stocks and £20 would be used to buy Government/Corporate bonds.

I’m hoping this hasn’t been too overwhelming. There will be future posts on fees (which is a hotly debated topic in the finance industry) and tax efficient wrappers (I’m talking about the beauty of ISAs and the SIPP, Self Invested Personal Pension)

If this has only left you wanting more then welcome to the club!

Just a practical note here. Please, please do further reading if this is the first blog you’ve come across on this subject. It’s by no means certain that you’re money will go up over time and that you won’t lose all that you invest. However, I’m of the opinion that unless global capitalism fails spectacularly, I think investing in index trackers is about as good a break as you’re going to get in investing.

Making Your Spare Cash Work Harder

So all that hard work has paid off. The SSBS has done its job and now you find yourself with some extra cash lying around and you’re not sure what to do with it. Well you have a number of options, one of those is lending it to the Government or companies (known as buying bonds) or buying a stake in a company (known as buying stocks).

I’m reluctant to use the word ‘investing’, purely because it instantly brings up images of gambling and people like Jordon Belfort.

I want to make this as clear as possible. With a little effort (and I’m talking about doing a small amount of reading) you will realise that the term ‘investing’ isn’t the big scary complicated monster, you may think it is. Investing does not have to the equivalent of putting all your money on black at the roulette table and waving goodbye to your hard earned cash.

I’m going to quickly talk about 2 of the most widely bought asset classes, stocks and bonds. No problem if you’re unsure what an ‘asset class’ is, here’s a nice explanation: Asset Class. I’m going to keep it short in the hope you don’t lose interest, so please bare with it, you’ll be glad you did when you’re done.

Bonds

First off, what is a bond and why would I buy these with my spare cash? Put simply a bond is a loan from you to the Government or company. The Government or company will put a price and time frame (known as maturity) on the life of the bond and a rate of interest (known as a coupon) you will earn for loaning them your cash. Once the time frame is up on the bond (it hits maturity) you get the cash back that you paid for the bond. For example:

Company A are offering a 5 year bond with a 5% coupon for £100. So the math plays out like so.

You buy 1 bond for £100.

Every year you’ll earn 5% interest on the £100. So 100 * 0.05 = £5

After 5 years you will get your £100 cash back and have earnt £5 (interest earnt per year) * 5 (number of years) which is £25. Which gives you a grand total of £125.

Government bonds are considered safer than company bonds because the Government isn’t likely to go bust anytime soon. However, because of the relative safety of your cash, the interest rate the Government offers is usually much lower.

How do I buy bonds?

Buying individual Government bonds can be done via the NS&I website.

As for buying company bonds. You will have to investigate this yourself as I’ve never bought a company bond directly. However, it’s not going to be any more complicated than buying a bond from the Government.

Stocks (also known as equities)

What is a stock and why would I buy these with my spare cash? A stock is you buying a stake in a company and in return for buying a stake in the company, you will be entitled to regular payouts known as dividends.

Similar to bonds paying interest, stocks pay out dividends. Dividends come from the companies profits and it’s a sort of thank you from the company to the shareholder for taking the risk and buying a stake in that company. The biggest difference between bond interest and a stock dividends is, a company does not have to pay its shareholders dividends. Companies set when a dividend is paid, so a company may decide on paying a dividend every 3 months, every 6 months or once a year. It all depends on the company as to when this happens.

As well as the dividends the stock price may increase or decrease overtime. Ideally you’ll want the stock price to increase but this is not a guarantee. A stock price may increase or decrease for many, many reasons. Imagine you buy stocks in a pharmaceutical company and they find a cure for a widespread disease and they are the only company that can produce the drug. Based on this information, the company is likely to be more profitable in the future due to the research breakthrough and so the stock price will likely increase. However, this works both ways, the company may be trialing a drug and the results come back as it’s no better than a placebo. This would then likely cause the stock price to fall as the company’s profits may not be as high in the future due to the new drug not being a success.

How do I buy stocks?

You buy stocks through a ‘brokerage’. A brokerage is the middleman between you and the company you want to buy stocks for. They will handle all the complexities of buying the stock upon your instruction. For this they charge for each transaction. They will also charge a fee for holding the stock for you. This is usually a percentage of the total value of your stock portfolio (read that as the total value of all the stocks you own).

Monevator has done an absolutely outstanding job of comparing online brokers for UK investors: Compare the UKs cheapest brokers

Conclusion

If you’re now a little pissed because you’ve just spent a good 10 minutes reading this and although it all sounds like a good idea, it’s still confusing and seems risky, then don’t worry. You’re right to think it’s risky. Investing in bonds and stocks like this is about as risky as it gets. Now you may be thinking, OK, so I was right about it being risky, how do I reduce the risk but still take part so my spare cash works harder for me? Well, you’re going to love the next installment on this. It’s called indexing and it comes with some massive advantages for the average investor like you and me. It’s the equivalent of putting the eggs you own in many, many baskets without needing to think about it too much.