Latest / A Little Bit Richer / Investing Portfolios: Start Small, Think Big

Transcript

Investing Portfolios: Start Small, Think Big · A Little Bit Richer

• 0:02
  Iona: Hello, I'm Iona Bain, and welcome to A Little Bit
• 0:05
  Iona: Richer, brought to you by L& G. Now, with so
• 0:08
  Iona: many different options available, it can be tricky to know
• 0:10
  Iona: where to start when building your investment portfolio, but no
• 0:14
  Iona: matter how much you have to invest, it's important to
• 0:17
  Iona: get the basics right, so you can build good habits
• 0:19
  Iona: and grow your money. So today, we're looking at how
• 0:22
  Iona: you might start investing beyond your pension savings, so you
• 0:25
  Iona: can build a portfolio your future self will thank you
• 0:29
  Iona: for. And we couldn't think of anyone better to join
• 0:31
  Iona: us today than Mr. MoneyJar himself, Rotimi Merriman- Johnson. He's
• 0:36
  Iona: a financial advisor and award- winning content creator who's been
• 0:40
  Iona: featured on the BBC, the Financial Times, ITV News, and
• 0:44
  Iona: Sky News. Rotimi is an ambassador of the UK charity
• 0:47
  Iona: National Numeracy, and he hosts his own financial podcast, The
• 0:51
  Iona: Mr. MoneyJar Show. Welcome, Rotimi.
• 0:54
  Rotimi: Thanks very much for having me, Iona.
• 0:56
  Iona: Before we start investing, should we have a cushion? And
• 1:00
  Iona: if so, how much should we have in easily accessible savings?
• 1:06
  Rotimi: Yeah. So the standard advice around emergency funds is that
• 1:10
  Rotimi: you should have three to six months' worth of living
• 1:13
  Rotimi: expenses tucked away. We've had a lot of inflation in
• 1:16
  Rotimi: the last few years. The cost of living is quite
• 1:19
  Rotimi: high. Six months represents quite a lot of money for
• 1:21
  Rotimi: people. So when I speak to people, I say, " Try
• 1:25
  Rotimi: and have, as a starting point, one month's worth of
• 1:28
  Rotimi: expenses tucked away." And I try not to give a
• 1:31
  Rotimi: fixed sum, because that depends on the time and the
• 1:33
  Rotimi: place. But just imagine, if you had one month's worth
• 1:37
  Rotimi: of expenses tucked away, just the psychological ease that you
• 1:40
  Rotimi: would feel and the financial resilience you would have. One
• 1:45
  Rotimi: month's of living expenses, put it in an easy access
• 1:48
  Rotimi: savings account, and then anything over and above that you
• 1:51
  Rotimi: can begin to invest, if you so wish.
• 1:54
  Iona: And why should people have that money in easily accessible
• 1:58
  Iona: savings? Why couldn't people just rely on the money that
• 2:01
  Iona: they've invested in the stock market and pull that out
• 2:03
  Iona: at any time?
• 2:05
  Rotimi: Right. So it's because, as we know with investing, the
• 2:08
  Rotimi: value of investments can rise as well as fall. And
• 2:12
  Rotimi: if you don't have that emergency fund set aside and
• 2:17
  Rotimi: all of your money is invested, and the stock market
• 2:20
  Rotimi: takes a tumble, as it has done in recent times,
• 2:23
  Rotimi: then you might have to sell your investments at a
• 2:26
  Rotimi: loss to access your money. So that's why we keep
• 2:30
  Rotimi: a portion of our money in emergency savings, and then
• 2:34
  Rotimi: we invest the surplus.
• 2:36
  Iona: Mm- hmm. So it's not about choosing whether to save
• 2:40
  Iona: or invest. In a sense, we've all got to be
• 2:42
  Iona: both team saving and team investing.
• 2:44
  Rotimi: Yeah. The saving bit is for short- term future you,
• 2:47
  Rotimi: and the investing bit is for long- term future you,
• 2:49
  Rotimi: like years and years into the future.
• 2:51
  Iona: So let's assume therefore that somebody has got that foundation
• 2:55
  Iona: in place and they're looking to start investing. Where should
• 2:59
  Iona: they begin?
• 3:00
  Rotimi: So there's three simple steps when it comes to investing.
• 3:04
  Rotimi: You need to pick an investing platform, sometimes called a
• 3:08
  Rotimi: broker. You need to pick your investment account or accounts.
• 3:13
  Rotimi: And then you need to decide what the money is
• 3:15
  Rotimi: going to be invested in. So that's the basics of
• 3:19
  Rotimi: it. Now, when it comes to signing up to investment
• 3:21
  Rotimi: platform, this is a very, very similar process to opening
• 3:25
  Rotimi: a bank account online. You then need to nominate a
• 3:27
  Rotimi: bank account that you want to then use to add
• 3:30
  Rotimi: money to that platform. And you can typically add money
• 3:34
  Rotimi: in a couple of ways, either through lump sums or
• 3:37
  Rotimi: through monthly savings. And the lump sum amounts tend to
• 3:40
  Rotimi: be slightly higher than the monthly savings amounts. Some platforms
• 3:44
  Rotimi: will let you do monthly savings from as little as £ 25 a month, for example.
• 3:48
  Iona: That sounds like a really achievable, realistic way to start
• 3:52
  Iona: investing. And also, can there be advantages in drip feeding that
• 3:57
  Iona: money into the stock market on a regular basis?
• 4:00
  Rotimi: Yes. So there is a temptation to do what's called
• 4:03
  Rotimi: time the market. Try and buy at the right time, try and sell at
• 4:07
  Rotimi: the right time. If you instead just decide to invest
• 4:11
  Rotimi: what you can afford every single month for the long
• 4:14
  Rotimi: term, then this removes the temptation to time the market,
• 4:17
  Rotimi: it reduces some of the anxiety around prices going up
• 4:20
  Rotimi: and down, and we're doing it so that we can
• 4:22
  Rotimi: build our wealth at a point in the future.
• 4:25
  Iona: You've got to take a step back and just trust
• 4:27
  Iona: in the process.
• 4:28
  Rotimi: Yeah.
• 4:28
  Iona: Yeah. So on the one hand, you can buy shares in individual
• 4:33
  Iona: companies, as you were saying before, and that's ultimately what
• 4:36
  Iona: we are doing when we're investing. But we don't have
• 4:39
  Iona: to do that ourselves necessarily, and therefore deal with all
• 4:43
  Iona: those issues that can come along with that. We can
• 4:45
  Iona: also invest in funds. Just explain what the difference is
• 4:49
  Iona: between investing in companies on an individual basis versus investing
• 4:53
  Iona: in funds.
• 4:54
  Rotimi: Yeah. So you've signed up to your platform, and then
• 4:57
  Rotimi: you'll need to open an investing account within that platform.
• 5:00
  Rotimi: So investing platforms will typically offer a general investment account.
• 5:05
  Rotimi: With this, you can put in as much money as
• 5:07
  Rotimi: you like, and then you can invest that money. So
• 5:10
  Rotimi: there's no annual limit, but no tax protection. Then you've
• 5:14
  Rotimi: got stocks and shares ISAs, one of the four ISA
• 5:17
  Rotimi: types. You can put in up to £ 20,000 per tax
• 5:20
  Rotimi: year into a stocks and shares ISA, and of the
• 5:22
  Rotimi: money that you put in, any gains that you get
• 5:24
  Rotimi: on your investments or any dividends that you receive are
• 5:27
  Rotimi: completely tax- free. And this becomes especially powerful once you
• 5:31
  Rotimi: begin to really tap into compounding and get to those
• 5:33
  Rotimi: larger investment sizes. SIPPs are another type of investment account.
• 5:37
  Iona: What does that stand for?
• 5:39
  Rotimi: SIPP stands for self- invested personal pension. And not a lot of people
• 5:43
  Rotimi: realize this, but a workplace pension is a type of
• 5:45
  Rotimi: private pension, but you can open a pension of your
• 5:48
  Rotimi: own, and there's no actual limit to the number of
• 5:50
  Rotimi: pension accounts you can open and contribute to in a
• 5:53
  Rotimi: tax year. Self- invested personal pensions have their own annual
• 5:57
  Rotimi: limit of £ 60,000 per tax year, and again, that money is
• 6:01
  Rotimi: sheltered from tax, and you get what's called tax relief
• 6:04
  Rotimi: on your contributions, which is where the government adds in
• 6:08
  Rotimi: extra money.
• 6:08
  Iona: Mm- hmm. And it also depends on your goal. If you're
• 6:10
  Iona: wanting to enhance your retirement income, SIPP could be worth considering.
• 6:15
  Rotimi: Or if you're self- employed. Yeah.
• 6:16
  Iona: Indeed, because you don't have your workplace pension.
• 6:18
  Rotimi: Exactly.
• 6:19
  Iona: Absolutely. And then when it comes to those differences between
• 6:24
  Iona: investing in funds and investing in individual shares, explain what
• 6:27
  Iona: the pros and cons are respectively.
• 6:30
  Rotimi: Yes, yes. So you can invest in stocks, which is when
• 6:33
  Rotimi: you purchase ownership in a company, so shares in Google
• 6:39
  Rotimi: for example. The thing with purchasing individual stocks is your
• 6:43
  Rotimi: investment performance is tied to just that one company, and
• 6:47
  Rotimi: it's a more active way of investing. So if you
• 6:50
  Rotimi: pick the right stock, then you can do really well
• 6:53
  Rotimi: off the back of it potentially, but it also means
• 6:56
  Rotimi: that if the company doesn't do so well, your investment
• 6:59
  Rotimi: can go to zero. So what some people do is
• 7:03
  Rotimi: they invest in what are called funds, which is where
• 7:05
  Rotimi: you give your money to an investment firm who's buying
• 7:10
  Rotimi: shares on their end, but they've basically selected a group
• 7:14
  Rotimi: of shares which they think are either going to outperform
• 7:18
  Rotimi: the market or target a particular sector, like tech or
• 7:22
  Rotimi: clean energy. And the performance of your investment will be the
• 7:26
  Rotimi: average of how all the companies in that fund does.
• 7:29
  Rotimi: Then when it comes to funds, there are actively managed
• 7:32
  Rotimi: funds, which is where a selection process has gone on,
• 7:36
  Rotimi: and then there are index funds or tracker funds, which
• 7:39
  Rotimi: just try to replicate what the market does. And index
• 7:43
  Rotimi: or tracker funds are particularly popular with people because they're
• 7:45
  Rotimi: very cheap, and they're not actively managed, and you can
• 7:49
  Rotimi: buy indexes that track the UK stock market, the US
• 7:53
  Rotimi: stock market, or even the global stock market.
• 7:55
  Iona: I mean, buying and selling shares has become a lot
• 7:58
  Iona: more accessible and a lot more popular in recent times,
• 8:01
  Iona: which on the one hand is something I assume that
• 8:04
  Iona: you'd be quite encouraged to see, but there can be
• 8:06
  Iona: downsides to that, can't there? Because you can get involved
• 8:09
  Iona: and jump in at the deep end but not necessarily know
• 8:12
  Iona: that much about what you're doing. What would your advice
• 8:15
  Iona: be for anyone who is tempted to get out there
• 8:18
  Iona: and start buying and selling shares, and might be quite gung-
• 8:21
  Iona: ho about it, and maybe need to take a step
• 8:24
  Iona: back and assess what the risks are?
• 8:26
  Rotimi: Yeah. If you want to invest, take an amount of
• 8:29
  Rotimi: money that you don't need, invest it, and just use
• 8:32
  Rotimi: that to see what happens. Use it to get used to
• 8:35
  Rotimi: the buying and selling. And this is why it's good
• 8:38
  Rotimi: that a lot of investing platforms have quite low minimums
• 8:42
  Rotimi: when it comes to putting money into the platform. You
• 8:44
  Rotimi: can invest it, and it's almost like you're learning the buying
• 8:47
  Rotimi: and selling process. You're getting used to seeing your money
• 8:51
  Rotimi: go up and down in value, and you're building your
• 8:54
  Rotimi: confidence whilst not risking it all.
• 8:56
  Iona: So if in doubt, start small, and then work up from-
• 9:00
  Rotimi: And then build. Yeah.
• 9:01
  Iona: Yeah. Absolutely. What's a good rule of thumb for diversifying
• 9:05
  Iona: your investments, and why does diversification matter so much when
• 9:10
  Iona: it comes to investing?
• 9:11
  Rotimi: So diversification in simple terms means not putting all your
• 9:15
  Rotimi: eggs in one basket. And the reason why we do
• 9:18
  Rotimi: this is because different companies will go through different cycles
• 9:24
  Rotimi: and will perform differently at different times, and rather than
• 9:28
  Rotimi: have a scenario where you're just invested into one company
• 9:31
  Rotimi: and you're hoping that that company does well, you build
• 9:34
  Rotimi: what's called a portfolio of companies. You can do this
• 9:36
  Rotimi: yourself, or you can use a fund. And the performance
• 9:41
  Rotimi: of your investments will depend on how a selection of
• 9:45
  Rotimi: companies does. So it helps with your investment performance, and
• 9:49
  Rotimi: again, it helps from a psychological perspective of, you're not
• 9:52
  Rotimi: relying on just one company to deliver your returns for
• 9:55
  Rotimi: you. If you're creating a portfolio for yourself, as some
• 9:58
  Rotimi: people do, it will mean that you'll need to understand
• 10:01
  Rotimi: each individual company and why you're putting them into your
• 10:04
  Rotimi: portfolio. If you're a beginner investor or you're not interested
• 10:07
  Rotimi: in picking stocks, you can just buy units in a
• 10:11
  Rotimi: fund, and that's another way of diversifying. So to put
• 10:16
  Rotimi: it in context, if you were using an index fund
• 10:19
  Rotimi: that tracked the UK stock market, the FTSE 100, you would have
• 10:23
  Rotimi: 100 companies in that fund. So for your money to
• 10:25
  Rotimi: go to zero, it would require 100 companies to go
• 10:29
  Rotimi: to zero, which I think if that's happened, we have
• 10:32
  Rotimi: bigger problems to worry about.
• 10:33
  Iona: Yes. Yes.
• 10:34
  Rotimi: If you're investing in the US, you can buy an
• 10:37
  Rotimi: index which tracks the biggest 500 companies in the US.
• 10:40
  Rotimi: Again, that's diversification there. And then if you invest in
• 10:43
  Rotimi: a global fund, which is what I personally do, then
• 10:46
  Rotimi: that could contain hundreds or even thousands of companies from
• 10:50
  Rotimi: all over the world. And in a global fund, the
• 10:53
  Rotimi: weighting of the different countries will follow the size of
• 10:57
  Rotimi: the global stock market.
• 10:59
  Iona: We've spoken about how some people might be quite happy
• 11:02
  Iona: to jump in and get started, but there could be
• 11:05
  Iona: lots of people for whom the prospect of losing money
• 11:08
  Iona: is a very scary one. So how do we get
• 11:10
  Iona: over that fear?
• 11:11
  Rotimi: It's a very legitimate fear. And look, we're not taught
• 11:14
  Rotimi: about this stuff in school. You may or may not
• 11:16
  Rotimi: have someone at home who can teach you this stuff.
• 11:19
  Rotimi: But what we are taught to do is to buy
• 11:20
  Rotimi: things, which shops to go to. You know the right
• 11:23
  Rotimi: prices to buy things at. But when it comes to
• 11:26
  Rotimi: investing, or perhaps even saving, we don't have that same
• 11:28
  Rotimi: knowledge. And that's where I think the fear comes from,
• 11:30
  Rotimi: I think comes from a lack of experience and of
• 11:34
  Rotimi: expectation of what's going to happen.
• 11:37
  Iona: And also because we have to delay gratification. We're saving
• 11:39
  Iona: and investing, we have to wait to get those results.
• 11:42
  Rotimi: Yeah, exactly. But there's a couple things I would say
• 11:45
  Rotimi: to people. If you are one of the 30 million (inaudible)
• 11:49
  Rotimi: employees in the UK, you're investing already. You're investing
• 11:53
  Rotimi: into your workplace pension. That money is not held in
• 11:55
  Rotimi: cash, that money is being invested. You're paying into it
• 11:58
  Rotimi: month in, month out. And as a result, pension wealth
• 12:02
  Rotimi: is the biggest store of wealth in the UK, and
• 12:04
  Rotimi: it's just from everyone working, paying into their pensions every
• 12:07
  Rotimi: month. So you're already doing it, albeit behind the scenes.
• 12:11
  Rotimi: When it comes to investing your money in, say, a
• 12:14
  Rotimi: stocks and shares ISA for example, you can use a
• 12:16
  Rotimi: very similar principle of taking what you can afford, investing
• 12:20
  Rotimi: regularly, and doing it for the long term. Now, there's
• 12:24
  Rotimi: no such thing as a 100% risk- free investment, but we
• 12:29
  Rotimi: must remember the distinction between the value of our investments
• 12:33
  Rotimi: going down and losing money. If you invest your money,
• 12:37
  Rotimi: the value will go up and down, but you do
• 12:40
  Rotimi: not lose or gain money until you sell. Again, that's
• 12:44
  Rotimi: why we do it for the long term. If we
• 12:46
  Rotimi: do it for the long term and we don't need to
• 12:48
  Rotimi: sell our investments, we can wait for the market to
• 12:52
  Rotimi: recover, essentially. And if you look at the stock market
• 12:55
  Rotimi: chart for the FTSE 100, the S&P 500, for example, you'll see that it trends
• 13:00
  Rotimi: upwards, but it's not in a straight line.
• 13:03
  Iona: What would your advice be to anyone who is seeing
• 13:06
  Iona: all that turmoil out there and is thinking, " Actually, I'm
• 13:09
  Iona: not sure if this is the right time to be invested"?
• 13:11
  Rotimi: Yeah. Isn't it interesting how someone can say something, and
• 13:16
  Rotimi: then the value of a company will drop, even though
• 13:19
  Rotimi: the on- the- ground reality of that company has not changed?
• 13:23
  Iona: Yeah.
• 13:23
  Rotimi: So when it comes to how we value companies, there's
• 13:27
  Rotimi: almost the book value of that company, but then there's
• 13:31
  Rotimi: this added value on top based upon what people think
• 13:35
  Rotimi: is going to happen. They'll then sell those stocks, and
• 13:39
  Rotimi: then that will cause the value to fall. Those changes
• 13:42
  Rotimi: in valuation happen in the short term all the time,
• 13:45
  Rotimi: all day, every day. They're playing one game, but you're
• 13:49
  Rotimi: playing a different game, which is to ignore the noise
• 13:53
  Rotimi: and to invest for long term. So this is why I say
• 13:55
  Rotimi: the volatility is going to happen, but if you can stay the
• 13:59
  Rotimi: course, then it's not something that you need to worry about.
• 14:02
  Iona: What about these options that people might see when they
• 14:06
  Iona: start their investing journey that seem a little bit more
• 14:09
  Iona: exotic, like crypto, commodities, gold, forex trading? What would your
• 14:15
  Iona: advice be around those options?
• 14:18
  Rotimi: There's a very important investing principle, which was shared by
• 14:22
  Rotimi: Warren Buffett, held by many to be the best investor
• 14:25
  Rotimi: of all time. And his principle is to invest in
• 14:28
  Rotimi: what you understand. That's what I would say to people. Do
• 14:31
  Rotimi: you understand what you're investing in? Do you understand, if
• 14:35
  Rotimi: the price has gone down or gone up, why it's
• 14:37
  Rotimi: gone down or gone up? Do you understand the trends,
• 14:40
  Rotimi: the cycles? If you don't, then that's when the anxiety
• 14:46
  Rotimi: and the worry sets in. If you've seen something online,
• 14:48
  Rotimi: you've gone, " I'm going to invest in that because I've
• 14:51
  Rotimi: someone talking about it," you don't know why they've bought
• 14:53
  Rotimi: it, or if they've even bought it, you copy them,
• 14:56
  Rotimi: and then it's now gone down 30%, and you're worried.
• 15:00
  Rotimi: So I would just say, stick to what you understand,
• 15:03
  Rotimi: and continually learn and build upon your knowledge.
• 15:05
  Iona: And also perhaps be wary of anything that looks like
• 15:08
  Iona: a shortcut or a get rich quick scheme, because there
• 15:12
  Iona: are no shortcuts when it comes to investing. It's long-
• 15:14
  Iona: term, by its very nature.
• 15:15
  Rotimi: Yeah. It's a long- term thing, one. Two, people who are
• 15:19
  Rotimi: making money and investing are not on the internet talking
• 15:22
  Rotimi: about their strategies. Trust me. They're just quietly making money
• 15:25
  Rotimi: from it. They're not going to come online to tell
• 15:27
  Rotimi: you how to 10x your money in a month.
• 15:29
  Iona: Yeah, because they're already doing fine.
• 15:31
  Rotimi: Yeah.
• 15:32
  Iona: Are there any investing principles that we ought to really
• 15:37
  Iona: keep in mind as we start this journey, and try
• 15:40
  Iona: to stick with investing for the long term?
• 15:42
  Rotimi: Diversification, trying not to time the market, so trying not
• 15:46
  Rotimi: to get in and get out, and investing in what
• 15:49
  Rotimi: you understand. I think if you stick to these four
• 15:52
  Rotimi: principles, the quality of your decision- making is going to
• 15:54
  Rotimi: go up.
• 15:55
  Iona: And if there are three things that you would want
• 15:58
  Iona: to serve as the starting point for people as they
• 16:01
  Iona: go about this, what would those three things be?
• 16:05
  Rotimi: Investing's for everyone. It's never been easier or more accessible
• 16:09
  Rotimi: for people, so I wouldn't want people to be scared
• 16:13
  Rotimi: of it, if you use the investing principles we've spoken
• 16:15
  Rotimi: about. You don't need to have loads and loads of
• 16:17
  Rotimi: money to invest. In fact, you can start with small
• 16:20
  Rotimi: sums, and because of compounding, the earlier you start, the
• 16:25
  Rotimi: longer your money has to grow. And it doesn't need
• 16:29
  Rotimi: to be super complicated. You get great results by investing
• 16:35
  Rotimi: consistently for the long term in a diversified way.
• 16:38
  Iona: So in a sense, once you've actually just taken that
• 16:40
  Iona: decision, you've done the hard bit, in a way.
• 16:43
  Rotimi: Yeah.
• 16:43
  Iona: You then just have to wait to see-
• 16:45
  Rotimi: The hard bit is leaving it alone. Yeah.
• 16:47
  Iona: Yes. That is all fantastic advice. Thank you so much, Rotimi.
• 16:51
  Rotimi: Thank you for having me.
• 16:51
  Iona: Well, Rotimi, I think we're feeling a lot more empowered
• 16:56
  Iona: now to go and start that future fund, so thank
• 16:58
  Iona: you very much. Next time the consumer editor at The
• 17:01
  Iona: Financial Times, Claer Barrett, will be here to talk through
• 17:04
  Iona: living with debt and managing it. This podcast is brought
• 17:08
  Iona: to you by L& G. You can keep up with
• 17:09
  Iona: the show on YouTube, TikTok, and Instagram @ legalandgeneral, and I would
• 17:14
  Iona: love it if you could follow the podcast, leave us
• 17:17
  Iona: a review, and help others get a little bit richer
• 17:20
  Iona: too. Thanks for listening. Until next time, see you soon.