plonkee money an english-er's thoughts on personal finance

September 21, 2009

keeping going keeping going

Filed under: investment — Tags: , — plonkee @ 7:14 pm

A lot of personal finance is the long boring slog.

I am what’s politely described as a ‘flexible organiser’. You can assume by that, that I’m not particularly organised, in addition I choose to use my organising skills mostly at work, where it’s more important. It means that I’m not very good at periodic tasks. I’m also lazy, really lazy. To compensate, I have pretty much everything set up as auto-magical.

automatic investing…

One of the things that is automagical is my investing. I invest through work in a stakeholder pension – exactly enough to get the match – and I also invest in a stocks and shares ISA. I use these financial products to save money in tax, but I just think of them as my investment accounts.

At the moment, I have £400 a month going into investments each and every month. I started my investment accounts with £70 a month when I got my first job.As you can probably tell, the amounts have generally increased over time, although I’m not sure whether that’s always been true, I could easily have taken an accidental break because I didn’t open a new account in time or something.

…takes a while to build momentum…

Money just rolls into the accounts every month, but I’m not yet at the stage where it’s built up into a massive sum of money. Off hand, I think I have in the region of £10k-£15k in my investments. That might sound like a lot of money, but I think I’ll need something in the region of £1m or more to retire. It can feel like it’s not really worth the effort – the money goes in but doesn’t seem to work for me.

The recent performance of the stockmarket doesn’t help. I’m primarily invested in FTSE All Share index funds, which over the past 4-5 years has been up and down massively, but is pretty much back where it started. 0% growth isn’t exactly what I’m hoping for long term.

…but when it gets going, it really goes

Fortunately for me, I can still remember the basics of mathematics. The power of compounding returns is really just an example of how exponential growth is so much larger than straight line growth. The money I’m putting away now won’t really work hard for me for another 10-15 years, but once it does it’ll just keep powering on.

And I’m savvy enough to realise that you can’t rely on the stockmarket in the short term, but chances are pretty good that you can in the long term. I’m still young, I’ve got just under 40 years until retirement and I’m confident that the stockmarket is most likely to be up over that period.

So, I’m going to keep going with my current plan. I’m about 20 years away from fundamentally needing to alter my investment strategy into a more conservative asset allocation. For me, investing is not fun, but it’s also not something to worry about. It’s more like brushing your teeth, something you do without particularly thinking about, because it’s going to be good for you in the long run.

March 24, 2009

the importance of looking at fees

Filed under: investment — plonkee @ 8:26 am

I’m a maths graduate. This means that inevitably I know a lot of people who work in finance. I was talking to one the other day, and he said that one of the things they’re working on at the moment is looking at the projections that they use for investment returns in their marketing brochures. Currently they use a small range of numbers for annual growth and give a projection of what your investment might be worth in 10 years for the different growth figures.

They’re going to continue doing this in the future, but have decided to look at the range of actual returns on the products to pick the right range of numbers for growth. So, say currently they use 5%, 7%, and 9%, but actual growth is more between 2% and 6% over 10 years then they’d switch to using 2%, 4% and 5% in their marketing projections.

It all sounds very reasonable and sensible to me, but what was funny was that one of the new graduates is apparently doing a lot of the donkey work on the calculations suddenly realised that if (as is the case with many actively managed funds) the charges were 1.8% a year, and the projected return was only 2%, then the fund would have a 2%-1.8% = 0.2% actual return to investors. It would barely cover its expenses and certainly wouldn’t be a good long term investment.

Now, it’s unlikely that 2% is going to be a projected growth rate, but fees are really important when you’re looking at investments. They come directly off the growth of the fund, and you have to pay them regardless of whether your investment makes money or loses money.

February 19, 2009

the magic money cupboard

Filed under: investment — Tags: , — plonkee @ 8:24 pm

One of my friends is an actuary with an insurance company. His favourite concept is that of the magic money cupboard. He reckons that when it really gets down to it, a surprisingly large number of people (who should know better) believe that when you take out an investment policy, the insurance company puts it into a magic money cupboard, and after a few years, it comes out much bigger.

As my friend quite rightly points out, there is no magic money cupboard. If you save or invest money with any company, they can only put the money in the same places that everyone else does – broadly speaking into bonds, shares, cash, property or commodities.

When you take out a pension, or an investment policy, or anything like that, you are really investing in bonds, shares and cash (and occasionally property or commodities). The value of bonds and shares can and will go up and down, and cash is at risk from inflation. If the whole stock market is doing badly, then it doesn’t matter who your investment is with, if there’s any component invested in shares that bit will be doing badly too.

People that look after the money you invest are clever, have passed lots of exams, and are genuinely trying to get the best return for your money. However, they don’t work miracles, and they aren’t likely to do much better than average because they have to work from the same information that everyone else does.

There’s no such thing as a risk-free investment, and nothing is immune from the major ups and downs of the markets. Understanding and accepting an appropriate level of risk are much better for you than mistakenly believing that the insurance policy you’ve taken out will make money come rain or shine because then, you’re taking on risk that you don’t even know about.

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