Let’s get back to basics today with some simple action points covering everything you need to get started with equity investing.
I’ve been an active investor for the last 17 years and have a learnt a lot during that time.
And one of the main things I have learnt is how most people are wasting money and getting fleeced. This applies to life generally but to investing in particular.
The biggest and most common mistakes are:
1. Not saving and investing (enough) in equities
2. Trying too hard to beat the market
4. Getting fleeced on costs
5. Getting paralysed by complexity
Active investing is filled with many paradoxes, distractions and traps for beginners and people that are not prepared to put in the time and effort to truly understand what they are doing. With active investing, many things that seem “obvious” are actually wrong.
The good news is this. There is an incredibly easy way to invest smartly in equities that means you will consistently outperform most investors, whilst spending little time or emotional energy. That is to invest passively by index tracking. Index trackers simply buy shares in all the companies in an index such as the FTSE100 or S&P500. This ensures instant diversification and a stake in the largest and most successful businesses around.
Once you own a broad equity index tracker, the entire capitalist system is working for you. You are no longer the sucker, in fact The Man is now your bitch. All those CEOs, middle managers and worker drones, turning up every day to factories, offices and warehouses around the world are working so that their companies can pay you a share of their (growing) profits. They keep on working even while you are asleep. You don’t have to watch over them – you have people to do that for you. If they don’t turn up and work for you, they get fired.
This is power but not exploitation – they are given the same chance to be free that you are. The capitalist system is the most productive and the least unfair that mankind has ever been able to devise. Unfortunately, most people choose to squander their money on shit rather than own enough of the system to achieve freedom.
When considering index trackers, there is just one fund management company that stands out from the rest. That company is Vanguard. This is no secret to the small cadre of people in the FI community. However it amazes me that, out there in the wider world, most people have not even heard about equity investing via Vanguard index funds / ETFs.
1. The company is owned by you the customer (i.e. investors in Vanguard funds). Thus, Vanguard have no incentive to screw you. No other large fund management group is set up in this way.
2. Their costs are the lowest. The entire business model is set up around the objective of minimising costs. When they can reduce fees, they do.
3. Their ethics and ethos compare favourably to many other firms in the financial services industry. The founder, John Bogle, has arguably done more for investors to democratise investing than just about anyone else in history.
4. They are big. They are one of the largest fund managers in the world and their products are widely available in Europe as well as North America.
Thanks partly to Vanguard, costs have come down. Although other fund management groups sometimes offer funds that may appear slightly cheaper, those other funds groups do not have the alignment of interests with investors that Vanguard’s unique ownership model provides. They will sometimes publicise a cheap product to draw you in and then try to sell you other stuff.
Our time and mental energy is limited. We must allocate these scarce resources ruthlessly. In my opinion, it’s not worth the effort to try and save costs beyond the low fees already offered by Vanguard.
Let’s cut to the chase. Here is all you need to know to get started:
1. Equity investing allows you to own businesses and capture the growth in the economy over time. It’s what rich people do. Its often an important part of how they got rich.
2. Open an account with a cheap, execution only online broker. Personally, I use The Share Centre. You can use the excellent Monevator table to help you choose. Use tax efficient accounts e.g. ISAs.
3. Invest a regular amount each month. Use a Vanguard equity index tracking fund / ETF (or a few of these). Pay yourself first, investing straight after your salary hits your bank account.
4. Hold for as many years as possible, trading as little as possible.
5. Never sell (or stop contributing) during a market panic. You will never need do so because you are smart, live within your means and always keep some cash to hand.
People will tell you its more complicated than this. Financial services providers, the mainstream financial media and their advertisers will try to scare you and sell you more complex and expensive stuff. Be warned. And examine their financial incentives carefully.
That’s it. You are now good to go. You can certainly make things more complicated than this…but, before you do, are you sure it would justify the time, cost and effort involved? Remember, the most fun things to do in life have nothing to do with money.
1. I do not work for Vanguard or get paid by them