What if you know nothing about investing?

piggy bank

A couple of weeks ago I was asked to give a talk to the support staff at a company about their workplace pension choices…now that pension auto-enrollment is being introduced.

Everyone there was female…other than one token male and The Escape Artist.  Some knew a lot about investing but most didn’t. And being women, they were happy to admit that they didn’t know everything about investing.

Having spent years in meetings with men from private equity houses and hedge funds (many of whom apparently knew everything…even after they’d just blown up another investment) this honesty was refreshing.

Fortunately, you don’t need to know much to get your workplace pension in good shape. Contrary to popular opinion, investing your own money can be made simple. So simple that its a bit embarrassing that the financial services sector creams off about 10% of GDP.

Here’s the thing:  you don’t need to understand everything about something in order to use it effectively.  

For example, I’m gonna let you into a secret. The Escape Artist is not very good at quantum mechanics, thermodynamics and electrical engineering. To be honest, I barely know what they even mean!

But The Escape Artist is able to bring summon great power from the forces of nature and bring light to the darkness.  I can flick a switch and light up whole rooms in my house.  Apparently, this uses something called “electricity”.

You will now no doubt be looking around your house for this “electricity”. Errrr…its invisible so you won’t be able to see it.

I know what you’re thinking: he’s making this shit up!  You may say that seeing is believing. But I’ve noticed that sceptics as to whether “electricity”exists tend to go quiet when you drop a toaster into the bath they are taking.

So, I am able to perform miracles with electricity…even though I don’t have a clue what electricity really is…and I can’t really be bothered to learn about it.

Generally in life, ignorance and laziness are not winning strategies.  But investing is a bit different to most other parts of life.

When it comes to investing, you hardly need to know anything.  Index tracking funds allow you to “piggy back” off all the knowledge, hard work and analysis done by other investors and analysts.  All of which is embedded in market prices. And once you’ve got your investing set up on automatic pilot, laziness can actually make you rich…as long as you respect a few basic principles.

Is The Escape Artist going to tell you those principles?  Is the Pope gonna wear a pointy hat and a dress??

Of course he is!

1. This is important

Your pension fund could easily end up worth more than your house.

Think how much time and energy you put into buying a house, cleaning a house, maintaining a house, extending a house, decorating a house, filling it full of crap soft furnishings etc etc.

So perhaps filling out one single form to make a pension fund choice isn’t too much hassle?

2. Remember Kate

You may be concerned about the looming pensions crisis in The West.

But fortunately, as well as solving the Obesity Crisis, The Escape Artist has also solved the Pensions Crisis.

Thank God I was here.  It could have been serious otherwise.

You may remember Kate…but for those of you that weren’t paying attention, here’s a recap:

Kate is a bright school leaver who gets a job aged 18. Unusually, Kate does not go to university to learn how to eat vodka jelly but instead gets a job that pays, say, £16,000 and lives with her parents for the first couple of years before sharing a cheap house with roommates.

Over the next 7 years, our heroine does well and learns stuff at work that actually helps her in life. Things like how to work hard, deal with people and use basic arithmetic. And she does not spend all her salary on knick knacks. Instead she saves, paying herself first every month, setting up a direct debit to stash £167 per month for a total of £15,000 over that period.

Kate focuses on what she can control and directs her monthly savings into a low cost equity index tracker. Kate doesn’t waste time on pointless speculation about what future equity returns might be because who knows?  Kate understands that shares have traditionally delivered the highest returns over long periods and can’t see why that won’t continue.

Kate saves £2,000 per year until age 25 when she stops and doesn’t touch it for 40 years. Fortunately, Kate’s TV is broken so she doesn’t see the clowns encouraging her to panic when the stock market falls. When valuations are lower, she gets more shares for her money.

Kate is lucky to start investing at a favourable point in history where people, for the most part, focus on innovating and creating wealth rather than fighting wars to colonise and exterminate each other. As a result, Kate gets roughly the same annual return (~10%) as the S&P 500 has done over the last 100 years or so.

At age 65, Kate fires up her laptop and is pleasantly surprised to see that her £15,000 of contributions have grown to just over £1 million.  True, inflation means that a million pounds isn’t worth as much as it used to be.  But, based on a 4% withdrawal rate, this is probably enough to provide Kate with £40,000 per year for ever.

That is fine for Kate who just wants enough to buy champagne from Lidl occasionally and buy presents for her grandchildren without worrying if she can afford it. 

What if you are 38 not 18? Well, the best time to start investing was 20 years ago…the second best time is now.

3. Financial services companies are not your friends…

I know they say they are.

I know you’ve seen the adverts with happy couples walking hand on the beach with the nice doggie etc etc…but its all bullshit.

The good news is that we don’t have to be their friends. We just have to deal with them as counter-parties.  A little bit of scepticism is in order…as if you were buying a second hand car off them.

That means you need to know what fees you are paying (see point 5 below) and which fund your money is being invested in (see point 6 below).

Under the new auto-enrollment regime,  if you ignore that form from HR, your hard earned money will get chucked into a default option.  Alarmingly, the insurance company may not even tell you what’s in that default option. You may have no idea where your money is going.  They’ll probably put you into a “balanced” fund that contains lots of expensive bonds that yield next to nothing because that’s the “safe” option.

Safe for them, perhaps. After all, its not their money.

Safe for long term investors saving for retirement? Not so much.

4. …but market falls can be

Its a good thing for savers when the market falls.  Yes, I can prove that. You’ll be buying cheap assets in the sales.

What do you do when the market falls?   You don’t need to do anything other than enjoy the fact that you’ll be getting more shares for your money every month.

If you want, you can save more when the market falls and the news headlines are scary.  Be warned, this is risky. There is a risk you end up with more money than you know what to do with.

What if the TV news is too scary? You do know there’s an off button right?

5. In investing, you get what you don’t pay for

You know Kate and her £1,000,000 at age 65?

She only got that because she didn’t pay a shit load of fees to the financial services industry.  If she paid an extra 2% a year of fees, I’m sad to report that her fund would only be worth £457,000 at retirement.

When you buy a house, the more you pay, the more you get (all other things being equal). Not so when investing.

In investing, you get what you don’t pay for.

6. Get a global equities tracker fund

Warren Buffet recommends buying a Vanguard tracker fund that holds shares in a collection of large companies.

Vanguard is owned by its customers and usually has the lowest cost funds. In other words, with Vanguard your interests are aligned with theirs. So maybe Vanguard are your friend and we can make an exception to rule 3 above.

Now you may know better than Warren Buffet.  But if you don’t, and just want to invest simply, watch this:

Lars is suggesting you could just buy something like this.

Done that? Great…you have just stuck it to The Man.

What about bonds?  When you own bonds, you own a bunch of paper IOUs.  They are expensive and won’t be worth so much after inflation.

So yes, you can add a bond allocation of say 20% and rebalance once a year etc. (or just let a Vanguard 80:20 Lifestrategy fund do this for you).  But if you cant be bothered with that, you’ll probably do just as well (or even better) in terms of returns…its just that the value of your fund will fluctuate more.

7. Relax…the system works in your favour

I want to welcome you to The Rich Persons Club!

No, that’s fine…you don’t need a lot of money right now. That will come to you over time. Slowly at first, then much faster later on.

Now you’re in The Club, I’m going to let you in on some secrets!

Once you own a global equity index trackerthe entire capitalist system is working for you.  When you own equities (shares, stocks) you own the system.  You own the factories, the fork lift trucks, the warehouses, the brands, the cash, the accounts receivable. And all those consumer wage slave employees? To be honest, you pretty much own them as well.

The Escape Artist did not make The Rules.  But he does understand them. So let me ask you…in whose interests do you think that the system is run?  Is it for poor people?  For the dispossessed? For the young & stupid?

Or is it set up for shareholders? the owners of assets? the people with lawyers, the people that vote, that lobby, work hard and, if necessary, fight for their interests from positions of power inside the system?

Hhhmmm, tricky one.

8. Complexity is the enemy of execution

Keep it simple.

You are allowed to read books on investing if you want.  Its just that you don’t need to in order to get started.

Nor do you need to be able to back out implied volatility from option prices, value derivatives, nor know what Trump will do next, nor predict the outcome of the 3.30 at Goodwood.

9. Knowledge without action is useless

You are now ready to go…so where did you put that form?

Like I said, now is good.

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  1. I’ve learned that the best way to understand something is to jump in. Obviously you should understand the principle of investing and vaguely how it works. But the majority of FIRE bloggers I’ve spoken to learned about the stock market by getting their hands dirty instead of driving themselves mad with research.

  2. I can recommend reading the Motley Fool investment guide (buy from Amazon for 1p) It might not be completely up to date but it gave me a good overview when I started out 20 odd years ago with my first ISA. Now nearly 2 years into financial independence I can say investing in tracker funds does seem to work! PS love your work, keep it up.

  3. I published an article yesterday that touched on knowing your own risk tolerance. I believe you wouldn’t know that until you get some experience being invested yourself. You learn about your own temperament along the way as well. ‘Kate’ is indeed doing well. I just hope it is not too difficult to stash away £167 monthly on an average salary.

  4. I turned 35 yesterday. I got an HSA with 15k pushed to investments from Vanguard. Other than that I have cash in the bank growing at 0.05% interest.

    Is Vanguard a good starter for an investment dummy? If yes, which Vanguard stock? S&P? Total stock index fund or something else? Just like Kate, I don’t want to touch it for a long long time.

    1. Sam, thank you for your questions. Let me first explain the limitations in my reply! I’m English, in London, so I don’t know the tax system in the USA at all, but I gather, that like us, you can make some investments (401K?? IRAs??) that reduce your tax, either now or in the future. If so, they come in near the end. Because I think the process should look like this:-
      1. Work out how much you can save from your earnings. Don’t be a perfectionist and assume you can save everything, but keep comfortable.
      2. Set up a transfer from your bank account to a savings account for that amount.
      3. Find a cheap stockbroker!!! Expensive ones can take significant amounts – do your internet research.
      4. Every three months, or every time it reaches $1,000, whichever takes longer, invest it.
      5. The question is where! If you plan to live in the USA, I’d suggest about half in the USA and about half in the rest of the world. Why? You’ll spend in $, so if the $ goes up, you’ll have a $ income, but if the $ goes down, you’ll still have an income. Invest one amount and see how you feel about it.
      6 You asked about S&P total stock index – fine. Have a look at the S&P 500 too, it covers, to my scant knowledge, lots of the market.
      7 Avoid high charges like the plague! Look at Vanguard, Blackrock etc. and you’re already on the right web sites to find more. I like index trackers because we’ve had companies go beserk, spend like crazy at the top of the market and go broke. You don’t want too much money in one of those, nor is it easy to tell who’s about to do it. Spread your risks.
      8 Finally, we’re back where we started. Yes, put them in tax-free accounts if you can.
      Good luck! Don’t give up if the market goes down, you can buy the next lot more cheaply, and does it really matter what’s happening this week when you’re looking forward 25 – 30 years? Reinvest the dividends/distributions.
      My best wishes,

      1. Thanks. Really appreciate your response. I am also looking at Vanguard Lifestyle funds.

  5. […] liked the recent blog post from The Escape Artist that should, in my opinion, be printed in every Money section of the weekend newspapers in the […]

  6. SurreyBoy · · Reply

    In the 1990s during my first job i started a personal pension. A FTSE tracker – no employer contribution available To be honest i cant even remember what motivated me. It was £200 a month plus tax relief.

    I cant remember the dot com crash remotely concerning my young self. I remember the 2008 meltdown and the downward pointing red arrow on the BBC news each night, and concerns over job insecurity. It never crossed my mind back then whether my pension pot was being slaughtered – though it must have been beaten to a pulp.

    Foolishly I only modestly increased the contributions to that personal pension a couple of times, before stopping and joining an employer contribution scheme in my 30s. In recent years ive become interested in FI and the value of those historic contributions. I reckon i put in 35k of my own money through my 20s and early 30s.

    Today that pot has grown to a size where in a good month now it can increase in value by a grand. Part of my bitterly regrets not paying in more all those years ago. Another part of me is eternally grateful i paid in anything.

    In my 20s i didnt know a thing about investing, and only took an interest recently. One day I woke up in my mid 40s and the pot had gone on the rampage. Great article.

  7. […] What if you know nothing about investing? – The Escape Artist […]

  8. Great talk. From age 20 – 34 I did invest but made all the mistakes like market timing, speculating, using leveraged commodity ETFs etc.

    Fortunately, although I lost big chunks of money and possibly broke even at best, I didn’t have enough money to make a significant difference.

    Thankfully I saw the light at the moment I started earning the big bucks and became a global index tracker.

    People who start investing with the knowledge in this post are off to such a great start. The advantage compared to the average investor is huge.

  9. Great blog and great article. I’m in the fortunate position of having a little lump sum to invest. I understand and agree with everything you’ve said, but in relation to investing the lump sum everything seels so expensive right now! FTSE has obviously gone up a lot (we’re told mainly due to the pound going down), and obviously buying US stocks is going to be super expensive as the GBP is so low against the dollar.

    Ok now I’m not saying I have a crystal ball, but I feel that currencys tend to cycle and mean revert. I can remember the dollar being 2 to the pound, then down to about 1.3, then back to 2, then down to where it is now about 1.25. Ok thats over circa 25 years, but it does wave around a lot.

    We know the best way to invest in stock market is regulalrly – to benefit from pound cost averaging, but for a lump sum thats not easy or possible!

    Any thoughts or ideas from Escape Artist, or any readers?

    Could you do an article some time about lump sum investing?

    Thanks for the great blog!

    1. I agree with you James.

      I am fully almost invested in the markets, much of that being in active funds and individual stocks. I’d like to transition to the Vanguard World Tracker options, however feel the poor exchange rate will reverse at some point and will wipe out the first 10 or 20% of gains. If and when the exchange rates get back to and above long term averages I will certainly start the process of selling active and buying passive. Investing in world markets when US is low and/or pound is at or stronger than $1.5.

      Good luck.

  10. rick24 · · Reply

    You seem to be recommending an all-equity approach, which is ok for young investors (in their 20’s?), but market corrections do have to be taken into account for older investors because recoveries can take years. That’s where bonds come in. They are not there to earn shed-loads of money but to damp the effects of market corrections. This becomes increasingly important as you approach retirement because you can’t wait for markets to recover. Tim Hale’s book “Smarter Investing” gives the mechanics of this.

  11. […] You don’t need to understand everything about something in order to use it effectively. (theescapeartist.me) […]

  12. What happens if the Stock market has another 2008 style crash? The Vanguard tracker loses money for you/loses some of your money? Then you just wait and hope it goes back up/recovers? (genuine question, I literally know NOTHING about investing, hence reading this post.).

  13. I have just read all this ‘stuff’ on pension investments and am still none the wiser. Why is it so difficult to understand.

    1. Simon Apperley · · Reply

      Sharon – did anyone help you out, or do you still need some help? I think it’s quite straightforward to articulate – save money regularly in to the stock market through a ‘fund’, over time the value of the ‘fund’ rises. When you want to stop working full time (retire), the value of your ‘fund’ (or ‘funds’) is the pot of money that provides you an income. What you do when you retire is draw an income from the ‘fund’ – which is set at a rate that allows the money to last until you die. The only complexity comes in terms of picking which ‘fund(s)’ to put your money in.

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