In recent articles I have explained that if you hand your savings over to a fund manager, you are asking for trouble. Because while he is certain to make a handsome profit, you may not. Low investment returns and high fees are a lethal combination, and this is not likely to change.
Similarly, interest rates on savings accounts are highly likely to remain miserably low. And property doesn’t look much better: according to a report by Aviva, 62% of over 55’s own their own home outright. Many of them are going to want to realise some of the value in their property to pay for their retirement, but the younger generations cannot afford to buy it from them.
Inevitably, it seems to me, this balance of supply and demand will depress house prices for the next few decades.
So how are you supposed to build your wealth?
There is no more important question for an investor today. I’d like to show you how simple it is to take this matter into your own hands. And I’d also like to show how rewarding it can be to look after your own investments.
Let’s start at the start.
Looking after your own wealth has never been easier
In the few years since the financial crisis took hold, a new phrase has entered the lexicon – ‘DIY investing’. Faced with the inescapable fact that traditional forms of managed savings are not delivering the required returns, savers are taking matters into their own hands.
This has been enabled by new technology. Online dealing and sources of information are making the job easier than it ever has been and, as ever where new technology is concerned, Americans are leading the way. In the US, online brokers are gaining market share at the expense of the big players, such as Morgan Stanley and Goldman Sachs. Something similar is now beginning to happen in this country.
So how do you become a DIY investor?
The first thing that you need is some money. You cannot become an investor if you do not have any money to invest, and so you must get into the habit of saving. It does not have to be much. If you are saving for your retirement, as you should be, time is very much on your side. If you invest £100 per month for twenty years and achieve an annual investment return of 5%, you will end up with £44,000. If you do the same, but keep it up for thirty years, you will accumulate an amount of £96,000.
The exact amount that you will end up with depends upon three factors.
Three factors that determine your returns
The first is the amount of money that you set aside; the second is the length of time that you put your money to work; and the third is the rate of return that you achieve. The last is absolutely crucial. To take the above example, if you invest £100 per month for 30 years and achieve only 3% per year, you will end up with only £48,000, instead of the £96,000 delivered by a 5% return.
As I have explained before, this 2% difference is the approximate amount skimmed off by fund managers. 5% per annum is not an especially ambitious target. To whet your appetite, if you can make 10% per year, your £100 per month contribution turns into £333,000 after thirty years.
So start saving and then open an online account. There are a number of providers and given that this is a transparent industry the services that they offer tend to be pretty similar, as are their charges. Three of the leading providers are:
My advice would be to have a good look at MoneyWeek’s introduction to online trading. It’s a good idea to take a look at the provider websites as well. Familiarise yourself with the terminology, the charges and account operating procedures. They are all full of useful information and much of it, you will notice, is pretty similar from one site to another.
You will find that these providers offer different types of account, including an ‘Isa’ or a ‘Sipp’. I will go through each of these and describe what they mean next week.
You have nothing to fear
But today I just want to make clear that these, and all other online trading services, are just that – they offer a service that enables you to invest directly in shares and bonds. They act as a conduit. They do not manage your money, and they will only act upon your instructions. You do not place your money in their hands, and so you need not worry about their own solvency.
These firms are regulated by the Financial Services Authority, and if you open an account with one of them and transfer money into it you can withdraw it any time. It is as safe as holding your money in a bank account.
You have nothing to fear, and by opening an online dealing account you will be joining the thousands across the country who have done so and who are already experiencing the satisfaction of controlling their own savings.
So start by having a look at the MoneyWeek online trading site. And make sure to tune into Penny Sleuth again next week, when I will take you to the next stage.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.
Please note that Fleet Street Publications Limited and its sister company, MoneyWeek Limited, has a relationship with The Share Centre through its subsidiary 0800 Shares Limited and also by introducing investors to the Share Centre. Fleet Street Publications receives commission in connection to trades executed via the 0800 share dealing service and for introduced accounts. 0800 Shares Limited is an appointed representative of Fleet Street Publications Limited which is authorised and regulated by the Financial Services Authority.