PLEASE NOTE: The first half of this post, was updated in January 2017 as a response to a large number of people who have got in touch to ask questions on the below and, more generally, about our products and services.
Many people have asked if I "still believe in the funds" below - seeing as the article is quite old - and / or got in touch to ask something along the lines of "what funds are you recommending now?'"or "what funds should I buy please Andy?".
To save me writing the same email again a few dozen more times, I have decided to post the answer to these sorts of questions here - for the time being - until we launch the new, updated version of our site at some point in the future where all should hopefully be 100% clear.
The key point here - in answering questions of this kind - is to stress that anyone seeking to give specific, personalised financial advice in the UK is required by law (by the financial regulator, the FCA) to conduct a detailed 'fact find' process with someone before they are permitted to give such advice. This fact find process is sometimes called a 'know your client' or 'KYC'. The idea is that a financial adviser must ensure they give 'appropriate' advice. This is obviously, quite rightly, aimed at protecting the consumer from bad or inappropriate advice to minimise the chance that people lose money, take on more risk than is appropriate for their circumstances or do something fundamentally silly like make investments whilst they still have significant expensive unsecured debt (such as credit card debt or a bank loan).
As you might imagine, conducting this 'fact find' process involves a fair bit of time and effort to say the least. Most usually there will be a face to face meeting in someone's home or office, or, alternatively, a long phone call or series of phone calls in order for the financial adviser to get the full understanding of that person's entire financial picture that they are obliged to get by law. This will include income and expenditure, mortgage, other debts, any current investments, existing pension arrangements, attitude to risk, long term financial goals and so on. The adviser will then spend hours of their time in addition to this to prepare appropriate, specific and personally-tailored recommendations on the back of that meeting or phone call.
It is against the law for me or any member of the Plain English Finance team, therefore, to say to someone " you should buy fund x or fund y" without having conducted the above process. I am permitted to make general comments about a fund - i.e. that it is sensible, has a good track record, has a great team behind it, is good value and so on - just as every Sunday newspaper does in their weekend Money or Investment sections and lots of specialist publications such as MoneyWeek, Investor's Chronicle or Shares Magazine do every week. I cannot, however, say "I'm so glad you've read my book, thanks for your kind comments, yes, Mr and Mrs Smith, you should buy Fundsmith this week..."
I hope this is clear.
The Advice Gap
This reality, however, presents a problem - and one that has attracted increasing press coverage in recent years: Something called 'the advice gap'.
Quite simply, the costs of being a financial adviser are significant - most particularly the costs of regulation and compliance, ongoing compulsory education and training every year, insurance costs, employing staff and travelling around the country to meet with people and learn about their financial situation and lots else besides. To make this work economically and actually make a living, therefore, the cost of this sort of personally tailored investment advice is necessarily quite high - and actually, sadly, prohibitively so for most people.
Many (possibly even most) financial advisers in the UK charge significant sums to do the work I explained above UP FRONT (i.e. whether you work with them or not, after they have met with you). £1,000 or even £1,500 is not unusual - frequently even more.
At Plain English Finance, we work with a small number of financial advisers who have sufficient experience to understand and implement an 'own the world' approach to investment (as per my book) and who are willing to conduct an initial meeting and prepare their recommendations on a no obligation basis. (We call this our "bespoke service"). To be clear: We do not charge anything up front for one of our highly qualified advisers to meet you or speak to you to learn all about your financial situation and prepare recommendations for you. This is quite rare in the UK market.
That is the good news. The bad news is that, because they are willing to do this (work on a no obligation basis) and because of the reasonably large amount of work they will do for someone and the costs involved in doing that work - at their risk - this service is only really appropriate for someone with total assets approaching about £100,000. This is very simply because:
- I don't want our customers ever paying more than 1% of their assets for this service (very competitive vs. most financial advisers in the UK market) and..
- ...as I hope readers will understand by now, it simply isn't economic for our partners to go to the all the effort of travelling around the country and doing a great deal of work for people for the chance to earn less than about £1,000. We have sent London-based advisers as far afield as Sunderland and Plymouth in the last two years (at their expense). Bear in mind that they will do all this work for people whether they become customers or not - so they have to price in a number of people who decide not to become clients in the calculation.
This is the advice gap. Financial advisers in the UK can only make a living working with people who have reasonably significant assets, particularly given most people are unwilling to pay £1,000 or even more for financial advice. This means that literally millions of people can't get good financial advice (or, aren't willing to pay for it). This is one of the reasons I set up Plain English Finance.
For nearly six years, we have been trying to work out how to help people who don't have enough money to work with professional financial advisers - within the confines of what is permitted by the regulator and as inexpensively as possible. First off, I tried to give as much useful information as possible in my book but, having read my book, lots of people had more questions about exactly what they should do. I then tried to answer such questions, again - to the extent I am permitted to by law - for free, in these blog pages and in literally hundreds of free phone calls I have done with people in the last few years.
It got to the point, however, where I was simply overwhelmed by the number of people sending me emails and asking if I could give them a call every week. It is for this reason that we created our monthly premium package. This includes a document called the Complete Guide (which is £9 on its own), in which I have done my best to deal with all the questions I have had over the last few years in one place. It also includes access to a private Facebook group in which I can answer everyone's questions at the same time and help people get the right accounts and the right habits in place to start succeeding financially.
This group costs £10 a month (or even less if you buy a full year's membership up front). We happen to think (as do many of our members) that the cost of roughly two pints (or glossy magazines) a month is exceptionally good value for maximising your chances of really sorting your finances out - not least given that doing so will very likely have a five, six or even seven figure impact on your life over time.
Finally - To answer another of the questions that made me write this post in the first place - I confirm that I stand by what I have written below about 7IM and Fundsmith. There is more information in our Complete Guide and more discussion of other ideas in our Facebook group.
Most importantly, however, please do ensure you keep an eye out for our periodic emails as we will hopefully have something truly exciting and groundbreaking in the UK finance market coming soon and you won't want to miss it.
Happy investing and very best wishes,
Andy - (January 2017)...
This article is where we draw together all our thoughts and start making some concrete investment decisions so you can start making money...
Let us quickly summarise the steps you need to take in order to set up the Plain English Finance "Own The World" strategy:
- Open a stocks and shares ISA with a good quality stock broking company.
- Work out how much you can spare each month for saving and investment. Think about how you can live on 90-95% of your income rather than how you can save 5-10%. The psychology works better this way.
- Save at least a month's salary in cash, preferably three.
- Once you have a cash buffer saved, arrange a standing order / direct debit to your ISA account and work out which specific investment vehicles you are going to buy in it each month.
It is point 4 which we will look at now...
As a reminder, the "keeping things simple" strategy is the one you want if you don't want to give any more thought to investment. It is a "set and forget", formulaic approach.
Once you have your ISA account set up (you will need to deposit a small amount of cash to do this), you will then instruct whichever stockbroking firm you have chosen to automatically buy your chosen assets each month with the money you transfer. As I explained in my book, you will want to own a small number of assets that result in you "owning the world" and "owning inflation".
So how do we do this, specifically? You are going to look to own a top-quality, low-cost fund which will give you global exposure (to "own the world") and then some precious metals (to "own inflation"). For what it is worth - my personal preference is that I like to have about 60-70% of my investments in an 'own the world' fund or funds, about 20-30% in precious metals and the rest in cash for a rainy day and / or the ability to invest in anything particularly interesting that crops up.
Which Global Fund?
I thought it might be useful to have a look at a couple of examples of the sorts of fund someone might consider with the 60% or so of their money they might chose to invest every month in "owning the world". It is worth noting that today there are many ways that a person with a good understanding of financial products in the UK market can get this sort of global exposure inexpensively. Recently, the better financial services companies in the UK have worked out the merits of this kind of investment strategy. A number already have these sorts of funds in the market and more are likely to follow.
My point here is that there will be an increasing choice of options for you to "own the world" for the right price. I am going to suggest a couple of funds below which I think are good ones at the time of writing but in the months and years ahead there may be even better options as new funds are launched so be sure to subscribe to the Plain English Finance email so I can keep you up to date in future. Please do let me know if you discover any such products too. I am always keen to hear about top quality, low cost products.
Here are some examples of options that you might consider in today's market:
One of the stand out companies I found when researching the best way to "own the world" was Seven Investment Management (7IM).
In my opinion, their funds are one of the best solutions in the UK market to achieve our objective. They offer a focused range of funds that give you exposure to an incredibly diverse range of assets.
Even investing as little as £100 a month you end up owning a huge variety of assets from all over the world. 7IM offer:
- moderately adventurous and
- adventurous funds
The cautious funds have more exposure to bonds and the adventurous more exposure to equities. This means that the cautious funds are less risky but have a lower projected return than the adventurous funds.
You should also be aware of two broad categories of fund offered by 7IM: The MM (multi-managed) funds are a collection of active funds. If you buy one of these funds, you will end up with an exposure to a large number of actively managed funds.
Whilst I think these are good products, I would personally look at investing in the other category of fund, the AAP funds. AAP stands for “asset allocated passives”. These funds aim to achieve the same wide exposure but with passive funds instead.
The older you are, the more cautiously invested you should be given that you will want to preserve what you have built up. This is another reason I like 7IM: Each of their funds achieves our objective of owning a huge variety of assets from all over the world inexpensively and you are even able to finesse what you own based on how old you are.
As such, if you do decide to use 7IM’s funds to “own the world”, I would suggest that you choose the right 7IM fund based on your age as per the following:
If you are in:
- your teens, 20s or 30s you might consider investing in the 7IM AAP “Adventurous” fund.
- your 40s, the 7IM AAP “Moderately Adventurous” fund.
- your 50s, the 7IM AAP “Balanced” fund.
- your 60s or over, chose the 7IM AAP “Moderately Cautious” fund.
This is a very simple way of giving you the best fund for your purposes without having to spend too much time thinking about things.
All you have to do is work out how much you want to pay into the fund you have chosen each month and instruct whichever firm you have opened your ISA account with.
I very much like the 7IM funds for the reasons outlined above but another top quality option is provided by a company called Fundsmith.
Fundsmith was set up in November 2010 by Terry Smith who has had a stellar career in the City and who's approach to investment is very much on the same wavelength as Plain English Finance. Mr Smith's Fundsmith equity fund aims to own the best 20-30 companies from all over the world whilst keeping your costs as low as possible. (Note in Jan 2017 - Since launching the fund his returns have been pretty spectacular!).
Fundsmith is different to the 7IM funds because the fund is 100% equity-based. That is to say that it only owns global shares and does not have any bonds or commodities like the 7IM funds do. If you have read my book or a reasonable amount of these articles you should have read my points about the Permanent Portfolio, the Gone Fishin' Portfolio and the approach Harvard and Yale take to investment.
If you have read these points you may be surprised that I am suggesting a 100% equity-based fund for the "owning the world" portion of the "keeping things simple" strategy here.This is because the fundamental approach to "owning the world" is to own a wide variety of assets (shares, bonds and commodities) as well as assets from all over the world. Despite this fact, I think there are a number of reasons that Fundsmith is still an excellent vehicle for our purposes:
First, the fund ensures you are geographically hedged because Mr. Smith invests in what he sees as the very best shares from all over the world. Secondly, I am firmly of the opinion that the majority of bonds in the world are currently overvalued which means I am comfortable leaving bonds out of the "keeping things simple" strategy for the time being, especially if you are nowhere near retirement. Thirdly, you will have the commodity exposure you need by virtue of buying precious metals to "own inflation". Fourthly, Mr. Smith's track record with this fund is superb and I have confidence in his team's ability to pick shares which will continue to perform almost regardless of what the world economy is doing and finally because the cost structure of his fund is excellent (please click on the link to his site above for more information).
As such, if you are less than about 50 years old, I consider Fundsmith to be an excellent option for the "owning the world" portion of your "keeping things simple" portfolio.
...and so finally:
So if you want to implement the Plain English Finance "keeping things simple" strategy - all you have to do is put a certain amount of your investible money into a fund like one of the 7IM funds or the Fundsmith equity fund (to "own the world"), a certain amount into gold or into gold and silver and keep whatever is left over building up cash (I would suggest, at least ten percent of what you have).
Please note, that if you decide to use the 7Im funds to "own the world" you should ask your stock broker to buy the "C-class" funds for you. These are cheaper because they don't incorporate any commission for an IFA. If you are choosing your own funds you are what is known as an "execution only" client and you should, therefore, be able to buy the cheaper version of the fund because 7IM will not need to take a cut of your money to pay an IFA.
Some final considerations
A note on lump sums
An addition point to make is that if you already have a lump-sum you would like to invest (a very good idea) and if you want to keep things very simple, then I suggest you simply divide that sum into ten or twelve and pay 1/10th or 1/12th of it in to the above investments each month for the next year along with whatever you intend to save monthly. Investing every month like this achieves “averaging in” or “smoothing” hence why taking this approach is a good idea. This will reduce the risk that you invest a big lump of cash days before a market crash. Don’t forget, however, that you should suffer far less from any kind of market crash than most given your geographical and asset diversification.
Another consideration of the “keeping it simple” approach is an idea called “rebalancing”. To illustrate: Imagine if you invested £3,000 in gold and silver at the beginning of a year and £6,000 in your chosen “own the world” fund (and kept another £1,000 in cash). This would imply that you had allocated 30% of your money to gold and silver, 60% to “owning the world” and 10% to cash.
Now imagine that, over the year, gold and silver go up by 20%, your world fund by 10% and cash by 0% (as interest rates are basically 0%). This would mean that one year later you would have £3,600 in gold and silver, £6,600 in your world fund and still £1,000 in cash. The crucial thing to understand here is that your percentage allocation to each asset will have changed slightly. You will now have £11,200 in total and it will be split: 32.1% gold and silver, 58.9% in your world fund and 9% in cash compared to your target split of 30%, 60% and 10%.
Obviously the percentages have not changed by a huge amount but over time if you did nothing to deal with this situation you could end up with a split which is some way away from the 30/60/10 that you are looking for.
The solution to this is what we call “rebalancing”. Once a year or so, you would look at the proportion of assets you hold and sell the ones which have gone up most to buy the ones that have gone up less (or fallen). In the example above, if your target is 30/60/10 then this would imply you would like to own: £3,360 of gold and silver, £6,720 in your world fund and have £1,120 in cash. All you would need to do would be to sell £240 worth of gold and silver, put half of it into your world fund and keep half in cash.
This approach ensures that you stick to your target asset allocation but it also has the benefit that you automatically take some profit from your best performing assets and use that profit to buy other assets at a relatively cheaper level.
The more mathematically minded of you will have noticed that, if you are buying assets every month in the right proportions, the differences in percentage change at the end of the year are likely to be very small indeed, unless there have been some very big moves in a short space of time.
You will not need to worry too much about rebalancing if you are following the methodology of monthly investment. Nevertheless, I would argue that you should just check your percentage allocation at least once a year to make sure things haven’t moved too far away from your target. I tend to do my rebalancing on new year’s day each year to punish myself for having a hangover. That is the only work you will need to do after you have set things up with this approach.
“Past performance is not indicative of future results…”
Many of you will have seen this phrase in the literature of financial services companies. Depending on the type of firm you are dealing with or product you are considering, it is usually compulsory for it to appear.
I have serious misgivings about the usefulness of the statement. If past performance was no guide to future results how would we pick football teams, why would we choose a certain brand of car over another and why might we decide to vote a government out of office at election time?
The reality is that past performance can be indicative of future results. We do, however, need to be careful how heavily we rely on it and ensure that we use it as only one possible indicator of future performance amongst many. In my opinion, sound analysis of what is going on around us is generally more useful for predicting what might happen in the future than focusing overly on performance numbers. You will quite possibly be bored of me repeating the example of gold’s fantastic performance over the last decade but let us use it once more to illustrate this point. It is certainly very interesting that gold has risen by a double digit amount nearly every year over this period .
However, were central banks around the world to reverse their policy of inventing vast amounts of money every year, or if we developed a technology to easily extract gold from sea water, something certain scientists believe is a possibility, we would be sensible to revise our thoughts about where gold prices might go in future. If we had a fiscally prudent Federal Reserve Chairman along the lines of Paul Volcker who held that position in the early eighties and we saw US interest rates back at levels last seen back then, it would be very damaging to the gold price.
Given this backdrop, gold’s performance over the last decade would become fundamentally irrelevant to its likely future performance. This is a very key point. Past performance is no doubt something we should be aware of and keep an eye on but I would contend that solid analysis and logic will trump it every time.
I would hope that after reading this far you would agree that the strategy we have outlined in this blog entry is based on just such solid analysis and logic: We have seen a great deal of evidence to support the ideas of owning the world and owning inflation and we have seen how important it is to do this as effectively and cheaply as possible.
An important thought on keeping your money invested
If you remember the magic of compounding, you will hopefully see that if you pay as much money into these accounts as possible and leave that money there for as long as possible you will achieve the biggest result in terms of building your money. The more money you invest and the more you leave invested, the more “free” money you can generate from compounding (interest on your interest or return on your return).
You will have to make your own decisions about when and for what reason you withdraw money from your ISA account but the longer you can leave it before upgrading your car or taking that exotic holiday, the more cars and amazing holidays you will be able to buy in the not too distant future and the more comfortable your retirement will be in the long run. As Economists say: “Jam today or more jam tomorrow…“.
As you might imagine, it is my firmly held opinion that if you use the logic outlined in this blog entry you will have done an extremely good job of setting up your financial affairs, particularly for someone who doesn’t want to invest any real time or effort.
As we have seen, this methodology means that:
- You are well diversified geographically and in terms of assets: You are invested in the world…
- You stand to benefit from the inflationary policies of central banks all over the world whilst everyone else sees their purchasing power gradually destroyed…
- You achieve this as cheaply and effectively as possible by leaving out expensive financial advisers, high-cost products and poor-quality investment accounts.
For those of you who you who want to get your house in order with as little effort as possible, to the best of my knowledge and ability, this is a superb approach to take. It will give you an excellent chance of making more money from your money than the very large majority of people. As we have seen it has worked for the likes of Harvard and Yale for decades.
In reasonably short order you should see a significant impact on your finances. Your money will start making you money. If you stick with the above plan over several years, your money will very possibly end up making you more than you can earn by working – our ultimate goal. By getting your financial affairs in order you give yourself the best chance of building a pot that could quite possibly make having a mortgage or any other kind of debt a thing of the past.
I can’t say that this approach will always make money. You may well experience the odd down year as there is no certainty in investment but what I can say with a high degree of confidence is that it is _highly likely_that following this approach will grow your real wealth far better than the approach taken by the vast majority of people and many financial advisers (particularly after accounting for their costs). If the material you have read so far has succeeded in its job you will hopefully find the ideas sufficiently compelling to agree with this assessment.
A very important final point
The above notwithstanding, I want to make a very important final point: Which is to say that although I am confident the approach outlined above is a very good one, there really is no substitute for taking a proactive approach to looking after your money. Arguably this has never been truer than today.
There are some very serious and frankly rather frightening structural changes going on in the world today, not least the possibility of rampant real inflation. If you really don’t have the inclination to spend a bit more time in your life learning about finance then please do implement the ideas outlined above.
In order to give yourself the very best chance of surviving and thriving, however, I would strongly recommend that you take further steps to improve your understanding of finance. Once you open the Pandora’s box of learning about money there is a good chance you might even find it fun or interesting at the very least.
Whatever happens you will certainly give yourself the best chance of spotting a big trend or change in the way the world economy is working and this will maximise your chances of avoiding being caught out in a crash on the one hand and in investing in the right places on the other. Taking responsibility for your own financial affairs will also save you a great deal of money in fees and costs, which can have a very significant impact on your finances as a whole, as we have seen.
So that is the Plain English Finance “keeping things simple” approach.
Create some financial surplus, get your accounts set up and invest as explained above.
For those of you who wanted to “keep things simple”. That is it. I hope you have found what you have read so far to be compelling and I hope that you will take action to revolutionise your financial affairs. If you have any concerns or questions, please do not hesitate to get hold of me via the contact page of the site and if you would like more help, you might consider having a look at our paid services.