Let’s pretend there are three candles, OK?
Happy birthday to my investments!
Last week was three years since I shovelled my cash Isa savings into the stock market.
I can still remember the stomach-churning moment when I hit the keys to buy. Fed up with years of rubbish interest on my savings, I was finally willing to consider the stock market, in the hope of higher returns.
It’s a very happy birthday too. I invested just over £28,600 back on 24 September, and three years later, it’s worth nearly £44,600.
Holy cow.
That’s up 56% – a gain of nearly £16,000. I wouldn’t have got that stuck in cash! Maybe a tenth, at the highest rates.
As this is also Good Money Week and I attended the second Fidelity Women & Money Innovation Lab, both focused on encouraging women to invest, I thought it might help to talk about what I chose and why.
Because even if you’ve grasped the basics (post on investing for beginners) and are ready to invest, most of us don’t have the first clue what to pick.
Faced with a gazillion different shares, funds, companies, platforms and investment theories, where on earth do you start? I’ve been writing about investing for years, and I still agonise over my choices. It’s scary knowing that unlike a savings account, you could get back less than you put in, even if historically the stock market has done much better over the long term.
Here’s something that might make it easier: when it comes to investing, there is no ‘best’ option.
I reckon it’s a bit like choosing a holiday. Everyone has different preferences and there are loads of different choices. Bank holiday in Bognor? Sun lounger in Spain? Trekking in Tibet? Swot up on the details and book it all yourself, or pick a package? But at some point, you just have to choose, or the whole summer has zipped past while you’re still researching.
How I chose
Now I’m not an expert or a financial adviser. I’m not recommending anyone rushes out and buys exactly what I bought. Heck, even I might not make the same choices if I did it all over again.
But in case it’s helpful, here’s how I narrowed it down:
- Funds not shares. I’m keen on funds, where someone else picks lots of different investments, rather than choosing shares in individual companies myself. Reckon I’d go straight for a Woolworths just before it collapsed. With a fund, even if one company fails, it doesn’t hit your balance so hard.
- Long track record. Sadly, good performance in the past is no guarantee you’ll get the same in future. But I liked the idea that funds and fund managers that had been around for a while had survived recessions and financial crises. Also, I wasn’t up for frantic trading. Too much time, effort and expense. I wanted investments I could just buy and hang on to for a looooong time.
- Low (ish) fees. If you use a fund, you have to pay for it. Don’t worry, you won’t get presented with a big bill, it just gets taken out of your investments. Fees of 0.5%, 1% or 1.5% a year might sound small, but even that extra 0.5% or 1% can really eat away at your money if you’re investing for decades.
- Active not passive. I went for funds where a manager picks and chooses investments, trying to do better than the market. The alternative is to use ‘passive’ or ‘tracker’ funds that don’t try to beat the market, but just do the same. Here’s the crunch: actively-managed funds charge higher fees than computer-driven passive funds, which can charge less than 0.1%. There’s a lot of debate about whether it’s worth paying more for active funds, as they don’t always deliver, but hey, that’s where I decided to start. I’m going to sit on the fence and say there’s a role for both.
Why I used investment trusts
Wait – don’t run away screaming at the jargon!
Investment trusts were actually invented for you and me, when Foreign & Colonial was founded 150 years ago to help the ‘investor of moderate means’ have ‘the same advantage as the large capitalist’. A Victorian version of robo advisers, if you like.
My old boss is an investment whizz, and he’s a big fan of investment trusts (Hi Ian!). Investment trusts are a kind of funds that have a history of charging lower fees while performing better than the more popular type of funds, called unit trusts.
(A cynic might wonder if part of the reason unit trusts are more popular is because they used to pay commission to financial advisers, while investment trusts didn’t)
It’s a bit like choosing between a wardrobe or a chest of drawers. There are pros and cons, but fundamentally they both store clothes. Unit trusts and investment trusts have different structures, but fundamentally both spread your money across lots of different investments. I’ve written a post here about the differences with investment trusts, but one big difference is that they can borrow money to invest. This ‘gearing’ can boost them while times are good, but also drag them down if markets fall.
I also knew that some investment trusts have been paying rising dividends – the share of profits paid out to people who invest in them – for decades. The Association of Investment Companies (the industry body for investment trusts) publishes a list of dividend heroes, which have paid higher dividends every year for at least 20 years. Currently there are 21, and 4 of them have raised their dividend every year for more than 50 years.
That’s where I bottled it.
I felt like I didn’t have a clue whether any of the dividend heroes were decent investments, or which ones would go together. So I sent the list to an independent financial adviser, and asked what he recommended.
My first investments
The financial adviser suggested three investment trusts from the list of dividend heroes (City of London, Temple Bar and Scottish Mortgage) and added one more (Finsbury Growth & Income).
Turns out I like my investments like my houses – old.
This lot aren’t whippersnappers, they’re positively geriatric. City of London was founded in 1891, Scottish Mortgage in 1909, Temple Bar in 1925, and Finsbury Growth & Income in 1926.
All four have managers who have stuck around for at least 16 years, and in the case of Job Curtis at City of London, for more than a quarter of a century.
Plus, Scottish Mortgage and Temple Bar have both paid out rising dividends for more than 30 years, while City of London has increased dividends payments every year for 51 years.
So big tick in the ‘survived wars, recessions and financial crises’ box.
They also have relatively low ongoing charges, especially for actively-managed funds – City of London, Scottish Mortgage and Temple Bar all charge less than half a percentage point a year, at 0.365%, 0.37% and 0.49% respectively. Finsbury Growth and Income charges slightly more, at 0.71%.
Don’t have a handy IFA to ask? If I’d checked Morningstar, the investment data company, I’d have seen these were all rated ‘gold’ at the time (Temple Bar has since moved to ‘silver’). This means Morningstar analysts reckoned these funds would do better than their rivals. All apart from Temple Bar also appear in Moneywise’s list of first 50 funds for beginners.
What do the funds invest in?
City of London is a sturdy option that invests in UK companies you’d have heard of. It focuses on reliable income growth, rather than trying to shoot the lights out.
Meanwhile Nick Train at Finsbury Growth & Income goes out on a limb by investing in a small number of household names, such as Unilever, Diageo and Heineken.
Over at Temple Bar, another UK-focused fund, the manager Alastair Mundy is a ‘contrarian’ investor, searching for opportunities in out-of-favour, undervalued areas. In practice, it means the fund doesn’t do exactly what the markets are doing. You hope that while it might falter while other funds are growing, it might also hold up if everything else is crashing.
My last holding, Scottish Mortgage is a bit different. It’s a massive £8.3 billion global investment trust focused more on growth than income. Despite the name, it’s actually rather racy. Managers James Anderson and Tom Slater invest in high tech and internet-based companies, including Amazon, Netflix and Alibaba, China’s biggest ecommerce company.
How did they do?
After shelling out the costs of buying the investment trusts, I ended up with £7,100 in each. Yup, it’s not like bunging money in a savings account, you have to pay dealing costs and 0.5% stamp duty when buying shares.
(Some investors split their investments in careful proportions between different types of asset and different countries, according to how much risk they want to take. In contrast, I took the highly unscientific approach of splitting the money 4 ways. So shoot me.)
After three years, they’re all up, with Scottish Mortgage as the soaraway success.
My £7,100 in each has grown to:
- City of London: £8,960, up by a quarter
- Temple Bar: £9,380, up by a third
- Finsbury Growth & Income: £10,890, up by just over half
- Scottish Mortgage: £15,360, more than doubled, rising 116%
In comparison, the FTSE All Share has grown 22% since I invested, while the FTSE All World Index, which is more relevant to Scottish Mortgage, grew 37%.
The last year saw stark differences in performance. Scottish Mortgage zoomed up 30% and Finsbury Growth & Income grew an impressive 15%, while City of London and Temple Bar didn’t perform better than their markets, at 4% and 1.4% each.
But overall, my £28,600 has been transformed into nearly £44,600, up 56% and by nearly £16,000. That feels pretty mindblowing to me.
My balance grew 17% in the first year, 17% in the second year, and 14% in the third year. I’ve been lucky with my timing, swept along by a rising market. There’s no way I can expect that to continue. Long term, I might hope to average out at 6% to 8% a year, so I’m due some rocky times ahead.
After three years, I’m still a toddler in investment terms. But relying on far more experienced funds has made a lot more of my money.
Now over to you – ready to invest but don’t know where to start? What would help? Or have you found a a great way to choose where on earth to invest? Do share in the comments, I’d love to hear!
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