Understanding Your Investment Style: Bull or Bear?
In the UK, savers invest a smaller percentage of their wealth in the stock market compared to other G7 countries, raising concerns about the potential impact on future retirement funding.
Experts warn this trend could lead to a significant retirement savings crisis, with current investments outside pensions averaging just 8% in the stock market. In contrast, American investors allocate 33%, Canadians 22%, and Italians 19% of their wealth to stocks, as reported by the investment firm Abrdn. French investors stand at 13%, while Japan and Germany showed similar figures with 9% each.
Britons also have a high proportion of cash holdings, at 15%, surpassing the 10% held by Americans and the 11% by Canadians. Only Germany (16%) and Japan (35%) maintain greater cash reserves.
The Financial Conduct Authority estimates approximately 8.6 million UK residents hold over £10,000 in cash that could otherwise be invested, potentially creating future financial challenges. Cash investments often yield lower returns than stocks and are less effective at preserving purchasing power against inflation.
So, how can individuals prevent an impending retirement savings crisis and foster a passion for investing?
Are You an Optimist or Pessimist? Take the Quiz
Your investment strategy should reflect your time horizon, income needs, and risk tolerance.
Consider these questions to assess whether you lean more towards being a bull (optimist) or a bear (pessimist).
Why Is There a Lack of Investment?
Traditionally, many UK workers benefited from defined benefit pensions, which guarantee inflation-linked income during retirement. With both these pensions and the state pension often sufficient, there was little motivation to explore additional investment avenues.
However, such pensions are becoming rare, often replaced by defined contribution plans where retirement income hinges on individual contributions and investment performance.
The shift in the US began in the late 1970s, providing American savers with a longer time to adapt to managing their own investments, consequently leaving UK savers trailing. Marcus Ellis from Quilter noted that British savers exhibit a significant confidence gap—many feel uncertain about investing and find the terminology intimidating. Additionally, there is a broad lack of financial literacy regarding stock market dynamics.
Myron Jobson from Interactive Investor mentioned that the thought of possibly losing money deters many people from investing, leading them to prefer the ‘safety’ of cash savings, despite its declining value due to inflation.
Reasons to Invest
Barclays’ research shows that shares generally outperform other asset classes. Their long-term analysis indicates UK shares achieved an average annual return of 1.2% above inflation over the last decade, contrasting sharply with losses in UK government and corporate bonds and cash.
When considering investments over an extended period, UK shares yielded an average annual return of 4.8% above inflation compared to 0.9% for government bonds and 0.5% for cash. For instance, an investment of £100 in UK shares at the end of 1990 would have grown to approximately £427 after inflation, while the same amount in cash would be worth just £111 today.
Getting Started
The landscape for investing has evolved, becoming both accessible and affordable. DIY investment platforms have emerged, lowering the barriers to entry for potential investors. Individuals can now invest by simply making a few clicks online or via mobile apps.
Many individuals automatically invest through their pensions without realizing it. However, it’s wise to assess how pension funds are allocated based on personal risk appetite.
For those looking to begin investing, stocks and shares ISAs are typically recommended. Each adult can invest up to £20,000 per tax year into ISAs, and the returns are tax-free.
Established platforms like Hargreaves Lansdown and Fidelity International provide ample resources for guidance. Newer platforms may offer lower costs with a smaller selection of investment opportunities.
If personalized advice is preferred, independent financial advisers can provide a range of product recommendations, while restricted advisers tend to offer a limited selection. Many people opt for one-off consultations to help establish portfolios and maximize tax-free investment allowances.
It’s advisable to contribute small, regular amounts rather than making significant lump-sum investments. Setting up a direct debit can simplify the process, aiming to utilize the ISA allowance throughout the tax year.
Selecting Investments
Once an account is established, you’ll need to determine your investment choices.
Diversification is crucial; spreading investments across various asset classes can mitigate risk. Jobson advises that diversification involves not just different stocks, but also assets from various sectors and regions.
Most DIY investment platforms offer pre-constructed portfolios tailored for diverse risk profiles, with categories ranging from cautious to adventurous.
As a rule of thumb, the longer your investment horizon, the more aggressive your asset allocation can be, leaning more towards equities rather than government bonds if you prioritize growth over income.
Your risk tolerance should guide investment decisions; it’s essential to avoid choices that could lead to sleepless nights. Many platforms have tools to help gauge risk levels.
The AJ Bell adventurous portfolio, for instance, includes 80% in shares and 20% in safer assets like bonds, whereas the cautious portfolio has the opposite allocation.
When you feel ready to manage your own funds, numerous online resources are available for researching and comparing fund performances, including sites like Trustnet and Morningstar.
Most funds come in two variants: income versions (marked with ‘Inc’) pay out dividends, while accumulation versions (‘Acc’) reinvest them for compounding growth.
Look for and compare different share classes based on their cost-effectiveness before making a selection.
Increasingly, investors are opting for low-cost tracker funds that mirror market indices rather than actively managed funds. Investment in tracker funds has surged from £93 billion in 2014, comprising 10.5% of total investments, to £361 billion by the end of 2024, accounting for 24.1% of the market share, according to the Investment Association.
Understanding Investment Costs
In investing, comprehending your costs is integral to success—making sure that your returns exceed these expenses.
Investment services typically charge an annual fee ranging from 0.25% to 0.5% of the investment value, while some platforms charge no annual fee or a fixed cost. Your best option will depend on your investment size and trade frequency.
Each trade may incur costs, including a 0.5% stamp duty. Additionally, annual fees for funds will vary, from as little as 0.06% for low-cost trackers, to more than 1.5% for actively managed funds. It is important to assess whether a higher fee correlates with enhanced performance.
If engaging an adviser or manager, you should account for additional annual fees of around 0.6%.
To evaluate if you are receiving good value, it can be helpful to compare the profits retained to the total fees paid across various service providers.
For example, an initial investment of £50,000 earning a steady 5% growth annually without charges could yield approximately £166,100 in profit over 30 years. However, with a 2.4% annual fee charged by a financial adviser, only £57,992 of those profits would be retained, with £108,105 lost to fees. Lowering total charges to around 1.68% would allow you to retain half of your profit.
Managing Income Withdrawals
Many investors, especially during retirement, aim to withdraw a sustainable income from their investments while maintaining their capital base.
It is advisable to withdraw at a rate that does not deplete the principal rapidly. The target is often to have the capital replenish itself annually to offset withdrawals.
Your portfolio’s natural yield, comprising dividends and interest, should ideally allow you to withdraw this sum without diminishing the capital itself. Nevertheless, performance variability may necessitate occasional capital draws.
Laith Khalaf of AJ Bell suggests a rough guideline of aiming for 4% as a sustainable withdrawal rate in retirement without significantly impacting the principal.
Is It O.K. to Keep Cash Savings?
Absolutely. Starting to invest does not preclude maintaining some cash savings. An accessible savings account serves as a valuable buffer and an emergency fund.
Financial experts typically recommend holding three to six months’ worth of expenses in cash reserves for emergencies and possibly more if unemployed. Regularly comparing savings rates ensures that your cash retains its value against inflation.
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