I hope you had an excellent Christmas! But let’s return to the task at hand.
You’ve worked out your spending. You’ve cleared your debts. You’ve got a savings buffer just in case. And you’ve read about investing and realise it will build your wealth better than any savings account currently available. The next step is to actually start investing! And I will provide step by step instructions to get you up and running. Let’s begin.
The Vanguard of your investing
For this guide I will be recommending Vanguard Investor. There’s a whole load of different platforms out there, of which Monevator has done a near-complete listing with all the pros and cons of each one and their associated fees. I myself have used them for the past 2 years and have no problems with their services offered. I have a few years of ISA allowances tied up in the Vanguard platform. For new entries to investing though, they have an extremely simple fee structure:
- 0.15% (or £1.50 per £1,000 invested) a year platform fee
- 0.07-1%+ (or 70p-£1 per £1,000 invested) a year on each ETF you decide to invest in (more on that later)
And that’s it. No fees to buy or sell ETFs. No fees to move an account to them, or away from them. Their platform fee is one of the lowest around percentage wise and their funds cost about the same at the more expensive platforms. As always though, do your own research. But for a new starter to investing it’s hard to go wrong with them unless you want to invest in something they don’t offer – they only offer Vanguard funds. As you become more confident with investing, you could consider moving to another platform if they offer something more attractive to you – this is personal finance after all – everyone has a different plan.
The absolute most important part is to start!
An aside about ISAs
Every year, the UK government allows you to save up to £20,000 (for tax year 2019/20) in an ISA (Individual Savings Account). This benefit is absolutely incredible and frankly unmatched in any other country in the world that I’m aware of. Money put in these accounts is free from Capital Gains Tax, Dividends Tax, tax on interest from bonds / cash and, if you die, your spouse/partner can inherit the entire amount and keep all those tax sheltered benefits (since 2018)!
In short, once the money is them, pretty much everything you can have in an ISA is tax-free from this point (with some caveats, but don’t worry about this yet). There are several types of ISAs but the one we’re interested in is a ‘Stocks & Shares ISA’ which holds, you guessed it, stocks and shares. If you have already opened one in this tax year, get it filled up as much as possible – you lose the allowance if you don’t use it.
Basically, use an ISA to invest. If you’re hitting the £20,000/year limit then you are rich enough to get some financial advice on what to do next.
Opening an account
- Navigate to the Vanguard website and click ‘Open an Account‘
- Start an application:
- Open a new Stocks & Shares ISA account:
- Read the information carefully and make sure you are eligible for the conditions required to open an ISA account with Vanguard.
- Usually you would pick what you fund(s) you want to invest in on this screen but for now, just setup a cash transfer once a month. The minimum Vanguard allows is £100 a month or a £500 one-off amount. We’ll go through possible fund options later, it’s easy to change the Direct Debit.
- Fill out all the required personal details (including National Insurance number) and create a username and password.
- Setup the Direct Debit instruction for £x/month from your bank account. I would recommend setting up the execution date to be a couple of days after your pay cheque so that you aren’t tempted to spend it instead…!
And that’s about it really. You have a Vanguard ISA setup and a temporary Direct Debit taking cash from your account and putting it into your ISA where it is now tax-free for all gains you’ll make in the future. The next step is to decide what to invest in.
Picking a fund / ETF
I do not (and cannot) offer investment advice. I have to be very clear on that. Always do your own research before investing in something and if you don’t understand it, I would say keep clear of it. What I can do is tell you how I set up my wife’s ISA. She has no interest in investing despite my (exciting, entertaining and well thought out*) discussions with her so she just wanted something she could chuck some money into every month and then forget about.
* Well I think they are – my wife might disagree
In terms of ‘fire and forget’ products that Vanguard offer – the most prominent are their LifeStrategy funds:
These funds are basically Vanguard’s interpretation of a global tracker index with a mix of bonds (fixed income) and equities (shares). You should dive into the excellent information packs provided with each one (click on the links on that page) to see what they consist of. On the whole they are well diversified across a number of countries and companies. The nice thing about these funds is that they re-balance as they go along, meaning if shares suddenly rocketed 100%, Vanguard would take those winners and move them into bonds to keep the bonds/equities percentage split. My more manual approach means I probably tinker too much with my portfolio.
The biggest choice to make with these funds is how much risk can you handle? Vanguard has a nice article on determining which one may be suitable for you. Equities can offer higher returns than bonds, but also carry far more volatility. How would you feel if the value of your portfolio dropped 30% tomorrow? Perhaps a 40/60 or 60/40 portfolio would allow you to invest with confidence starting out?
Seeing as my wife is young and has no need for her invested money for the foreseeable future, she chose to invest in the 80% equities version but do check your risk tolerance with some online tools. Her Direct Debit tops up her Vanguard account just after she gets paid and it gets invested into the LifeStrategy fund and therefore the stock and bonds markets. Once it’s setup, it really is that simple! And then it’s on automatic and a new habit is formed!
I hope you can see that it’s extremely easy and even fun to get into investing! Give it a go before this year’s ISA allowance disappears on 5th April 2020! And I’ll see you in the next post where we discuss the longer term plan of FIRE.