Babis' Weblog

Introduction

“Stock Market Investment is not risky, lack of knowledge about what you are doing is risky”, Rich Dad, Poor Dad 2: Cash Flow Quadrant – Rich Dad’s Guide to Financial Freedom by Robert Kiyosaki.

I love being a Foolish investor as it is very rewarding and lucrative. I found this on the Motley Fool web site in an article titled 13 Steps to Investing Foolishly and had to share it since I could not have put it into words better myself (it applies equally to the UK – just replace Wall Street with “The City”):

“We know that most people have never formally been taught much about finance or investing. That’s exactly how Wall Street likes it. It’s better for them if you think what they do is rocket science — that it’s too difficult to make your own financial decisions, so just entrust your hard-earned dollars to them so they can generate fat commissions for themselves.

Obviously, we think that’s bunk. The harsh reality is that there is really only one person who has your best interests at heart — you. Our job is to show you how to take control of your own financial life so you can make confident, well-informed decisions about every dollar that passes through your hands, whether you’re saving it, spending it, paying it back, or making it grow.”

This page, or blog, is not a tipsheet on what shares to buy.

The information on this page is based on my opinion, on what I have read from reputable sources and my experience of share dealing in my personal capacity for over 20 years. I do not represent any company. Please do your own due diligence before taking action to improve your financial situation.

What financial instrument types do I use?

The new, more efficient way to invest your money on the stock market is through ETFs (Exchange Traded Funds). They passively track an index or a specific commodity or basket thereof. They are listed on a stock exchange just like shares, but best of all, they carry no 0.5% stamp duty (tax) on purchase like other shares in the UK. There are a large variety of them available to trade on the LSE (London Stock Exchange), and the list is growing daily. These instruments leave more money in investor’s pockets due to the lower fees which is a big win for investors.

Another great cost effective way to invest your hard earned money on the stock market is through Investment Trusts. These are also listed on a stock exchange, are actively managed but their fees are lower than Unit Trusts / Mutual Funds an other funds.

Investing in shares and ETFs is not as complicated, and as risky, as the financial services industry would have you believe. What is risky is a lack of knowledge about what you are doing, however, giving your hard earned money to a fund manager who more often than not fails to beat the benchmark or charges high fees for the privilege is even riskier! It is very simple to open a brokerage account and to deal directly in the instruments that you want to buy.

As far as the stock market is concerned I personally concentrate on shares, with a few Investment Trusts.

How do I know what to buy?

1. I use some technical analysis through ShareScope or Google Finance.
2. I subscribe to The Motley Fool’s Stock Advisor and Rule Breakers newsletters, for US shares, which is fantastic and has a great track record – the past is definitely a guide to the future in this case.
3. I use the Internet to research great investment ideas – be careful with this and use reputable sites.
4. I follow successful investors like Robert Kiyosaki and Warren Buffett.
5. I chat with knowledgable friends.

How do I buy?

I buy US shares (NASDAQ and NYSE) on a lump sum basis based largely on what I read in the Motley Fool Newsletters, which I have found to be fantastic. They are very simple to read and understand. Their web site is excellent and explains things in plain English while not being patronizing. I am building up my holdings based on their “Core Holdings” and “Best Buys Now” recommendations. I deal through my ISA with TD Direct Investing, where, if you have a minimum value of £5,000, you pay no ISA fee.

I also invest on a regular monthly basis in shares on the LSE through my TD Direct Investing ISA as it only costs £1.50 per line of stock per deal. These deals are not immediate execution but take place once a month and are grouped with other investors’ purchases to keep costs down. This is a great way of pound cost averaging your investments, reduces timing risk, keeps costs down (a big factor in investment returns) and you’ll be amazed at how quickly your investment will grow over time if you keep at it – like most things in life, consistency will get you the success you want.

Tax Efficient Wrappers in the UK (ISAs and SIPPs)

ISA = Individual Savings Account (cash or stocks and shares)
SIPP = Self Invested Personal Pension

Unfortunately we cannot use the term “Tax Free” in this context because our British government has slowly infiltrated and pilfered our hard earned savings in these wrappers over the years, just like they have raided and stolen our pensions. There are still useful tax benefits though, for now.

Just to clarify, the term ISA does not only mean a cash ISA as many people think. An ISA is just a wrapper to protect hard earned (depends how smart you work) financial assets from the clutches of the tax man. Personally, I don’t see the point of having a cash ISA because the returns are so paltry these days and they are very inflexible. I don’t know why separate Cash and Stocks & Shares ISAs were created – probably just to confuse people unnecessarily. I personally feel that it is far better to have a Stocks & Shares ISA and if you are concerned about the markets then invest your money in something less volatile such as a Money Market ETF from dbxtrackers which would probably provide a better return than a cash ISA, or even a high paying, stable dividend share.

The biggest crime against yourself and your family would be to let the government get away with more than its fair share of your hard earned money than it needs to! I hope that you do not do this because that is like burning your wealth.

The total ISA allowance is £10,680 for 2012 – so you can have £5,340 in a Cash ISA and £5,340 in a Stocks & Shares ISA, or the full allowance in the latter. I try to use up my full allowance in a Stocks & Shares ISA with TDWaterhouse who offer reasonable dealing charges on US shares as well as UK. Everyone should try to use their full allowance by 5 April each year. Don’t be charitable towards the government – you can put your money to better use than they can.

SIPPs are a great, transparent and refreshing way to invest your money for your retirement after years of opaque and expensive products. SIPPs allow you to control exactly what you invest in, and as I mentioned before, if you are not sure what you are doing then investing in a simple ETF that tracks a broad index like the MSCI Emerging Markets or S&P 500 is pretty simple to do through ETFs issued by iShares, for example. There is also no stamp duty on buying ETFs – so another great way to keep your hard earned money from the government. There is no stamp duty on overseas stocks and shares either. The currency risk argument in doing this is also diluted if you invest in global companies that earn their revenue from more than one country. I am sure you can think of a few like Amazon (AMZN), Ford (F) and Costco (COST).

Everyone should have a SIPP, including your new born baby. Your baby will one day grow up and will eventually retire just like the rest of us. Do you want to trust the government being there to look after it? If you do not start a SIPP when your baby is born then you will be wasting thousands of pounds over its lifetime, firstly because of the wasted tax benefit each year, secondly because of the fantastic power of compounding and thirdly, the inevitable increase in the value of your portfolio (because it is difficult to do worse than most fund managers). It is far better to put money into a SIPP as early as possible as opposed to later (the difference is astounding), therefore people should not wait until they start working (if their parents can afford it, if not, there are many ways to diversify your income these days, part-time) or they near retirement age because this will be detrimental to your financial health near retirement.

As I use them to manage other people’s pensions, I would recommend Sippdeal as they have also recently won numerous awards, they have no annual charges and their dealing charges are a very reasonable £9.95 per deal online.

If your boss is not paying you enough to invest in shares then click the banner below, or if you cannot see the banner then please just click here to find out how you can do this simply with your own part time business and save loads in tax to further invest in the great listed comapanies out there. Don’t tell your boss though, unless you are prepared to have him / her join you.

Happy Foolish investing!

“One good investment is worth a lifetime of labour.” ~ Tom ‘Big Al’ Schreiter