Getting To Grips with Funds - BOD034

0:00I haven't even checked my hair. I'm sure my hair is just gorgeous as always. Well, that, it's amazing how that was the word I was going to go for. Gorgeous. Yes, uh-huh. It's, yeah. Okay. Hi and welcome to the Bank of Dad podcast. I'm Kate and this is my dad Pete. Hello. And we're here to teach you the money lessons we were never taught at school. There's no judgment, no jargon, just real talk about how to handle your money. Not bad, it's been a while since you've done this. Yeah, it took me a minute. Nice tan, by the way. thanks you too it was the sole mission for 10 days it was read books 10 up it was lovely wasn't it yep really really good do you have a favourite book of the ones that you read because you read 6?

0:467 and a half gosh actually I really enjoyed I read a lot of sort of non-fiction I really enjoyed the first two in what is a trilogy by Leigh Bardugo really really love Six of Crows she's famous for Grishaverse series. So this, the first one, it's called Ninth House and the second one is Hellbent. So it's a trilogy, totally different from the other stuff. Yeah. Really enjoyed them. Read those one per day. They were that good. Yeah. I read five and a half, but the half of the book that I read was 800 pages. Sarah J Maas. So it's six books, right? Like that's, the half was 400 pages. It's not a competition.

1:25That's a book. But if it was, I'd beat you. Yeah. Because you read nonfiction, it's fluffy. Yeah, well, you reckon. I'm joking did you see how angry he got then yeah yeah finding meaning in the second half of life yeah it was quite funny you were chatting to me in the pool after reading it going sorry if I've messed you up what the hell are you reading Jungian psychology I was reading it was quite good but yeah anyway far more interest how is the house purchase going so actually I was about to say pretty stagnant but for the viewers and listeners there has been a development major development I got my mortgage offer finally four months it's been an ordeal hasn't it but for two specific reasons yeah which we've alluded to before but essentially having a house buying a house that is considered an affordable house under the section considered it's still 193 grand or whatever yeah so it's under something called the section 106 scheme which I actually believe is a Cornwall only oh really yeah because Gary was like what the hell is this oh okay Yeah.

2:28Gary is mortgage advisor Gary King. We love him. Extraordinaire. Yeah, we love him. So that means I buy the house for 81 % of its market value, which is great. I'm buying a lot more house than I'm paying for. But the deal is I sell it for whatever its value is at 81 % of whatever the value is. Yeah, but what's cool is you can't get it valued by an estate agent. It's got to be valued by a surveyor, a charter surveyor. Yes. And you can't be outbid. You can't bid more than the asking price. Yes. So for example, there was an offer on the house when I looked at it. Which was less than the asking price.

3:02Which was less than the asking price. So I went asking price. And I got it. And you can't be beaten. All I could do was be equaled. Yes. And they pick who they prefer. Yeah. But thankfully we didn't have to go down that route. So that's the first reason why it's been tricky. The second reason being because it's really hard to buy in Cornwall, okay? It's a lot of money. We are doing a joint borrower sole proprietor JBSP mortgage, which means that mum and dad are on the mortgage. But don't own the house. But don't own the house. So it's bitship for them, really. Shafted either way you look at it.

3:32But actually, it's a means to an end. But the point is, the banks can then look at that and go, oh, if she can't, they can. Yes, they factor in our income, don't they? So that they can lend more. They also factor in our age, though. So it means that you can't necessarily get as long a mortgage as you might otherwise have been able to get. Yes. But those two things combined have meant that it's been a ball ache, to get it on, get it ready. I mean, despite Gary's tireless efforts, it's been a hassle and part of it is because of the way I'm paid and stuff you know I'm a business owner and it's dividends and company years and tax years and all that sort of stuff the amount of stuff two different accountants it's just been a bit of a faff but anyway we've got the mortgage offer now I messaged I emailed my solicitor this last week and she said that she is awaiting responses from the seller's solicitors regarding some things from the searches and also awaiting some documents from Barclays my lenders yeah anyone got some independent legal advice which is happening tomorrow.

4:26Just to make sure I'm not swindling you, I guess. To make sure we know what we're getting into. Yeah, like... I asked if I could waive it. I mean, you know, I know what I'm getting into, but it's important that mum knows, you know, from somebody other than me, I think. But, although she'd be like... Couldn't get less. Yeah. But I did ask if I could waive the right to legal advice, but the answer was no. So I've got to do that and pay for that. So anyway. Sorry. No, no. It's all good. What are we talking about this week? this week we are kind of it's in a similar vein to last week which honestly feels like a very long time that we recorded it yeah so um yeah so i'm sure it is on the similar vein we just don't remember what we're on about then um in that we're talking about choosing funds last week we were talking about asset allocation so it's all about kind of making the most of your investments isn't it yeah yeah getting the investments in place getting them right hopefully from day one yeah And sent things off on the right foot.

5:21So choosing funds this week. But before we get into that, it is time for Wanky Word of the Week.

5:32Yep. And what is this week's Wanky Word of the Week? Benchmark. Benchmark. A meaningless word. Yeah. I mean, and we know the meaning of it. Yeah. Something, a standard against which you are measured, isn't it? is there a specific meaning for this? Well, no, because fund managers, to some degree, can choose what benchmark they are measured against, which kind of makes a mockery of the whole thing. Yeah, I was just about to say, well, what's the point in that then? Well, because you pick a benchmark which makes you look good. Yeah, thus, then they're not comparable to other. Well, it's like I'm thinner than the people on my 600-pound life, but that doesn't make me in good shape, does it?

6:14No, exactly. so it depends on you we had a real phase of watching that didn't we we did so you know if you can set your own benchmark it seems a bit daft we'll come back to benchmarks later but it's basically when you are choosing fun they will say you know compared to this benchmark we have achieved an out performance of X or an under performance of Y whatever oh it's sounding suitably wanky yeah well it's just a bit of a stupid word how did that word come about anyway do you know what I mean it's probably something like in the victorian times where they would put a bench up sideways and that was like how they measured you like in height like you're that part on the benchmark like do you know what i mean it probably is it's probably something like that okay you want to do it you want to google it out yeah well i want to see how close i am because i feel like that's actually not bad benchmark etymology let's have a look origins and 19th century land surveying so now you're not far off with victoria but you're probably all right where surveyors cut a horizontal mark horizontal mark into a stone wall or building to insert a metal bracket called a bench that securely held a measuring rod in place.

7:20Hang on, let's just review the things I got right there. Along the wall, Victorian, along the wall, and a measuring thing. Well done, Kate. God, I'm a genius. Or lucky, but either way. It was an educated guess. It was educated and it started out well. So choosing funds. So let's start with the basics. What is a fund? Yeah, good place to start. A fund is a, we call them collective investments. So what it means is you, me, and however many other people want to invest in this fund, we essentially pool our money together. You think, well, that sounds a bit dodged. How am I keeping track of that? Well, obviously there are mechanisms for who owns how many shares in the fund.

8:05Yeah, if I put 300 grand in and you put 20 quid in, it's probably not fair that we have the same volume of ownership. No, you wouldn't have the same number of shares, would you? Yeah. You'd have proportionally the right number of shares based on how much you put in. And what's important is that by pooling your money, it gives you pretty much two things. Firstly, potentially at least, economies of scale. So, you know, more people invested more money. You can buy more stuff. and also if the fund manager is going to buy like 10 million quid of a particular stock they're going to get a deal on trading fees and stuff like that they've got institutional rights yeah and there's not many individuals who can buy that much of no and the thing about owning because mostly these are shares also bonds so the underlying assets that we talked about last time you know as an individual investor if you own shares in say 10 companies i swear to god the paperwork these days even if it's virtual into your email inbox It's intense.

9:02Really? And so if you own 100 stocks, it would just be unmanageable. Whereas by investing in a fund, you could be potentially accessing 5 ,000 underlying stocks. So you're spreading your money more widely. So not only economies of scale in terms of… You also diversify. Yes, exactly. It's not just in terms of cost, but also reducing risk by diversification. You can buy more stuff, access to more stuff as well through a fund. But it comes at a price. There are costs involved in investing in a fund. so a fund is simply a collective investment you pool your money with other investors it gets me more stuff and yeah and different stuff we've defined that before but I think it's just good to reiterate that especially beginning an episode all about it it would be yeah it would be remiss of us because if somebody hadn't listened to the previous one so yeah indeed so there are obviously thousands of funds to choose from where do you even go about I will take the piss where do you even go about oh we're carrying on yeah Yeah.

10:00Okay. You're going to piss about it. It's getting on the edit. Okay. There are thousands of funds to choose from. No, it's fine. So look, I always think choosing a fund, I actually done a video on Meaningful Money YouTube channel on this very recently. People sort of start with what fund should I buy? It's like, hang on, that's like decision number six, right? It's way down the list. It's important, but it's a long way down the list of what's really important. So if you're going to invest at all, you should always say, right, what's the intent? What do I want my money to do for me? here you've got to then work from there so you know from there comes on you know uh the kind of risk you might take um the time scale stuff like that so these are the questions you should be asking yourself jumping ahead a little bit but if you start with intent the rest kind of gets easier whereas if you start with like 20 000 funds on a sourcing website somewhere and you're just like how do I start with this?

10:56Does there have to be a set? Can the goal be just as simple as I want my money to grow? Yes, it can. Or does it have to be, this is for the house, this fund will be for this, this fund? You can over compartmentalise for sure. Most of us want our money to grow. Otherwise, why would we do it? But you should always really, I think, try to answer the question, to what end? Even if that's a really vague answer. Can it just be like security? Yes. I want a bigger number. I want a bigger number. Eventually, if that's always your answer, then you'll never be happy and you'll never be satisfied and you'll work your entire life.

11:35I will feel comfortable at X. Yes, totally. By such and such a time and date. That is legit, yeah. Most people will be like, well, I'd like to retire one day. So if you're talking about pension money, but not so much. In my eyes, I'm trying to think. This age, it's to build it. It's to get money. You've got stocks and shares at ISA. I do. You've had lifetime ISA. I haven't put much in my stocks and shares recently. Well, you're about to buy a house, so that's fine. And really, to this point, that's kind of been the target. Yeah. With that out of the way, it's going to be like, okay, we might want to size up one day.

12:16It might just be getting a bigger buffer between you and whatever the world throws at you. Emergency fund, obviously, is a start. but once that's done, you're like, well, actually, we're building financial freedom one day. And at your age, you never put a number on that. You never put a timescale on it because it's just, it's a big number and it's a long way in the future. And so to grow the money is a legitimate goal, no doubt. As long as that's not your goal. You know what I'm trying to... Yes, as long as that's not your only thing. It's like, I want as much money as possible. It's like, you'll never be happy.

12:47Go outside and smell the flowers. There's other things going on. Take your shoes off and walk on the grass. Yeah, exactly. Get in touch with nature. Before choosing a fund, what questions should you ask yourself? So a really important one, again, should you be investing at all? Because if it's like in your case, you've disinvested now, haven't you? Because the house purchase is imminent. Yeah, I didn't want my deposit to go to less than what I said I have. Yeah, right. Last thing you wanted is market crash before, you know, and suddenly instead of X, you've got X minus five grand. That would be great.

13:17That would be shit. So if you need the money in the foreseeable future, say the next two, three, four years, the question has to be, should you be investing at all? Or should you keep the money safe in the bank on deposit? All right. So the first question is, should you be investing at all? I think, obviously, yes, timescale matters, but it depends on the function. So for example, the next kind of big purchase I'll have to do is I'm going to need to size up my car. Yeah. But saving through an ice is not a bad way of doing that. No, for sure. But that's not like a life or death purchase that if it goes down, it's going to kill you.

13:48No, exactly. That's an important point. and you probably haven't got a rock solid timescale on it. And so in the absence of that, you just want, yeah, I want the money to work. Yeah. Because if it's five years, you'll wish you had invested. Yeah. Because otherwise you would have missed out on it. If it's two, it's like, well, I didn't very much, but hey, at least it didn't do nothing. Yes, exactly. So timescale is important. Risk, we've done previous episodes on risk. And, you know, it's such a kind of fluffy, difficult to pin down thing. risk so we generally start with people's kind of innate risk tolerance which is hard to measure and different to capacity yes well done but it's hard if you've never invested before to know that stuff you can answer the questions but it's like well okay i'm answering this stuff with no frame of reference so is it quite not quite a good idea because that sounds like advice but is it you know, to start investing, to work out your tolerance, to sort of go fairly run of the mill, maybe on the more cautious side.

14:52I'd go the other side of run of the mill if I was starting out. On the slightly more volatile side and then go, oh, I'm constantly checking it, not so good with that, dial it back, or actually I'm totally fine, I can even afford to go up a bit more in terms of risk. Yeah, you can't learn this stuff in the abstract, unfortunately. you can learn about it. And plenty of people will say, well, you need to sort of go on a thought experiment. You know, if it went from 10 ,000 quid down to eight, how would you feel? And the answer is you don't know. And I think risk tolerance, we have a kind of baseline for risk tolerance and you kind of learn that by doing.

15:25But also I'm a big proponent of kind of flexing risk up and down based on timescale. So some of your age investing for retirement should be like a full out 100 % equities. It doesn't matter what the market does because you've got 30 years before you can touch it, 35 years. So just let the markets do their thing because you know over those timescales, you will multiple times your money. No doubt about that. But a big holiday in five years' time, you wouldn't take maybe quite that level of risk because you might want to just dive back the volatility a little bit. So risk is both innate, but it's really hard to know what that is except for by doing, and it's also linked to timescale, I think.

16:06So these are the things you need to be asking yourself. Okay. The next section is called understanding the mechanics. And I have a question here that says, what do I need to know about how funds work? And you've written four bullet points here, none of which are words. No, they're triggers for me. All of them are acronyms. Pretty much. So let's dial up the wankiness. Here we go. Bullet point one. It's written O-E-I-C. Is that what you all call OICs? We call them OICs. So there are a few different kinds of funds, right? People don't need to lose sleep over this, but it's pretty important, I think, that they at least have a broad handle on it.

16:42Right. So most funds by far are OICs. It stands for Open-Ended Investment Company, but that doesn't matter. What makes an OIC an OIC is that the fund company, if somebody new wants to invest, they simply create more shares in the fund. So the number of shares available at any one time is open-ended. So if you want to put some money in, they'll make some shares just for you, Kate. Aww. Right? And when you sell your money, they'll destroy them. Yeah. When you sell out the shares, they'll just destroy them, right? Destroy them or give them to someone else when they buy them? A bit of both, potentially.

17:15What does it mean by destroy them? Just cancel them. They stop existing. And therefore, everybody else's that they own in that company go up slightly. Well, this is the point of an open-ended, right? And it's as opposed to, which we'll get to, investment trusts in a minute, which are closed-ended. If you're a company that people can invest into through OICs, can the fund manager just break up the company into as many shares as they want? No, no. It's not the company shares that are increased. It's the fund. So, you know, if you've got, say, you've got 10 investors, right, and they've got 100 grand each in.

17:50There's a million quid invested in that fund. And then you have somebody else who wants to invest another 100 grand. We've now got 11 investors. But the same amount of... Well, on a closed-ended fund, one of the existing investors would have to want to sell. Yes, because they needed to stay at the 10. Yes, but on an open-ended fund, they would just create more shares for the new investor. But we're not diluting anybody else's shares. So how do they do that? They press some keys on a keyboard. It's all digital. Just more appear? Yeah. From where? I really wouldn't lose any sleepover again. Right.

18:29But I'm like, where did... Okay, right. This is the clarification I need then. How is it not shares in a company? So the fund buys shares in the company. So you buy shares in a fund. The fund is essentially, it's an entity. All you own is shares in the company. Your money goes in... Sorry, shares in the fund. Your money goes into the fund and the fund manager says, I'm going to take that money and buy shares in Vodafone and Tesla and Apple, right? But they don't control how many shares Apple have in issue. They just buy any that are available. But the fund is what you own. You indirectly own the companies.

19:07So it's the fund is the mechanism. So what happens if the company goes bust? Company? Company goes bust. Well, then the value of the fund will fall because it owns the company. Right. I think I'm with you. Yeah, it is. I'm looking forward to Has Kate got it later on. Shit, I forgot about that. I could almost hesitate to say this and now I'm questioning my life choices. But the great thing about open-ended funds is that they're super flexible and they're super liquid. And that means you can get in and out really easily. Okay. You can sell your shares really easily and get your cash back. Because you don't have to wait for a buyer.

19:45With a closed-ended fund, like an investment trust, IT, it's the third bullet point here, right? An investment trust is closed-ended. So if I want to buy some shares in an investment trust, there has to be somebody willing to sell. And that's what a market is for, to match buyers and sellers. And so if you wanted to sell, you have to wait. But there was no buyer, then you can't sell. You're stuck in that fund. Gotcha. Right? So we've got Oikes. Open-ended investment company. Pigs. What? Oik. Oh, Oik. Yeah. Okay. And ITs, investment trusts. Which are closed. they're closed ended yeah um kikes no no investment trust just call them my teeth closed ended kicks yeah yeah look they're closed ended so everything we've said yeah you know if you're going to buy there has to be a seller if you want to sell there has to be a buyer um that structure is also as it happens an investment trust can borrow to invest so not only can they take your money as an investor they can borrow from a bank and double down on their investments that adds an element of risk because it can go in both ways because if the investment goes wrong not only do they owe you the investor they also owe the bank so it's just wouldn't want to be them well not if it goes badly but that's what they're paid for to get that stuff right okay they don't always but that's what they're paid for so to be honest not that many people So investment trusts are kind of advanced level, right?

21:18OICs are by far the most available. The other one that everybody that's even looked at this briefly will have heard of is an ETF. Yes. Exchange Traded Fund. OICs are priced once a day. So if you want to buy a fund, right, and you've got 100 quid, right, and they're a pound a share, you'll have 100 shares. But if they're two pounds a share, you'll only get 50 shares. Sure. So the fund share price moves, but it only moves once a day. Right. Don't ask why. Forward pricing, it's called. And basically, the fund sets its price once a day. Whereas, if you want to buy shares in a company, let's say Apple or Vodafone or whatever, their share price moves throughout the day.

22:01You've seen the charts, right? They go up and down throughout the day. Markets continually moving. What is that, like hourly updates or? By the millisecond. it's continual you know from whenever the market opens 8.30 till 4.30 literally by the millisecond in fact traders have moved their data centres like 500km closer to New York because it saves them 3ms on trading time I kid you not is this the whole like when people are yelling each other waving papers around on the phone it used to be like that now it's bots now it's algorithmic trading it's all electronic but it used to be the yelling in the thing yeah and people were like holding three phones to their ears and waving bits of paper and chucking paper airplanes at each other I don't know how they didn't all have like aneurysms well quite a lot of them did I think a lot of them died young, stressful yeah so now it's mostly digital and because of that less aneurysms well three millisecond could make you a million quid because the price will move in those three milliseconds but honestly for people listening to this you don't worry about that that's the big finance stuff Oh, right, so you pick a good time, but actually, if it's to the millisecond, you're never going to know.

23:11Oikes are traded once a day, you get the price in one day. ETFs behave like shares, their price moves throughout the day. Don't matter why, they just do. So ETFs behave a little bit more like shares, but they essentially do the same thing. All these are pooled investments, like we talked about right at the beginning. Just different mechanisms. The fourth bullet point on here, which I think people need to understand, is that there is a difference between accumulation and income or distribution. So very often on a fund, you'll see ACK, A-C-C at the end, or INC or DIS. And INC and DIS are the same thing.

23:45Income or distribution. Distribution is another word for income. So a fund owns shares in companies. Companies do well. They make a profit. They issue a dividend. It's an income to their shareholder investors, right? Well, if you own shares through a fund, it's the fund that gets the dividend, right? but surely they've got to give that to their yes exactly so an accumulation fund what happens is the when a dividend comes in it increases the price of each share just bear with me right so let's say well that makes sense because it's gone up in value it's well there's more money in the fund now yes exactly because they've had the dividend Yes, so...

24:34Thus, the share is worth more. Yes, so the good job, right? An income fund, instead of the share being worth more, it creates more units. So the price stays the same, but now you hold slightly more of them. Same net result. And that's in an income one? In an income slash distribution, yeah. Let me guess, accumulation one, the value of your share goes up? Yes. Gotcha. So, yeah, right? God, I'm working hard here. I think my brain is looking like it's got a six-pack. Yeah. Yeah, we have Nurofen for when we finish recording. Not sponsored. Other brands of... Other painkillers are available. I'll take any of them.

25:11Yeah, anyway. So, you know, these are just mechanics, but I feel like you're going to come across these terms and these are the sort of things that can make people just go, oh, I don't know what that means, I'm not going to do anything. To be honest, OIC or ETF is fine. Either is fine, it doesn't really matter. And when people are picking them, they might have ACC or INC. While you're building wealth, for the most part, Certainly if it's a pension, certainly if it's an ISO, go for ACK. It just makes life easier. Don't worry too much about why. But we know why, what they mean. Okay, so sometimes you see when you're picking them, the phrase is actively managed and passively managed, and I've heard that in Jackson's too.

25:44What does it mean? What are the differences? A favourite topic of mine. We're quite a way in already, so. Yeah, well, yes, we are. We're nearly 30 minutes in. We've gone a long way to go. This might become two episodes. Well, in fairness, it's because I've asked loads of questions off script, but I needed to to understand. That's why I'm here. So I'm assuming that the audience, I am the vessel of the audience. You are, exactly. So, yes, active versus passive, favourite subject. Yeah. One of my favourite subjects. So, we talked about when you're investing in a fund, you're pulling your money with other people.

26:18There is a fund manager involved, right? Their job is to run the fund. They're the name of the fund, I guess. Well, usually it's a human. So you might choose, for example, the Fidelity XYZ fund, right? Fidelity, let's say UK income fund. And there will be a manager, a name, a person, right? Usually extremely well paid. And their job is to buy and sell stuff according to the intent of the fund. So in that case, Fidelity is the company. It's a UK income fund. So the whole point of that fund is to invest in UK stocks that produce a good income. Their job is to find which stocks to buy. Now, let's just say we're going to invest in the XYZ FTSE 100 fund.

27:05Which? That's an index of the 100 biggest companies registered in the UK. Yes. Let's just say you want to invest in the FTSE 100. So we've got the XYZ FTSE 100 fund, and that is an active fund. The manager of that fund will look at the 100 available companies that they can invest in. and say, which of these do I think are going to win? Which do I think of these are going to go up? Which do I think are not in a good place and are probably going to go down? Let's just say they identify 30 out of the 100 possible companies in the FTSE 100. They split your money in whatever weight they want against those top 30.

27:45They have made an active choice as to which shares to buy. The whole point of that is for them to outperform the FTSE 100 as a whole, the index. Okay. And the index is the collection of those hundred companies and the sort of combined value of them all. So the whole point of paying a fund manager is to beat the market that they are investing in. Otherwise, that's the point. Well, the point is the alternative is passive investing, sometimes called index investing or focus investing. and a passive investor will buy all 100 companies in the FTSE 100, irrespective of which they think are going to go up or down.

28:29So the pros of that would be that it probably averages out. The cons of that is you could be putting more money in the successful ones, but it's harder to predict what the successful ones are going to be. Ding, ding, ding, ding. Exactly right. it's really hard. In fact, it's impossible to predict which ones are going to do well. And the stats on this are ridiculous. So the active investing, while seems logical, pay the clever person with knowledge and experience to guess which will be best. But the stats are that only about one in ten of those do it consistently. So you've got a 90 % chance of choosing the wrong manager.