How To Invest - BOD006

0:00My sparkling personality, you could consider an asset, but whether it's got any value or not is up for debate. I mean, you could buy a rental property, say, and a crack den opens up next door. You've got no influence. I mean, it happens all the time. Hi, and welcome to the Bank of Dad podcast. I am Kate, and this is my dad, Pete. Hello. And we are here to share with you the money lessons that we were never taught at school. There's no judgment, no jargon, just real talk about how to handle your money. Yeah, we're having fun, enjoying these. We are. I am really enjoying it. And you're right, we're definitely getting into a groove now, I think.

0:33Feels like it. Well, we'll let them decide, shall we? Yeah, exactly. So last week we talked about savings, which I loved. Yeah, you did enjoy that one, didn't you? I did. So, you know, but while still being able to enjoy life. Really important. But one of the things we mentioned was savings versus investing, which leads us very nicely into today's topic, which is investing. Yeah, I feel like people need to know about this, even if it's something they don't get to straight away. Yeah. So we're very much kind of laying the foundations in these early episodes. Who knows where we'll end up. Obviously, we'll doubtless be answering listener questions in due course.

1:11But when we were planning these, when you were planning these first sort of dozen or so episodes, it's very much about laying the foundations and giving people kind of what they need to know at the start. And only what they need to know. Yeah, none of the stuff that they don't. Cutting out all the rubbish. Because even when I was reading, not even rubbish, but cutting out the industry-specific stuff and the stuff that you as a financial advisor need to know, but I do not need to know. No, most people don't need to know a lot of what I know. Exactly. So it's good that this can be a resource for people who just need to know what they need to know.

1:44Exactly right. Amazing. So it is time for Wanky Word of the Week.

1:54We're jigging along to a theme tune we haven't fully finalised yet. So by the time you edit this, we'll have it nailed down. Yeah, absolutely. So today's wanky word of the week. Is asset. What is it? Tell all. Is asset. Yeah, there could have been about a million words. But even though we're talking about investing, I thought this was a good place to start, right? So an asset is something you own that makes you money. Something you own that makes you money. As opposed to a liability. That's the opposite of an asset. The liability is a debt. Something that you own that costs you money. Something that you owe that costs you money.

2:27Owe or own? Owe. Okay. Generally speaking. So? Yeah. You can own a debt if you're the one doing the lending, but let's not confuse things. Okay. So can you give me an example of a liability? Credit card balance. Great. Personal loan, car loan, all that stuff. Mortgage. Whereas an asset is something you own. Yeah, that will make you money over time. A house or a stock or a... Technically speaking, it's just something you own, but it has to have a value. Otherwise, it's not really an asset, right? Okay. Okay. You know, my sparkling personality, you could consider an asset, but whether it's of any value or not...

2:58You could consider an asset. Whether it's got any value or not is up for debate, right? So, whereas the house has a value. Sparkling. That's the obvious adjective that came to mind. Sorry, yeah. I can't believe you don't agree wholeheartedly with that. A sparkling personality. So, an asset is something you own that makes you money. That makes sense. And that has a value. Okay, perfect. So, let's just get straight into the basics of investing. The first being, what does investing actually mean? Yeah, important one. this because um it's one of those words that's thrown around a lot but actually can people define it well yeah a client said to me this week that they'd invested in a hot tub so i'm not sure that's an investment that's a spending i think yeah i think a lot of people think use the term into investing interchangeably with like a big spend yes they do that's a good shout they do because that would be an example you know like oh i've invested i've invested in i'm trying to think of something that I might say I've invested in a lot of books but that's not really a good example I'm trying but you know something I've invested in a nicer car yeah I mean that's self-delusion but let's not be too judgmental I think a lot of people use it interchangeably incorrectly with a big expenditure I think you're right yeah it feels it's big so it's an investment right but I think it's almost like a personal investment for yourself not actually for the term investment means that's kind of all right so investing we mentioned last week about investing versus saving yeah and we talked about the length of time so if you put money in a bank you're saving it and you should save for a short term really maybe two maximum three years investing the my definition of investing is you it you exchange cash in the bank for something an asset that either goes up in value, produces an income, or ideally both.

4:53So I'll say it again. You exchange your cash in the bank for an asset that goes up in value, produces an income, or ideally both. I have a feeling I'm going to be asked that in the Has Kate Got It section. Yeah, funny that. Spoiler alert. But if you think about a house, now ignore the fact that you might have a mortgage on it for now, But if you own a house, generally speaking, house prices rise. Yeah. So that's owning something where the value goes up. But if you live in the house, you're not earning rent. So it's not producing an income. But if you owned a rental property. You own the house and that value is going to go up.

5:30And its value should rise. But it's also producing an income through the tenants giving you rent. So you can have an investment where it only does one or the other. Yeah. Right? But the best investments do both. Right? So that's what investing is. Exchanges. So instead of having cash in the bank, you've bought something which will either increase in value, produce an income, or ideally both. Both. That's good to know. So investing has a lot of stigma, I think. Yes. When you first go into it, isn't it just gambling? Well, it depends what you're buying, right? Crypto. Well, so if you define gambling, you win or lose based on an outcome you can't control.

6:15Luck. Right? Yeah. So if you gamble on a horse race or on the F1 World Drivers Championship or whatever, there's not a thing you can do to influence the outcome. Yeah, you've got no control. Right? So essentially, you're betting. That's gambling. Yeah. Investing is not like that. unless you decide to invest in, say, the shares of a single company because that could go up or down. That company fails, you could lose everything. Which is why you tend to have multiple baskets that you spread your eggs across. Exactly, eggs in many baskets, right. And we'll maybe mention that a little bit later. But done right, investing is not gambling.

6:56I agree. there is a you're not in necessarily complete control no you're not in control at all you can't impact the outcome of the companies whose shares you've bought or so there is an element of gambling but you can have control over the amount of risk yeah so there are things you can control yeah there are things you can control so I mean you could buy a rental property say yeah and a crack den opens up next door you've got no influence I mean it happens all the time How many rental properties have I owned? I've got crack dents. I know. It's like I'm a magnet for the... Anyway. So look, it's...

7:33You can't... So you can't control that. You can't control the board of directors on a company whose shares you own. You can't control what central banks do to influence the world economy. There's a million things you can't control, but there are some things that you can. So that differentiates it from gambling. and investing done right, your chances of losing all your money are essentially nil, essentially zero. So we'll get into that. Yeah. Okay. That's good. That's a good. Definitely not gambling. It's a good differentiation. Break that stigma. Yeah, break the stigma. We like that. Okay. Right.

8:09Where does my money actually go when I do invest? Right. So if you're buying an asset, you know, you now, let's say you were fortunate enough, say, to have 5 ,000 quid in the bank that you don't have a short-term need for, and so you decide to invest it. Well, your bank balance will reduce by 5 ,000, and you'll maybe open an investment account with one of the many platforms available, and you now see a 5 ,000-pound balance over here. So it's probably just a different app on your phone, right? So it was in here. Now it's in the investment piece. Now, I think it's probably, rather than sort of get too buried today.

8:51Yeah, this is quite a high level. There's a lot of levels to it. No, no, we need to keep it fairly light. So there are still protections on your money. The companies that you invest with, they have all sorts of protections against fraud, being hacked, all that sort of stuff. Your money generally is held in what's called a nominee. So it's a sort of a safe place. their sole job is to look after your money and be responsible for it, right? And so there's all kinds of protections and legal stuff. And actually in the UK, there is no country in the world with greater protection for investors than we have.

9:27Yeah, there's no doubt about it. The weight of regulation and compliance and all that sort of stuff, it's really, really high in this country. Really, really good. I mean, I'm a regulated advisor, so I'm kind of under all that protection. And it can be onerous for me, but the whole point of that That is its protection for the consumer, right? Yeah. So it's really, really important. And we're very lucky in the UK that we've got all sorts of protections. So don't worry about the mechanics of where it goes, but just think of it as now it's not in your bank anymore. It's in an investment account or it's sitting in bricks and mortar in a property, if that's what you're investing in.

9:58We'll maybe talk about asset classes another time, different things you can buy. Yes. Okay. Yeah, that makes sense. Okay. So when people are, you know, Googling interest, Googling investing, sorry, and like, what do I do? there's a term that comes up a lot and that is compounding. Compounding. I'm glad you said that rather than compound interest. Yes. Because either is right, right? So yeah, compounding or compound interest. Are they interchangeable, those terms? Yeah, they are really. Interest specifically relates to money in the bank or certain kinds of investments. Right. Really, it should be compounding of income, but it doesn't matter, right?

10:39Okay. This is where I can get a bit pedicudy, but I'll try not to. So we're not talking about regular, we're bringing, we're basics here. Yeah, exactly. Talking about the basics. I don't need to. Save all of that for meaningful money. Yeah, yeah, true. Okay. We've got deep there. Right. So compounding is where the money that you, the asset that you own, if it produces an income, you use that income to buy more of the asset. So can we make this a bit less in the, oh God, what's the word I'm looking at? Abstract. Okay. So I bought£100 worth of shares. Okay. You bought£100 worth of shares in Company X, right?

11:18And now... As in X, Y, Z, not... Not X. The thing that was Twitter. No, no, exactly. Okay. Company Q. Marks & Spencer? Vodafone? Wouldn't be my choice. Yeah. What company would you choose? Apple. Apple is the one I was going to suggest. Right. So you buy£100 worth of Apple shares, right? Yes. Apple makes a profit, say, right? Because it's massive and it makes lots of profit. Just from you alone, to be honest. Yeah, there is a lot of Apple gadgets in this thing. So if it makes a profit, one of the things that Apple can do with that profit is distribute it to its shareholders. So that means I will get a tiny, tiny slice of Apple's profit.

11:55Let's just say it's a pound. So I own£100 worth of shares. And it's now become... And now I've got£101. If I take that pound and spend it... I still have£100 worth of shares, but I've also now got a£1... In cash. In cash. But what if I buy another little bit of a share? So now I've got£101 of shares. Gotcha. Well,£101 of shares will throw off a bigger dividend, share of profit, next year or in six months' time. So I might get£1.50. Let's just say. So now I've got£102.50 worth of shares. So it's like a snowball. Because every time the asset becomes of higher value, you get a bigger income from it.

12:37Yeah. And eventually it becomes this self-sustaining, it's like a chain reaction you can't stop it so you use the income produced by the asset to buy more of the asset and essentially you're doing nothing to make that money what is that in the background yeah i swear if it's drilling it's drilling do they not know we're filming a podcast in here so it becomes it's like a snowball it keeps just getting bigger and bigger and bigger and essentially you're making money without doing anything now. You're not actually buying any more. You're not using any more of your money in the bank to buy any more of these assets.

13:13No, because it's money you've earned from that, not your way or whatever. Yeah, it's growing on its own. And so compounding, I don't actually know whether this is true or it's one of those internet things that just has sort of become established, but somebody said, apparently Einstein called compounding the eighth wonder of the world. I don't know if that's true. I want to Google that. Sort of, it'd be interesting to know, but it's this weird sort of powerful force. It's only mathematics. Yeah. But the sort of snowball effect is supremely powerful. And if you can harness it, then... Well, we talked about that same effect when we were getting out of debt.

13:49Debt snowball. The debt snowball. And that, you know, when you get big, it's like from a non-financed example, like the influencers when you've got 100 followers first you're going to get grow and then the people who've got 100 000 followers they're going to grow even quicker because you've got that big like the bigger you get the quicker you get bigger that's definitely right and that's why they say like the first 10 000 pounds of savings is the hardest yes or the first 100 grand worth of investments is the hardest thereafter it gets easier because it does a lot of the work for you that's the power of compounding okay that's really that's really good to know okay so we've done kind of the basics now let's talk about how we do how we do this right so how much money do I need to start investing you can start investing on some platforms at 10 quid a month a platform is just like an app yeah like Hargreaves Lansdowne well you're an HL customer I am yeah they're the biggest platform by far it's not necessarily the cheapest but it's really user friendly super user friendly great app and a really big company so for a lot of people that gives them some peace of mind security right so HL there's all sorts of others AJ Bell Interactive Investor.

14:56Invest Engine is one that I really like, Trading 212. So there's loads of choice, right? Each platform will have a different minimum, but some of them are down to 10 quid a month or 25 quid a month, right? So what you need to do, there's no point at all investing if you are in bad debt or you don't have an emergency fund. I think you're getting ahead of yourself. I think we mentioned that in the last week's episode as well. Yeah, maybe. I think if you're trying to do too many things at once, there's no point investing to try and make money when you're paying money out on debt interest. It doesn't make sense.

15:32No, you can use the money that you're investing to get out of debt quicker. Yeah, totally. And then you've got more to invest. And so you'll end up ahead actually doing it that way. Probably quicker in the long run. And it's a lot less distracting. You know, it's, yeah, be focused. It's really important to be focused with finance. So if you've got debt, clear that first. You're making yourself richer in so doing. You're getting back to zero. We like that. Yeah, exactly, right? And if you haven't got an emergency fund, you need to do that. What you don't want to do is have to dip into your investments if something comes up.

16:03You need to fix the car or whatever. So you've got your emergency fund, you're out of debt, that's when you're going to get invested. Then you're investing, yeah. And there are some companies who have it as low as£10 a month. So it's not like I have to have 500 quid ready to go. No, you don't. You can do it that way if you want, but actually there's real power in investing regularly, just as there is in saving regularly. Early you start. metal. Well, yeah, exactly. As soon as it starts growing. All right. So we kind of talked about which different platforms. Maybe in the show notes we could link some of the ones?

16:30We could link some. I've got to be careful. Remember, I'm a regulated advisor. So if I start saying you should use... Yeah, it becomes advice. It becomes advice. So I've got to be really careful. But we can link some ones that are maybe user-friendly for beginners. What we will do, actually, we'll put a link to a brilliant site called Boring Money. In fact, there's two sites we can link to, Boring Money and Money to the Masses, both run by friends of mine. And they have kind of comparison tables. Oh, so like the compare the market of... Yeah, exactly. Oh, that's cool. That's good. We'll link them.

16:56Yeah, yeah. So we'll link them and you can make a choice. So should I pick my own investment or let someone else do it? Right. So if you've never invested before, when on earth do you start? We talk about investing, buying an asset that's going to make you money. How do I know what's a good thing to buy? Most people are really bad at picking their own investments. Okay. So the way we invest, we look after 300 million quid on behalf of our clients at Jackson's. And where we always talk on meaningful money is the best way to invest for ordinary people is to buy a fund. And that fund will do all the buying for you.

17:32What do I have? You have funds. Do I? Yeah, you have Vanguard funds, don't you? Oh, and that's why, so they're buying and selling all my shares all the time. They're buying all the shares for you, all the time. That's right, I see. You just buy one fund and you've never changed it since you've owned it. No. It's like the laziest investing ever. It's exactly what I do. that makes sense because i i actually misunderstood that then i thought vanguard was an asset no vanguard is a company that buys and sells funds for you shares for you that makes sense so then i don't have to do it myself i think it's worth us clarifying this fund thing because i think that is the point of entry for most normal people right so i said you pull your money with other people well that sounds like okay who are all these people well there's all sorts of protections so a company like vanguard that you invest with yeah um they produce this fund right And they invite investors to it.

18:22So people buy, you might buy 10 ,000 pounds or 500 pounds worth of shares in a fund. Now, if you imagine another 100 ,000 people do that. It's a big old fund. This fund's got millions, if not billions of pounds in it. And like anything in life, if you've got more of something, you have kind of buying power. So if you went and bought some kind of asset, it's little old you, right? Or little young you. I was going to say, old. Right. Excuse you. Whereas Vanguard, being one of the biggest investment companies on the planet, they can get things cheaper, they can get access to stuff that you and I can't.

18:58Because they're... Because they're massive. Right. And also, if you were to buy individual shares in companies, if you held more than a dozen different companies, you'd be inundated with paperwork and hassle. They do it for you instead. They do all that for you. Yeah, that's good. Right? So a fund is just a mechanism for making investment easier. and it both, it spreads your money wider because they can buy more stuff and generally they can buy it more cheap. And I guess if they're noticing a fund is... A share. A share is really not doing very well. They may sell it. Sell it and buy something else or whatever.

19:32Depends on... Or if it's doing really well, they might sell it then and buy something else. They may. But the point is, they make all the decisions through their experience and their algorithms probably. Yeah. We're going to get into all this. Yeah, right. For right now, your question was, should I pick my own investments? My answer is no. Buy a fund that will do it for you. All right. So there's a lot of things going on in the world that might make people worry about getting into investing. You know, we've got a rather powerful gentleman across the sea who's doing interesting things. Yes. A strange orange-tinged man in the White House.

20:13Yes. And, you know, we've still got the war with Ukraine going on. There's a lot of things in the world that people know impacts things like markets. They might not understand why, but it impacts things like markets. Yeah, they hear it on the news. They hear it. You do. How do you know? Is it risky to start investing with everything that's going on? Is there a good time? How do you know when a good time is, if there is such a thing? I very regularly challenge clients because they will say, wow well you know with everything that's going on at the minute I'll say okay tell me what you mean by that and they're like wow things are not very good are they okay tell me what you mean by that and occasionally you know I'm not being facetious when I do that it's just like I want to know what's worrying them you know Trump is a worry for a lot of people increasing polarization not meeting in the middle everybody's got their opinion they're sticking to it no matter what and if you're on the left or the right that's the end of us going to America anytime soon well exactly we've just slagged off the White House, right?

21:13But my challenge is that there's always been something going on. You go back to the 70s, we were nearly at nuclear Armageddon with the Cuban Missile Crisis. In 2008, the world was on the brink of financial meltdown. The entire system was grinding to a halt, right? It's only because government stepped in with trillions of dollars globally that the whole thing kept moving. So there's always something going on. There's wars all over the world continuously. The issue, I think, why a lot of it feels worse now is that we're on 24-hour news cycle and social media and everything, right? Yeah, we're bombarded by it, aren't we?

21:49This stuff's always been going on, but we used to hear about it a week after it happened, by the time the correspondent got off a boat and came back to London and Fleet Street and wrote about it in the paper, right? Or, you know, they telegraphed it back, right? It's also instant. The world is small now. So that makes it feel worse. I'm not sure it is a lot worse. Okay. But for people, you know, who didn't, my age, I've never not had news at the tip of my face. No, exactly. So this is normal for you, right? Yeah. But the point is, investing done right will make you money over the long term. Remember, investing is for the long term.

22:25No matter what's going on in the world. Why? Because I believe there's only really two, there's two brilliant asset classes. that kind of do what we... Assets, classes being types of things you can buy. Yeah, things you can buy that make you money, produce an income. Or both. Or both, right? And my buddy Andy Hart calls them businesses and bricks. In other words, shares and property. All right? There are lots of other things. You can buy bonds, you can buy crypto, you can buy gold, you can buy timber, you can buy a million things, right? They all have a purpose, but the ones that work and have consistently worked are businesses and bricks, shares and property.

23:01So if you think about it, with all the shit that's been going on in the world the last few years, and there has been a lot of it, stock markets are at all-time highs. Right? So, in other words, people are making money. Despite all things. Despite all those things. So don't let the noise that you're hearing about the world stop you. Don't let it put you off. No. If you invest for the long term, investments go up and down. It's really important that people understand that. So you don't go into investing thinking it's only ever going to go up. No. You've got to prepare yourself for the risk that it might go down.

23:32But if it goes down, it'll probably come back up. It goes down temporarily. Yeah. But it can be really, really unpleasant. Well, yeah, like that COVID drop. The COVID drop, I mean, markets dropped by 35 % in about six weeks. So a third of your money gone, except it hasn't. You still own all the same stuff you had. It's just not worth as much. At the start, it's not worth as much. But if it went down, it can go back up. And it always does. The declines are temporary. The advance is permanent. Really important to remember, right? That's good. I feel like that's an Instagram post. Say that again.

24:01The declines are temporary. The advance is permanent. It's not mine. It's by a genius advisor called Nick Murray. Nick Murray, thank you for that. The declines are temporary. The advance is permanent. I like that. In stock markets specifically, right? So it's not too risky at the minute. It's just now. You know, the best time to invest was 20 years ago. Second best time is now, right? Because if you'd invested 20 years ago or 25 or 30 years, you'd have a lot of money by now, right? I'd also not be born. in your case. The second best time is now. So the best time to start is now, right? Just get on that.

24:37So, on that note, is there a chance that I could lose everything? So, let's think about shares. If you bought shares in Apple. Because most often you don't just buy shares in one thing. Certainly not if you've got a fund. But if you did, no, if you got a fund, your money's going to be spread thousands of different ways. And the likelihood of all of those companies going. That's the key point, really. So if you, let's just say. Sorry, I've stepped on your point. No, sorry. No, it's good. Let's say, let's say Marks & Spencer's, right? Even though you chose Apple. Apple's pretty massive. Yeah. Marks & Sparks is a shop, ultimately.

25:15Yeah. And they've had good years and bad years. They've been around for 100 years. But there are plenty of shops that are not around anymore. Right? So, you know, if you owned just shares in Marks & Sparks and they went bust, you would lose everything. because the shares are now worthless. Yeah. Right? Whereas if you own shares in a thousand different companies, some of them might go bust, but most of them won't and most of them will grow because that's what happens with companies too. And that's what the benefit of a fund is, is that they will spread out the eggs and baskets. That's right. And we always suggest that people should invest globally, so all the way around the world, and primarily in shares.