A fully flexible way to invest
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Welcome to Word on the Street's Personal Finance podcast from Barclays UK, where our experts share their knowledge and insights to help you become a better and more confident investor. In this episode, the first in our Personal Finance series, we discuss how to approach saving and investing, and specifically how those new to investing should begin to plan and establish their financial goals.
Phil Attreed: Hello and thank you for joining, especially those listeners who regularly join our established weekly market and investment debates. This is the first episode of our extended Word on the Street series focused on all things personal finance. In this edition we'll briefly touch on getting ready to save and invest, for those who are entirely new to investing, and then we'll move on to possibly one of the more important elements, establishing financial goals. I'm Phil Attreed, Barclays Head of Investment Consulting, and for this episode I'm joined by Clare Francis, our director of savings and investments, and Rob Smith, our behavioural finance expert, to help you navigate these first stages. Now Clare let's start with the basics. One of the most common questions when people have saved money is: should I pay off my debt or should I invest? If I already have overdrafts, credit cards, loans, and other longer-term borrowings, such as car finance and mortgages, what should I be considering before I think about investing?
Clare Francis: I think some people or a lot of people probably think you have to be debt-free before you start investing and that isn't necessarily true. I, for example, have got a mortgage and car finance and I've got investments. But I think the key is if you've got money outstanding on credit cards and loans and are regularly overdrawn, you're probably not ready to invest. So focus on paying those down first and building up some cash savings before you start thinking about investing.
Rob Smith: Yes, if I can just add to what Clare was saying. I think because the way that we often organise our finances by splitting them up and having different pots or segregating them into different accounts, it's easy to inadvertently waste your money that way. Studies have shown that many of us pay interest on expensive debt, such as credit cards as Clare mentioned, but we also have savings that are allocated, earmarked to different written pots for something else, which is obviously a fairly inefficient use of your money. So I think you really need to think about the cost of the debt and how much the interest is you're going to have pay on that debt.
PA: So if the debt is likely to cost me more than the likely returns from investing, then clearly it seems sensible to pay it off.
CF: I think the other important thing before you consider starting to invest is to make sure you've got some cash savings in place in case of emergencies or for short term things like holidays and Christmas because, of course, with investing there does come additional risk. You've got to remember that stock markets can fall as well as rise, so you could lose money and for that reason it's only really suitable for money that you can afford to put away from the medium to long term, say things that are five years or more further away from you, so the longer term goals. Anything short term of less than five years make sure you've got some cash savings in place and then of course for emergencies as well. Because otherwise if you haven’t, you haven’t got that buffer that's when you don't have to fall back on credit cards and loans and you never get out of that cycle.
PA: Of course. I would consider myself a fairly prudent manager of household finances. Clare, where does insurance play a part in helping me commit to investing?
CF: It's a good point and I think it's a point that's often overlooked because a lot of people think: "Yes, I'm doing really well here, I've got some savings, I've got little or no debt, and I've got some investments in place so my family is well protected." But actually protection insurance is something that a lot of people do overlook. Life insurance, critical illness cover, and income protection, they're all important things to consider because your savings and investments only go so far. How would your family cope if you suddenly lost an income and there was suddenly less money coming in or every month? So getting some insurance to protect against that is definitely worth considering if you don't already have it in place.
PA: Insurance and protection won't cover you from everything, which is why having that cash buffer we talked about before is important, but they can also be important to helping me get as fully invested as I should be, that's whether I'm starting out or indeed if I'm a more experienced investor and have a larger amount that could be invested. Would you agree with that Rob?
RS: Yes, completely Phil. I think as Clare alluded to earlier, as an investor one of the most important things is you want to be able to have flexibility to choose when you sell your investments and not be forced into it. You obviously don't really want to be having to sell your investments when we're going through a dip in the market. So insurance can help cover some of the bigger financial risks which might otherwise force you to sell your investments. And I think the other thing to consider is that investing is inherently emotional. The markets have their ups and downs and that can be stressful for us to cope with, so insurance along with having a cash buffer can really help reduce financial worries and make you feel more comfortable with your financial circumstances. And that may make coping with the investment journey that little bit easier.
PA: And just going back on that buffer point, I think it's probably one of the questions I'm asked most, or have been over the years: is there a rule of thumb about how much I should set aside to always access before I start on that longer term savings and investments journey? Clare, maybe one for you.
CF: In short, there's no hard and fast rule. Some people say you need at least three months' salary, some suggest you need even more than that, and I think it's very much down and dependent on the individual. I think, as the coronavirus crisis is highlighting, it just shows how important that buffer is because overnight almost, your situation can change. So having some money to fall back on to help you through unexpected circumstances is really important and what people are living through at the moment might suggest that a more prudent approach and building up a bit more in cash savings could be the sensible approach. But as I say, it is all down to the individual. It's all down to you and your household. What are your monthly outgoings; are you the only earner in the family; and if you were to lose your job or something changes, how long do you think it would take you to find another one? These are all things you need to consider which can help you determine and decide what you would feel comfortable in, in terms of how much cash you want to have readily available just in case. So for one person, it could be three months but for somebody else it could be even as much as nine to 12 months' salary. It's just whatever it feels right for you.
PA: Great, okay, So I've paid off some debt, I'm happy I've got the right amount of protection insurance, and I have safely squirrelled away a cash buffer, what next? Where might savings versus investments be more appropriate?
CF: I think as we've already discussed, the main role for cash savings is the emergency, it's the unexpected, and it's also the short-term, so next year's family holiday, being able to afford Christmas without putting it on your credit card, and those sort of things, thing for less than five years. However, if there are things further ahead in the future, or you've got surplus money at the end of every month, and you've got some that goes into your cash and you've still got a bit to spare and you don't think you're going to need it anytime soon, that's when you can begin to consider investing, remembering that stock markets can go down and up so that's the rationale and the reason for holding it for longer because the longer you keep your money invested the greater the chance it's got to recover and ride out any stock market falls. Rob mentioned earlier, what you don't want to do is find yourself having to sell during a market dip and when the value of your investments has fallen back. The longer you can hold it the better. Also be prepared because, even if you have got a five, 10, 15, 20-year time horizon ahead of you, there will be times during that period when the markets will fall. It could be really bumpy along the way, so be prepared for that and don't panic when it happens because it's pretty much inevitable. As long as you've got that cash savings to fall back on if you need it and the cash to support those shorter term needs, then you should hopefully be able to ride it out. The whole idea with investing is that over the longer term, the returns you get will hopefully outweigh and be higher than the returns you would have got from cash. So there is a reward to be had for the risk that you're taking, fingers crossed.
PA: Of course. Rob I think often when people read about investing or speak someone at a bank or an investment firm, they are encouraged to start thinking about setting financial goals. How exactly should I think about goals? My instinct is not to lose what I have, but I'd quite like some more.
RS: And I think you're not you're not alone there, Phil, that sounds like something I can resonate with as well. I think when it comes to finances in general, it's savings as well as investing, planning and setting goals is a really important process. First of all, it can give us a feeling of control. We know what's going on in our financial lives and we can see what we want to achieve. But it's also quite important in order to provide the necessary feedback on how we're doing, how we're progressing, because if you don't get that, it can be hard to motivate yourself. Now this process of planning and setting goals can not only improve your objective financial health, so how well you're actually doing in terms of saving and meeting those goals, but also, really importantly, it's been shown to improve financial well-being, so how you feel about your money and an emotional state that it puts you in. And actually your savings buffer, we've talked about that quite a bit now, but your savings buffer is one of the most important pieces for financial well-being, so it's really important to have that right before you see the start embarking on any of your longer-term goals. That said, when we think about investing and events in the longer term, it is important to also recognise the contingent nature of our decisions. What I mean by that is that things are dependent on other situations arising and decisions that we take in the medium term. So what we think might be important to us now and what we want in 10 years' time now is often different to the realities when we actually get there in 10 years' time. So our plans need to have the flexibility in place to be able to deal with all that life has to throw at us.
PA: Absolutely, things change for all of us. And Clare do you have any observations about how different people think about their goals?
CF: Again I think it's all down to individuality. I'm a bit like you, Phil, in that I don't necessarily have specific goals but I'm investing generally for mine and my son's futures. So if for example, he's only five at the moment, but if he decides that he wants to go to university in the future, I'll probably dip into some my investments to help support that. But if not, if he does something different and doesn't need that support, the money I'm investing now will be going towards my retirement. But going back to what Rob said, who knows what might happen in my life between now and then? There may be other things that I decide that actually, yes, I want to spend some money on, and thank goodness I've got some investments to help me do that. But I think other people do like the discipline and the structure and do have more definitive things that they want to be able to afford so perhaps they want private secondary education for their children, they know a date in time when they want to have a certain amount of money or have access to it, or there's a certain age that they definitely want to retire at as opposed to waiting to see when they can afford to retire. In some ways this can help give discipline to your approach because you know exactly what you need and when you need it by and therefore how much you need to be putting away to hopefully help yourself get there. But others I think will take a much more flexible approach, like it sounds the three of us do. When it comes to things like retirement, so for me for example if I don't need it in between time, I can be flexible at the moment because I've still got years ahead before I'm going to need that money. But there will come a time and it will be before I retire, when I'll need to take stock and have a look at how things are going and what my investments are worth and what that is going to translate to in terms of supporting me after I finish working. At that point you probably do need to become a little bit more disciplined and be able to understand exactly your value, your worth, and what it's going to enable you to do because that could determine whether I'm able to retire at age 68, retire a bit early, or perhaps have to work longer. It's just doing what feels right but being understanding how it's doing and how things are performing and what that is going to translate to in terms of supporting you and your needs.
PA: Rob, it sounds like Clare and I don't know exactly what our goals are. Is that okay from a behavioural finance perspective in your eyes?
RS: Yes, of course. And as Clare said, I think I'd probably find myself in a similar position. I've got young children like Clare and so a lot of these things that I'm saving for seem like a long way away. Hopefully I get there at some point. But the reality is in some ways it's good not to be too specific with your goals. I think the important thing is to understand that knowing what we're trying to achieve can make it easier to motivate us to have the right behaviour to save and to invest well. So if we can make it tangible then, something we can almost touch and see, then that's more likely to be able to help us motivate ourselves. I'll give the example of saving towards a new house or a second home, depending on your situation, even if we don't necessarily know when and where and the cost, we can still use that image. Tools that people use, such as printing off a picture of what that dream house might look like and putting it on the fridge as a reminder to constantly be there, to help us stay focused on some of those goals. Ideally you want to have an idea of what you're trying to achieve, the direction of travel, and then it makes it a little bit easier to be able to look back and say: "Okay, am I going in the right direction, how's progress?" and give ourselves some feedback. Because the most important thing is not necessarily the really big end goals but actually is to have a plan for some of the smaller actions that you need, so whatever habits that I'm going to have to put in place in order to help me meet those goals.
PA: So Rob, what if I've got multiple goals? How do I go about prioritising them when it comes to investing?
RS: So when it comes to managing lots of different goals, now that's the case for probably most people, not many people have one a singular financial goal. As I mentioned before we have a tendency to compartmentalise, so we put things into pots or "jam jars", a very common phrase that's used. That can be really helpful to help us make sense of our financial situation which can often be quite complex. And actually putting your emergency buffer for instance into a different pot or different account where you're less likely to access it and spend it can be a really good thing and a useful tool to keeping it away from your monthly spending habits. But what we don't want to do is suffer from the rigidity that all these different goals and the structure that that puts on us. So what you want to do is to think about, of all the goals you have, which goals are the most important to you, and think about which ones you really can't do without. Think about some when they occur, so are they in the next four to five years, which would suggest that saving in cash is probably the right answer. Or are they further out, where you could start to think about investing. Can you be flexible with the amount or the timing of that goal? And I think you want to think about that for all the goals you have because depending on when they occur and if you can be flexible or not, it should help steer you as to how much the risk of loss you might be able to take and therefore whether investing is right and how you can invest to try and meet some of those goals.
PA: Right, and what's the best way to remain flexible? As well as things change, this year for instance has been incredibly difficult for investors, no?
RS: Yes, exactly. I think it's incredibly important to be able to adapt. We usually say, for example, if we have a period of bad returns, and obviously this situation we find ourselves in now is exactly that example. I think there're a couple of things we can do almost beforehand to help ourselves remain as flexible as possible, including the way we think of our goals as I've talked about before. But making sure that our goals are realistic and guided by the amount of risk of loss that you're happy and able to take is important I think. What can get you into problems is this idea of requiring a certain return. So because you have x, y and z that you want to meet, that means you must need a return of something in order to achieve that. Therefore, when we come into some periods, inevitably as we will when we have market downturns, that make those goals possibly even further away and in reality we might have taken on a bit too much risk going into that and therefore maybe even more exposed.
CF: I think the other thing is: being flexible is fine and if things change and you need to reduce the amount you're putting away into investing that's fine. And even if it takes you a bit off your plan, don't panic about it. If your circumstances change, it's all okay and although we've discussed, ideally you don't want to be having to sell your investments at a time when the markets have dipped, if you need to you need to. You can access your investments at any time and although the idea is that you're investing money that can be put away for the medium to longer-term, five years plus, if something changes and you need to get at it, you can do. I think that's the other important thing to reiterate here, is that while it's important to not start investing unless you've got your cash savings in place and you feel you can definitely afford to, if you do need to access your investments earlier than originally anticipated, you can do and don't worry too much about that.
RS: And I think that what Clare's talking about is exactly right. Sometimes you don't necessarily have that financial flexibility. I think the other thing you can think about is the emotional flexibility as well. Sometimes we find ourselves in these situations and it may not be that we actually we need the money that are in our investments to pay for something, but it may be that emotionally, we're feeling not very flexible because of the fact that we've just experienced a huge downturn in the markets. So it's important to realise that sometimes it's beneficial to take a step back before making some of our decisions about whether we buy or sell our investments. Take a bit of a cooling-off period, maybe sit on it for a night and then come back to it. And that will hopefully reduce the risk of making a more emotionally driven decision.
PA: Clare, with all of the new apps and web pages that are now available, it seems very easy to check up on my finances wherever and whenever I want. But how often would you recommend reviewing goals?
CF: Ideally not too often. Obviously you can now have access to your investments any time really, 24/7. And it's important to keep an eye on things, so how your investments are performing and particularly if you're investing for a specific goal. You want to know if you're roughly on track in case you need to start putting away bit a bit more. But I think once or twice a year should be enough for this. The risk of looking at your investments too frequently is that of course the value will change and it changes daily. So if it's dropped since the last time you looked, or you're hearing bad news about stock markets in the media, you might be tempted to sell and get out and panic a bit. But remember: you're investing for the long term and if you remember why you're investing and that you've got time on your side to ride out any downturns in the markets, you should still be okay. So I guess my recommendation here is to try and resist the temptation to tinker because it's that that can derail your plans really and knock you off track because things will move up and down over the long term
PA: Of course and then you're far more likely to hear the bad news than the good news. Rob, do you have any additional thoughts on that point?
RS: I think my main point would be to reiterate what Clare said. I think not too often and probably less than you're tempted to. Something to consider is the fact that for individual investors, as a whole, what we tend to see is individual investors underperforming the performance of the stocks and shares they've bought if they'd just had a buy and hold strategy because they've been tempted to buy and sell and buy and sell at different points in the market. The reality is the reason you need to be careful is the more you check your investments, as Clare mentioned before. especially if there's bad news, lots of bad news like we currently find in the media, is it's going to increase our perception of risk from that short-term monitoring. And I think it's likely quite different to the reality of the likely long-term risks of investing and so we always need to remember to align how we looking on investments with our goals. If our goals are much further out in the future, then that's the way we should be trying to look at how our investments are performing rather than on a day-to-day basis.
PA: And Clare, are there any particular reasons why I might want to actually review my investments?
CF: Yes, I think, as we mentioned, it's important to do an annual review and probably do that across your finances, not just investments but with everything. But I think there could be other reasons why you may want to take additional reviews. Perhaps your circumstances have changed; maybe you've had a salary rise; or even a salary decrease; or there's been a change in the household finances; or you could have received an inheritance and as a result might have more money to invest or be wondering what to do with. So if your goals change or there's a new goal you want to start saving for, your circumstances change, then it absolutely makes sense to review your existing investments and potentially make some changes. If nothing changes, once or twice a year should be enough, but obviously if anything does change then absolutely take that opportunity to review things.
PA: And Clare, how my spending coming to this decision-making review process as well?
CF: The amount you spend has got a direct impact obviously on the amount you've got left to save and invest at the end of the month. So if your spending increases, maybe you've had a new baby or you move house and take on a bigger mortgage, they'll be less left at the end of the month to put away. So if that happens, again don't feel that you're tied to making this commitment into investing every month. Be flexible as we've already discussed earlier. Similarly, your spending might reduce, so maybe you've paid off your mortgage, or your children have left home, or you've got a pay rise and you've actually got more to save or invest at the end of the month. All of these factors come into consideration and I guess the thing is to be putting away what's comfortably affordable for you and not to be feeling as though it's restricting other elements of your life.
PA: So keep a close eye on what's left at the end of the month and don't just don't just go off and spend it unnecessarily. But Rob are any behavioural tricks or habits that I can employ to make me more successful at meeting my goals?
RS: I think when it comes to saving or I guess it's the same for creating any lasting habits is we really want to try and make it as easy and painless as possible. So an example of saving, think about setting yourselves a goal for saving and create a standing order to move that amount out of your account on pay day rather than, which is what I have to confess sometimes I find myself doing and I know is very common is, simply seeing how you get on during the month and hope that you've saved something at the end and if you have then you'll put that into your savings account. Obviously the reality is you're more likely to spend more of what you have versus if you've already taken that money out at the beginning. So loss aversion, the fact we don't really like losses or the concern that losses give us much more than the amount of happiness would get from it from a gain, and other psychological biases sometimes make it very difficult to bear that short-term pain of spending less, even though obviously it's the benefit to ourselves much later in life. I think one thing that's being shown to help and boost saving and help motivate people is to try and put yourself in the shoes of your future self, so when you'll be in retirement and think about what sort of lifestyle you'd like and those sorts of things as well as I mentioned earlier, the idea of having pictures or visual representations of some of your goals that you'll try to meet and having them somewhere where you can you can see them. All of these things aim to try and increase our motivation, that likelihood we're going to stick to any savings or investing goals.
PA: Thanks Rob and thank you, Clare, very thought-provoking insights from both of you on beginning the savings and investments journey. That just leaves me to thank our listeners for joining us today. As always you can listen to our regular Friday podcasts on the latest markets and investment thinking and we'll be back in a month with the next episode in our personal finance series.
All investments can fall as well as rise in value and their past performance is not a reliable indicator of a future performance. This podcast is not a personal investment recommendation.
You shouldn’t think about investing money if doing so means risking the clothes off your back, or the roof over your head. The money you use for your investments should never come from the pot earmarked for paying the mortgage, or other essential household bills.
Many of us don’t keep a close track of our incomings and outgoings. But you can’t begin to work out how much money you can afford to put aside for investments until you're fully on top of exactly what’s coming in to your bank account, what’s leaving it and where this money is going.
Undertaking a full audit of your personal finances may not be the most exciting way to spend your time, but it’s well worth doing. Not only will it give you a clear view of the real state of your finances, but you may also identify areas where you can make savings.
Start by making a list of all your income. This will include your salary, any freelance fees, income from existing investments, interest from savings, as well as grants, pensions, benefits and any financial support relatives might provide. Make a note of when you receive this income and whether this is weekly, monthly, quarterly or annually.
Your next step should be to go through your bank statements and add up all your regular outgoings. It’s worth going back a few months in case there are payments that don’t go out every month. And, it’s a good idea to review Direct Debits and standing orders coming out of your account at the same time, as you may be paying for things you no longer need or use, such as magazine subscriptions or gym membership.
Once you’ve listed all your outgoings, divide your expenditure into essential and non-essential categories, and look at ways you might be able to reduce your outgoings. For example, could you switch to a cheaper gas or electricity supplier, or might you be able to do without a landline if you usually rely on your mobile?
The savings you make by reviewing these outgoings could be the start of your fund for investments.
A key part of any personal finance audit will be to add up the accumulated debt on all your credit cards and work out how you can pay it off. If you want investments to become a way of making and earning money, you should try to pay off your debts first. The same resolve should be applied to any personal loans you’ve taken out. Debt of this kind can be a millstone around your neck preventing you from starting out as an investor. Borrowing to invest or investing to borrow can be a fast road to financial ruin. Don’t do either.
The money you set aside for investing should never be money that doubles up as an emergency savings fund. Investment money should be held over a long-term period – think at least five years as a minimum.
You should, have some savings kept separate which are immediately accessible to pay unexpected bills – for example, if you need to fix a leaky roof, or take an emergency flight to visit a sick relative. Establishing an emergency or rainy day fund should be a priority before you start investing.
Once such a fund has been built up, you can be confident that there won’t be a call on the money you have set aside for investments.
The financial audit process should also reveal where there are any gaps in your finances. For many this will be adequate insurance that would ease the financial strain if something goes wrong. Consider, for example, the financial impact on your family if the breadwinner lost their job, became too ill to work, suffered an accident, or if there was an unexpected death in the family. Have you got the right life insurance in place to protect you financially should the worst happen? What about income replacement cover if there’s a prolonged break in employment?
Sound professional advice can be just the right input you need to work through your financial audit and steer you towards an action plan. A professional adviser will be able to point out what’s missing from your financial plans, and help you identify financial goals and how your investments may achieve them.
Many investors feel confident enough to make their own decisions, but remember you don’t have to engage a professional adviser for your entire investing life. For some, expert input at the outset may be all it takes to get them going, while others may feel more comfortable receiving regular advice. Remember, too, whether you take advice or not, the investments you hold can fall in value as well as rise; you may get back less than you invest.
The value of investments can fall as well as rise. You may get back less than you invest.
A fully flexible way to invest
Tempting as it may be to plunge straight into investing, you may need to address other aspects of your personal finances first. In this section, you'll learn more about some of the things you should take into consideration before putting your money to work.
If you’re new to investing, knowing where to start can be a daunting task. Here, we guide you through your investment journey, from what to consider before you start, the different types of investment account, which might suit you, and the various asset classes. You’ll also learn why it’s important to focus on the long-term as an investor, and create a diversified portfolio which includes a range of different investments.