A Little Bit Richer

Iona: Hello, I'm Iona Bain, and welcome to A Little Bit Richer, brought to you by L& G. Now, with so many different options available, it can be tricky to know where to start when building your investment portfolio, but no matter how much you have to invest, it's important to get the basics right, so you can build good habits and grow your money. So today, we're looking at how you might start investing beyond your pension savings, so you can build a portfolio your future self will thank you for.

And we couldn't think of anyone better to join us today than Mr. MoneyJar himself, Rotimi Merriman- Johnson. He's a financial advisor and award- winning content creator who's been featured on the BBC, the Financial Times, ITV News, and Sky News. Rotimi is an ambassador of the UK charity National Numeracy, and he hosts his own financial podcast, The Mr. MoneyJar Show.

Welcome, Rotimi.

Rotimi: Thanks very much for having me, Iona.

Iona: Before we start investing, should we have a cushion? And if so, how much should we have in easily accessible savings?

Rotimi: Yeah. So the standard advice around emergency funds is that you should have three to six months' worth of living expenses tucked away. We've had a lot of inflation in the last few years. The cost of living is quite high. Six months represents quite a lot of money for people. So when I speak to people, I say, " Try and have, as a starting point, one month's worth of expenses tucked away."

And I try not to give a fixed sum, because that depends on the time and the place. But just imagine, if you had one month's worth of expenses tucked away, just the psychological ease that you would feel and the financial resilience you would have. One month's of living expenses, put it in an easy access savings account, and then anything over and above that you can begin to invest, if you so wish.

Iona: And why should people have that money in easily accessible savings? Why couldn't people just rely on the money that they've invested in the stock market and pull that out at any time?

Rotimi: Right. So it's because, as we know with investing, the value of investments can rise as well as fall. And if you don't have that emergency fund set aside and all of your money is invested, and the stock market takes a tumble, as it has done in recent times, then you might have to sell your investments at a loss to access your money. So that's why we keep a portion of our money in emergency savings, and then we invest the surplus.

Iona: Mm- hmm. So it's not about choosing whether to save or invest. In a sense, we've all got to be both team saving and team investing.

Rotimi: Yeah. The saving bit is for short- term future you, and the investing bit is for long- term future you, like years and years into the future.

Iona: So let's assume therefore that somebody has got that foundation in place and they're looking to start investing. Where should they begin?

Rotimi: So there's three simple steps when it comes to investing. You need to pick an investing platform, sometimes called a broker. You need to pick your investment account or accounts. And then you need to decide what the money is going to be invested in. So that's the basics of it.

Now, when it comes to signing up to investment platform, this is a very, very similar process to opening a bank account online. You then need to nominate a bank account that you want to then use to add money to that platform. And you can typically add money in a couple of ways, either through lump sums or through monthly savings. And the lump sum amounts tend to be slightly higher than the monthly savings amounts. Some platforms will let you do monthly savings from as little as £ 25 a month, for example.

Iona: That sounds like a really achievable, realistic way to start investing. And also, can there be advantages in drip feeding that money into the stock market on a regular basis?

Rotimi: Yes. So there is a temptation to do what's called time the market. Try and buy at the right time, try and sell at the right time. If you instead just decide to invest what you can afford every single month for the long term, then this removes the temptation to time the market, it reduces some of the anxiety around prices going up and down, and we're doing it so that we can build our wealth at a point in the future.

Iona: You've got to take a step back and just trust in the process.

Rotimi: Yeah.

Iona: Yeah. So on the one hand, you can buy shares in individual companies, as you were saying before, and that's ultimately what we are doing when we're investing. But we don't have to do that ourselves necessarily, and therefore deal with all those issues that can come along with that. We can also invest in funds. Just explain what the difference is between investing in companies on an individual basis versus investing in funds.

Rotimi: Yeah. So you've signed up to your platform, and then you'll need to open an investing account within that platform. So investing platforms will typically offer a general investment account. With this, you can put in as much money as you like, and then you can invest that money. So there's no annual limit, but no tax protection. Then you've got stocks and shares ISAs, one of the four ISA types.

You can put in up to £20,000 per tax year into a stocks and shares ISA, and of the money that you put in, any gains that you get on your investments or any dividends that you receive are completely tax- free. And this becomes especially powerful once you begin to really tap into compounding and get to those larger investment sizes.

SIPPs are another type of investment account.

Iona: What does that stand for?

Rotimi: SIPP stands for self- invested personal pension. And not a lot of people realize this, but a workplace pension is a type of private pension, but you can open a pension of your own, and there's no actual limit to the number of pension accounts you can open and contribute to in a tax year. Self-invested personal pensions have their own annual limit of £60,000 per tax year, and again, that money is sheltered from tax, and you get what's called tax relief on your contributions, which is where the government adds in extra money.

Iona: Mm- hmm. And it also depends on your goal. If you're wanting to enhance your retirement income, SIPP could be worth considering.

Rotimi: Or if you're self- employed. Yeah.

Iona: Indeed, because you don't have your workplace pension.

Rotimi: Exactly.

Iona: Absolutely. And then when it comes to those differences between investing in funds and investing in individual shares, explain what the pros and cons are respectively.

Rotimi: Yes, yes. So you can invest in stocks, which is when you purchase ownership in a company, so shares in Google for example. The thing with purchasing individual stocks is your investment performance is tied to just that one company, and it's a more active way of investing. So if you pick the right stock, then you can do really well off the back of it potentially, but it also means that if the company doesn't do so well, your investment can go to zero.

So what some people do is they invest in what are called funds, which is where you give your money to an investment firm who's buying shares on their end, but they've basically selected a group of shares which they think are either going to outperform the market or target a particular sector, like tech or clean energy. And the performance of your investment will be the average of how all the companies in that fund does.

Then when it comes to funds, there are actively managed funds, which is where a selection process has gone on, and then there are index funds or tracker funds, which just try to replicate what the market does. And index or tracker funds are particularly popular with people because they're very cheap, and they're not actively managed, and you can buy indexes that track the UK stock market, the US stock market, or even the global stock market.

Iona: I mean, buying and selling shares has become a lot more accessible and a lot more popular in recent times, which on the one hand is something I assume that you'd be quite encouraged to see, but there can be downsides to that, can't there? Because you can get involved and jump in at the deep end but not necessarily know that much about what you're doing. What would your advice be for anyone who is tempted to get out there and start buying and selling shares, and might be quite gung- ho about it, and maybe need to take a step back and assess what the risks are?

Rotimi: Yeah. If you want to invest, take an amount of money that you don't need, invest it, and just use that to see what happens. Use it to get used to the buying and selling. And this is why it's good that a lot of investing platforms have quite low minimums when it comes to putting money into the platform. You can invest it, and it's almost like you're learning the buying and selling process. You're getting used to seeing your money go up and down in value, and you're building your confidence whilst not risking it all.

Iona: So if in doubt, start small, and then work up from-

Rotimi: And then build. Yeah.

Iona: Yeah. Absolutely. What's a good rule of thumb for diversifying your investments, and why does diversification matter so much when it comes to investing?

Rotimi: So diversification in simple terms means not putting all your eggs in one basket. And the reason why we do this is because different companies will go through different cycles and will perform differently at different times, and rather than have a scenario where you're just invested into one company and you're hoping that that company does well, you build what's called a portfolio of companies.

You can do this yourself, or you can use a fund. And the performance of your investments will depend on how a selection of companies does. So it helps with your investment performance, and again, it helps from a psychological perspective of, you're not relying on just one company to deliver your returns for you.

If you're creating a portfolio for yourself, as some people do, it will mean that you'll need to understand each individual company and why you're putting them into your portfolio. If you're a beginner investor or you're not interested in picking stocks, you can just buy units in a fund, and that's another way of diversifying.

So to put it in context, if you were using an index fund that tracked the UK stock market, the FTSE 100, you would have 100 companies in that fund. So for your money to go to zero, it would require 100 companies to go to zero, which I think if that's happened, we have bigger problems to worry about.

Iona: Yes. Yes.

Rotimi: If you're investing in the US, you can buy an index which tracks the biggest 500 companies in the US. Again, that's diversification there. And then if you invest in a global fund, which is what I personally do, then that could contain hundreds or even thousands of companies from all over the world. And in a global fund, the weighting of the different countries will follow the size of the global stock market.

Iona: We've spoken about how some people might be quite happy to jump in and get started, but there could be lots of people for whom the prospect of losing money is a very scary one. So how do we get over that fear?

Rotimi: It's a very legitimate fear. And look, we're not taught about this stuff in school. You may or may not have someone at home who can teach you this stuff. But what we are taught to do is to buy things, which shops to go to. You know the right prices to buy things at. But when it comes to investing, or perhaps even saving, we don't have that same knowledge. And that's where I think the fear comes from, I think comes from a lack of experience and of expectation of what's going to happen.

Iona: And also because we have to delay gratification. We're saving and investing, we have to wait to get those results.

Rotimi: Yeah, exactly. But there's a couple things I would say to people.

If you are one of the 30 million employees in the UK, you're investing already. You're investing into your workplace pension. That money is not held in cash, that money is being invested. You're paying into it month in, month out. And as a result, pension wealth is the biggest store of wealth in the UK, and it's just from everyone working, paying into their pensions every month. So you're already doing it, albeit behind the scenes.

When it comes to investing your money in, say, a stocks and shares ISA for example, you can use a very similar principle of taking what you can afford, investing regularly, and doing it for the long term.

Now, there's no such thing as a 100% risk- free investment, but we must remember the distinction between the value of our investments going down and losing money. If you invest your money, the value will go up and down, but you do not lose or gain money until you sell. Again, that's why we do it for the long term. If we do it for the long term and we don't need to sell our investments, we can wait for the market to recover, essentially. And if you look at the stock market chart for the FTSE 100, the S&P 500, for example, you'll see that it trends upwards, but it's not in a straight line.

Iona: What would your advice be to anyone who is seeing all that turmoil out there and is thinking, " Actually, I'm not sure if this is the right time to be invested"?

Rotimi: Yeah. Isn't it interesting how someone can say something, and then the value of a company will drop, even though the on- the- ground reality of that company has not changed?

Iona: Yeah.

Rotimi: So when it comes to how we value companies, there's almost the book value of that company, but then there's this added value on top based upon what people think is going to happen. They'll then sell those stocks, and then that will cause the value to fall.

Those changes in valuation happen in the short term all the time, all day, every day. They're playing one game, but you're playing a different game, which is to ignore the noise and to invest for long term. So this is why I say the volatility is going to happen, but if you can stay the course, then it's not something that you need to worry about.

Iona: What about these options that people might see when they start their investing journey that seem a little bit more exotic, like crypto, commodities, gold, forex trading? What would your advice be around those options?

Rotimi: There's a very important investing principle, which was shared by Warren Buffett, held by many to be the best investor of all time. And his principle is to invest in what you understand. That's what I would say to people. Do you understand what you're investing in? Do you understand, if the price has gone down or gone up, why it's gone down or gone up? Do you understand the trends, the cycles?

If you don't, then that's when the anxiety and the worry sets in. If you've seen something online, you've gone, " I'm going to invest in that because I've someone talking about it," you don't know why they've bought it, or if they've even bought it, you copy them, and then it's now gone down 30%, and you're worried. So I would just say, stick to what you understand, and continually learn and build upon your knowledge.

Iona: And also perhaps be wary of anything that looks like a shortcut or a get rich quick scheme, because there are no shortcuts when it comes to investing. It's long- term, by its very nature.

Rotimi: Yeah. It's a long- term thing, one. Two, people who are making money and investing are not on the internet talking about their strategies. Trust me. They're just quietly making money from it. They're not going to come online to tell you how to 10x your money in a month.

Iona: Yeah, because they're already doing fine.

Rotimi: Yeah.

Iona: Are there any investing principles that we ought to really keep in mind as we start this journey, and try to stick with investing for the long term?

Rotimi: Diversification, trying not to time the market, so trying not to get in and get out, and investing in what you understand. I think if you stick to these four principles, the quality of your decision- making is going to go up.

Iona: And if there are three things that you would want to serve as the starting point for people as they go about this, what would those three things be?

Rotimi: Investing's for everyone. It's never been easier or more accessible for people, so I wouldn't want people to be scared of it, if you use the investing principles we've spoken about. You don't need to have loads and loads of money to invest. In fact, you can start with small sums, and because of compounding, the earlier you start, the longer your money has to grow. And it doesn't need to be super complicated. You get great results by investing consistently for the long term in a diversified way.

Iona: So in a sense, once you've actually just taken that decision, you've done the hard bit, in a way.

Rotimi: Yeah.

Iona: You then just have to wait to see-

Rotimi: The hard bit is leaving it alone. Yeah.

Iona: Yes. That is all fantastic advice. Thank you so much, Rotimi.

Rotimi: Thank you for having me.

Iona: Well, Rotimi, I think we're feeling a lot more empowered now to go and start that future fund, so thank you very much. Next time the consumer editor at The Financial Times, Claer Barrett, will be here to talk through living with debt and managing it.

This podcast is brought to you by L&G. You can keep up with the show on YouTube, TikTok, and Instagram @legalandgeneral, and I would love it if you could follow the podcast, leave us a review, and help others get a little bit richer too. Thanks for listening. Until next time, see you soon.