There’s an interesting argument relating to the value of debt in times of high inflation. Just as the buying power of your cash is eroded over time, if you maintain a debt (such as a mortgage) over the same period, the value of that debt may still be £100k but after inflation is taken into account in real terms it’s equivalent to a lower value. However, this is a little theoretical and I still subscribe to the approach of paying off your mortgage debt as quickly as possible, not least because it de-risks you from any further interest changes or remortgaging costs.

Pound cost averaging

This is an odd-sounding concept that essentially means it’s better to drip-feed an investment with smaller, regular amounts than a single lump sum. The calculations are a little messy but it’s easier to visualise graphically (see Figure 9). Take, for example, a share that’s valued at £10 in January. You buy 1,200, for an investment of £12,000. Over the next year, the share price varies between £13.25 and £7.50. Consider if you’d instead have invested £1,000 every month. The average share price over the 10 months is still £10 but buying in smaller, monthly investments has allowed you to buy 1,227 shares for your investment of £12,000, at an average share price of £9.78, or a discount of £0.22 per share.

Granted, if there were dividends due in the period, the first option would have yielded a higher dividend payout but the advantage of pound cost averaging is that it’s considerably easier to invest a smaller amount regularly than a lump sum and therefore the ability to buy more when the share price is lower contributes to outweighing a single lump sum investment. It also reduces the risk that you invest your lump sum at a high point in the market which then drops. We’d all like to buy at the lowest price but don’t know when that might be, so spreading the investment reduces the risk of inadvertently investing all your money at the top of the market.

Performance

Let’s take the S&P 500 as an example and look at overall growth and annual returns (see Figure 10, previous page). The S&P 500 is a benchmark of US stock performance and since its creation in 1957 it has returned an annual average of more than 11% through to 2021. Figure 10 shows those returns over the past 25 years, with only six years failing to make a positive return. Other than more often making a return than a loss, there’s no particular trend and this is where it’s advantageous to use pound cost averaging over an extended period to smooth performance and generate a reliable return rather than trying to pick a winning investment on any given day.

Given this trend in returns, it’s no surprise that, overall, the market has grown in tandem from an average closing price in 1995 of 541 to 4,097 in 2022. In other words, the combined financial size of those 500 US companies has grown dramatically over the past 27 years.

In the developed world, most economies and therefore stock market indices are growing over time. Clearly there are challenging times when economies shrink, either through political instability or a global shock such as Covid-19, but in the long term the trend is up. Although it’s not particularly ground breaking, this is key to my investment philosophy: I invest little and often over the long term. You don’t need to pay extra fees for someone to try to beat the market; just ride the market itself for a much lower cost. Compound interest shows the power of reinvesting returns but the real leverage comes when it’s applied over a longer period.

I’ll add one final comment – and again, it stems from a Warren Buffett quote, ‘Be fearful when others are greedy and greedy when others are fearful.’ When a stock is popular (or when there’s high demand and buyers are greedy for it) the stock price rises; however, the value of what you’re buying has reduced as you’re paying more for the same number of shares. When a stock is out of favour in the market and there’s less demand, the price falls. Providing the underlying business is still solid, you can pay a lower price for it and get better value.

The reason I highlight this is to reinforce the fact that even though shares, indices or a market can drop in value, it’s not always something to worry about. If anything, provided you believe in the underlying growth proposition of that company or economy over the long term, then you’re buying in at a lower price and getting better value for money, as in the pound cost averaging example. So while I’m not too concerned about a drop in the market and see it as a potential buying opportunity, beware of any company whose share price is falling because they are themselves failing. Every so often a business will fail, possibly because it hasn’t kept up with market trends or technology and the share price falls, making it look like a potential bargain against the previous year’s results. But if it’s a dead duck, it’s not good value. Examples include HMV and Kodak, companies that completely failed to keep pace with technology. At its height in 1994, Kodak was worth $20 billion but it ignored the potential of digital cameras (despite inventing them) and sales fell off a cliff from $14 billion to $2 billion, with the company falling into bankruptcy in 2012. Cheap doesn’t always mean good value.

The time to be more concerned about a market dip is if you have to sell, or liquidate, your investments and end up selling at a potential loss – but there are strategies to manage that as you reach retirement. However, if you’re an investor in your thirties and not looking to retire for the next 30 years or so, I’d advise you to ride it out and it will bounce back. It probably won’t be a surprise that I look at my investments on a daily basis and, yes, I get a little grumpy if I see they have gone down – but I don’t panic, as I’ve learned over the past decade or so that what goes down does come up again and when that happens, I’m happy!

To prove that this isn’t all theoretical, I’m sharing an extract from my personal tracker from pre-Covid-19 days, over two years. The investment value includes our pensions and ISAs. There are some caveats to this graph (Figure 12, below) in that I was still employed during 2020 and contributing to my pension, though we were incrementally adding to ISAs and had started drawing down from Lou’s pension in 2021, so it’s not as pure a picture as the S&P 500 example but it shows similar trends. Yes, it was a shock to see more than £100k wiped off at the start of Covid-19 but it has recovered well and I believe it still has a way to go.

Figure 12: Personal investment performance 2020 to 2022

Duplication

When I started working and enrolled in my first company pension, I received a piece of advice that sparked my investment journey. There used to be a second part to the State Pension that was known as the State Earnings Related Pension Scheme (SERPS) but you could opt out of it and invest the money elsewhere. I wouldn’t have done this but two of my school friends were taking a gap year while working for Norwich Union (now Aviva) and the company suggested this to them. If you opted out, you needed a private pension to pay the SERPS money into and I arrogantly thought that I might be better off managing my own money than leaving it to the government, so I gave it a go. This started off my personal pension (now SIPP) and the opportunity to pick investments. I was like a kid in a sweet shop; I jumped at almost every tip I read and invested in all sorts of oddball funds and shares. However, over time, I saw which investments were doing well and which ones tanked but still didn’t have much of a strategy, even though I thought it was performing OK. This became the backbone of my pension and as I moved on from each job, I transferred the old company pension into my SIPP until it was a reasonable size. Because of this, I began to worry that I might not really know what I was doing, so I sought investment advice from a popular investment company. As part of this, they reviewed my portfolio performance and discussed the option of moving the management of my pension over to them. I was proud of my progress and the pot I’d amassed but felt rather deflated about the summary of my portfolio as ‘rather eclectic’ and found that it hadn’t performed that well against several benchmarks. Nonetheless, I learned some important lessons from the review, the main ones being about duplication, dilution and trading costs. For the record, I took the discussion as valuable free advice and didn’t transfer my pension. It’s worth remembering that just because you’re talking to a salesperson, you don’t have to buy; if during the process you decide it’s not right for you, you can always say no.

I invested in many different funds and one piece of analysis I received suggested breaking down the full list of underlying shares. This showed that some shares were held in several different funds, particularly the large global technology stocks. A large holding of a particular share wasn’t a problem but holding shares in different funds was. For example, you might hold 1,000 Microsoft shares in two different funds but because of their different investment strategies, you might find one selling 100 shares one day while the other bought 100. At the end of the day, you still had the same number of shares but you’d been charged two dealing costs. This is another reason why investing in a single tracker is sensible, as it avoids this problem.

I had more than 6,000 different company shares in total (held in multiple funds) and we then focused on the smaller holdings or ‘comet’s tail’ of the list. I remember L’Oreal as an example, because it transpired that I owned £300 of shares through one of my European funds. L’Oreal is a great company but what if it was so great that it doubled its share price? That would be a spectacular result for any stock but because my holding was so small, such an increase would only impact my portfolio by fractions of a per cent – so it wasn’t worth it (no pun intended). Taking the example of the S&P 500 again, it covers 500 (big) stocks, so you’re limiting your exposure to investing in many (very) small holdings.

Most funds and platforms are a little vague when it comes to transaction charges. Some are better at declaring the total monthly charge for managing your pension but how many transactions are happening each day in relation to your holdings? I didn’t have a clue. Dealing costs are comparatively small but having no visibility of how many transactions you’re making is a cost that’s out of control. Against trackers, some ‘buy and hold’ funds will have significantly fewer transaction costs but the fee for the fund manager usually outweighs this. Similarly, large funds have a larger number of clients to spread the fees over, so costs can be lower. It’s still not totally transparent but some of the tracking apps (discussed in Chapter 8) do pull this information through, which I find more helpful than trying to extract directly from a provider’s website. It varies by platform but I can see transaction charges of around £100 a month for my investments and although I’d like them to be less, I’m reconciled to the fact that I do need to pay for the service they’re providing.

Diversification

Next, let’s look at diversification. There are two threads here – within your investments and for investments generally. Simply put, you don’t want to put all your eggs in one basket, so it’s a good idea to spread the risk. I’ve talked a lot about the S&P 500 and that’s because it’s a massive economy, hosting many major (but varied) global companies. The FTSE also lists many significant companies, so I do hold a couple of different trackers to give some geographical spread and, because I have a slightly adventurous streak, I also have some money invested in an emerging markets fund to capture some of the tiger economies of south-east Asia. Having such a spread is sensible but it’s important not to get tempted to add just one more fund covering a slightly different sector because, before you know it, you’re back to square one.

The second thread relates to liquidity, or how quickly you can convert your investments into cash. It’s all well and good having a huge pension pot but not so good if you’re unable to afford an emergency bill or cover a period of unemployment, so it’s helpful to have a diverse range of investments and not all the same type. Pensions are straightforward as they’re tied up until you’re 55. ISAs are more readily able to be converted into cash and although you’d lose that year’s tax-free benefit, it’s not a deal breaker. Cash is obviously liquid in that it can be spent immediately but that depends on attractive interest rates being available. It’s always good to have a cash buffer of 6 to 12 months’ worth of general expenditure and my favourite way of doing this is through Premium Bonds. It’s true that the ‘interest’ (prizes) isn’t guaranteed but there’s a fair chance of winning a prize (sometimes a big one) and statistically it’s comparable with market rates so in my opinion, it’s a better bet than the lottery.

The other common investment is property, or second properties and BTL. If you have a mortgage, it’s likely to be your biggest investment, at least in the early years before your pension starts to accumulate. Shortly after getting married, we considered buying a rental property and took advice from my pension provider during an annual review. Their comment was that we already had a significant chunk of our potential wealth tied up in a property so would we be comfortable securing more debt, particularly as we were planning to move jobs and were a little unsure where we’d end up. This brought up the subject of liquidity and that it would be slow to release the capital out of a second house. It was through this discussion that we migrated towards a strategy of paying off our mortgage debt as quickly as possible over buying another property and equally contributing into both pension and ISAs. Having a quick look at our current spread, we have 50% in our pension, 38% in property, 10% in ISAs and 2% in cash and Premium Bonds. This isn’t a specific target to aim for but it’s a useful ratio to track once you’ve set up your plan. We haven’t looked for the ‘magic bullet’ or utopian solution to investing but the approach we’ve taken to our spending and financial decisions has led us to the position we’re in now.

Background research

I believe that several of the topics I’ve covered will be applicable and/or helpful to set you on a path on a better understanding of your finances, help you build a plan and have the confidence to make good decisions. But outside this book, where can you get more information or advice? Many investment platforms (for example, AJ Bell, Hargreaves Lansdown, Vanguard) provide interesting, unbiased and well-researched articles online, many with email bulletins. I’d suggest reading a range and picking the provider you prefer. I don’t want to force you into reading the Financial Times every day (I certainly don’t) but having some awareness of trends and movements in the markets is a good thing and it’s going to be easier if you’re comfortable with the way it’s presented. Although more old fashioned, the traditional Sunday newspapers normally have a financial section that’s not too heavy going and provides a reliable source of background information.

What I’d try to avoid are articles or posts that promote a share or investment tip with a catchy headline such as ‘My inflation-resistant FTSE stock everyone should invest in’. It’s far too tempting and, before you know it, you might be hooked on an extremely diversified portfolio – I know, I’ve been there. At Christmas, keep an eye out for financial journalists’ stock tips for the year ahead and reviews of the previous year’s predictions. If anything, it will underline that there’s no such thing as a guaranteed investment. In all my years of reading these reports, I’ve never come across an article that reported 100% success.

There are also regular articles on poorly performing investments or ‘dog funds’. Given that there are so many funds available and returns are variable, some are going to be at the bottom of the league table and there’s always a selection of big brand names on the list. This doesn’t really help you unless you happen to have an underperforming fund but the gist of my approach is not to major on managed funds but stick to low-cost trackers. However, it serves to underline the point that ‘expert managers’ aren’t infallible. Even fund managers who have a sound investment strategy will have periods when the market goes against them – but don’t jump ship after one poor set of results if you believe there’s a sound basis behind the investment strategy and external factors that are impacting short-term performance can be overcome. Remember you’re investing in the long term and don’t try to time the market.

Where to invest and fee structures

We’ve touched on investment platforms, so let’s address where and how you invest. If you’re in a company scheme, you’re stuck with their provider but when you’re consolidating a number of old schemes or want to invest in your own SIPP, you need to choose a provider. Whichever one you choose, three things are important to consider: how much advice or support do you want, how big an investment range are you looking for, and what are the costs? You can usually find articles that rank platforms by cost but this isn’t the only factor to consider; if you’re comfortable making all your investment decisions, then the cheapest no-frills option could be the one that works for you. If you want a bit more support and advice, you’ll have to pay for it.

Hargreaves Lansdown – a company I’ve been with for 25-plus years – are in the middle of the cost table. I can’t recall why I chose them but they provide a usable interface, have particularly good supporting information and, while some argue their services are a little expensive, I can live with that because it’s through their advice that I’ve built a significant pension pot. Without their content, I don’t think my portfolio would be where it is today. I can invest in almost anything, which I like, despite it contributing to my highly eclectic portfolio!

While trying to rationalise my investments and migrating to simple trackers, I moved our ISAs over to Vanguard, a low-cost platform. I also transferred my last company pension as I wanted to trial their ‘standard’ pension package, given that I was nearing being able to draw from it and it felt right to be in a more structured fund. Both the tracker and pension (LifeStrategy 100% Equity) have performed well with low fees, which is a great result. The downside is that I can’t invest in shares directly but the range of funds and trackers is great for a standard portfolio.

We’ve moved Lou’s pension over to St James’s Place, which is often cited as an expensive option and, by many, overpriced. They are also often the brunt of negative press articles. Given what I’ve written about the confidence in our financial decisions, this choice might surprise you but I can explain the logic. I often read on forums how easy it is to select and track your investments and how you’d be stupid to select one of the higher fee options, but pure investing is not the sole consideration, particularly as you approach your later years. After decades of self-investing, we hit the point where we were able to start drawing down from Lou’s pension. While you can figure it out for yourself, we felt it was time to pay someone else to do the administration and give advice. We’ve also been impacted by both our mothers being diagnosed with dementia and the realisation that, despite our current confidence, at some point we’d need support in managing our finances. We felt it was time to engage with a financial advisor who we could get to know and develop a relationship with for the remainder of our investment time frame.

I listened to an interesting podcast discussing this very subject (TRAP 2023) – how much should you pay for advice? They used the analogy of going out for an anniversary or birthday meal. You’d want to go to a high-quality restaurant where the food was fabulous and you’d expect to pay a bit more for the experience. Therefore, when you’re looking for financial advice, the question is do you want Michelin-star quality or Wetherspoons? Don’t get me wrong, we love our local Wetherspoons and visit regularly – but not for special occasions! We’d hit a time in our investment cycle when we needed to have the support of a trusted advisor who could help with executing our retirement. Timing was key in our decision making – we’d been managing our portfolio perfectly well but knew we might not be able to in the future and took this decision to de-risk our later life.

When you start investing, the total fees are relatively small but they’ll grow alongside your investments, so I’d suggest that, for the most part, you can replicate the basics of our low-cost model. But there will come a time when you want some advice and, if this is combined with a financial platform, you should mentally separate the fees from the pure management of your investments. Included in those fees could be a full financial health check every year, administration of our pension ‘payroll’ plus ad hoc advice ranging from capital gains (for example, selling a second property) to whether it’s more tax efficient to spend from our ISA or withdraw more from the pension. We still have other investments in low-cost products but we can also tap into an advisor to help manage our plan as we get older. It was the right decision for us but there are many options and it’s important to find a solution you’re comfortable with. Not least, you have to be clear about your plans and aspirations and not accept a cookie cutter solution. We have a great relationship with our partner at St James’s Place and regularly quiz her on all manner of financial questions, but most important is to find a solution or partner that you’re comfortable with, and that you’re getting value for money against what you need from them.

We researched three financial partners before making our choice and each had a different approach to fees. One quoted a straight 2.5% take-on fee to accept the portfolio, in addition to a regular management charge, which is a whopping £12,500 for a £500k pension pot. Another did a full financial analysis and cash flow modelling exercise as part of the pre-sales discussion, which was ours to keep (for free) and five years earlier had cost us £2,000. The final one didn’t charge any take-on fee but there was a tie-in clause that would be payable if we left shortly after joining, on a reducing scale from 5% over a five-year period. Two quoted the sales gimmick, ‘Our annual fees are usually 4% but for you, we’ve agreed 2.5%.’ It’s a big decision, not to be taken lightly, but beware of big fees. If you’re starting from scratch, opening your first SIPP or ISA, there will be limited charges and fees will grow proportionally as your investment grows. The time to be cautious is when you’ve built up a reasonable pot and you’re being asked to pay to transfer it somewhere else. Make sure you understand why you’re moving and what you’re getting in return. Yes, there are some costs involved in transferring investments and ultimately the recipient company is going to profit from your ongoing fees. I’m not a big fan of upfront costs to move but I understand such pricing structures are in place partly to offset the cost of pre-sales activity (ie advertising and spending time with you before you sign up).

Fee structures and transparency are an ongoing and contentious issue and there’s no easy answer as to what’s going to be right for you. However I’d go back to a previous theme of knowing exactly what you want, being comfortable with what you’re being offered and whether it’s right for you. For example, we had two criteria for moving some of our portfolio over to a paid-for service: one, would they handle the drawdown administration of Lou’s pension and could they provide other, related investment advice; and two, did we like them and were they younger than us? Putting it bluntly, we didn’t want them to retire or die before we did!

I’ve touched on financial advisors several times and it’s right to consider them again. One piece of analysis they’re likely to do (you can also find an online tool to do it for you) is related to your attitude to risk. Generally, it follows that bonds are lower risk (caveat some of my earlier comments) and shares are higher risk, so advisors will aim to match a portfolio to your appetite for risk.

Final thoughts

Our investment journey hasn’t been perfect. We’ve made mistakes, losing money on some investments, so what I’ve learned is that it’s important to recognise when to cut your losses and sell. It’s the reverse of a concept called ‘in for free’ that a colleague and I used to use when we started investing in penny shares back in the 1990s. If we bought a share and it increased in value, we’d often sell our original stake, including fees, so we didn’t make a loss but still had the residual invested ‘for free’. Therefore we felt we had a pot of what was essentially free money and if another investment tanked and we lost the lot or had to sell at a big loss, we could offset this in our own minds against the ‘free money’ so we didn’t feel so bad. It’s OK to have an investment every so often that doesn’t work out. There are many external factors at play, so just aim to be well informed and get out when you know you’ve lost and try not to repeat it too often.

I also acknowledge that we’re not at the end of our financial journey and, while I don’t tinker with my portfolio as much as I used to, I’m still tweaking what we invest in. Two years ago, we decided to differentiate our investments by different strategies to see which really is the best solution. Broadly we have:

my ISA in a Vanguard World Index Tracker

Lou’s ISA in a Vanguard S&P 500 Tracker

my original eclectic Hargreaves Lansdown portfolio

Lou’s pension with St James’s Place, who manage her pension payroll and provide advice and have produced a portfolio based on Lou’s risk profile and drawdown requirements

my old company pension pots transferred into Vanguard LifeStrategy 100%

a general investment fund (we ran out of pension and ISA opportunities) invested in 50% S&P 500, 30% FTSE 100 and 20% emerging markets (all trackers)

Premium Bonds for our emergency cash fund.