This is a sensibly short handbook for ‘busy young professionals’ which demystifies the foggy world of investing, writes Simon Bain…
The author, neither journalist nor qualified adviser but a 20-year banking industry insider, has written it for his own twenty-somethings just into their working lives. It’s a refreshingly authentic take on the young investor agenda which heads right to the heart of it in the first few pages.
“The key is investing in a ready-made portfolio, where someone else has done the hard work of working out the right blend of investments. If you had an adviser, chances are this is essentially what they would advise you to do anyway.”
No stone is left unturned, but the lessons are delivered simply. An adviser would tell you to do five things: take risk, diversify, use tax breaks, invest enough, and stick with it. Young investors need a portfolio with 80 to 100 per cent in equities. Statistically, an active fund has to outperform the equivalent passive by (at least) 0.6 per cent to be worthwhile.
Coxon ploughs straight into the tricky ESG options, noting that there are few ready-made passive ESG funds. Some robo-advisers offer portfolios of green ETFs, but ‘you may need to consider more expensive active funds’.
Pensions are firmly nailed, with the clear direction that if you are in a company pension ‘you want to select the 100%-equity low-cost passive option’. (Sadly not always on offer.) Coxon is rightly evangelical about the LISA for anyone saving for a home or for retirement or both. And he has a delightful theory that the harsh 6.25% penalty for withdrawals from a LISA was just cock-up – devised by innumerate arts grads in the Treasury!
On advice, there’s another useful steer. You’ll pay a robo-adviser 1% for what you could do yourself for 0.5% – but on annual savings of £4000 that’s a fee of only £20. As your fund grows, and your confidence with it, you can ‘take off the training wheels and go full DIY’.
I did feel the baffling world of bonds was unpacked with all its head-scrambling circus of yields, maturities and prices a little too early in the book, especially as it becomes clear so soon that young investors should be supremely focused on equities. But the section on risk tolerance shows why it is important to have a basic understanding of bonds in order to grasp what a 60-40 or 80-20 portfolio means, as those will be the ready-made choices on offer.
The author rightly warns that the model risk questionnaires can lead new investors to self-identify as more cautious than they really are or more importantly need to be. For instance, does the idea of stomaching a 25% loss sound horrendous? It probably does, but ticking the ‘15% loss’ box would lead you to a portfolio of only 40% equities – more suitable for someone in their 60s than their 20s. That emerges from one of the book’s regular neat and well-judged graphics.
When it comes to actually picking your investment, the author takes a satisfyingly deep dive. Rather than confusing us with a wealth of options, Coxon homes in on those that really tick the necessary boxes: Vanguard and Blackrock (or an MSCI index fund) for passives; Nutmeg, Moneyfarm and Wealthify for robos; Liontrust for sustainable investing. And maybe spread across more than one manager. They’re not recommendations, but the guidance feels impartial and reliable.
There are useful chapters on future planning, budgeting, and insurance, while the ‘core-satellite/fun investing’ brief includes a helpful pointer to investment trusts for anyone keen to learn.
Overall, the pro-passives message is clear and fair, though it’s perhaps fair to note that in niche areas and less well-researched markets active managers can add value while passives are more limited. It’s also worth stressing that picking your own ETFs or portfolio of ETFs does not get you round the decision of which market or index to track – and that decision (your asset allocation) will have the biggest influence on year-to-year performance.
The book’s discussion of performance, and how it relates to volatility, includes a novel analysis of how three active/passive/ESG funds have behaved over a three-year period, which is said to be a reasonable window for judgement.
Fittingly the finale deals with the key area of investor psychology and what prevents us from ‘sticking with it’. Nuggets of wisdom: only look at your portfolio a few times a year, don’t have access to it on your phone!
The (probably spurned) adviser turns out to have a key role – that of dissuading the nerve-shredded client from selling up in a market meltdown (and thereby earning his corn). It may make you wish you had an adviser after all!
There are appendices on tax, company share plans, and crypto – an area explored more widely in Iona’s book ‘Own It!’, which Coxon recommends among a handful (not a library) of useful resources.
Ready-made Investing is written by Walter Coxon and published by Troubadour, £11.99