ANDY BELL: Forget Bitcoin, my advice is to get rich slow

Greed and ignorance are the lubricants that move the investment world. At the moment I cannot present a credible thesis as to why someone should invest in cryptocurrencies. It defies logic.

We have also seen numerous new investors in the past few months who have used GameStop and other stocks to hit hedge funds with what is known as a “short squeeze”.

A short what? Basically, a group collectively buys shares in a troubled company to drive the price above any reasonable valuation.

The hedge funds that have wagered against the company (by taking a short position – borrowing stocks they don’t own) will then have to buy shares in the company to close out their position.

Margot Robbie explains how mortgage bonds work in the 2015 film The Big Short

That drives the price even higher. The victims are not the hedge funds, but inexperienced investors who are late for the party and leave the package in hand when the music stops.

The Big Short, which depicts the 2008 financial crisis, is one of my favorite films. Recognizing the challenges of making a film with very technical concepts, director Adam McKay hired Australian actress Margot Robbie to explain what a mortgage loan was while sipping champagne naked in a bathtub.

Anthony Bourdain, the New York chef who passed away three years ago, also nicely explained what a collateralised debt obligation – or CDO – is: worthless fish scraps that are meant for the bin, mixed with a little sauce and sold as an expensive seafood stew.

Far more interesting and insightful than a collection of sub-prime mortgages packaged together and sold as high quality AAA mortgage-backed security.

When I started writing my book The DIY Investor, I tried to follow Margot and Anthony’s lead. The best lecturers I had at the university were those who could explain the most complex subjects in an easy-to-understand way.

I got to a point where if I didn’t understand something I concluded that the person explaining it probably didn’t understand it as well as they should. This means that the readers of my book have an excuse, if they don’t understand something in it, it is my fault, not theirs.

So where do we start? One of the overarching observations from the 26 years I’ve run my online investment platform AJ Bell is that you can make investing as easy or complicated as you want. I prefer simplicity and have always tried to make it as easy as possible for customers.

Granted, some rules and regulations make things unnecessarily complex, but investing is more accessible today than ever.

There is no magic formula. The path to investment success depends on your individual goals, but I’ve learned a few things that I believe all DIY investors should consider.

“It contradicts logic”: AJ Bell co-founder Andy Bell on the cryptocurrency investment craze

1. Be patient

Investing is not a get-rich-quick scheme. In fact, it’s a slow way to get rich.

2. Why invest?

Starting without sensible destinations is like taking a ride without deciding where to go. Think about what you want to achieve in the context of an outcome and a timeframe.

You could pay off your mortgage in 15 years, finance a world cruise when you are 60, or provide an annual income of £ 10,000 from the age of 55 in today’s money.

Starting without sensible destinations is like taking a ride without deciding where to go. Think about what you want to achieve in the context of an outcome and a timeframe.

Don’t forget about inflation and be realistic. Also think about what your investment strategy will look like.

Do you invest directly in stocks or do you leave your money to experienced fund managers?

Then think about how much risk you want to take, which is a little harder to quantify, but most mutual funds have some risk rating.

Think of your outcome as the goal, your investment strategy as the path you will take, and your risk tolerance as the speed you are ready to go.

3. Don’t miss out on valuable tax benefits

You and your spouse or partner can each add £ 20,000 to an Isa (tax-friendly individual savings account) each year; £ 40,000 per year in a Sipp (self-invested personal pension); and don’t forget Junior Isas for the kids where you can donate £ 9,000 per child per year.

If you are under 40, consider opting for Lifetime Isa to take advantage of the 25% Government Bonus on up to £ 4,000 annual investment.

Make the most of your £ 12,300 annual capital gains tax allowance by cashing in ample profits each tax year – and don’t forget that you are free to move investments between spouses and civil partners. But don’t let the tax tail wag the plant dog.

Spread Your Risk: A common misconception is to confuse owning multiple different funds with a diversified portfolio

Spread Your Risk: A common misconception is to confuse owning multiple different funds with a diversified portfolio

4. Diversification does not mean making a lot of investments

If there’s one rule you should follow when investing, I recommend diversification – spread your risk and don’t put all your eggs in one basket. A common misconception is to confuse owning multiple different funds with a diversified portfolio. Owning five UK equity funds doesn’t mean you are properly diversified.

In fact, you are likely only buying the same underlying assets five times.

Diversification is about understanding how different assets correlate with one another and spreading risk across asset classes and regions.

Stocks, gilts (UK government bonds), bonds, real estate and cash are the top five asset classes, and if you spread these across different territories you are likely well diversified.

Most investment platforms now offer best buy lists that you can use to filter the best funds, as well as X-ray tools that you can use to analyze a fund’s underlying holdings by asset class and geographic location.

5. Don’t ignore the fees

Costs eat up your investment income like a moth eats your clothes. It’s easier than ever to compare fees between different funds and investment platforms – and we’re not talking about cost savings on the side.

A fund manager or an investment platform may charge two, three or more times the fees of a comparable competitor.

Buying stocks outright is probably the cheapest option, but it carries the greatest risk.

If you invest in funds like most DIY investors, you can invest in active funds, where an investment manager decides which assets to buy and sell.

Or you can invest in the much cheaper passive funds, in which the fund only tracks an index or a basket of indices.

AND HERE ARE FIVE KEY BASICS TO AVOID …

1. It is important to take the emotions out of investing

Psychologically, people are programmed to invest poorly. Buying at the top of the market or selling at the bottom are two classic mistakes inexperienced investors make.

While not everyone can afford a financial advisor, one of the overlooked benefits is that it helps you hold your nerve during times of market volatility, and the good guys can even anticipate a market correction before it occurs.

2. It’s important to monitor your investments regularly, but don’t be obsessed with short-term stock market movements.

A “sneaky peak once a week” is a good rule of thumb for a long-term portfolio.

3rd Don’t invest in something you don’t understand.

This is difficult to do in practice because even seasoned fund managers don’t really understand the companies they invest in. But the principle is good.

4th When you invest in stocks, you are buying part of the company. Hence, it is important to understand the basics of how it works, making money, and the business outlook.

When investing in a fund, make sure you understand its investment goals – then sit back and let the fund manager do what they do best.

5. A good understanding of the investments you hold and their expected performance can remove some of the mysteries and emotions involved in investing.

Simple is good. Set realistic goals and understand the level of risk you are comfortable with.

No one is going to look after your money as well as you, but don’t forget that if everything goes wrong, as a DIY investor, you can only blame one person.

And remember, don’t be greedy or ignorant.

Get his book now for free

Andy Bell is the co-founder and CEO of AJ Bell, one of the UK’s largest investment platforms. He has watched the investment journeys of thousands of DIY investors and is the author of the widely acclaimed book The DIY Investor.

It’s available from the harriman-house.com website and costs £ 17.99 (£ 14.99, e-book). But AJ Bell teamed up with The Mail on Sunday to give away 500 FREE copies.

To request your copy, email: jeff.prestridge@mailonsunday.co.uk or write to Jeff Prestridge, The Mail on Sunday, 2 Derry Street, London W8 5TT.

You must provide your name and address and indicate whether you want the hardcover or digital version of the book.

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