The Rise of Robo-Advisers

What are robo-advisers?

Robo-advisers are online investment management platforms that use algorithms to invest clients money with minimal human interaction.

Sounds complex! It’s actually much more simple than it sounds –  you fill out a short quiz online, about 10-15 personality based questions (and who doesn’t love a personality quiz!) which determines how you feel about risk and then matches you with an investment profile accordingly. Some people are super cautious and will fret about any short term losses (volatility) whereas some are happy to weather some storms for the prospect of improved investment returns over the long term – it all depends on you! In terms of what you get profiles are generally split into low, medium and high risk investment portfolios and the more comfortable you feel with risk, the higher the proportion of equities or stocks you are allocated in your investment portfolio, the rest will be made up of less risky investment vehicles such as bonds.

Which companies are there to choose from?

There are lots of UK companies to choose from – the main ones being Nutmeg and Moneyfarm, although alternative companies include Scalable Capital, Evester and Moneybox. The main things to consider are how much you can afford to initially invest, the management fees and performance history – but as robo-advisers are relatively new to the market they only have a few years trading history to review.

Each company asks for different minimum starting investments which might help you choose who you would like to invest with depending on what you can afford – you can invest with Nutmeg with a £500 initial investment followed by monthly regular payments  but with Moneyfarm you can open your account for just £1. The fees also differ – Nutmeg charge 0.75% management fees on investments up to £100k for their fully managed portfolios, whereas Moneyfarm charges just 0.30%.

Why use a robo-adviser? 

Robo-advisers are usually much cheaper for the customer than traditional financial advisers in terms of management fees but most importantly they also allow you to invest small sums of money. Traditional investment houses often require thousands of pounds as a minimum to invest which lots of millennials simply don’t have but are curious about investing and want to dip their toes in the heady world of stocks and shares.

The main advantage is the diverse portfolio robo-advisers give you by using ETFs (exchange traded funds). These funds act like traditional tracker funds but can be traded like individual stocks, this allows brokers to spread your investments globally and across different forms of investment to create a diverse portfolio which reduces the overall risk if one sector performs badly.

You also have a lot of control, its pretty easy to change the risk level of your portfolio up or down depending if you feel uncomfortable with your current risk portfolio or just feel a bit more adventurous. When I started I had a medium risk portfolio but have increased this to a high risk portfolio now I feel a lot more comfortable with the stock market and am seeing much better returns. One thing that I have learnt is that risk or volatility is just how the stock market works – there will be days when the FTSE does not perform and the value of your investment drops, that doesn’t mean you lose all your money – realising this has helped me with my investment confidence and encouraged me to invest more.

Digital services are quick and easy to use and most have apps so you can keep track of your finances and see your money growing from your phone. It also allows you to automate your finances by setting up direct debits. This means its to easy become a regular investor & with a little bit of time you will start to see the pounds compounding by themselves.

Who should choose a robo-adviser?

Anyone! Setting up an account with a robo-adviser is usually pretty simple. I think they work particularly well for anyone who is keen on investing but short on time to pick their own investments, anyone who is a first time investor looking to build confidence in the stock market and gain some knowledge and anyone who is looking for a low cost platform with a small initial pot to invest.

All in all, I really recommend robo-advisors for any millennial looking to grow their money – I will write a separate article about Nutmeg who I use as I really love their platform and want to review it properly.

Please let me know your thoughts on robo-advisers & comment if you’ve enjoyed the article!

 

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Investments – A Risky Business?

risk profit lossWhenever I talk to people about investing, people often respond with, “oh I would never hold any investments, they’re too risky!” And that’s exactly how I used to think about investing before I started doing my research. The scary part begins whenever you set up an investment account and read, “the value of your investments can go down as well as up”. This can be a major red flag to savers who want to safeguard their hard-earned money.
Although putting money into savings accounts seems sensible, these savings are at risk from loss in a similar way to investments. This is due to inflation. Current interest rates are extremely low with no clear sign these rates will be lifted in the near future. Basically this means that the growth expected by your savings is unlikely to match rising inflation rates with the overall effect of your money devaluing in real terms over time. So there is inherent risk in savings accounts which is often misunderstood by savers.

 
When thinking about money you need to consider risk in order to try to generate the returns you would like from your investments. In essence, the higher risk you take with investments, the higher returns you can generally expect to generate. If you accept very little risk, the financial products you invest in are unlikely to generate huge returns but you are less likely to sustain losses. However, if it was as simple as choosing high risk investments and making lots of money, everyone would make high risk investments every day!
So what is important to consider when picking your investment strategy?

 

1) Personality

Where do you sit on the risk spectrum? What level of risk are you prepared to accept in order to achieve growth? How would you feel if your investments lost money?

When I first started investing, I had a medium tolerance to risk – that meant I was happy to lose a little bit as long as generally my investments were doing well but I wanted to avoid investing in volatile areas of the market which typically suffer larger losses & bigger gains. My risk tolerance has now increased and I would say I am happy with higher risk investments, provided they are sensible decisions. My risk level changed after my initial scepticism of the stock market & investments was disproved once I started investing and seeing good returns on my money. Now I’m pretty laid back & happy to accept market volatility after seeing some steady growth for the past couple of years. On the other hand, my fiancé tends to fret about his investments, checks his stocks multiple times a day & questions his decisions – his risk tolerance is probably lower than mine. There is nothing wrong with either approach but it is important to think about your own tolerance level before picking investments to avoid disappointment from low returns or future losses. Luckily there are lots of online quizzes which help you to identify your investment personality.

 

2) Time frame

How long do you want to invest for? Generally speaking investments are designed for long term growth – ideally at least 10-15 years, but probably nothing less than 5 years. This allows you to ride out volatility in the markets & any big market drops, such as the 2008 financial crisis. Returns will also increase due to compounding. Compounding means you re-invest any money made from growth & this subsequently increases your % returns in the next financial year – I imagine a snowball to help understand compounding. When you first roll your snowball it seems small, but as you add each layer it suddenly grows exponentially. This is what your money has the capacity to do when invested properly. The longer you leave your investments to grow without making withdrawals the bigger the effect from compounding you will see.

 

3) Purpose of the investment

Why do you want to invest? Is it retirement savings? A nest egg for a rainy day? Or just because you love investing? Understanding why you want to invest is really important for thinking about your time frame & the volatility you will accept. For example, retirement savings are likely to be locked away for maybe 30-40 years – you can accept a higher risk investment because you are likely to have time on your side to ride through any market related volatility & the higher returns you can expect will be important in the future when cost of living is likely to be higher. If you want a house deposit in the next 5-10 years you might want to consider a lower-moderate risk strategy to safeguard your investments from market volatility.

 

These 3 factors are what I consider before making any investments, I think they are useful to help guide yourself in making the right decisions for you, for the right purpose. I hope that’s been a useful introduction to start you thinking about investments!

 

Seven Steps to Starting Saving

Increase your savings
1) Open both savings & investment accounts.

If you don’t have the accounts open, you won’t be putting any money into them. A quick google will tell you the best deals available and websites like moneysavingexpert.com have done the hard work for you. Once you have your emergency fund, put the rest of your savings into an investment account. Pick the best option & open the account, usually within minutes – make sure you check the small print to qualify for the interest payments. Next step, set up direct debits into these accounts on payday not the end of the month. Savings should be the first thing you do not the last. Always pay yourself first. Be realistic but commit to the goal.

2) Review all your regular direct debits

These come out every month but do you honestly know the total you spend every month on your direct debits? Go through your bank statements & split them into essential & non-essential. I had contact lens subscriptions despite having about a 6 month supply in a drawer, gym memberships I didn’t use etc. Cancel what you can & put the difference immediately into investments – you won’t miss it if you didn’t realise you had it in the first place.

3) Pay off expensive credit cards

This is really important, don’t save money if you are paying high interest on debt. Clear the debt first then save. If your interest charges from credit card debt are £100 a year, but your interest payments from savings only get to £10 – you lose £90 a year. Put all your efforts into clearing your debts first. Credit cards can definitely be used to your advantage, having access to credit is a good thing and there’s a clever concept known as stooging where you save your money in your high interest current account & spend on 0% interest credit cards so you can make money from money! To do this you need to be financially savvy and always know your balances & spending – I have a simple rule, to use credit I need to have enough to pay off the entire amount if the banks asked that day. If you are using credit cards for bigger purchases, use 0% credit cards to spread the cost of purchases interest free rather than high interest options available direct from the shop. You can get access to 0% offers for up to two years but you must make at least the minimum monthly payment & be able to make final payments or you could get into trouble long term. Can’t pay at the end of your term – try a 0% balance transfer onto a new 0% card & get your finances into gear to be able to make your payments next time.

4) Know where your money goes

Ever get that feeling at the end of the month – where did it all go? Lots of high street banks have apps which track spending on debit or credit cards. I’m with Santander who have a Spendlytics app. I can see which sectors I’m spending my money in – retail, travel etc. Know where your weaknesses are. Spending £20 a week on buying lunch is £960 a year! Pack your lunch the night before – you’ll save hundreds. If you can’t go without a strong posh coffee in the morning, save £3 a day by getting a coffee maker at home – the Tassimo is inexpensive & you can have a Costa Caramel Latte for 62p at home from the capsules. Track your savings & put that money into your investments. Watch the pennies & the pounds look out for themselves.

5) Cut the cost of essential bills

Spend a day doing price comparison checks for all your essential bills. Gas, electricity, insurance, TV subscriptions… get the best quote, switch if you can & call your provider to see if they can give you a better offer. If they can’t, switch. It’s usually very straightforward to switch provider & often the new provider will do all the hard work for you. Every time a subscription is due for renewal, don’t take the renewal quote or automatically renew – check – it will be costing you hundreds a year. That money could pay for your holidays or add to your house deposit!

6) Use loyalty card schemes to get freebies

We have had cases of wine & cinema tickets for free from collecting Nectar points by using credit cards, topping up fuel & doing the weekly shop. This happens every few months. Make sure you’re not losing out on your loyalty, get a nectar card, Morrison’s more card etc & use it every time you shop. You might be surprised what you can get.

7) Identify your priorities for luxuries

If you don’t allow yourself any fun or luxuries when you’re trying to save you’ll give up pretty quickly. You don’t need to punish yourself & you work hard to earn your money. Just work out what your priorities are – if you need 2 holidays a year to stop yourself going crazy like me, that’s great – put them into your budget, put your money aside & enjoy them! That’s what life’s all about. But question your lifestyle, do you need expensive makeup & haircuts every 6 weeks or can you cut back a little? Know what makes you happy, don’t cut it out, but watch your spending.

By doing all these things, you’ve probably saved yourself a couple of hundred a month without trying too hard – invest this & you will watch it grow. Read more about how to make your money work harder & it will stop being a chore & something you enjoy doing.

Savings Basics

Starting to save money often feels impossible. When people think about their goals the targets seem unreachable and the goalposts ever-changing. However, there are a few basic principles when it comes to savings that are worth remembering and once you start, it always seems a little easier.
You really need three pots:
Pot 1 – The Emergency Fund

Emergency piggy bank
This is the first savings pot you should develop, it should ideally be held in cash, easily accessible and contain 2-3 months’ salary. The idea of this pot is that it will cover you if your car breaks down, your boiler packs in in the middle of December or you need to make an emergency trip, injure yourself or whatever other calamity life throws at you. You should prioritise building this first – this is what stops people taking out super high interest payday loans to cover bills & expenses or just having to go without for a few months in the event of anything unexpected. Consider holding a high interest current account. These often pay you better rates for keeping a certain amount of money in cash each month rather than just a typical high street savings account. Shop around for what offers the best deal – remember this is your money, make it work hard and work for you!

 

Pot 2 – The Medium Term Investment

stock market
After you’ve worked on your emergency fund, you should start thinking about having a more longer term savings & investment strategy. This is where it really gets exciting and you can make your money work for you. Ideally you are looking at holding & building this pot over a 10-20 year period and because it is a long term pot you can allow the concepts of financial risk and growth to come into play. It is best not to hold this in cash or in typical savings accounts, at least not in the current markets with incredibly low interest rates as what ends up happening is your money will effectively devalue and be worth “less” than your original pot in real terms as the value has risen less than inflation. Think about opening a stocks & shares ISA (more on this later) to keep this money in a tax wrapper – the government allow you to save £20000 a year tax free.

Pot 3 – Pension Savings

Pensions-2
This is the pot that often gets ignored, but it is the pot which is the most important. People of my generation are looking at working well into our 70’s and half of all people born today will have a life expectancy of over a hundred. This means around 30 years where you can reasonably expect not to earn an income and if you want to maintain a quality of life, starting pension savings now is about the most important decision you could make today. That doesn’t even include thinking about retiring early!

It’s not all bad news though, if you are young, time is on your side due to the magic of compounding! Compounding is about the best thing in finance, it means the ability of your assets or savings pots to generate earnings, these earnings are then reinvested to generate higher earnings in the next year, and the bubble keeps growing. In terms of starting savings for your pensions, all workplaces now have to offer a workplace pension, make sure you are contributing to this & consider increasing your contributions. In terms of private pension schemes, I would always opt for your workplace pension first because your employer should at least match your contributions which doubles your investment!

If you have spare money left to invest, consider putting this into a private pension such as a SIPP (Self-Invested Private Pension). Any money you put into a SIPP will get a government bonus of 25% and if you are a higher rate tax-payer you can get up to 45% but you need to claim it back. There are so many different pensions’ investment options I will cover in another blog, but the best advice is to use your workplace pension in the first place.

overwhelmed.jpg

When I first started thinking about this I felt completely overwhelmed! But then I realised, you can just start small. It doesn’t matter if you can only put £50 into an investment account – you might find once you’ve done this for a few months you find you can afford a hundred. It’s all about creating good financial habits & looking after your financial future. The options are endless and the right option will be different for everyone. The best thing to do is to educate yourself – once you understand finance you are well on your way to financial freedom already.

 

Money Medicine

Graduating from university at 22 with a medical degree and a heady sense of optimism of the world of work, I remember a phone conversation with my Mum about how excited I was to receive my first paycheck, a yearly salary of approximately £25000, having funded myself so far with a mixture of university frugality & generous gifts from relatives, it seemed a small fortune. I remember saying, Mum, I don’t know what I will do with £1500 a month – I was used to living off a few hundred a term. Fast forward one year, one terrible breakup, 5 holidays, 1 set of expensive opera tickets, new hair and a work wardrobe – I rang my Mum again; broke, in my overdraft and worrying about credit card debt. The reality of adult life had hit. I was, I realised, a millennial without a clue.

 
I used to hate the term millennial as it springs to mind an entitled 20 something brat who doesn’t have determination, endeavour or an appetite for hard graft. The suggestion is that our generation feel the world should land at our feet, that we spend our house deposits on avocado toast, pineapple ornaments and an Instagram lifestyle. I actually believe the reputation of our generation results from a combination of bearing the financial brunt of economic austerity combined with a rejection of expected societal norm. The feeling that our generation seems to have in abundance is that we want to work to live, our experiences are more valuable than our possessions and a passion to spend the majority of our adult lives working in a job we enjoy. The roots of these beliefs may exist in being brought up with a view that we can be anything we want to be, but to me, the principles are solid.

 
I came across the concept of financial independence after a couple of years of becoming increasingly interested in the world of personal finance. Financial independence in a nutshell means the ability to live off the money generated through your savings & investments, so you no longer need to work or can retire early. Frustrations working within a large impersonal organisation with ever increasing demands and little personal satisfaction further increased my enthusiasm. I wanted to learn more about saving, investing and watching your money grow.

 
I started to make better financial decisions, learnt about the joys of compounding – probably the best lesson to learn in your twenties and got passionate about the stock market. I have made some big and some small lifestyle changes and slowly am seeing the rewards. I wanted to write about my experiences trying to pursue financial independence, to connect with others passionate about personal finance and to show others how you can save smartly no matter what your income.

Welcome to my blog, I hope you enjoy reading!