David Adams 13 Dec 2018 11:59am

Investing in the future

David Adams investigates whether investment could be employed by more people to close the retirement savings gap, and how best to use investment products and services


Some economia readers will have had their own investment portfolios for many years; and may have extensive expertise in using investment products and services. Many of you will have a stocks and shares ISA and/or a SIPP or some other kind of retail investment product. Others will also have money invested through membership of one or more workplace pension schemes, although you may not have thought very deeply about how it is invested.

But, as with the general population, it is almost certainly the case that many readers will have little direct experience of using investment products and services. If you are a member of this group, you may be missing a trick. True, the current financial environment is unpredictable, but even if by the time this article is published there has been a stock market crash, long-term investments in the financial markets still have a much better chance of delivering, at the very least, above-inflation returns.

The best investments do considerably better than that. For example – and admittedly this is an extreme example – if someone had spent $1,000 on shares in Apple in 2008, instead of, say, buying $1,000 -worth of the company’s innovative but not always long-lived devices, that $1,000 stake would have been worth $7,200 by mid-2018.

This is not just about the theoretical possibility that you might turn out to be a brilliant investor. The returns that good, not necessarily stellar, investments deliver could have an important role to play in closing the retirement savings gap, now present in many countries, between the amount of money people are saving for retirement and the amount they will need to enjoy a comfortable post-work income.

The gap exists in part because many workers are making only minimum contributions to occupational pension schemes; and in part because a growing number of occupational pensions are Defined Contribution pensions, which tend not to provide as high an income in retirement as the Defined Benefit pensions that most private sector employers are phasing out.

Many other workers are not members of any occupational pension provision at all, as they rely on casual or part-time employment in the so-called gig economy.

Only about one in three self-employed people (31%) are saving into a pension, according to research commissioned by the Association of Independent Professionals and the Self-Employed (IPSE). ICAEW figures suggest that more than half of people aged 21 to 30 in the UK either pay only minimum pension contributions or are not saving any money for retirement.

A report published by the Institute in August 2018 suggests that one way to close the retirement savings gap would be to increase use of investment products. The report, Audit insights: investment management, argues that the investment industry needs to create more “valuable, affordable, appropriate and… personalised” products and services for consumers.

But there is another reason why many consumers are not involved in investment, says Philippa Kelly, ICAEW head of financial services. “Saving is seen as something sensible people do and investing is something you only do if you have quite a bit more money,” she says.

“Actually, you ‘save’ into a pension but the pension fund is ‘invested’ – the risk is taken over a variety of asset classes rather than sitting in a savings account. Investing is for everyone – and it is the only way you can really ma
Of course, saving into a pension is still worthwhile.

Nathan Long, a senior analyst at Hargreaves Lansdown, says that anyone looking to save for retirement should look at pensions and ISAs first, bearing in mind the tax benefits both can offer.

But it may also be worth you investing some of your money elsewhere, he suggests, particularly if you will not need it in the near future. “If you’re going to need that money back within five years, it shouldn’t be invested, because there is a risk that if there is a stock market crash, it will fall in value. If someone is saving for a house deposit, or for their children going to university, keep it in cash. You’re not going to get much of a return, but that money will be there when you need it.

“But as soon as you go over five years, you’ve got enough time to ride out any fluctuations in the stock market. And if you set up a regular savings plan and you’re paying in monthly, it will smooth out those fluctuations even more, because every time the market falls you’re getting more for your money.”

Julie Mitchell, a wealth adviser at the independent financial adviser Independent Women, points out that the introduction of the pension freedoms means a growing number of people will now be using drawdown products to provide an income for at least part of their retirement, rather than simply buying an annuity as soon as they retire. “That means there is flexibility for people to leave their investments in the market and get growth on top of that,” she says.

It is now easier than ever before to start investing, by using online ‘robo-adviser’ services like Wealthify or Nutmeg, which make automated portfolio and investment decisions based on pre-assigned risk levels and charge competitive prices.

At Wealthify, individuals choose between five investment styles – cautious, tentative, confident, ambitious and adventurous – then fill out a question- naire to check whether their stated investment style really matches their attitudes and goals. They can start investing with just £1.

“Some people just want to dip their toe in,” says Wealthify co-founder and chief investment officer Michelle Pearce-Burke. “We will build a diversified portfolio for them, just using that little bit of money. What then happens is that when people see the return they get over a year, or two years, they think about what they would have got if they had put £100, or £1,000 in – and then they put more in.”

Mobile app-based service dabbl offers another entry level experience, allowing individuals to invest in companies and brands they like, from food or drink companies to retailers or car manufacturers, helping them to become more comfortable with the way investing works. Jess Moore, a 24-year-old media broker at start-up media agency Electric Glue, has been using the service since early 2018.

“I heard about dabbl through a friend and I thought it might be worth investigating, because I want to get smarter with what I do with my money,” she says.

“I love the fact that I have something on my phone that can teach me about investing. I might have really enjoyed a bottle of beer in a restaurant or have ordered a nice top from Asos and I can take a picture of the label on the bottle or the clothing, see how well that company’s doing and I may then be able to buy shares in it. You can build up a mini-portfolio and track your progress.”

Moore’s initial investment goals are to raise money to fund the development of her own business idea, So-Me, a fashion commerce app. In the longer term she would like to raise enough money to put a deposit down on a property. She admits she’s not really thinking about retirement at the moment – “but talk to me again in 15 years”. She also says that she would now consider using other investment services.

Mark Ackred, dabbl founder and CEO, believes the concept can also be very valuable for the businesses in which “dabblers” invest, helping them to build brand loyalty and trust. “Businesses want their customers to be more involved in the business; and how much more involved could you be than if you were invested in that company?” he asks.

Investing via individual funds, perhaps with the assistance of an investment broker, may look like a more complex option, but that doesn’t have to be the case, says Long.

“You don’t have to be logging into your account every day and reading the Financial Times – you just have to choose something that you’re comfortable is suitable for your circumstances,” he explains. “It might be something simple, like an index tracker fund, or a FTSE, share or global equities tracker.”

One aspect of investment products and services that would definitely be welcome would be more simple and transparent fee structures. Besides an investment management charge – which is reason- ably easy to understand – investors using some services may also need to pay other fees, including administration charges, fees for use of online platforms to review a portfolio, entry and exit fees when working with a specific manager, additional transaction fees and a performance fee, plus the costs of consulting an IFA.

ICAEW’s report suggests that in future, with increased competition in this space, “investment managers will have to prove their quality in order to charge performance fees”.

It must be hoped that the straightforward fees used by services like Wealthify, Moneyfarm and Nutmeg will have a positive impact on the market if they become more popular.

Kelly believes the message about the potential benefits of using investment to save for retirement will get through to younger people who will want to use digital investment services. “Digital natives will be comfortable using the technology that will be needed to make this successful,” she says.

Pearce-Burke is also optimistic: she thinks the rise of user-friendly investment services will make it a genuinely mainstream proposition. “I think people will start to see investment as a more normal thing and we’ll be a lot more open to it as a nation,” she says. “Anyone with a steady career and a steady income – certainly anyone reading economia – should be considering investing in some form.

Tips rom the greatest investors

If you decide to take complete control over your own investments, you could try to emulate some of the most successful investors in history.

After a short career in investment during the early 1950s, Warren Buffett had amassed personal savings of about $174,000, the equivalent of around $1.57m today. He then launched a series of investment partnerships businesses. Using an investment philosophy based in large part on value investing – buying stocks in well-run companies for reasonable prices – and on passive investment in well-diversified index funds, Buffett has amassed a personal net worth thought to be around $90.2bn at the time of writing, making him the third richest person in the world.

His investment philosophy can be broken down into a few key principles: invest in businesses that you understand, that are well run, and that you want to be invested in for the long term. As he has said: “Our favourite holding period is forever.”

You might also want to consider the views of the British fund manager Terry Smith, whose Fundsmith fund, launched in late 2010, has delivered returns of about 309% over the past eight years and is now worth £17bn.

He recently told The Guardian that his strategy could be summed up as: “Buy good companies. Don’t overpay. Do nothing.” Companies he is invested in include Microsoft, Reckitt Benckiser and Domino’s Pizza. Interestingly, he does not usually invest in banks, insurance companies, chemical, heavy industry, construction, real estate, resource extraction or airlines.

Case study: Elisabeth Merrett

Elisabeth Merrett, 37, is a self-employed internal communications specialist, currently contracting for Lloyds Banking Group. Earlier this year she decided to move some money out of her bank accounts.

“I’d had an ISA with my bank for a very long time, I had quite poor returns – and I also felt it was a bit too easy to access,” she says. As someone who is self-employed and had not been saving into a pension since leaving the civil service, the need to save for retirement spurred her into action.

She decided to set up a stocks and shares ISA and a SIPP. Having weighed up the merits of a couple of potential providers she chose Hargreaves Lansdown, “because they had lots of research on their website that was really easy to read for a non- expert like me”.

“I always thought this was something that other people did – people who knew more about finance than me,” she says. “I want to learn a bit more about it, build up my understanding and then maybe I can make some more informed decisions. In hindsight, I wish I’d done this sooner.”