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The Advice Gap – what am I missing?

Written by Lucy Smith & Tom Miller, as part of The Professionals Network by Charles Stanley.

Young couple with bills and credit cards, calculation of income expenditure

by
The Professionals Network

in Features

16.11.2020

I am now getting to that age where my friends are beginning to ask me for advice on what they should do with their money. Everyone is thinking about it, but unsure of where or how to start.

Let’s take my friend Freddie. He is 29 and has just purchased his first property with his girlfriend, Jess. After they have paid their monthly mortgage payment, cross-fit membership, had a weekend away to Berlin and eaten their way around London’s vegan food markets, they have found themselves with some spare cash at the end of each month.

However, prior to investing there are a few crucial things that they must consider. Firstly, Jess and Freddie must make sure that they are contributing to their pension through their employer. Secondly, they should ensure that they have paid off any high-interest consumer debt such as credit cards and pay day loans. Finally, Jess and Freddie should have 3-6 months of emergency savings in their bank account. Coronavirus has highlighted the importance of this more than ever. During such unprecedented times of economic uncertainty, the need to have a rainy-day fund for when things might get tough has become apparent to many of us.

Now that Freddie and Jess have completed these steps, they are ready to consider investing in their future. Outside of using a cash ISA to save towards their first home, they don’t have any real financial experience and limited knowledge of what is available to them. They both have a pension with their current employers, contributing the legal minimum without a clue as to how or where their pension is invested. I find that this is a common theme among young people.

Essentially, people like Freddie and Jess are looking for some advice - someone to tell them what they should consider and the best options for their money in the long-term. Millennials are predominantly seen to embrace the “live now” mentality and to not be concerned about securing their financial future; but, from my conversation with Freddie & Jess, this is far from the truth. They just don’t know how to go about it.

Now, the biggest issue for millennials is what I and many of my peers call the “Advice Gap”. Essentially, Freddie and Jess are both in a position where they have some disposable income. However, they need advice on how best to use or invest this, but can’t afford a financial adviser at this time. And they are not alone!

When you think about stock market investments you probably think of films such as “The Wolf of Wall Street”, and the thousands upon thousands that you need to have sitting in your bank account. For many young people, this can seem completely unattainable and, even if you were to consider investing in the stock market, you wouldn’t have a clue where to start. Surrounded by reality TV and Instagram ads we are now, more than ever, aware of what money can buy. Investing is something that seems so familiar and yet we know so little about it. This article aims to provide some guidance on where to start with your investment journey and why you should start considering your options now.

So why is it important to start early?

Saving money can sometimes seem impossible for a young professional, especially when you consider the cost of living. But, with a few small tweaks and saving little and often, you can very quickly build up enough cash to start investing. For example, say you spend £5 on a coffee run each day, that’s £25 per week or £110 a month, adding up to a whopping £1,300 per year. When you break it down and consider the cost of these small purchases, it can really add up.

£5 on coffee a day would cost around £1300 a year

Now let’s consider the difference between investing these savings in the stock market in comparison to a savings account. In the middle of a global pandemic, the bank may seem like the safest bet on where to place your money. However, due to the current economic climate, the Bank of England has lowered the base rate to an all-time low of 0.1% in an attempt to stimulate the economy. There will always be winners and losers in these scenarios. However, in this particular case, it appears that those who are saving are likely to be the losers. Although this may mean that certain financial goals can be achieved, chances are that your savings in the bank are not doing well, particularly when you consider how inflation results in the erosion of cash savings over time. The concept of making your money work harder has never been more relevant.

Historically, the stock market has on average been on an upwards trajectory. This makes it an attractive way to generate wealth in the long-term. We must consider that typically asset performance outpaces the interest rates received from cash savings. For example, if you were to have put £100 into a fixed-term savings account in 1999, this would have grown to £194 by 30th June 2020. Whereas, this same £100 invested into UK shares over the same time period would have been worth £432 – that’s over double the amount.* However, the downside of this is that you must always consider that investing money in assets such as equities puts your capital at risk in a way that cash does not. This demonstrates the typical risk-reward trade-off that comes with investing, where the higher the reward, the greater the risk you must be willing to take.

Where do I go from here?

So if you, like Freddie and Jess, think you are ready to take the plunge with investing what are the next steps? Firstly, you need to consider what your investment time horizon - are you looking to invest for 5 to 10 plus years? Please be aware that any time frame below 5 years may be considered as unsuitable for investing in the stock market due to volatility.

Another consideration for both Freddie and Jess was how much risk to take on with their current pensions. When it comes to longer term savings and investments (such as pensions), if you are in your late 20s it is likely that this will remain invested for around 30 years. The current legislation does not allow people born after 1992 to access their pension before the age of 58. Therefore, in this scenario, Freddie and Jess may consider being more adventurous in their risk outlook.

The final consideration is what investments are suitable for your goals. As we mentioned earlier, you should always consider what your portfolio can withstand. For example, if you were invested in equities during the recent market crash where the FTSE 100 (the main UK stock market which tracks the top 100 UK companies) fell 30.73% from 20th February to 19th March due to Coronavirus, how much would this have impacted you?

Your next step from here is to find a reliable platform to hold these investments on. Charles Stanley offers a range of products including Charles Stanley Direct (a non-advised, online platform for you to hold your investments), the Personal Portfolio Service (an advised service where your investments are managed for you starting at a minimum of £20,000) and financial planning. Then, using our Do’s and Don’ts, you just need to find the investment product that is right for you. 

Our tips for Freddie & Jess

DON’T focus on the short term – stock markets can be extremely volatile and constantly fluctuate, so trying to make small gains over the short term can be a risky strategy. Investing should be a long-term commitment.

DON’T forget about the risks – investing brings the opportunity to grow your capital at a rate greater than the bank, however, it is important to remember that investing also comes with greater risk and you may get back less than originally invested.  

DON’T put all your eggs in one basket – it is important to diversify your portfolio. This reduces the risk and can even out any potential losses which may be incurred. This is where research becomes important – websites such as Morning Star offer a detailed review of various investments from a professional point of view which can be extremely beneficial if you have no idea where to start.

Tips to do and don't

DO be realistic – it’s important you set yourself realistic targets, finding a balance between enjoying your money now and putting some away for the future. A good place to start is to consider your objectives, for example, do you want to grow your capital over the long-term or are you looking to use this pot of money to contribute towards a deposit for a house in a few years?

DO find out how much both you and your employer currently contribute to your workplace pension and what this is invested in. Could you afford to contribute more?

DO consider the impact of fees on your portfolio – this also impacts how much you are looking to invest and the performance. A fund may have a good track history but if the fees are high, is it worth it for what you are looking for?

We hope that this article will help you kickstart your investment journey and wish you all the best!

 

Written by Lucy Smith & Tom Miller. Tom and Lucy​ are part of The Professionals Network by Charles Stanley; designed to connect and educate the next generation of investors. Read more articles from our network contributors and find out how you can be part of the network.

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Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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