Magical Penny

How To Start Investing -A 21st Century Approach

by Magical Penny on June 16, 2010

When I was growing up I loved the Argos catalogue. If you missed out on this wondrous thing it’s a book of home and leisure products from a popular UK retailer and is currently in the homes of around two thirds of the UK households.

I don’t have one in my house at the moment but at the age of perhaps 9 or 10 it was revered as a bible.

It would not be unusual to find me lying on my bed eagerly flicking through the catalogue pages, reading every last description and staring at the pictures: Super-soaker water guns, digital watches. Remote control cars. You could even buy flying lessons…but alas the minimum age of 16 seemed eons away at that time. I could spend hours looking at all the cool toys and gadgets laid out on the pages.

Click to watch Magical Penny’s second ever video on how to read and understand investment prospectuses

Despite my obsession with Argos catalogues in my childhood I moved on from catalogue window shopping!

Little did I realise though that I would need to study a new type of catalogue with the same intensity as the Argos catalogues of my youth:

The Investment Prospectus!

Investment prospectuses is like a shopping catalogue for investors. They are useful because they give you some insight into ‘funds’ or ‘unit trusts’, the collective investments that pools money from many investors and invests it in variety of things.

Investing in Unit Trusts

For most people, when they think about stock market investing, they think about buying individual shares in popular companies. However there’s more to investing than that. In fact, as part of Magical Penny’s introduction to investing series I wrote a popular article ‘Five Reasons Not To Invest In Single Shares’. But if individual shares are not the way to go then what is? One answer is Unit Trusts (or mutual funds in the US and elsewhere) because they provide you with instant diversification, spreading your ‘eggs’ around in lots of different ‘baskets’.

Unit trusts make it easy to buy collections of lots of different investments like company stock, commodities (stuff -oil, wood, cocoa etc), bonds (company debt), cash or all of the above. You don’t actually own all these investments directly but instead a unit trust packages up all the different things into a single investment that you can simply buy a ‘unit’ of.

Click here for more info on Unit Trusts.

But don’t trust the marketing

If you watched Monday’s video, you’ll know that whilst there are many benefits to investing in unit trusts, the information presented in investment prospectuses selling the investments can be misleading.

But there is a solution to get closer to the truth and, for me, it revolutionised how I researched investments. It also made unit trusts much easier to understand and compare.

Fund Supermarkets!

A fund supermarket is a relatively modern invention that allows you to compare hundreds of different unit trusts from lots of different companies in one online site.

Think of it as like an Argos catalogue combined with a hundreds of other catalogues….oooh I just got chills!

Like in a real supermarket where you can pick up two different items and compare them next to one another, a fund supermarket allows you to directly compare different investments even if they are offered by different investment companies.

In the next few posts Magical Penny will be going into much more detail about fund supermarkets and showing you how to invest but I thought it worthwhile to at least introduce a solution to the problem of confusing and misleading investment prospectuses outlined in the video.

So consider yourself reassured!

There is a way to invest that’s easy to understand and it doesn’t take much time either. And I look forward to sharing with you how to do it! I hope you’ll continue on this journey of discovery into the world of investing.

You can subscribe for free by clicking here

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How To Read An Investment Prospectus

by Magical Penny on June 14, 2010

Magical Penny’s second ever video on how to read and understand investment prospectuses:

This video post will help you understand investment prospectuses: the marketing publications that investment companies send out to persuade you to invest your hard-earned cash in their investment products.

Here’s what you’ll find in the video -I hope you find it useful.

[0:37] – Beware of marketing. How to look beyond the charts and optimisitic forcasts of the future.
[1:20] – I show you some of the 20 investment prospectuses I read in preperation for the video!
[1:43] – Where you can get investment prospectuses for free: http://www.fundbrochures.co.uk/
[5:40] – Your first priority should be finding funds with low expense ratios and don’t pay initial fees.
[9:19] – Don’t pay exit fees either!
[12:45] – Other fees to look out for: including performance-based charges and admin fees.
[15:00] – What is gearing and why you should be aware of its effects.
[17:00] – Can investment funds be ‘above average’ over the long term and beat the market?

I’d love to hear your thoughts on the video. Do you prefer video or articles? Should they be shorter? Longer? What else do you want to learn about? Leave a comment and thank you for taking the time to watch the video, even if it was only for the first 5 minutes (but watch the end too for the fun picture…you’ve got to have a bit of fun after reading 20 perspectuses!).

Look out for future Magical Penny posts for how to begin investing. And subscribe for free.

Like this video? Then you’ll love my first video:

See the first video on the pros and cons of investing pretax and post tax by click here.

I also recommend two books in the video. You can learn about them here:

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Living For Today is Wrong

by Magical Penny on June 11, 2010

Warning: This is a more ‘stream of consciousness’ post today. As I continue to work behind the scenes on definitive posts for how to find good unit trusts and the best ways to invest I thought I’d share with you something that landed in my inbox a few days ago:

The email in question was one of Brian Kim’s “Motivational and Inspirational Thoughts” (MIT) emails. Some might scoff that I subcribe to these MITs but I honestly believe its important to be thinking about your personal development regularly.

You may think it gets repetitive reading “be the best you can be” type content day in day out, but you should try it. There’s something special about reading inspirational things on a regular basis. Even the most positive person can find such content uplifting and give them a boost to make today better than yesterday.

Reading postive ideas and messages, either in books or online is something I would recommend
(and naturally I feel the same is true for reading and learning about money management for helping you stay focused on amazing and life-affirming saving goals).

And so onto the email:

There are some people who buy really nice things, but don’t use them.

They’re saving them for some “special occasion.”

And should one arise, they rationalize and say they’ll save it for an even
better occasion.

In short, they never get to enjoy it.

Enjoy it.

Today.

Give yourself permission to enjoy.

There is no perfect day in the future.

There is only the perfect day of today.

Normally I find Brian’s emails inspirational and easy to agree with. But this one kept me thinking.

Am I saving my money (and the ‘nice things’ I could be buying) for a perfect day in the future that may never come? Should I be thinking more about today?

Whilst living and being present in the moment and focusing on today are worthy goals, this message troubled me as it could be used too easily to justify not saving for the future. And this is dangerous particularly because:

We don’t need money to enjoy today…but there’s always the possibility that we will need money to enjoy tomorrow.
We’re never going to be younger than we are today and we have almost limitless options and paths as we walk through life. Yet each passing day sees our options and possible paths deminish. It’s great to save for the future for this reason as it maintains our options, or at least limits the decline of those options.

The email may be right that there’s only a ‘perfect day of today’ but the more you control your spending today, the greater potential you have to transform your future. And considering the power of compounding this isn’t being melodramatic or overy inspirational -small but consistant long term saving today can has huge implications on your potential wealth in the future.

This topic may seem rather deep for Friday but I hope you take a moment to examine any prejudices or beliefs you may have about spending and saving patterns now and in the future. Maybe I’m off-base? How do you balance creating perfect todays with planned tomorrows?

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Will You Be Rich?

by Magical Penny on June 9, 2010

There a lot of debate about the power of positive thinking. Some, fans of books like ‘The Secret’, are strong advocates of the ‘think positive’ philosophy, stating that if you project your desires into the ether, the universe will manifest them.

Sounds a bit “new-age” to me.

However I do think there’s a lot of power in believing in yourself and actively examining how you see yourself.

Who are you?

Are you a ‘success’?
Are you ‘a work in progress’?
Are you the type of person who wants to leave a legacy?
Are you a ‘Saver’?
Are you a ‘Spender’?

How about ‘an investor’?

You may be daunted by the idea of being an investor but hopefully these 4 points will help you get prepared for the first step, to challenge your perceptions and begin your journey towards growing your pennies sustainably through the stock market.

Keep it Simple

Investing doesn’t have to be about filling your days watching the values of stocks going up and down or checking the news everyday.
You can get great returns from simply investing in broad diversified ‘funds’ or ‘unit trusts’ that own large parts of a market. A simple investment of a few of these unit trusts is not only easier to manage but can even lead to better returns over the long term as you don’t lose out to as many transaction fees compared with more ‘active’ traders. This is not to say you should ignore your investments but the message is that simple investing is easy to set up, manage and can even be more profitable over the long term.

Make it Concrete

There’s something truly magical about buying your first investment. Whilst reading about investing and learning the process is definitely worthwhile, it does not compare to actually becoming ‘an investor’.

It is a powerful feeling of making a commitment to your future and starting on the journey to grow your pennies more seriously -to make an investment that will one day turn dreams into reality.

If you are daunted by the idea of investing thousands of pounds into things that fluctuate in value I challenge you to start small and see how you feel. You may find it’s not as scary as you think, especially as you should only be investing with money you don’t ‘need’ so you are not forced to sell and lose money in the short term. Over the long term the likely increased value of your investment makes investing very worthwhile.

Control your Emotions

Whilst investing can certainly be thrilling, the best investing is completely emotionless. You don’t want to panic when investment valuations go down. In fact if you’re still in ‘buying’ mode as those of us in our 20s and 30s are, you should be happy when your investments go down as you can buy more at a lower price.

It’s only when you’re older than a falling market can be disastrous. But by then you should have made simple adjustments to less risky investments to avoid losing all your money.

For those of us in our 20s and 30s though, stock market risk is a non-issue as we’re not selling for decades yet.

Ignore the Stories

If you have friends who are also investing you’re bound to come across amazing stories of investment returns. Perhaps stories like:

“I doubled my money in a month”
“I lost thousands”
“You should invest in China”

You should almost always ignore stories about the stock market (apart from if you read about them on Magical Penny of course!). The stories may be based on half-truths or exaggerations. And stock-tips are almost always purely fiction or the product of a very limited interpretation. Simply stick with a strategy you know and understand (and you will know and understand different strategies very soon!) and keep investing slowly but surely.

It may be lot to take in but these 4 points should help you be an investor yet!

If you believe in yourself and your bright future that is.

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What is a Unit Trust? Unit Trusts Explained

by Magical Penny on June 7, 2010

UPDATE: You don’t want to miss this post:

As part of Magical Penny‘s introduction to investing series I wrote a popular article ‘Five Reasons Not To Invest In Single Shares’. But if individual shares are not the way to go then what is? One answer is Unit Trusts (or mutual funds in the US and elsewhere)

A Unit Trust is a type of collective investment scheme that pools money from many investors and invests it in variety of things. Rather than buying shares in companies directly you can buy ‘units’ of a unit trust. That unit trust can then use your money to buy dozens if not hundreds of different company shares.

What’s the fuss about?

It’s the easiest way to begin investing in the stock market for your long term future, and potentially the cheapest too. And if you are a member of a company pension scheme as I recommended in my recent video, then you’re likely to own part of a unit trust already!

Unit Trusts are great because they are easy to set up and offer instant diversification meaning your risk of losing all your money is massively reduced – unit trusts often holds dozens if not hundreds of different company shares so if one company goes out of business you don’t lose hardly any money but you benefit from all the other companies growth. Unit trusts can also be cheaper to buy than individual stocks as you don’t have to pay broker fees directly. Technically the unit trust is still paying broker fees but the economies of scale mean the fees are much smaller than if you were simply buying individual shares yourself through a broker.

A broker is the middleman who match up buyers and sellers and does all the admin for you when you want to own individual company stock yourself.

4 Things to Consider before Investing a Penny

Whilst unit trusts are great for most people there are several things to look out for if you’re looking to buy your first ever unit trust:

1) Are you really ready to invest?

I couldn’t help myself! Magical Penny has spent the first 4 months of its life making sure you’re prepared to invest –have you enough cash for emergencies, opportunities and even fun, and are you investing with money you don’t need for several years? If that’s two “Yes” answers that’s great! Read on!

2) Ignore all “Load” funds

When you begin reading about different investment trusts you’ll notice there are some trusts that charge you a certain percentage up front. These are referred to ‘load funds’ because they ‘load’ the fee at the front –making you pay a percentage of your investment straight away for the privilege of investing in that particular trust. (Also look out for unit trusts that charge you an exit fee too-there’s less common but still out there).

My experiences

When I first started investing I thought the ‘load’ fee was simply part of the investing process. I paid something like 2% for one my first investments. It seems small but there’s no need to pay any load fee as there are plenty of ‘no-load’ funds that perform just as well.

In fact, no-load funds tend to give you a better return over the long term because you have not given up part of your investment straight away. Don’t be tempted, even if you find what you think is a good fund with a ‘load’. Over the long-term ‘no-load’ funds are more likely to give you a better return as you have more of your money compounding over time instead of ending up in someone elses’s pocket.

3) Watch out for high expense ratios

There are thousands of unit trusts so you’re likely to be overwhelmed with choice when you start looking. One of your first criteria to look out for is the ‘expense ratio’. This is the fee that unit trusts take out of the pool of invested money to service their own costs –to pay the people that run the fund and for administration. This is different to the ‘load’ because it’s the annual cost of the fund rather than the one off ‘load’ fee -you don’t have to pay these annual fees to the unit trust -they just take the money out of the pool of money in the trust.

1% is a big deal

The higher the fee the better the trust has to peform to get the same ‘return’. For example a 2% expense ratio fund would have to have a 7% return to end up with real 5% return. But a 1% expense ratio fund only has to reach 6% to end up with the same 5% return. An important thing to remember is that when it comes to investing, 1% is a massive number because of the power of compound interest over time.

Costs can vary greatly although most managed unit trusts tend to have an expense ratio of 1.5%. There are some funds that charge even higher amounts but don’t be tempted to invest in them, even if they have enjoyed huge returns over the last few years. When it comes to investing you can only be sure of one thing: the expense ratio. Keep it as low as you can, preferably below 1%. I’ll show what to look out for specifically when we look into some fund prospectuses in future posts so make sure you subscribe and don’t miss a post!

4) Make it automatic and start straight away

Most funds have a minimum investment amount that you must invest if you are buy units in a unit trust. Sometimes it’s £250 but sometimes it’s a £1000 minimum. This can be a pretty daunting amount of money, especially if you’ve never invested before!

It’s these kind of minimums that lead some people to think that investing is only for the rich. Thankfully there’s a way that almost everyone can start investing straight away –automatic monthly transfers.

If you agree to invest a little every month (typically just £50 by standing order or direct debit), most unit trust providers are happy to waive the minimum investment amount.

This is what I did to allow me to begin investing as soon as possible and gave me the knowledge and confidence to continue to grow my pennies over the long term.

If you take on board these 4 points you’ll be in great position to take advantage of the stock market to grow your pennies!

Did you find the article helpful? Sign up for more free information from Magical Penny, the award winning personal finance website. Click here!

On Wednesday we’ll look more specifically how to choose a unit trust that’s right for you so I hope you found this useful as a primer to unit trusts. Have a good Monday and share with your friends so they can start learning how to grow their pennies over the long term too! 🙂

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The Most Popular Personal Finance Sites

by Magical Penny on June 4, 2010

You may have found Magical Penny by accident, or you may be a ‘real-life’ friend along for the ride.

Regardless, I appreciate you reading the site, especially now as we are about to begin the real journey that Magical Penny was founded for.

We’re going to enter the world of investing. And I’m incredbily excited to share with you some of the best ways of going about doing something that many think is scary or really complicated.

The fun begins on Monday but in the meantime you definitely can’t go far wrong spending a few minutes this weekend having a browse through some of the most popular and best personal finance sites on the internet, compiled in this brilliant list:

http://www.wisebread.com/top-100-most-popular-personal-finance-blogs/

If you’re still in the mood for reading, Magical Penny was featured in the June 4, 2010 Edition #144 of the Carnival of Financial Planning.

The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. It is focussed on efficient and sustainable personal financial planning practices that can lead to lifetime financial security.

Highly recommended reading -just click here.

Have a great weekend and be sure to come back on Monday to begin learning about how to actually start investing!

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Two Powerful Ways To Stay on Track

by Magical Penny on June 2, 2010

Our friends influence us more than we may think. Not just for encouraging extra rounds at the bar but in the little things like our lunch choices and how we spend our evenings.

Many writings on the subject of money are filled with tips and hints:

“why not bring your lunch from home?”
“buy a used car”
Even “How about delaying your haircuts?”

However it’s not just a matter of doing these things yourself with iron-willed willpower, but making them fit into your own life alongside your social network.

For example if all your friends leave the office to go for lunch then you’ll find bringing your own lunch everyday less appealing. Similarly if there’s a ‘new car’ culture in your workplace, driving that old used car might lead you feeling like you’re missing out.

If you’re reading Magical Penny you are most likely wanting to reach some financial goals that you’ve set for yourself. You can’t always simply get new friends (nor might you want to) but here are two ideas that I find helpful to make sure I am still moving towards my goals.

1) Get competitive

Not everyone enjoys being competitive but it certainly is a good motivator to stay on track financially. One of my favourite personal finance writers, Ramit, often talks about “dominating your finances” and I love the energy associated with this attitude.

*You* have to make a decision to keep saving regularly and not spend all your earnings each month.
*You* have to decide to be proactive and earn about investing instead of watching TV when you come home from work.
You can *dominate* your finances whilst your friends simply ‘get by’.

You have to be careful not to compare yourself too much to others but I’ve certainly found a bit of healthy competition with friends a great way to stay on track with savings goals…(including with a few particular regular blog commenters around here… 🙂 )

2) Accept you’re sacrificing something that means less to you than your goal

If you want to save for a deposit on a house AND find money to invest regularly each month AND go on adventurous holidays AND not live in poverty for the rest of the year, then you need to be making conscious spending choices. You need to choose between going out each weekend, or buying a new gadget when you feel like it and the choice to work towards your goals.

You may have friends without such demanding financial goals and they might seem to have more money to spend on every-day ‘stuff’ but you should embrace the subtle satisfaction of knowing you are choosing to save and then spend money on more meaningful medium and long term goals.

This post was inspired by my awesome friends who when told I was considering a new laptop computer asked me if it was life-style inflation and if I had fully considered my options! You guys rock.

Do you find yourself going against the grain amongst your friends when it comes to saving and spending? How do you stay on track? Share an idea in the comments!

Will a high salary make you happy?

Also, Magical Penny is Editors Pick for this week’s carnival of personal finance! http://bit.ly/b2PH68

The blog was also featured in the carnival of financial planning

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Reflections: Opera, Middle-Age, and Planting the Seed

by Magical Penny on May 31, 2010

Celebrating a birthday is always, for me, a time to reflect.

A time to think about what I’ve been up to over the last year.

What I want to achieve for the year ahead; things I want to do before I’m 30 (now 6 years away!); and what I want to achieve before I die.

Thinking back over the the last year, it certainly has been a blast.

As a market researcher I’ve learnt a lot and have been discovering what direction I want to move towards in my career.
As a singer I’ve continued to meet some amazing people, experienced some wonderful moments, and even went out of my comfort zone to play a part in an opera.
And of course there’s Magical Penny. I can hardly reflect too much on it as it is only the blog’s 4 month anniversary but it’s had a profound effect on my life already:

Firstly, thank you for reading this and sharing in the journey. I sincerely hope that the words I publish here become something more: I hope the words have been transformed to actual pennies in your piggy-bank (and soon, an investing account!).

Secondly, if you don’t already have a blog I highly recommend it (and I’m happy to give you any tips on that front too!).

Despite the achievements and the experiences ticked-off on the score-card of life, every passing year seems to go by faster.

We’ll be 30 soon, then 40.

And if we’re lucky we’ll get to the dizzying heights of middle-age and beyond!

As each birthday comes and goes I feel glad that I started saving for retirement.

This birthday has been no different.

It made me think back to when I was a student, when I was first reading about the need to get started early. I didn’t have much money at the time but I understood in that moment exactly what I needed to do even if I didn’t know precisely how to actually get there: I needed to plant a money seed as soon as I was able, and give it time to grow.

Had I not come across those early personal finance blogs I could have quite easily continued into a ‘normal’ life of spending exactly what you earn (or more) and not start thinking about putting something away for retirement until I started finding my first few grey hairs around my temple.

I’ve never been a wreckless spender but I could easily have missed out on the profound message of living like no-one else (below your means) so later you can live like no-one else. Thankfully, learning about investing and beginning with small but regular saving has set me on a path that I’m happy with.

Of course, none of my happy reflections over the past year have anything to do with my bank account balance.

It never should.

The trick is to make your life shape your bank account balance, and not to let your bank account balance shape your life.

It’s hard to master and I’m still finding that balance but it’s good to reflect on where you’re at once in a while.

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Should I Invest Using Pre-Tax or Post-Tax Money?

by Magical Penny on May 28, 2010

Today’s an exciting day for Magical Penny as it’s the launch of the very first Magical Penny Video!

Pre Tax and Post Tax Investing -Which is better?

In the video I outline the pros and cons of saving using Pre-tax and Post-tax money.

Pre-tax savings

Pre-tax savings means saving in a pension or 401k and involves your money being fed directly from your employer into a savings vehicle without paying any income tax -you pay tax only when you come to take it out once you retire according to tax tools such as a tax estimator.

Post-tax savings

Post-tax savings means saving with your money that you ‘bring home’ -the money you find in your paycheck. If you then invest that in a savings vehicle like an ISA (or a Roth IRA if you’re in the US) then you get to keep all the gains and don’t have to pay any more tax.

My Conclusion?

…you’ll have to watch the video for the details but suffice to say it’s a typical personal finance blogger answer I’m afraid: You need to do a bit of both!

Your Thoughts?

From my perspective the video was a fun experiment but what do you think? Do you think I should do more videos or stick to writing? I’d love to hear from you -both on your perspective on pre and post-tax saving, and on what you think of the video format!

Production Notes

Yes I know I look a bit squashed in the video -the mp4 conversion to a format compatible with Windows Movie-Maker was not pretty (currently my only editing tool) -but for my first ever attempt at making a video I’m pretty proud of the result.

Have a great weekend all -I certainly intend to as I celebrate my 24th birthday 🙂

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How to Rock Your Finances Whilst Sleeping

by Magical Penny on May 26, 2010

Inevitably, from time to time, life gets busy or you have days where you feel unwell (or even both!).
Such days may send you off-track,and mean you risk missing your goals or not following through with your intentions.

Your finances can also come under-fire occasionally:

There are times when you are too tired to cook so you order a takeaway.
There are times when a bike puncture means you opt for a taxi.
And there are times when you simply spend a bit too much money in starbucks!

Life doesn’t always go to plan so neither does a budget (!) but there is a solution of sorts:

Automation!

If you do this then…

You still may have months where you spend more than you intend but you’ll always have that automated transfer into your savings account.
You may not feel up for saving money but you know you’ve automatically invested a portion of your earnings into the market for the future.
You might not have the energy to research the best places to grow your pennies but you know you made some educated choices at the start of the year and now you don’t have to worry about the ups and downs of the market day to day. You can concentrate on getting some rest!

In case you’ve not figured this out yet, these examples are all related to me over the last couple of days.

I’m sure, however, you can all relate to them and I hope that, if you haven’t already, you decide to automate some positive financial choices so you reach your goals (hopefully) regardless of your every-day situation.

Happy Wednesday! 🙂

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