Written by Demetrius Vouyiouklis
In late August 2011 interest rates on savings are derisory – you lose around 2% versus inflation if you have your money in a savings account at the bank. Then, to add insult to injury, except for interest received tax free in a Cash ISA, you pay tax on savings interest. The UK £ has dropped considerably against major currencies (Euro, US $) meaning assets held in the UK currency have lost comparative value. At the same time a lot of ‘traditional’ types of investments, e.g. property, appear at the very least unwise, with prices static and/or dropping.
I took early retirement three years ago and have a number of hours free every day. During that time I can entertain myself (as my wife, Karen Bryan editor of Help Me To Save, works from home), which is easier in good weather since I enjoy outdoor activities. But I still feel the need to be productive and would enjoy making some extra money. However, the idea of time commitment does not appeal and my local part-time job market is dire.
Ideally, I’d like to do something that requires some thinking, when it suits me, without travelling to work and preferably on my computer at home. At the same time, I have some savings on deposit in the bank, that are at best losing value. I don’t particularly wish to gamble with my money, but may risk some of it to keep myself busy in the manner I’d prefer. And hey, who knows, if I invest in shares I should learn something about the way the financial markets work and/or make some money.
I intend to do a fair bit of research, follow some rules and hope that I am lucky/create my own luck. I am not desperate for great gains but do believe that as life is a bit of a gamble anyway, why not take it that bit further and test the UK share market, which seems somewhat depressed at present. Could the only way be up, or will I lose my shirt?
I hope I can use experienced advice, apparently abundant online, without learning the expensive way, i.e. through losing money. However, I also appreciate that sometimes markets are unpredictable and despite my best efforts I may lose most or all my money. That’s why I will not invest what I cannot afford to lose, in other words I will use funds that are left over after I’ve covered our essential spending. In this regard, if I do go ahead, I will use money that someone else may have spent on a hobby as part of their travel and leisure budget.
I am now looking at two brokerage firms, TD Waterhouse and interactive investor, who provide a standard execution service for a fee. With this, I can invest online or by phone in UK equities, Gilts, Bonds and Unit Trusts. My shares will be held electronically and my trades automatically settled with funds either being credited or deducted from my account. Importantly, the firms also offer a ‘fantasy portfolio’ through which I can test my ideas before I’m ready to part with cash.
One of my first considerations is how much to invest, that is, what’s the total I am prepared to risk. Dealing and other related costs also mean that there’s no point in buying/selling a few shares only at a time. Ideally, as in order to make a profit I will have to buy and sell an asset (2x dealing fees), the profit should be much higher than the dealing cost. In addition, in order to dilute my risks, I should purchase more than one type of share, and in reasonable amounts to make trades worthwhile. So, I’m currently trying to figure out how many share types to buy and how much money to allocate per share type, in order to work out my necessary minimal total exposure.
I am now looking at shares, their historic charts and doing some reading in UK finance in general. I will start with a fantasy portfolio to reflect what I can afford and how I’d like to act in real share dealing. If things look promising I may venture into real purchases of shares.
This article was included in the Carnival of Financial Planning #201 September 9 2011.
Update 30 August 2011 – I’ve purchased my fantasy shares.
Update 17 September 2011 – I’ve written my interim report on my fantasy portfolio experiment.
Update 26 October 2011 – I’ve “sold” my shares and written my final report on my fantasy portfolio.
I will only invest money in share trading that I can afford to lose, as I am aware that share values can go up and down, there are fees/charges when you buy and sell shares and it’s even possible to lose the capital invested. You may wish to consult an independent financial advisor before investing in shares.