Many of us set ourselves New Year Resolutions. And equally, many of us are very poor at keeping to those resolutions. Going to the gym, losing weight, boozing less, training for a half-marathon, learning a foreign language — the spirit is willing, but the flesh is weak.
Fewer people set themselves financial resolutions. And ever fewer set investment resolutions. But plenty of people ought to — especially the latter, those investment resolutions.
Because again and again, I run into people who openly tell me that they know that they ought to be doing something with their investments, but somehow never quite get around to it.
Yet ironically, many of those investment resolutions are actually easier to keep than those wistful dreams of losing weight, getting fit, learning a language or training for a half-marathon.
And that’s because they don’t require sustained effort over a long period. You don’t have to get up at 5am to get to the gym, and you can eat and drink what you like.
Let’s take a look.
Pick up some instant diversification
Investment trusts are quoted equity vehicles — shares, in other words — which, loosely speaking, invest in other quoted companies. Some aim for capital growth, some aim to deliver a steady income, some aim to do a bit of both, and some aim to invest in particular overseas regions — Asia Pacific, say, or North America.
The venerable City of London Investment Trust, for instance, is an income-focused trust, holding among its top-ten largest investments Shell, AstraZeneca, British American Tobacco, Unilever, and HSBC. It dates back to 1891, and at today’s share price yields 4.7%.
Generally speaking, investment trusts’ charges are very reasonable, and lower than those charged by open-ended investment funds. I hold quite a few.
Spread your wings overseas
The UK’s share of the world’s total equity market is tiny — under 5%, last time I looked. Yet many investors stick rigidly to a focus on UK shares only. Granted, a lot of the FTSE 100 have high levels of overseas earnings — think Shell, HSBC, GSK, Rio Tinto for instance — but that’s not quite the same thing.
Not least because many industries simply aren’t represented on the London Stock Exchange, meaning that London-focused investors can’t gain exposure to them. Granted, you could buy shares in companies such as Boeing, Mercedes-Benz, and Nestlé directly — most UK brokerages make it fairly easy to buy foreign shares — but the tax situation can get a bit messy.
An easier option: buy an investment trust specialising in overseas companies. Either overseas companies anywhere, or overseas companies located in particular regions, or particular industries. No tax complications, and in one share you’ll often get exposure to 50–100 companies.
Invest through a SIPP
Finally, not a resolution regarding what to buy, but a resolution regarding where to hold those investments.
Many investors invest via ordinary brokerage accounts, either from one of the UK’s stockbroking majors, or from one of the crop of — often foreign-owned — ‘challenger’ brokers competing in the ultra-low commission fee segment of the market.
That’s fine for novice investors, but for investors who are tax-resident in the UK, there is also the option of ISAs and SIPPs as a tax-advantaged form of brokerage account.
With ISAs, you don’t pay income tax or capital gains tax on investments made through the ISA account, saving you not just money, but also spent on tracking your investments and calculating the applicable taxes. And with SIPPs — which are a pension product — you get tax relief on contributions made (but not income drawn).
Now, ISAs are well known, thanks to the ISA savings accounts offered by the major UK banks and building societies. But SIPPs as a route for investing and buying shares, less so. And in fact, not every broker even offers SIPPs: ‘challenger’ brokers often don’t.
Yet the tax advantages are very evident: under current UK tax law, you get tax relief at your highest marginal rate. So, simply put, every time you invest money in the SIPP, you get a dollop of ‘free cash’ — the tax relief — landing in the account about six weeks later, available for investing. Put £1,000 in, and you’ll get £250. (In other words, 20% of £1,250.)
Set up a direct debit, let the money flow in — and when you’re ready, buy shares with a sum of money that’s 25% greater than the amount you’ve subscribed, courtesy of HM Treasury. Granted, it’s retirement savings, and so not available until close to retirement. But it’s still a fairly effortless way of building a nest egg.
What’s not to like?
