can’t use a credit card to buy investment products over the phone, via the Internet or in other circumstances where you can’t send a cheque. Some of the reasons lie in the complexity of consumer credit legislation. Another factor is that financial companies only want you to invest what you can afford, although unauthorised, illegal and probably fraudulent offshore investment firms may try to sucker you into schemes by telling you to use your credit card.
But the most important reason you shouldn’t borrow to invest or save is that doing so only makes financial sense if the return is going to be higher than the interest rate charged. Paying 29.9 per cent annual interest – and that’s by no means the top credit card rate – is pointless unless you can be very sure that your investment will grow even faster and that your original capital will be safe. Both now and in all of history, no such investments exist.
And note that even if you could borrow at 0 per cent annual interest, you’d still have to be sure of getting your money back with one of those rare investments that can’t fall, in order to be better off.
Investors build up future funds
Investors are people who are prepared to go the extra mile to try to ensure that their wealth goes the extra thousands, tens of thousands or even more. Investors want control over their money but are ready to take a risk provided that they’re in charge and know the odds. They want their money to work hard for them – as hard as they worked to get the money.
You don’t need an MBA, a posh old-school tie or stacks of money. However, know that although you can sleepwalk into just saving your cash, you must be wide awake to be an investor.
As a pure saver, you really don’t have to know what you’re doing. You can just stash your cash under the bed, for example. As an investor, you must know what you’re doing and have the self-discipline to follow your strategy, even if the strategy is doing nothing, buying and forgetting, or benign neglect.
So are you an investor? Check out these attributes to find out:
✔ You have spare cash.
✔ You have an emergency fund for the day the roof falls down or the car collapses.
✔ You want more than the bank or building society offers.
✔ You think about your money-making strategy and tactics.
✔ You can face up to bad days (and there’ll always be some) on investment markets without worry.
✔ You’re ready to swap certitude for a bigger potential reward.
✔ You can afford to lock away your spare cash for five years at the very least.
✔ You understand what you’re doing with your money.
✔ You’re prepared to lose money occasionally – knowing it’s an occupational hazard.
✔ You’re ready to invest your time into growing your fortune.
All these attributes belong to an investor.
Working out where you fit
So, what’s your bottom-line personality type when it comes to money?
✔ You decided you’re an investor. Congratulations! You’re ready to embark on the road to growing your money. It won’t be easy. You may face stiff climbs, vertiginous falls, rocky surfaces, long deviations and dead ends. But give it enough work and time, and I promise that investing will work out.
✔ You didn’t qualify as an investor. You got as far as a saver and no further. Or you’re really stuck as a spender. You’re wishing you’d spent the price of this book on something else or stuck it in your savings account, where at the current virtually invisible savings rates it’ll double in about 100 years. Well, don’t regret your purchase or vow to send this book off for recycling, or try to recoup some of the price by selling it in a car boot sale. Stick with it. The very fact that you bought this book shows you’re ready to move on to investing when you’re financially and psychologically ready.
And even if you decide you never want to buy a share, sell a bond, invest in a unit trust or check on foreign exchange rates, this book is still for you. Why? Because you’re almost certainly an investor already. (The following section tells you how, if I’ve piqued your curiosity.)
Your financial fate already depends on the ups and downs of the stocks and shares markets. Few people can escape this fact, and every day the number of people who can ignore the investment world diminishes. You may be an unconscious investor or even an unwilling one, but there’s no running away from it; you’re already an investor.
Investing through your pension fund
The biggest amount of investment money you’re likely to have is the value of your pension fund. And whether you pay into it yourself, rely on your employer or build it up via a partnership with your employer, it all rides on investment markets.
Just to give you an idea of how much you may have, suppose that you earn £25,000 a year and put 10 per cent of your earnings each month into a pension fund that grows at a 7 per cent average per year. Here’s what your fund is worth over the course of 45 years (I’ve ignored tax relief on pension contributions, future wage rises, inflation, and fund and pension management charges to keep this example simple):
That’s serious money! And it all started with a first monthly payment of just £208! Of course, the assumptions I make are foolish. No one continues on a flat salary for 45 years – some see earnings soar and others stop work. And although the annual growth rate I’ve used is an average based on the past, whatever happens in the future, it won’t be smooth!
Most people haven’t a clue that they have the potential for anything like the preceding example over a working lifetime. But even if you’re aware of what you could achieve, I bet you didn’t know that you have a good chance of taking some investment control over that sum. Even if you don’t want to, at the very least you should be able to check up on what the pension fund managers are doing with your money. Understanding what other people are doing with your money can help you increase your own pension fund in good markets and prevent it from going down when the investment world turns sour.
Note that your pension plan isn’t the only area where you may be an unwitting stocks and shares investor. Endowment mortgages and other investment-linked insurance schemes also revolve around stocks and shares.
Investing in your employer
Millions of people are potential and actual investors in the company they work for. Most big stock-market-quoted companies, like British Airways or Wal-Mart’s UK offshoot Asda, offer employees option plans that give workers the chance to acquire a stake in the firm. To acquire that stake, workers buy shares, also known as equities, which I explain in the section ‘
