Dr James, 1m 43s:

I've heard people explain investing in lots of different ways, but actually, and if you ask me, people overly complicate it a lot of the time. And that's why today I'm going to break investing down into four simple steps. Whether you're a beginner, an intermediate, or an expert, I promise you probably never thought about it in this way, and there's going to be little bits of wisdom that you can pull out. Looking forward to this one. As ever, you can claim your CPD for this episode within the official Dentists Who Invest Smart Money Members Club. Smart Money Members Club also includes multiple mini courses and webinar series on finance for dentists, including how to become as tax efficient as possible, as well as understanding investing. All of this content counts as verifiable CPD, and you can download your certificates there and then upon completion of each lesson. In addition to this, we also include a whopping 10% discount on your dental indemnity and 5% discount on lab bills for dental principals, amongst other perks and discounts for members. Please use the link in the description to claim your verifiable CPD for this episode. Why do people overcomplicate investing? I think it happens a lot. And I think I think that uh social media has a big role to play in that, especially if you spend a lot of time on Twitter and X where people post charts and everything along those lines. And as someone who's been that style of investor and kind of saw the light a little bit and come back to the more steady-eddy stuff, I can definitely see say I've seen both sides of the fence. Having said that, I'm a little bit more open to those more faster styles than maybe a lot of people that are out there. Both have their place and both have their merits. But if you ask me, you've got to walk before you can run. And maybe that's when I see people run afoul of the whole investing side of things a lot more than they should do. What do I mean by that? Understand the basics, which by the way are amazing strategies that will people make people millionaires with time and probably beat 95% of what's out there. In fact, you know what? I'm gonna say 99% of what's out there versus people's standard investing portfolios. Even if you do the very steady eddy index funds uh linked investing strategies that are out there, you will still beat the vast majority of people. It is crazy trading. Uh, whenever you start to go down that route, really it's like 0.0001% that you're better than, providing you can master it, of course. But anyway, let's revert back to what I was saying just a second ago. Let's keep things simple where we can because the simpler the better. You only really need to know four things in order to set up an investment portfolio. This is the most eloquent I've ever seen anybody articulate investing before, and it's not my concept, it's not my idea, by the way. I have put my own flavor on it with time, but like I was saying a second ago, I can't I can't take all the credit. I really, really, really can't, but I definitely have never seen this articulate more beautifully. Here's the four things you need to know, and here's the order that you need to know them in as well. I'm gonna cover them high level, then we're gonna get into the nitty-gritty and the specifics of each one so that everybody can make these decisions and make the best investment portfolio they can. First thing you need to know is your asset, what blend of assets are going to take you to where you need to go and allow you to achieve your goals, as in financial freedom. That is the whole point and principle behind investing. Second thing you need to know is the fund, as in how are those assets packaged together. How can we make that as efficient as possible in terms of fees and returns? Third thing you need to know is your account. Will it be a pension? Will it be an ISA? Will it be a GIA? Will it be something else? You gotta decide that. Then the fourth thing you need to know is the platform. And actually, when it comes to deciding the platform, look beyond the ones that are out there that you see quoted an awful lot on social media because those are the ones that tend to have a little bit more fees. You pay for the brand, if you ask me. Now you'll notice that I actually said at the very beginning that you gotta under you gotta make the decisions in that order. Notice what you decide first. You actually decide on your asset first. You decide on your asset before everything else. And I feel a lot of people do this the wrong way around. They'll pick a platform because they'll be like, oh, this platform sounds cool. I've heard someone say good things about this, and then they'll try to find the assets that they like in that platform. Actually, your platform selection should be determined by your asset first of all. And your asset is mainly determined by your time frame as in when you need the money. Because if you need a certain asset that will take you uh towards your goal, that that will that will take you the fastest towards your goal in the most efficient way, then actually, why are we trying to pick a platform and then just shoehorn in the best asset that we can? Why are we picking from the selection of assets that are on a platform that we think is cool versus selecting the asset first, which is gonna be the greatest determinant of how efficiently we reach financial freedom, and then letting that determine the platforms that we find that asset on, narrowing it down our selection to those platforms, and then deciding based off the decision as to what asset we're gonna select in the first place, is actually far better to do it that way. And that was a decision that I made wrong at the start. So, yeah, asset comes first, then fund, then account, then platform in that order. So let's talk about assets first of all. What do I mean by that? Well, really, your asset is what you invest your cash in, as in an asset is something designed to retain value and appreciate with time. Therefore, by that definition, cash is not actually an asset in that instance. It does retain value, but it doesn't appreciate with time, it depreciates. And what I found really helpful was whenever someone said to me back in the day, they said, James, you've got to think about all these ways that you can store value, all these things that you can invest in as just different forms of asset, they're just different means and uh they're just different portals through which you can invest your money into something. And really, cash is just a way of measuring their value, it's a measure of value. That's all it is. So, therefore, by that token, really, whether you have your money in a property or in a stock or in bonds or anything under the sun, all cash does is just a way of measuring how valuable it is relative to something else. That's all it is. It's kind of arbitrary, it doesn't actually really mean anything, it's all relative, effectively. And that's all cash is. It's just a yardstick, it's just a meter stick. It's just like the same we measure a house in terms of meters, in terms of its dimensions, we measure its value in terms of cash. That's all we do, that's all it is. It's just a metric. That's simply all it is. So you know when price goes up and down, let's say the price of an asset goes up and down, everybody thinks the value of cash is fixed. But actually, would the value of an asset not appear to go up if the value of the cash decreased? Think about it. That's also true. So, really, we think cash is the given and the constant. We think money is safe in our bank account, and it just because it it has the appearance of being static when we look on the bank screen that it's a fixed number and it stays that way. Actually, its value is fluctuation as well. Check out the DXY, the value of the dollar uh measured against a brass a basket of other currencies. Measure out measure how it fluctuates with time. Actually, that's why exchange rates go up and down as well, because the value of the cash is fluctuating. Anyway, we went on a small tangent there. Your biggest determinant with regards to time frame, with regards to your asset, is your time frame, as in when do you need the money. Now, what do I mean by that? Really, you can break investment down into three things returns, volatility, and inflation. It's only really those three things. You know when you look at a chart, you know when you look at an investment chart, really you can boil that chart down into one of all the fluctuations and all the movement on that chart is only ever going to be one of three things. It's gonna be appreciation, as in returns on your asset, it's gonna be the volatility as in how it fluctuates in terms of value. And the other thing to be conscious of is inflation as in how that rises with time, because a return may not necessarily be a true return if it is lower than inflation or around about the same rate. So we have to actually beat inflation in order to get some true returns in our investment portfolio. Now, that's interesting because a lot of people equate risk and volatility, but they're not the same thing 1,000%. I see far too many people allocated low risk portfolios, and what those actually mean is low volatility portfolios. We tend to equate risk. What we tend to assume risk is whenever we hear that term is total capital loss. The principle that we may lose all of our money. But if you ask me, a well-selected portfolio of bonds versus stocks, the two most common assets that people will invest in whenever going through a financial advisor or going through a typical investment account. Really, whenever it comes to those assets, what we have to remember and what we have to bear in mind is that actually we need those to outpace inflation by as much as possible. And we also, it's our portfolio, whether it's in a low-risk portfolio with bonds, which is the standard definition, risk inverted, commas, or a high-risk portfolio of folio stocks. Actually, if we look at it through the lens of which portfolio is more likely to lose all of our money, neither of those portfolios is more likely to lose all of your money than the other. You're either in vet providing your investing in the world bond market or the world stock market. I mean, obviously it depends on the fund. There's a few more variables there, of course, but actually, no more, neither of those portfolios is more risky than the other in terms of the chances of a losing her money. It's it comes back to our definition of risk. Whereas what you might conceivably argue is that the low risk portfolio, which say is comprised of a higher proportion of bonds, is more likely to lose us money with time because the real returns will never outpace inflation. Therefore, in a weird way, the lowest risk portfolios, people are allocated those portfolios as low risk all the time. But in a weird way, they're actually some of the risky S portfolios because we're never actually going to achieve our goals and attain financial freedom. So this is the thing, that's the crazy thing that's out there. And this is a standard definition that if you go to a lot of financial advisors, slash financial planners up and down the country, they have to use this because it is a regulatory requirement by the FCA to categorize your investors in terms of risk. But the weird paradox is that when you put them in a low-risk portfolio, it's also the risky-esque portfolio sometimes. And this is something that we have to remember, we have to get over this. Risk does not equal volatility. If you want to get really academic for this, this is a podcast for another day. There's actually four definitions, there's four types of risk, four common ones at least, anyway. There's many more. But anyway, that is one of the biggest belief shattering things that is out there whenever it comes to the investing side of things. Now we got to understand in on that basis, really, if we are deciding to ourselves, okay, cool, once we've removed volatility as a factor, once we understand that that's actually part of the journey, once we understand that actually it's good a good thing to take on a little bit more volatility when we've got the right asset blend, then immediately now we understand what we understand next is that actually it can be our friend and we want to take on a little bit more of it, or at least we understand that it is part of the journey in the process, and it doesn't emotionally unnerve us so much anymore. And we can achieve financial freedom much sooner, which is a great thing, which is a good thing. So, therefore, if we remove emotional factors and volatility as in from our decision making whenever it comes to our asset, all we're really left with is time frame as in when do we need the money. Now, if you look at returns over 10 years and above on any conceivable period of history from the beginning of the stock market or when these things were measured, which is roughly the 1920s, you'll see that over a 10-year time frame, a well-selected, well-diversified portfolio of stocks has outpaced a portfolio of bonds, and it's certainly outpaced a portfolio of cash, of course. Inflation on average is about three to four percent every year. The world stock market has returned roughly 10% on year year on year. So therefore, you've got a margin real returns of 7% just there. Now, 7% margin or profit margin compounds to quite a lot with time. We won't get into compounding today, of course, but Einstein called it the eighth wonder of the world for a reason. Let's just say that. Whereas the low-risk portfolios that you see out there are sometimes getting like three, four percent returns every year, and that's before we factor in inflation. Have we even got a profit margin there? It's actually bananas, and this happens a lot. I mean, the number of portfolios that I look into just through having conversations with people through run and Dennis who invest, and you see that virtually every single one has got something to optimize on this front, is just bananas. Sometimes you see, you look into people's portfolios. I had one lady the other day, and uh she had 20% cash in her portfolio, even though she didn't need the money for 10 years, she was in her early 40s and she wasn't able to access her pension until she was 57. Therefore, really all of that money should have been doing something in her pension. And when queried, the professional that was in charge of her money had simply forgotten to allocate it to some sort of asset other than cash, which is just friggin' bananas. Like, this is the sort of stuff that's out there. So, really, I implore anybody out there to start looking into your portfolio and questioning things because actually, in my experience, it's very rare that there's not something to optimize. And when we're talking about optimize something, optimizing something, we're literally talking about your future, we're literally talking about financial freedom here. So, one little tiny tweak can make a huge difference or pull that forward, it's about five to ten years. Anyway, it's not just as simple as selecting any old stock. I'm just gonna go ahead and throw that out there. You have to get the right combination, you have to measure you have to invest in a way that diversifies you across the whole of the global economy. But before you decide that you're gonna pick a fund with stocks in it, you have to know that stocks are the right asset selection for you, and therefore you need to nail down your time frame. If you don't need the money for 10 years, then stocks have can at least 10 years, then the volatility is not so much of a factor, and you really are orientating your money towards returns. Whereas if you are going to retire in the next 10 years and you need that money, well, really that's where you want to diversify into more defensive assets such as cash and such as bonds. But really, at that stage, that is probably where it's worth having a conversation with a good financial planner at that point. Food for thought. And by the way, please just caveat, please bear in mind that I'm caveating everything that I'm saying right now with not financial advice. There's a little bit more to it, but painting with broad strokes, this is the stuff that anybody can use to set up their own portfolio. UK dentists, Dennists Who Invest now has an official platform where you can learn about finance and obtain UK compliant, verifiable CBD at the same time. 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This includes a whopping 10% discount on dental indemnity, the offer to beat your income protection deal no matter what you're paying, and for the principals out there, 5% discount on lab bills and 10% discount on practice insurance. These are designed to offer hundreds, if not thousands, in annual savings. The purpose of this members club is to not only boost your monthly income but also manage your outgoings as much as possible and therefore create more profit. To celebrate the launch of the Smart Money Members Club, and given that the CPD deadline is coming up soon, I've decided to offer the first month of this platform entirely for free. This offer will end in the coming weeks as soon as the current CPD cycle is up. To collect your CPD for this podcast episode using the Smart Money Members Club, feel free to use the link in the description of this podcast. Anyway, we've dealt with assets. Next move is funds. Now, obviously, we talked about stocks just a second ago. If you're investing in individual companies, no matter how big the company, there's always a risk that that company can go busted any one time. So what you really want to do is have a collection of companies. Now, helpfully in the world of ETFs and online investing and apps investing, somebody somewhere has compiled a lot of these bonds and uh stocks into funds that we can select, as in off-the-shelf pre-made combinations, pre pre-packaged, uh specific combinations of companies, sometimes as much as tens of thousands, all in one place that you can buy as one product, or you can buy as one uh pre-packaged uh you know asset, or it's there ready to go. You just purchase the fund rather than having to purchase all the individual companies. It's gonna be slightly tedious to get exposure to 8,000, 10,000 companies, maybe even more. You'd have to buy individually those 10,000 companies. So why not just buy it via a fund, which is so much more convenient? Now, when it comes to fund selection, obviously this is determined by your asset selection. If your time frame is over 10 years and volatility and emotional factors are not a consideration, then a 100% stocks portfolio is something you could feasibly argue as an option. Therefore, you want a fund that is 100% stocks at that point, but not just anyone, a well-diversified one. Now, the really cool thing is that because of how simplified investing has been made these days, well, a lot of funds out there, passive funds, will simply mimic common indexes or indices. Therefore, we really just have to find one that mimics an index that we like, and then we're away because it's done all of the thinking for us. What is an index? I mean, an index is just a measurement, it's just a it's just well, we'll give the SP 500 as an example. It's it's not quite this, but it pretty much is this. The 500 biggest companies in America, uh basically uh it's it's a it's a selection, it's a collection of those companies all amalgamated together uh in terms of their market cap. So let's say, for example, Apple is like, now I don't know these off the top of my head, but let's say, for example, Apple is 20% of the US's 500 biggest companies, then therefore, because we've selected 500 companies to go into this fund, well, then Apple is going to constitute 20% of this fund, of course. It's just an arbitrary measurement. Why does it have to be 500? The answer is it doesn't. The Dow Jones is 30. Someone just made this up one day and then they just decided to measure it, and it kind of worked out and it went well. There's no reason it has to be that. But anyway, that's certainly if you have something that's been around since the 1950s, which the SP 500 has, well, then you've got a lot of data to show that it's continued to grow with time. That's the only reason why people gravitate towards indexes, they're not a magic combination of assets, that's really not what they are. It's just that they've been around for such a long time and have a lot of data and have a lot of credibility and belief. That's all. Anyway, so the whole idea is to get funds that mimic indexes that perform extremely well, or at least that's certainly one investing thesis, anyway. Not just the SP, there's loads out there. You might want to check out the MSCI as another cool index as well. When it comes to fund selection, really what you want to do is a few things to look out for. Now, the funds won't 100% mimic the indexes, that's an important thing to remember. So, say for example, in the in the SP 500, of those 500 companies, you might get like 10 that constitute like 0.0001% of the market cap of the fund, therefore, or the market cap of the index rather. So, therefore, is it really worth a fund manager's while to purchase those funds and go out of the way to get it and maintain them in terms of them of rebalancing them in the portfolio? Probably not. So they probably just omit them uh to a degree, which is an important thing to remember. But anyway, this is a this is a key tenet whenever it comes to the investing side of things because because because because not every fund will 100% mimic the index that we talked about just a second ago, and you can actually look up to what degree they mimic the index in the key investor information document of each fund. It'll give you a percentage variance in that document as regards to the performance of the index versus the performance of the fund. Generally, you want to keep it to within 0.2% if you can, because then you know that the fund does actually mimic the index. Anyway, something interesting. There's a lot to be said for passive funds as well. The difference between a passive fund is it will just blindly mimic an index, whereas an active fund will have a fund manager who will actively buy in, dip in and out of the market at opportune moments, what he or she believes to be opportune moments, in order to make profit. Now, the vast majority of funds that are active do not outperform passive funds, even though they might be able to eke out a few percentage points extra of returns. Once you've factored in the additional fees for funds, typically you will find that passive funds outperform. Now, there's some data on that. Apparently, in the UK, 75% of passive of active funds do not beat the market. Uh, in the US, apparently it's a little higher, it's more like 93% of active funds do not beat the market, where the benchmark we're using is the SP 500 in both those examples. But really, what that serves to highlight to me is if you've got a one in four chance of being able to beat the market, and you're also in for a little bit of a white knuckle ride because you have no idea if your fund is the 75% or the 25%, to me, it might just be so much less stressful to just go and find a really good index that you know has performed for a very long time. If you're Looking at fees in terms of the funds, really, what I would expect to pay for a good passive fund is between 0.1 to 0.2% fund fee. Whereas for an active fund, what I would expect to pay is maybe like 1% to 2%, something along those lines. And remember, if you're in margin in terms of profitability, is 10%. Basically, if you have an active fund, sometimes you're giving away 1 out of 10 is obviously 10% of your profit, or 2 out of 10 is 20% of your profit, where 2% is the fee and 10% is potentially your return if you're if it's comparable to the market. Well, then you're basically giving away 10 to 20% of your profit, which is actually quite a lot whenever you frame it in those terms. So definitely, if you ask me, I'm of the school of thought that passive is superior, but horses for courses. Once you've determined your asset and then use that to determine your fund and find a good fund, then the next move is to find a good account which is tax efficient, maintains a good balance between tax efficiency and ease of access, because those are the two key determinants of what account you might choose for, what what account you might go for. Then you just got to decide what makes sense for you, where do we actually store this fund in terms of a tax wrapper? There's only really three in the UK if you're investing in a personal name. It's either going to be a general investment account, sometimes call sometimes called a fund and shares account, depending on the platform that you choose. Uh an ISA, oh, there's different tax files, so there's five different types, or a self-invested personal pension. If it's inside a limited company, obviously that is another option that a lot of dentists have. However, it's not in your personal name, it is of course incorporated. If it's in your personal name, you just got to weigh up, which makes sense for you. Again, this podcast would probably double or triple in length if we were to go into the pros and cons of each and every investing account. But it's always, it can literally only be one of those three. Uh generally, broad strokes here, absolutely broad strokes. If having access to your money at all times is a non-negotiable for you, then you're going to prioritize the ISA and take the tax hit. Whereas if you're happy to uh well, if you're you if if it makes sense for you from a point of view from uh you're happy to give your money and you put your money into a pot and not have access to it until a certain age, then you may wish to prioritize a pension because we can't ignore the tax benefits of pensions, of course. But it's always going to be a toss-up between those two things: ease of access, accessibility, slash, slash tax efficiency. Those are the two main things that you've got to decide. It's a little bit like a like a scale or like a thesaw. We've got to weigh up which is more important to us. Again, it makes more and more sense the older you get to prioritize the pension as well, because obviously it's going to be sooner, it's going to be closer and closer than when you can actually access that money in terms of time. So this is just something to consider. I see a lot of people out there, whenever it comes to received wisdom on investing or parents, I feel like everybody's had a parent wag their finger at them once upon a time in their life and say that they should contribute to their pension and max that out. Actually, if you ask me, there's such a thing as contributing too soon to your pension. I know there is presently no lifetime allowance, but that will come back. Therefore, if you have too much money in your pension pot, you can't get that out. You're almost beholden as to what the government decides to do if they decide to tax that very heavily. Uh, if you wish, you can read up on when they brought the lifetime allowance in. I think it was 2012 and how that's actually that actually went down over the years in terms of what the allowance was, as in the threshold at which you were taxed heavily in your pension went down every year, even though you might expect it to go up. Uh, off the top of my hand, I think it was 2 million, then it went to 1.8, 1.6, and then maybe all the way down to 1.2. But anyway, something to research, really counterintuitive, and then the Labour government just completely got rid of it uh a few years ago, which was a little unexpected. But if you ask me, it's a matter of time until they bring that back because they know that when the money's in there, people can't get it out, and they're kind of uh, you know, they can bring that back, and there's not a great deal people can do about it. It might be popular votes-wise, but yeah, your money's kind of stranded. But of course, listen, you know what I mean. They make sense for a lot of people, definitely not bashing pensions. I'm just saying it's a little bit more of a decision than a lot of people think it is. Decision number four, what platform do we go for? Really, what you've got to figure out. There's a few things here in terms of deciding what platform is good for you, but you'll notice how we haven't even spoken about platform whatsoever up until now. All we've talked about is asset, the combination of assets, the blend of assets rather, as in your fund, how the assets are packaged, in other words, and the account that they go into. We haven't talked about platform whatsoever. And that's because if you ask me, it's the final thing that you need to decide because actually you need to figure out what assets you want and then decide, and then find a platform that has them, rather than find a platform and then try to find the best assets on the platform to take you towards your goals. There's not an efficient way of doing it. All about these little tweaks that make a huge difference. Platform I think the biggest thing that is important to decide whenever it comes to your platform is is is is is is is is is the fees as well as the functionality. So you want a nice slick app. Uh you'd be surprised even in 2025, some of the biggest names do not have slick act slip slick uh slick apps. Uh they can be a little clunky in terms of usability, some of the biggest names. Even the one that I use, uh thankfully it has somewhat decent fees and a good selection uh of assets on there. So those are the real things that you want to weigh up basically whenever it comes to that. There's no one size fits all. You may be interested to know, you may be interested to know that certain platforms will charge you a fixed fee versus a percentage fee. So that means as your portfolio grows, it works out to be that much more economical for you because you're not giving away a percentage, you're giving away a flat fee, and say that flat fee is like 20-30 pounds every month. Obviously, if you have a significant amount of money and invest it, well, then a port a percentage is going to scale with that. There's going to be a crossover point where the flat fee starts to make more sense versus the percentage. Obviously, you just got to wear that up on an individual basis. Worth mentioning because not everybody knows that. There are certain platforms out there that claim themselves to be no fees and they advertise themselves as that. I'd be extremely wary. They've got to make their money somehow. They can only make their money through through one of three things. It's either going to be trading fees, it's going to be holding fees, or it's going to be something that's a little complicated that we're going to save for another day called the spread. So if some if a platform out there is advertising itself as no fee, it still has to make money somehow. So, therefore, if you ask me, it probably means they're making money in a little bit more of a low-key way and taking advantage of the spread that we talked about just a second ago. Does it actually work out more economical for you to use those platforms versus a platform that's upfront with their fees? Well, I'm dubious, put it like that. Food for thought, something to consider. If you look at the fees on a platform in terms of the ongoing fees, the platform fees, usually I would expect those to be around about the 0.1.2% mark, if you ask me. So that's in addition to the fund fee that we talked about just a second ago. So you might be paying 0.3.4% all in. That is for the platform fee and the fund fee. If it's higher than that, red flag right there, just have a real look around at how you might be able to get a better deal.