Investing your money is the only real way to get passive income. Whether that’s in the stock market, property, freaky DeFi projects or whatever: you can only get passive income through investing money.
Arguably, that means it’s not passive, since you have to raise the money in the first place… whatever.
The problem is that investing requires you to learn. You might not have time – or it might not be the best use of your time – to learn.
So the real trick is: how can you start investing with no knowledge of how to pick investments?
Disclaimer: this isn’t advice, this is just information and entertainment. I have no idea if you want to invest at all, we’ve probably never met and I’m not regulated to give financial advice. You should do your own research and make your own decisions – don’t abdicate your future to some random on the internet.
Investing with no knowledge – the good and bad
Pretty much all of the top investors ever picked their own investments.
We can deduce from this that most overperforming returns (you might hear this called “alpha“) comes from careful scrutiny, checking, modelling and assessment of companies/ industries/ markets.
When you start investing with no knowledge, you outsource this process. You could be paying a person or relying on an algorithm to do this all for you. You will also be paying a fee, directly or indirectly, for this service.
When this is useful
This is good if you can use that time to do something more valuable.
If you’re a high-flying corporate executive, you’ll probably benefit more from bringing up the business and gaining a hefty bonus than you will from optimising an extra 1% from your investments (well, until that 1% is pretty huge). Investing with no knowledge might suit you and the fee might be worth it.
Similarly, if you’re trying to work long hours, have a commute and need to find family time, the cost of outsourcing investment decisions might be worth it to squeeze in that precious quality time. I don’t know anyone who can read directors’ annual reports while bottle-feeding a baby; no-one can run back-testing on the historical performance of a 60-40 portfolio while taking the kids to the park for the day; dog walking is a terrible time to try rebalancing your ISA.
If you have little time – or your portfolio is still so small that you’re better off earning money than optimising it – investing with no knowledge can still be done.
When you should start to learn
It follows that when your portfolio is large enough that your time is more valuably spent optimising than on anything else, you should consider learning to invest yourself.
You might still not want to. I have met many multi-millionaires and billionaires who don’t manage their investments. For financial independence campaigners though, learning to optimise might get you to financial independence quicker than relying on outsourcing.
This is because fees for investing with no knowledge are typically – but not always – quite high.
Options for investing with no knowledge
If you’re going to invest without learning for yourself, you’re probably looking at stock market investing – or a mix of shares and bonds, held in funds.
Why?
This is a cheap way to invest, it’s unlikely that you will suffer a catastrophic all-goes-to-zero event without the apocalypse, regulation is pretty stringent to protect you from abuse and the entry point can be as low as £1 to start with.
Yes, you could buy property, you could buy crypto, you could invest in whisky or fine art… but on all of these things you need to learn a bit about what you’re buying first. Choosing is quite difficult and – even if you outsource this – there are market cycles and decisions you need to make that require a bit more knowledge than what we’re looking at today.
This brings me to the options I think are worth looking at for investing with no knowledge:
- A financial advisor picking a portfolio for you;
- Robo-investing;
- “Target retirement” funds; and
- Global tracking funds.
Let’s have a look at the pros and cons of each.
1. Getting a financial advisor to pick a portfolio for you
Many financial advisors specialise in investments. You don’t have to look far to find one. Consider looking at unbiased.co.uk to find one near you if you’re interested.
Financial independence is still a new idea for most financial advisors. They will consider retirement planning, but many will be surprised if you tell them you plan to live off your £300k pot from age 35. Their training (I’ve done the minimum required to work as one…) focuses on protecting consumers and trying to match investment risk to the character of the person in front of them.
Most financial advisors offer a “discretionary management” service, where you just throw money at them and they do it for you after an initial chat. This really is investing with no knowledge, relying on theirs instead.
Many will also offer you “advised” services, where they tell you what they’re thinking and you make the final yes/no decision. This sometimes works out cheaper.
Advantages
Financial advisors are really good if you’re nervous and need someone to stop you from panicking when markets are weak. They are usually OK at picking reasonable portfolios that will generate you some kind of return.
An independent financial advisor can usually go one better and look at all of your financial wellbeing, including things like insurance and estate planning.
Disadvantages
So many fees.
Most independent financial advisors will charge you a fee for jobs (like producing a report) and then charge you a “management fee” for holding your money. This is often 1% or greater of your pot each year.
Yes, if you have £300k in the pot, expect to pay them £3k per year.
There is also a tendency to be typecast and anecdotally I’ve heard of people being recommended product simply because they were of a certain age or the financial advisor wanted them to buy it.
This is the most expensive option, by far.
2. Robo-investing
Paying a financial advisor for yourself is expensive, and most people kind of want the same thing anyway. To get around this, savvy investment advisors have created pre-designed portfolios that you can buy into with a whole host of investors and that manage themselves, giving you a bulk discount on fees.
This is usually called “robo-investing”, since the advisor isn’t seeing your portfolio as much as they are seeing the aggregate of everyone who has invested in the same profile. You place your money in, it is invested in a pot with others and the software manages it for you.
Advantages
You get a financial advisor’s portfolio choice and rebalancing service at a lower rate. This usually means you can sign up with just £1 at the start, and you don’t need to worry about buying and selling whole fund units or shares.
You can also get access to “alternative” assets in a portfolio, which you won’t usually be able to buy with an index fund. That’s an appeal for me, as I don’t like being reliant on the stock market, which is easily swayed by popular hype/ euphoria/ despair.
This really is no-knowledge investing, too. You pick a risk level, the robo-investor offers you a portfolio and you simply deposit in by direct debit each month and let it do its thing. No decisions about rebalancing, no need to assess the market, no fuss.
I have used these in the past. One of the platforms I have used is Wealthify. If you sign up to Wealthify via my link, we both get £25 when you deposit £250 for at least 3 months. What I particularly like about Wealthify is that you can start off investing in Environmental, Socially Responsible and Green (ESG) funds from day 1 on their “ethical” plan. Other products I have tried need you to have a minimum balance before switching to this kind of investing, although I would be tempted to invest with Clim8 if it didn’t exclude the Channel Islands.
Disadvantages of robo-investors
Robo-investors only really invest in a fixed portfolio of funds, and they tend to add a platform fee on top. This means that when you start to hit bigger amounts invested, your fees can be substantial. Less than 1%, certainly, but still noticeable. For example, one of the ethical investing plans on Wealthify comes with a 0.6% annual platform management fee, as does Clim8.
You’re usually limited in your choice of investments, too. You might, say, want lots of global diversification, but the robo-investor portfolio makes you have a take a home market bias.
3. “Target retirement” funds
The thing that puts a lot of people off managing their own investments is how and when to rebalance. Target Retirement funds do this on a timer.
Effectively, you buy into the fund. It starts with a mix of shares and bonds, as a pre-made portfolio. As you get near the target date, the fund adjusts so that you have more bonds and fewer shares in it.
The logic is that bonds tend not to have the same dramatic price shifts that the stock market has.
Despite the name, you don’t actually need to be retiring. It’s not a prerequisite. You could decide to have a “Target Retirement 2030” fund as your way of saving for, say, your world travel plan in 2030, which you then sell to fund your big blowout tour.
Actually, that’s not a bad idea…
You can usually buy into several of these on the same platform. That’s cool. However, you can usually only buy the target retirement funds from a provider on its own platform: for example, you can only buy the Vanguard ones on the Vanguard platform.
Advantages
Again, this really is no knowledge. All you need to do is set up an account with a platform that offers one, set up a recurring purchase by direct debit, then leave the fund to do its thing.
I helped my mum set one of these up with Vanguard in a Self-Invested Personal Pension (a SIPP). She’s old enough that her investments are for actual retirement now, so her main investment vehicles are pension accounts. Mum seems to love the SIPP because the direct debit comes out of her account on payday and she never has to worry about it.
Platform fees for things like Vanguard are quite low (around 0.15% or a fixed monthly fee). These funds usually have a reasonable fee of 0.24%, so you can basically get this automated rebalancing benefit for an annual fee of 0.39%, cheaper than most robo-investors and miles ahead of a financial advisor.
Disadvantages
The set-up takes a bit of patience. If you’re comfortable with forms and administration, and you know what you’re looking at, it’s not too painful. However, lots of people are intimidated by paperwork, and this will put them off a bit.
Typically, these funds only invest in shares and bonds. You won’t find any alternative investment funds in there, just publicly traded items. This shouldn’t worry you too much, but personally I like having non-stock market investments too. That’s pure personal preference and not based on any studies, it’s just what I like.
You don’t get much steer as to whether a product is suitable for you or not. You just pick a date and presume that the equity:bonds ratio suits your risk appetite.
Oh, and ESG investing isn’t a big thing here. If you like ethical investments, I haven’t seen a target retirement fund (yet!) that offers this service.
Global tracking funds
The classic collective index fund is the “global tracking” fund. This is a single all-world, all-equities investment index fund that adjusts its holdings in a single pot, according to what is in the top x% of global publicly listed shares.
When you hear people on FIRE forums saying “VWRLD” or whatever, they’re usually talking about the Vanguard FTSE All-World ETF, which is a global fund that just holds shares in all of the worlds’ biggest publicly-listed companies, in the proportion that they appear on the index.
Fund fact: “FTSE” just means “Financial Times London Stock Exchange”, and it’s just to say that this is the company/ partnership/ organisation that made up the index. Making up an index is actually quite arbitrary, but following an index means that you take human emotion out of the investment decisions.
Vanguard are quite popular in the FIRE community, but they’re not the only fund manager to do an all-world fund. You can also buy similar funds with an ESG or other ethical filter added, for a small premium.
To buy these, you need to have an investing account. A stocks and shares ISA with a provider that lets you buy your own shares will do it. I have been using Trading 212, which is fee-free (they make their money in other ways) but you can buy these through more established companies like Hargreaves Lansdowne or whatever. They’re common.
On top of the platform fees, you will pay fees for the fund. The Vanguard fund above costs 0.22% in fees, but other providers can charge more or less.
It is possible to buy funds that have both shares and bonds in them, but these usually need you to buy through a platform and cost more. Vanguard does a few, such as this cool ESG called “SustainableLife“, but you have to buy them through the Vanguard platform.
Advantages
This can work out to be the cheapest way to get investing with very little knowledge.
If you want a particular flavour of investment index, you can usually find it. I quite like the look of this one from Amundi and I’m thinking of using it in my ISA instead of the Vanguard ESG all-world equivalent. It has a stricter ESG filter in favour of reduced fossil fuels, and I’m down with that.
You can usually get a slice of 300-1000+ companies bought across every country in the world, so if someone in a big public company is making money somewhere you can get an indirect benefit.
Disadvantages
This isn’t strictly investing with no knowledge. You need to make an (unguided) voyage of discovery to work out what your best investing option is, then set it up yourself.
You also need to choose your platform, but this seems quite minor. There are tons of platforms to choose from, and even some of the established big boys in the stockbroking world will let you buy funds without a commission.
You will only be buying shares and/or bonds, depending on what you buy into, but it’s generally just shares. This means that “market sentiment” (i.e. hype and panic) can affect your pot more than actual performance from the companies you own shares in. You also don’t take opportunities to buy quality companies at a discount; you just buy what’s there by size.
Which one is best?
Investing with no knowledge isn’t necessarily a bad decision. Investing is infinitely better than saving cash, and none of the strategies above is likely to fail too badly as long as you set them up with care at the start and consistently follow a plan.
All strategies have strengths and weaknesses and all of the above could work for your financial independence campaign.
What have I been using?
I’ve been a fan of the global funds strategy. It’s cheap to buy into and the running costs are low. Platform fees are minimal, results are pretty reasonable.
However, as I’m relocating to the Channel Islands, I have to be aware of different providers. For example, my SIPP is with Vanguard, but Vanguard are quite clear that if I move out of the UK to the Channel Islands I cannot be a customer of their platform (!). This means that I will have to move my SIPP, which is a shame because it has been doing pretty well.
My ISA is with Trading 212. They offer a General Investing Account to the Channel Islands, so I might remain with them. However, I have noticed on logging in that other people have accessed my account, which doesn’t fill me with confidence! I’m also less comfortable as they now use shares held in ISAs and GIAs to lend out for short-selling, which is a market strategy I’m not a fan of.
I do have a Wealthify robo-investing account. They cost a bit more than a normal do-it-yourself platform, but I like the exposure to alternative assets and that I don’t need to consider rebalancing. They do offer services to the Channel Islands, so I may begin to lean on them a bit more for my liquid investments.
