Millionaire Teacher Guiding British Investors

First Published at www.savethestudent.org

If you haven’t figured this out by now, let me share one of the most important things everybody should know:

The world is full of people who would sell you toe nail clippings and magic cat dung… if they could get away with it.

Unfortunately, the financial service industry breeds more of those opportunists than any other sales field.  And they can skilfully disguise feline faeces to look (and smell) sweeter than a bouquet of spring flowers.

As a young investor, you can’t afford to put some of these products on your dinner plate—not if you eventually want to grow wealthy.  I’m a high school personal finance teacher who built a million dollar investment portfolio by the time I was 38 years old.

I published a book called Millionaire Teacher, The Nine Rules of Wealth You Should Have Learned in School.  It hit #1 on Amazon USA for personal finance books in November 2011, #1 in Canada in February 2012, and now I want to boil down the essential elements for a young UK audience.

If you just read this with scepticism, good!  That’s what I want. 

Be sceptical of nearly everything people tell you, when they’re giving financial advice.  Find academic studies that might refute it.  Only then will you be educated enough to make a financial decision.  Don’t listen to a salesperson or financial advisor who refutes or supports certain advice.  Find an academic study, something truly impartial.

For starters, if you’re going to invest, buy assets that appreciate over time. 

Cars lose their value each year, so it’s best to spend small amounts on depreciating assets (like cars) and more on assets that increase in value. I’ve seen the advertisements for Forex trading, especially targeting young people with grand promises. But remember this:  for every dollar that’s made, there’s a dollar that’s lost.  Always. 

Unlike stocks, bonds and real estate, currencies (as a group) don’t rise in value.  When you trade a currency, there’s another person on the other end of that trade.  Do you really want to gamble with them?  The only sure winner is the investment bank that makes money on the commission spreads from the sale and purchase.  These products are pushed for that reason.  They create excitement (usually for the naive) and reap tremendous benefits for the large brokerages doing the transactions.

Investors are better off buying assets that appreciate over time—rather than wasting time and money trading currencies.

If two people trade a currency back and forth for twenty years, the winner will win by an equal proportion to the amount lost by the loser.  The odds are, also, that the winner wouldn’t win by much, if they each played the game for twenty years.

If you and I traded a stock market tracking fund or a London flat back and forth for twenty years, we would both benefit from the rising value of the stock market (plus dividends) or the rising value of the flat.  We’d likely be better off holding those assets, rather than trading them, but my point is this:  the overall stock and bond markets increase in value over time, as do real estate prices.

Forex trading doesn’t offer that.  It gives low odds of success (like a night at Blackpool) and you won’t find Warren Buffett, nor a college endowment fund manager, nor an economic Nobel prize winner suggesting Forex trading as a sensible investment method.  It makes money for the house, but not for the players, as an aggregate.

What would Warren Buffett suggest?

Buffett isn’t a fan of the financial service industry.  He often jokes about a fantasy he has, where a bunch of brokers get trapped on a deserted island with no escape.  Many investors buy actively managed unit trusts, but the firms that create them have one goal:  to make money for themselves.

So how do you increase your odds of investment success?

If you think that Warren Buffett and a slew of Economic Nobel Prize winners offer valuable advice (these guys aren’t selling products) then you’ll be keen to build a diversified, low cost portfolio of tracker funds.

In the U.S., these are called index funds. 

They’re extremely low cost unit trusts that beat more than 90% of professional investors over twenty year study periods, after all fees, attrition, and taxes.  Investment advisors and brokers hate these products, and they’ll usually do everything they can to deter you from buying them.  Brokers, after all, make more money for themselves when selling you litter box products instead.  Portfolios of actively managed unit trusts (and their hidden fees) are generally a bad deal for investors.

Allan S. Roth, adjunct professor at the University of Denver, ran a Monte Carlo simulation to determine the likelihood that an account of actively managed unit trusts would beat an account of index tracker funds.  After all, a responsible portfolio would have more than one tracker fund within it:  it would likely have at least a British stock market tracker fund, a bond market tracker fund, and an international stock market tracker fund.

Roth determined that, if you had five actively managed unit trusts over a 25 year period, your odds of beating a portfolio of index tracker funds would be just 3%.

If you had ten actively managed mutual funds over a 25 year period, your odds of beating a portfolio of index tracker funds would be just 1%.

You won’t find academically supported evidence to refute those findings.  For the best odds of investment success, index tracker funds are the right choice.  Investing is about putting the odds in your favour.

  Five Years Ten Years Twenty Five Years
One Active Fund 30% 23% 12%
Five Active Funds 18% 11% 3%
Ten Active Funds 9% 6% 1%

 But not all tracker funds are created equally. 

Some of them can be pretty expensive.  In Richard Branson’s autobiography, Losing My Virginity, he said that:

“After Virgin entered the financial services industry, I can immodestly say it was never to be the same again.  We cut all commissions; we offered good value products; and we were practically trampled by investors in their rush to buy.”

The great funds that Branson touted were Virgin’s index tracker funds.  But they’re too expensive.  Branson’s intentions might have been good, but HSBC offers the same products at a fraction of the cost.  And in the world of money, small costs add up.

Check out what a 1% difference can make over an investment lifetime:

  • One thousand pounds compounding at 7 percent interest for 50 years=  29,457 pounds
  • One thousand pounds compounding at 8 percent interest for 50 years=  46,901 pounds

If you’re twenty years old, you could realistically have money working for you until the day you die.  Sure, you’ll be selling some of it to cover living costs as you retire, but you don’t want costs to anchor your money over a lifetime. 

I think the most convenient UK tracker funds are offered through HSBC. 

In a 2008 study titled “Mutual Fund Fees Around the World” (published by Oxford University Press) researchers Ajay Khorana, Henri Servaes and Peter Tufano found that UK’s stock market unit trusts cost investors an average of 2.28 percent a year, including sales costs and hidden expense fees.

A portfolio of HSBC’s tracker funds, in contrast, would cost you roughly 0.29 percent annually.  Virgin’s tracker funds cost more than three times as much.

When it comes to unit trusts, the lower the fees, the better.

As the global unit trust research firm, Morningstar reveals, low costs are the only reliable predictor of future performance.  Don’t fall for unit trusts with great historical returns.  The odds of them repeating that performance aren’t great. 

Create a diversified portfolio of low cost tracker funds, and you’ll beat more than 90 percent of investment professionals over your lifetime—without any work.  Don’t forget that a portfolio is not a single tracker fund—it’s a diversified basket of them.  This is the gem that most professionals will never be able to beat.

For further information on the topic, I recommend these books.

And don’t let anyone lure you into the litter box.




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Andrew Hallam

Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Wiley 2011) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use.

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17 Responses

  1. Lisa says:

    Hi, I have just bought your book and have read the first few chapters. My question is, I come from Asia and our access to Index Funds is limited in my country. I put away a portion of my salary monthly into a Financial Services company ( throught a financial adviser) that invests this money into 9 mutual funds. After reading your book so far I am now very worried about the money I am putting away for retirement. What would u advise me to do?

    Looking forward to your advice

  2. Hi Lisa,

    Here's a place to start. Contact these folks and ask if there's a brokerage in Dubai offering access to stocks on the New York or London stock exchanges. If they answer is yes, then you could use that brokerage to build low cost portfolios of ETFs. http://www.selectabroker.com/Brunei-Darussalam/

    Make sure the brokerages don't charge annual fees, don't provide advice, and have relatively low commissions (less than $40) per purchase transaction.

    If you can open such an account, and you have questions, give me a shout.

    Andrew

    • Nicholas says:

      Hi Andrew,

      Do that apply to Malaysia too? I found out that the indexed funds in my country mostly charging annual fee 🙁

      Nicholas

  3. Yeah, for a better deal Nicholas, you may need to visit Singapore.

  4. John says:

    Hi Andrew,

    I read your book and my wife and I have sold our RBC mutual funds and are planning on purchasing tracker funds. We're interested in HSBC tracker funds but we have a few questions:

    1. I am UK Citizen (from Canada) teaching in Beijing. As we are not UK residents do you know if this disqualifies us from purchasing HSBC UK Tracker Funds?

    2. Your book advises that we buy stock index funds and bond index funds. Reading through the HSBC Index Tracking Funds it seems as though they're all stock. Does HSBC have any bond index funds?

    3. If we can't invest in the UK can you point us in the right direction to start an index tracker investment with approximately $100K Canadian? As your book states, TD Waterhouse is an option, but I also noticed that Vanguard is available in Canada. Does it make any difference if we've lived abroad for 6 years and are no longer resident?

    Sorry for such long winded questions!

    John

  5. Chris says:

    Hi John,

    I seem to be in a similar(ish) situation; UK resident now teaching in the Philippines (20 yrs abroad). I contacted Vanguard UK but they will not let me purchase funds as I am non-resident. I think you can find out from the Inland Revenue whether they consider you resident or not. I am waiting to hear back from DBS Vickers about whether I can get an account with them without going to Singapore.

    Chris

  6. Marcelo says:

    Hello Andrew!

    Im from Uruguay, Im forestry engineer and Im not expert in investing. I have been saving some money for some time, always wishing to invest it. Im trying to take my first steps out of the “rat race”, like Robert Kiyosaki says hehe.

    I liked your book very much as I already told you, I investigated a bit and I shared your vision. I was thinking that having my money in the bank is worthless, Im not getting any interests and In addition every year my money can buy less things cuz inflation, you know this better than me.

    So the 10% rate / year of profit sounded good for me to get started, not too risky investment and well, Im going to give it a try as it will be always better than having the money stocked at bank. I was thinking on buying in a lot of different indexed funds so I dont risk too much if one of them has some bad years.

    Here is my question, if you have sometime ofc:

    I have been searching for brokers to make this investment, Im having problems finding one… mostly of them offer me ETFs and with automated leverage that puts in risk my whole invest if it suddenly drops and close my position… Basically this would never work for this kind of long term investment.

    I have no idea what to do, I mean I have some cash I want to do like you said in your book but I cant find the place. Any suggestions maybe?

    Thanks in advance, have a nice day!

  7. Ashley says:

    Hi Andrew,

    I noticed in your article you didn’t mention investing through an isa and have recommended the HSBC trackers. For example i have found that alliance trust savings offers cheap options for vanguard index funds and i am unsure how to proceed. Apologies if i have misinterpreted your advice, just trying to accommodate tax breaks before i set up my portfolio (initially have 10,000 to invest) with intentions to make regular small payments.

    Cheers

    Ashley

  8. Ashley says:

    Hi Andrew

    i should have added that i have been researching capital gains tax and as a british based investor was wondering if you had any further advice regarding the choice to invest through an isa or go direct to hsbc. Any help is greatly appreciated!

    Cheers

    Ashley

    • Hi Ashley,

      I’m sorry, but I don’t know what an isa is. Are you an expatriate?

      Cheers,

      Andrew

      • Ashley says:

        Hi Andrew,

        Thanks for the swift reply, I am a UK resident and looking to follow the advice of your book (great read by the way). An ISA account is exempt from income tax and capital gains tax on investment returns, and no tax is payable on money withdrawn from the scheme either. The downside is that you only have a certain allocation each year (soon to be £15,000). I got the inspiration from the blogpost below:

        http://monevator.com/get-an-isa-life/

        I was hoping for some advice on whether using ETF’s through an ISA platform and receiving tax breaks would be preferable to going straight to HSBC tracker funds as a beginner investor. Perhaps i am missing the point, and focusing on tax breaks is majoring in the minors as HSBC tracker funds have such low costs and potential for compounding. I hope this explains my question, i think the blogpost is an interesting read if you have the time.

        All the best!

        Ashley.

        • Hi Ashley,

          Such a question pertaining to your home country tax laws is beyond me. You may want to clarify with a fee-based advisor or tax accountant in your home country.

          Cheers,
          Andrew

        • Ashley,

          After a quick look online, it appears your isa account is much like a U.S. IRA or a Canadian RRSP. If that is the case, you can likely stuff it with virtually any investment product you want. For instance, Americans and Canadians (the smart ones) put their ETFs (indexes) inside their IRA/RRSP accounts. As such, the profits grow tax free. If they are huge savers, and need to invest outside the tax sheltered plans, having filled up their annual contribution room, then they do likewise with indexes in a standard taxable investment account. Shoot the Monevator guys a question about this. I have a feeling this may be correct.

          Cheers,
          Andrew

          • Ashley says:

            Hi Andrew,

            Thank you very much, i have been in touch with guys at monevator and will let you know of any developments, I will probably take the advice and clarify with a fee-based advisor or tax accountant to be sure.

            Many Thanks!

            Ashley.

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