Ian Cowie gives a personal account of how a 19th century invention can meet 21st century investors' needs.
Financial freedom - or the ability to own your home, choose how you work and when you retire - may seem out of reach to many young people today.
High house prices, insecure jobs in the gig economy and fewer risk-free final salary pensions are the all-too-familiar bad news. But the good news is that financial freedom is still achievable with patience and application for anyone prepared to set aside a modest sum each month.
Nor is there anything theoretical about this. I am talking about my personal experience over the course of a working lifetime and, if a humble hack can achieve financial freedom, anyone can.
Here’s how I did it, starting by saving just £25 a month, shortly after I got my first highly insecure job as a cub reporter on Fleet Street, a quarter of a century ago. Better still, there was nothing terribly clever or complicated about the course I plotted to arrive at financial freedom and independence. I used a form of savings and investment fund that was invented in the 19th century and continues to deliver high returns with low costs to 21st century savers and investors today.
To be specific, I began by setting up direct debit payments into a no-obligation, fully-flexible monthly savings scheme in 1992. It happened to be with Foreign & Colonial Investment Trust, a global pooled fund that has been listed on the London Stock Exchange since 1886, but it could just as well have been with any of the many investment companies that offer monthly savings schemes. Indeed, I continue to buy and hold shares in several investment companies today - including some managed by Baillie Gifford, BlackRock, Fidelity, Janus Henderson, JPMorgan and Schroder.
The important point, then and now, is that I gained exposure to the long-term tendency for shares to deliver higher returns than bank or building society cash deposits for the price of a few pints of beer a week. When I could afford to invest more, I did so.
While everyone is familiar with headlines about billions being wiped off stock markets, fewer people know that shares reflecting the broad composition of the London market have delivered higher returns than cash over three quarters of all the periods of five consecutive years since 1899, according to Barclays Bank.
Share prices can and do fall without warning and you may get back less than you invest. However, the longer you can afford to remain invested, the lower the risk that you will be forced by personal circumstances - or the need for cash now - to sell while prices are temporarily depressed.
Investment companies diminish the danger of stock market investment by diversification. They spread risk by allocating assets across dozens of different underlying holdings to reduce individual investors’ exposure to setbacks or failure at any one company or - in the case of international investment companies - any one country. The principle is the same as not putting too many eggs in one basket.
Investment companies also enable individual investors to share the cost of professional fund management and gain access to markets around the world, some of which trade while we are asleep. All of this without the high marketing costs of traditional insurance-based schemes and other pooled funds which paid financial advisers to recommend them. Remember that the more of your money which sticks to intermediaries’ shovels, the less will be left to work for your benefit.
So much for the theory. How did it work in practice? I stopped saving with F&C a decade or so ago and, as mentioned earlier, began buying other investment company shares that better meet my current needs and are currently worth a seven-figure sum in total. But the Association of Investment Companies tells me £100 invested in F&C Investment Trust in 1992 would have grown to £1,128 by September 2017. The Bank of England reckons only £197 of that was needed to keep pace with inflation.
Nor was this investment company unusual. The average investment company turned £100 into £1,295 over the same period. Contrary to what many might imagine, that return was much better than bricks and mortar. Nationwide, Britain’s biggest building society, reports that the average house price was £51,100 in 1992 and £210,100 in September 1997. So, £100 invested in the average home over this quarter century would have grown to £411.
Here and now, Joe, my son, remains a happy shareholder in F&C and I rather wish I had kept my monthly savings scheme going - not least because the manager tells me £25 a month over the last quarter century would have rolled up into £28,620 today. Not a bad return on £300 a year or a total of £7,000 over the period.
Yes, it did take the best part of a working lifetime but get-rich-quick schemes are for fantasists. In practice, for most people, the road to financial freedom will take time, application and patience. The sooner we begin the better. Or, as Mao Zedong - a communist revolutionary not often quoted in the City - pointed out: “A journey of a thousand miles starts with a single step.”
Ian Cowie is a columnist at The Sunday Times