Quite why the New Year is considered the season for book-buying, when cash is scarce, remains one of life’s little mysteries.
If you have been particularly unlucky, someone has spotted you as a reader of this column and given you a book on investing. It may not promise to make you rich but there’s always a hint that, by following the author’s formula, you will get there.
After all, the magic of compound interest – inaccurately alleged to have described by Albert Einstein as ‘the most important invention in all of human history’ – works wonders. Of course, Aristotle also said, ‘Never trust citations on the internet.’
Nevertheless, compound interest is a relentless taskmaster. At seven per cent, it doubles value in a decade, and quadruples in 20 years. The best piece of financial advice anyone can get is: pay off your credit-card bills in full every month. Interest on them accumulates at a truly frightening speed.
As a sensible Oldie-reader, you know all this, and you are rightly suspicious of the advertising from ‘wealth managers’, as stockbrokers and fund managers call themselves nowadays.
They would like to make you some money, but they make theirs from how much they are managing. The fees do go up with performance, but their rewards essentially depend on gathering more assets.
Other professionals who want to look after your capital are even more blatant. Perhaps you are tempted by the fashion for private equity, attracted by the manager’s portfolio of exciting investments not available on the boring old stock market.
These practitioners may practise ‘two and 20’, meaning that their fee is two per cent a year of your capital, plus 20 per cent of any gains. This model makes them rich, not you.
Nowadays, dealing costs for shares are very low (most of the cost is in the iniquitous stamp duty) and DIY investing has never been easier. You have already saved the fees charged by your wealth manager, and – with the single, shining exception of Warren Buffett – no fund manager has significantly outperformed the market for long enough to be considered more than just lucky.
Five simple rules help. Don’t follow fashion and rush into a share because it has gone up. Don’t buy something you know nothing about. Don’t buy a share that has been listed on the stock market for less than a year. Don’t fall in love with a share because it’s done well for you – it neither knows nor cares whether you hold it.
And do buy Simple But Not Easy, a brilliant book on investing by Richard Oldfield, to comfort you when you make mistakes.
Neil Collins was City Editor of the Daily Telegraph
