It comes as a nice surprise to hear that the self-employed are the most likely to invest, especially those that work part-time or on a contract basis. It is also refreshing to learn that SIPP investors, who are largely freelancers, contractors and small business owners may find more bang for their buck in Index Funds or passive investing according to a new book.
- More self-employed people invest than those employed at companies
- Private-sector employees are more likely to invest than those in the public sector
- Even those running out of money are managing to invest for the future
- The children of self-employed people are both more likely to have savings (69% for those whose dad was self-employed, and 70% where mum was self-employed compared to 62% overall), and less likely to have affordable debts (23% where dad was self-employed, 19% where mum was and 30% overall).
- Self-investors could have a better chance at higher returns and lower costs by investing in index funds rather than actively managed funds, according to a new book
Figures from the HL Savings & Resilience Barometer have revealed that even those individuals who regularly run out of money every month are managing to put something aside for the future. Hargreaves Lansdown’s Emma Wall, Head of Investment Analysis and Research, admitted it is a difficult statistic to digest, but one that the self-employed will be grateful for down the line.
“How long this lasts, however, with the cost of living rising every month, is tricky to say,” said Wall.
Anyone reading this can attest that the self-employed have been hit hard in recent years. HL’s report noted that service sector jobs most impacted by lockdown restrictions including hairdressing, shopkeepers and taxi drivers – are typically self-employed people. “Huge swathes of the creative sector are self-employed too, which slowed to a stop during the pandemic,” said the report.
Surviving even without furlough
“Slow to get a furlough equivalent, it was also not universal, and left many self-employed without income for the best part of two years,” said the report. “So, it comes as a heartening surprise to learn from our Savings and Resilience Barometer data that the self-employed are the most likely to invest, especially those that work part-time or on a contract basis”.
Wall said while markets may be in turmoil right now, investing is the best way to secure your long-term financial goals, such as an income in retirement.
Over a multi-decade timeframe, the stock market will far outperform cash savings,” said Wall. “The self-employed are less likely to qualify for a state pension – unless they opt to contribute National Insurance – so securing their own financial futures is imperative.Emma Wall, Head of Investment Analysis and Research, HL
How can self-investors get more bang for their buck?
Investors Jonathan Hollow and Robin Powell believe investing in broad-based index funds is the cheapest way to increase long-term wealth. This goes against the concept of active fund investing, which is either done directly by a self-investor who hand-picks stocks and private market investment opportunities (which takes time and research) or by a fund manager that selects individual stocks and actively trades and changes that portfolio of stocks throughout the year.
Active investing entails more costs than passive or Index investing because active funds tend to make a higher number of trades since a fund manager’s job is to react to share price fluctuations. The active fund manager also requires fees based on a percentage of your portfolio’s size.
Index fund investors on the other hand have to be able to stomach it when the markets are down and e aware that some active fund managers might be able to provide higher returns.
So is there a more effective way to invest without the substantial fund manager fees and still get a mix of stocks that have a good chance of weathering stormy markets? Hollow and Powell seem to think so and outline their views in their recently published book: How to Fund the Life You Want: What everyone needs to know about savings, pensions and investments
In an FT Money Clinic podcast Powell, a journalist that runs a blog called The Evidence-Based Investor, says he did get investing in his younger years, which is very much encouraged. But only later did he recognise that a lot of his returns were being eaten up by fees.
I was looking for the bright, shiny objects, if you like. And I just paid far too little attention to fees and charges, which, you know, it was only many years later I realised that actually are really crucial to good investor outcomes.Robin Powell, The Evidence-Based Investor Blog
Hollow explains why index funds can offer investors more diversity, which can help ride the troughs and waves of the markets, which not all fund managers can predict.
“An index fund is taking a slice of every single one of those businesses in relation to its size and representation in the market. So an index fund is just a miniature representation of a market,” says Hollow.
Powell says in the FT podcast that he is an advocate of long-term buy-and-hold index investing. “I tend not to use the term passive investing for, for various reasons, but the terms are essentially interchangeable,” he says.
In a recent EBI blog, Powell explains that one of the benefits of indexing is its low cost relative to active management. As indexing has grown, investors have benefited substantially by saving on fees and avoiding active underperformance.
The Blog said: “We can estimate the fee savings each year by multiplying the difference between the average expense ratios of active and index equity mutual funds by the total value of indexed assets for the S&P 500®, S&P 400® and S&P 600®. When we aggregate the results of these annual computations, we observe that the cumulative savings in management fees over the past 26 years is USD 403 billion.”
To listen to the podcast, go here: https://on.ft.com/3yNGXjR
DISCLAIMER: This article and cited podcast do not constitute an investment recommendation or individual financial advice. To find financial advice you will need to go to an independent financial adviser.