Last year my colleague Ben Carlson wrote a book Everything You Need to Know About Saving for Retirement. Robin Powell, who is the founding editor of The Evidence-Based Investor blog, believed the book deserved an audience in the UK. Hence Invest Your Way to Financial Freedom: A Simple Guide to Everything You Need to Know was born.
To get a sense for the book you can read an excerpt at the UK personal finance blog, Monevator. And Banker on Wheels wrote that the book is a “great resource for people who are new to saving and investing.
I had to the pleasure to ask Robin some questions about the book. Below you can find my questions in bold. Robin’s (unedited) answers follow. Enjoy!
AR: With so much financial content available online, why did you think it important to bring this work to readers in the UK?
RP: There are actually very few blogs in the UK that are genuinely independent and consumer-focused. So most of the content here is either from platforms, online brokers or fund management companies on the one hand, or the financial media on the other. As you and I well know, the investing industry has a vested interest in generating fees and building assets under management, and that’s the overriding goal that governs the content it disseminates. There are a few excellent journalists out there, but most of the “stories” that get printed are primarily designed to attract eyeballs, not to educate investors. This book is very much needed in the UK.
AR: One common refrain from new investors that they don’t know where to start. You argue that starting small and getting ’small wins’ are key. What is a ’small win’ new investors can achieve to get the ball rolling?
RP: The first thing investors need to to do is not to invest but to save. Ideally they should have the equivalent of six months of income behind them in case, say, they lose their job, have an accident and can’t work, or need to care for a sick relative. Investing without a cash cushion is not a good idea. And when you do start investing, a sensible first step is to automate your monthly contributions so you don’t even have to think about it.
AR: If savings is the best investment, the best investment many can make is in a higher salary. How can being comfortable with negotiation help?
RP: You’re absolutely right, maximizing your income is key, and that means standing up for yourself and negotiating a decent salary. Unfortunately, Americans are better at this than we are! Ben and I give some useful tips on this book in the book, but for me the best thing you can do is to make yourself indispensable to your boss. I’m a boss myself. We’re always busy, and we often do things we don’t like doing that could easily be done, perhaps better, by a junior colleague. Ask yourself, How can I be so helpful to my boss that he or she has to pay me more?
AR: So much of the financial media, and industry, is built around stock picking. Why is a single, all-in-one fund a good option for most investors?
RP: The media loves a good story, and the notion that you, as an ordinary investor, might unearth the next Google or Amazon is just too enticing to resist. The fact is that most — yes, most — stocks don’t even outperform government bonds. The bulk of market returns are driven by only around 4% of companies, and identifying those winners, in advance, is extremely difficult to do. Even the pros can’t manage it once you factor in the fees they charge. The only way you can guarantee owning all of tomorrow’s big winners is to own an index fund. It really is that simple. And yes, a single fund is perfectly adequate, particularly for new investors. Just choose a low-cost equity index tracker, invest money in it every month and forget all about it.
AR: Throughout the book you highlight the benefits of keeping things simple. Why is that so difficult for people to accomplish?
RP: Someone whose wisdom features heavily in the book is Warren Buffett, and when dispensing advice to ordinary investors, Buffett always emphasizes simplicity. There seems to be some perverse human characteristic, he once said, that likes to make simple things difficult. Investing isn’t always easy, as we explain in the book, but the rules are very simple. The investing likes to make everything complicated, but simplicity is the ultimate sophistication. And, to use another of my favorite Buffett quotes, it just isn’t necessary to do extraordinary things to achieve extraordinary results.
AR: The taxes on investments are more easily managed that trying to generate alpha. What general principles can investors use to best achieve after-tax returns?
RP: Every country has different rules, but most Western governments offer tax incentives for long-term investing. The tax relief on offer to pension savers in the UK is particularly generous. Young people who are buying stocks and Bitcoin and so on outside of a pension wrapper are effectively turning down free money. And even if, against the odds, they make a killing, they risk being landed with a tax bill. It’s completely bonkers, but most of the industry is too busy trying to make money out of young people to give them the information they really need.
AR: Chapter 22 includes 20 rules for personal finance. Do you have a favorite, or one that might be counter-intuitive to readers?
RP: A rule that that’s hugely important and that investors really struggle with is that you’re nowhere near as smart as you think you are. Think about it: even Warren Buffett hasn’t beaten the stock market since the global financial crisis. What makes you think you can on the strength of a tip from a friend or an article in the Sunday papers? Stay humble. Know what you don’t know, and stick to what you do know.
AR: Financial freedom means something different to everybody. How has writing this book changed how you think about your goals?
RP: I love my work, but I’d like to reach a point when I do it because I want to, and not because I need to. There are still so many places in Britain and Europe I’d like to visit. But, most of all, I want to spend as much time as possible with family and friends. Ultimately, life isn’t about worldly success or material wealth; it’s about kindness, love and personal relationships.
AR: Thanks Robin for your time. Good luck with the book!
*Full disclosure: Robin was kind enough to send me a review copy of his book.