Hello and welcome back to Mortgage Advisor on F.I.R.E. I am writing this in Snagov, a small village in Romania about forty kilometres outside of Bucharest. It’s a quiet little place on the edge of a forest and lake; the perfect place to come and write. Unfortunately, on this visit I have been very busy and playing catch up with sleep after a delay to my flight from the UK. We were scheduled to leave Doncaster airport at 22:15. Just as I was booking an Uber to take us to the airport, I had a message come through saying that our flight was delayed until 01:15 the following morning, but we still had to get to the airport as though the flight was on time to drop our luggage off. This was absurd.
We arrived at the airport and were given vouchers for food and drink as the flight was delayed by more than two hours. Anyone who has flown from Doncaster will know that choices for food are limited between a six-inch or footlong Subway, unless you feel like braving Wetherspoons. Costa have now opened in the departure area so I was able to boost my caffeine levels just at the time I would normally be going to sleep. We asked what time the Subway and Costa were closing and were assured it would be around 1am. It was surprising then, that when we tried to get food at Subway, the staff told us they were not serving anymore sandwiches that evening. Costa showed solidarity with their Sandwich Artist cousins by refusing to serve toasties or paninis warm. We were offered them cold. We refused.
The one silver lining was that we would be due compensation under EU law with the flights being delayed for more than three hours; we eventually left after 01:30. It was a strange flight though. I’ve flown to Bucharest many times over the last few years and it’s normally a three-hour flight minimum. We arrived in two-and-a-half hours. I did some research and it turns out that you only get compensation if your flight is more than three-hours late arriving; not departing. My theory is that the aircraft was ordered to fly faster to get to Bucharest less than three-hours late as it’s cheaper to burn a bit more fuel than it is to pay compensation to a full flight. Although we were more than three-hours late departing, we were only two-hours and thirty-five minutes late arriving. We had to wait an hour for our bags, and then by the time we got to the house and showered it was after 8am in the morning. Like I said, I’ve been catching up on sleep since then.
Premium Bonds: £9,900 (up £400 from last week).
Stocks and Shares ISA: £7,408.71 (up £123.37 from last week).
Credit Card Debt: £196.90 (up £196.90 from last week).
Loan Debt: £3,831.26 (down £24.69 from last week).
F**k It Fund: £1,075.85 (up £75 from last week).
Total Wealth Figure: £191,885.56 (total assets including residence valued at £173,501 by my lender) minus £138,625.59 (total debt including residential mortgage) equals £53,259.97 (up £426.16 from last week).
As you might have noticed, I have credit card debt for the first time in weeks. In part 4 of this blog I set out some ground rules, of which I have broken two. I am not too concerned as there are explanations for both breaches. First, I have credit card debt because I am abroad and had to pay for some dental treatment. This will be paid off on my return to the UK. It is just that the publishing schedule of this blog, and my ability to pay the card off, have not quite lined up. The other rule I broke was that I would invest £100 every month into my F**k It Fund. I only invested £75 this month, but it’s Christmas time and I’m abroad and had to unexpectedly pay for dental treatment; I only have so much money each month. Into 2020 I might have to reign in the commitment to my F**k It Fund, but I guarantee that my credit card debt will return to zero by the next blog in this series.
Day Trading & Trend Trading
Before I discuss these trading types in detail, I think it best to start with a definition of both.
“Day trading is speculation in securities, specifically buying and selling financial instruments within the same trading day, such that all positions are closed before the market closes for the trading day. Traders who trade in this capacity with the motive of profit are therefore speculators.” Wikipedia.
“Trend trading is a trading style that attempts to capture gains through the analysis of an asset's momentum in a particular direction. When the price is moving in one overall direction, such as up or down, that is called a trend. Trend traders enter into a long position when a security is trending upward.” Investopedia.
There are many people who claim to have made serious money through these types of trading. One thing I always point out is that for every success story there are probably hundreds of people who have tried and failed, losing money in the process. I believe it is possible to make money this way, but only under very specific circumstances.
I believe that trend trading is a more realistic way to make money as it involves a detailed analysis of a stock before investing. The stock is assessed before the decision to invest is made and if the business is healthy and making money, then it makes sense to invest. However, the analysis of a stock is complex and there are often things the average person on the street will not find out even with a thorough analysis of the publicly available information. Trend trading is risky, but because it involves holding a stock for possibly days, weeks or months, it lacks the hyperactive nature of day trading.
What makes a lot of people lose money (day or trend) trading is that they lack the mental resilience to cope with immediate losses and if you trade with either of these systems it is guaranteed that you will lose money as soon as your trade completes. It is guaranteed because of trading commissions and stamp duty. I will illustrate with an example:
I’ve picked a stock at random, Centrica PLC, which is trading at 89.62 right now. If you invest £5,000, you will pay £25 in stamp duty (0.5% of the value of the trade) as well as commission from the company you are using to execute the trade. Costs vary here, but you are probably looking at between £10-£20. I will say £10 for this example. So, you have already used up £35 of your £5,000, meaning you have £4,965 to invest. This will buy you 5,540 shares. For you to recoup that £35 you paid in stamp duty and fees, you need the stock to increase in value to approximately 90.25. To make any sort of meaningful return, say 10%, you could be waiting a while as the average annual return of the stock market is around 7%-8% (it can vary wildly throughout the year though). In order to make a return you must pick the right stock, at the right time. As the saying goes, “it’s not timing the market, but time in the market that counts.” If you research your target stock, invest and hold, you will probably make money in the long-term. If you day trade with this example, for every 1p the stock value increases you will make £55 upon sale. Hardly life changing amounts.
So how do people make money through day trading? I will give another example.
If you invest £50,000 in Centrica PLC using the figures above, you will pay £250 in stamp duty, but the fees will be roughly the same. As such, from your £50,000 you will have £49,740 to purchase 55,501 shares. In this example, for every 1p the stock value increases you could make £555 upon sale. Now, imagine you had £500,000 to invest and you can see how the money is made.
The difficulty for the average person is that you only have a limited Capital Gains allowance each year, and if you want to invest through an ISA you can only invest £20,000 per financial year as of 2019. It is difficult to raise enough money to trade frequently and effectively within the limits of an ISA. It’s not impossible, but it requires a healthy dose of luck.
I have tried my hand at both types of trading and lost money. There are ways to mitigate losses, such as a stop-loss. This is where you instruct your broker to automatically sell your stock if the price drops below a certain value. I have heard varying advice about how low you should set your stop-loss. If you set it too low, you risk losing more money than you need to. If you set it too high, you risk selling prematurely before a stock has chance to bounce back. For example:
You purchase a stock at 100 and set your stop-loss at 95. The stock drops to 95 and you automatically sell, losing 5 on each unit. However, the stock could then bounce back and climb to 120 over the next few weeks. If you had set your stop-loss at 90, the stock could drop to a low of 92 and then climb to 120 at which point you sell with a return of 20%. You could set you stop-loss at 85 and see the stock drop to 86 and then fluctuate between 86-89 for months though. It’s a tricky subject and one for which there is no definitive answer. The safer, wiser, choice for investing in stocks is dollar cost averaging. If you want to gamble, then day trading may be for you. If you day trade, though, understand that it is just an educated gamble and you risk losing a lot of money very quickly.
Dollar Cost Averaging
I will refer to Dollar Cost Averaging as DCA from this point on. Although it is called DCA, it does not mean you have to invest in dollars. The term DCA can be defined as:
“…a strategy in which an investor places a fixed [monetary] amount into a given investment (usually common stock) on a regular basis. The investment generally takes place each and every month regardless of what is occurring in the financial markets.” Investinganswers.com
DCA is at the heart of my investing strategy. I invest a minimum of £250 every month into my stocks and shares ISA. The £250 is then split across individual funds and stock, which can all vary in value day to day. For the sake of clarity, I will use a simple example to illustrate how DCA works. At the moment, EasyJet is trading at 1,440 per share. (Note: with regular investment plans, many ISA providers will not charge dealing commission. Stamp Duty is still payable, but this cost is the same each month and for extra clarity I will ignore the cost in these calculations to demonstrate the principle of DCA). £250 will buy 17 shares of EasyJet with money left over. (Further note: some ISA providers allow you to buy fractions of shares if your total investment will not buy a whole number of shares).
The following month on your scheduled investment day, EasyJet might be trading at 1,504. Your £250 will buy 16 shares. The month after, the price may have dropped to 1,380 and your £250 will buy 18 shares. Over time, the cost and value of your investment will smooth out. You get more for your money when prices are low and the value of the stock you own increases when prices go up. By investing on a regular and scheduled basis, it takes much of the worry out of investing. It’s impossible to regularly beat the market, so going with the flow of the market is how you build wealth in the long run. To take DCA to the next level, rather than investing in just individual stocks you can invest in funds that track a whole index, such as a FTSE100 tracker or a FTSE250 tracker, or a US equivalent. This is a hassle- and worry-free way to invest. It’s not flashy or exciting but it will work and build wealth given enough time, but you must be patient. This will not give you enough wealth to retire in a few years. Over a decade or two, it could create a serious pot of money for you.
There are a few instances when DCA may not be appropriate. One common debate is what to do when you have a substantial sum of money, say £10,000 or more. Should you invest it all immediately or spread your investment out into smaller sums throughout the year? Some people argue that it is safer to invest in smaller sums throughout the year. I disagree. If you are investing a finite amount of money, rather than a regular sum on an indefinite basis, I think you need to get the cash in the market as soon as possible. As I quoted earlier; “it’s not timing the market, but time in the market that counts.”
Rather than spreading the cash over time, I would suggest splitting the sum into two or more smaller amounts and spreading the money across different funds and stocks. If I had £10,000 to invest in a lump sum now, I would put £2,500 into the Vanguard FTSE100 tracker, £2,500 into iShares Emerging Markets Equity Index, £2,500 into the Vanguard US Equity Index and the remaining £2,500 into the Vanguard Global Bond Index. Yes, I like Vanguard.
If you invest your lump sum as soon as possible, you might hit the market at a peak but it’s statistically unlikely. Even if you do, over time the market grows anyway. The key to investing, and the fundamental principle behind DCA, is that you cannot regularly time and/or beat the market. So, rather than swim against the tide, go with the flow.
I’m flying back to the UK on 20/12 and have an early start. I have to be at Otopeni airport for 6am Romanian time (4am UK time). I would rather have flown via Amsterdam or Paris but I’m flying into Heathrow before a connecting flight to Manchester. Then, a train journey back to Sheffield awaits. I don’t feel like I’ve had a lot of time to relax on this trip; it’s been very hectic, but I’ll be back in June.
My girlfriend’s parents have three dogs and a cat. One of the dogs, Nica (short for Veronica) is old now, but still very happy. I love her to bits. In the last year or so she has aged a lot. A couple of times on this trip, when we’ve taken her for walks, her legs have given way and she’s stumbled. The winter in Romania seems quite mild so far with temperatures around 6-10 degrees. This time last year it was -10 degrees at one point in the day. I hope Nica is still here in June when I come back, but I’ve said my goodbyes to her for now.
Me and my favourite Romanian lady, Nica.
Next week will be the last instalment of this blog for 2019. I will have a look back at some of my worst financial mistakes and regrets in the hope that it helps some of you avoid making similar mistakes. Thank you again for your time and I hope you all have a great Christmas.