The one reason a lot of people don’t invest
You ever wonder who even buys stocks?
50 year olds do.
And the reason is not that they have more grit and saved harder than the generations after them.
The lie about our ‘spending habits’
If you were born in the 80s or 90s, the narrative is that you would rather blow your cash on a trip to Thailand, brunches, and an iPhone than put it toward your flat deposit.
It’s assumed your habits and attitude are the reason you don’t save and invest, and get ahead in life.
That’s not true.
It’s not affordable to get richer
In truth, we are avid savers, and are more thoughtful about the long term than previous generations.
But putting those savings to work is not affordable.
The options are:
- You can keep it in a savings account. You’ll earn nothing in interest, and as inflation stands at 2.7% now, you’ll become poorer.
- Putting it with a financial adviser is not an option. They won’t talk to you unless you have at least £50k to invest.
- Use a robo-adviser. You’ll be put in a ready-made portfolio based on your responses to a short online survey, and be charged c. 1% of your savings per annum.
- Invest it in the stock market yourself: the worst option for most. You could end up with less than you started, just due to broker commissions.
Here’s how you can turn £100 into £84, after making a 10% return:
If you, like a lot of people, have £100 / month to invest, a commission of £12 represents a large chunk of your money. You need to make a 14% return just to break even.
Tech created a faster, better, cheaper world — but it’s not evenly distributed
My job at KPMG was to audit financial services companies. Everything from local boutique brokerages to big banks to hedge funds.
So, I saw this first-hand.
Technology was changing the financial system. Trading which was done with desks of 50 to 100 humans was suddenly being automated and done by algorithms and machines.
Retail customers were paying exorbitant prices for a lot of services, for something that was now fully electronic. Just 0s and 1s in a data center, with close to zero marginal cost to change.
Banks and brokerages charge commissions as high as they can get away with.
If we fixed the problem
If we remove punitive commissions from the equation, all of a sudden self-directed investing becomes the best option.
Even for those just starting out.
You get to enjoy all the potential gains of investing and the expected value of your portfolio can track the market faithfully.
Check how your £100 will grow without the drag of fees:
Will we see 20% year-on-year returns?
I don’t know. No one does.
But on a long enough timeline, the stock market beats cash.
Even if you bought at the peak of the last bull market in 2007, right before the crash, you would have more than doubled your money by now.
Clearly, if you are e.g. 25 and have decades of investing ahead of you, you could benefit from the wealth creation that is the stock markets.
But it’s not affordable. Seemingly only those can afford it who were lucky enough to grow up in an era of unprecedented growth.
Building a zero cost vision
Investing in the stock market is the best way we humans have come up with to grow your savings over the long term. It’s not a secret.
But in order to benefit from this form of wealth creation, it needs to be affordable. Old-school brokers make too much money to be interested in catering to our generation.
Robo-advisers are an option, but not if you dislike an algorithm capturing a large chunk of your expected returns.
That’s why we’re building Freetrade.
Get your early access invite, and get started investing for free in 2018.
