Nick Hungerford is co-founder and CEO of investment firm Nutmeg. He grabbed a moment with hubbul, helping us untangle the finer points around investing money as a freelancer...
To kick-off, how important is it for freelancers and contractors to have emergency cash for a rainy day?
"As for anyone investing, it’s important to make sure you're comfortable with the amount of money you’re putting in, and that you have other provisions for managing life uncertainty and changes to income.
"Of course, freelancers and contractors often face more uncertainty than others, particularly if they work to short-term contracts. So the need to feel confidence in their rainy day fund is even greater. That said, many people invest purely for that reason – to build up a rainy day fund in case their life changes unexpectedly and dramatically, and they need a sizeable pot of money to ease the burden."
What’s the first piece of advice you’d give to a freelancer weighing up whether to invest?
"The key difference for freelancers and contractors is that they probably won’t have a workplace pension. Most people employed on a permanent basis by a company or organisation will tend to be in a pension scheme, arranged by their employer. They might not even consider that by having a pension they are investing, but they are. And there are great tax benefits with a pension. Freelancers need to look to make provisions for their long-term financial future by ensuring they have good personal pension plans sorted."
"Because they don’t have the employer safety net, many freelancers are actually more aware of their finances than those on a permanent contract. In some cases they're more likely to take on the risk of investing in exchange for the potential rewards. For starters though, and for anyone looking to invest, the first thing you should consider is the level of risk you’re happy with.
"Do your research, understand your options and only commit once you’re completely comfortable. After that, if you do decide to invest, make sure you take advantage of your annual ISA allowance, which also carries great tax benefits."
Aside from the obvious, what are the need to know benefits to investments?
"The tax breaks you can get with ISAs and pensions are great. It’s important to get your head round these and make the most of them. You only get a certain allowance with ISAs and pensions in each tax year you see.
"When it comes to investing, you can potentially get much better returns than the interest rates you typically earn on cash savings - which is why it's so appealing. This has been really relevant since the 2008 credit crisis, since which time the Bank of England has kept interest rates painfully low. In that period, the average annual returns on a typical medium-risk investment portfolio could have been in the region of 7%-10%. But remember, this is an average.
"You can have some years when your portfolio is down. But it’s all about sticking with it for the long-term and understanding the risk and reward."
So what type of investment options are out there for freelancers?
"The same as are available to pretty much anyone - the full landscape of investment options is vast. You can choose to invest in individual company stocks, government or corporate bonds, which tend to carry lower risk than stocks, commodities like oil, coffee and grain, or investment funds, which usually contain a large number of different stocks or other investment assets.
"At Nutmeg, we invest through exchange-traded funds (ETFs) which means we can invest small amounts across entire stock markets, like the FTSE 100 or the S&P500. In this way, we can spread risk and the chances for potential returns. A Nutmeg portfolio, no matter how much you put in, will generally hold thousands of individual investments across many countries and industry sectors."
Does patience pay off when it comes to investing?
"All the historical data shows that investing is very much a long-term proposition. You have to be prepared for the value of your investments to fall at certain times, and this can be for extended periods.
"Over the last 30 years a typical medium risk portfolio of 60% UK stocks and 40% UK bonds would have grown in value by around 1500% - far higher than the rise in average UK or even London property prices during the same time – but those investments will have had some massive dips over those 30 years, especially amid the market crashes around 2000 and 2008. Anyone selling their investments then, instead of riding it out, would have effectively ‘locked in’ those losses."
So a quick wins are non starters?
"Hate to break it to you but there is no quick win when it comes to investing. Or certainly, not one that comes without huge risk. Picking individual company stocks may well bring you a big profit in a short space of time, but you could equally lose the lot. It’s akin to gambling on red or black. There’s a quote by Jack Yelton: “There’s an easy way to leave the casino with a small fortune – go there with a big one."
"Looking at UK stock market data from 1965, you’d have a 55.2% chance of making gains if you’d invested for one day – similar odds to the toss of a coin. But long-term investing dramatically increases your chances of making positive returns. Investing for one month ups your probability to 63.9%. Investing for one year boosts your chances to 82.1% and investing for 10 years or more pushes it to 99.4%."
Got it. Retirement planning, pensions aside, what are the options?
"It doesn’t have to be all pensions. ISAs can steadily accrue value over time and hold brilliant tax benefits. Property is a popular retirement plan too - either by investing in a second property or downsizing when people reach retirement age, giving them a healthy lump sum to live off."
People can make their own investments, so why trust the professionals?
"Well, for a start, the time it takes. Keeping on top of global financial markets, industry reports, currency movements – all the things that can impact your portfolio – can become a full-time job, and that’s assuming you know exactly what you’re doing. We do all that for you, and make adjustments to your portfolio as we see fit. You'll have a team of investment experts doing all the hard work. It's as simple as that.
"Secondly, fees. Creating and managing your own portfolio means you may have to pay trading fees, commission and all manner of other charges as you do so. Finding the best investment products at the best fee rates can be painstaking. We work directly with fund providers to keep those costs low and we can buy and sell at higher volumes, across customer portfolios, to add more efficiency to the process."
Plain and simple, what’s a ‘Stocks and Shares’ ISA?
"Every year the government gives you a tax-free allowance in the form of a new Individual Savings Account (ISA). There are two main sorts of ISA — a Cash ISA and a Stocks and Shares ISA – and you can contribute money to one Stocks and Shares ISA and one Cash ISA in each tax year. Any capital gains you make on the money you hold in your ISA are free of tax, for the whole time you keep it in there. The ISA allowance for this tax year (2015-16) is £15,240."
Is investing as risky as its sometimes made out to be?
"When investing, there's always risk. The spectrum of risk and where you want to be on that spectrum is the crucial thing. With Nutmeg, you can choose how much risk you want to take, on a scale of 1 to 10. We’ll then build the portfolio tailored to the level of risk you’ve chosen and manage it to make sure it stays aligned to that level of risk.
"You can have different portfolios with different risk levels. For example, you might want a low risk Nutmeg portfolio, say risk level 3, when saving for a deposit on a property, and another at risk level 10 for your pension, which is likely to be invested for longer and therefore have more chance of riding out market dips and benefitting from market peaks. You can also change your risk settings as your life does."
How flexible are investments?
"Flexibility of investments and the ease in which you can buy and sell them - their liquidity - is really important. Again, there is a big range here. Property is commonly regarded as the first go-to for any aspiring investor, but it’s often forgotten that the value of property goes down as well as up, and when it’s fallen in value, during a recession or slump in the property market, it can be hard to sell at an attractive price."
Do you need heaps of money to get started?
"Thankfully, in this day and age, no. Nutmeg is one of a number of companies bringing technical innovation to the finance industry, levelling the playing field and making great services available to everyone at a price that’s fair. The kind of wealth management service we offer at Nutmeg was traditionally only available to those with £200k or more to invest. With us, you can start a professional investment portfolio, managed by our expert investment team, for just £1,000. And you can choose to invest in an ISA, a personal pension, or a general investment portfolio, or all three.
Finally, how long will it take to withdraw my investments?
"It can vary to be honest. Some investments will require you to stay invested for a long time, others you can access when you want. Much of it also depends on the liquidity of your investments too – and how easy it is to buy and sell.
"Our customers can log in and withdraw from their portfolio when they want – we’ll then typically run a weekly trading cycle to get their money out for them. We use ETFs that are highly liquid so we can buy and sell easily and efficiently.
"But again, it’s crucial to realise that tinkering excessively with an investment portfolio, taking money out one week, adding it back in the next, can harm your long-term returns. It’s very different to a bank account."
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