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An article @ This is Money compares prices for various items today with those 25 years ago. The first thing you’ll notice is that while (average) salaries have increased by 227%, house prices have gained a staggering 722%! But the comparison also shows that goods don’t always have to be more expensive than they were 25 years ago - for example, a 22 inch Sony colour TV would have set you back £297 in1982 while it only costs £148.99 today.

More highlights include:

• Pint of London Pride: £0.58 then - £2.80 now. That’s +382%
• Odeon cinema ticket: £1.60 then - £6.50 now. That’s +306%
• Manchester United season ticket: £64 then - £437 now. That’s +582%
• Sony Walkman: £80 then - £19.99 now. That’s -75%
• Flight to Paris: £148 then - £51 now. That’s -65%

Are you aware of any other goods that you have purchased in the past for more (or less) than you would buy it for today? Let us know in the comments!

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Everyone who is even just remotely interested in financial markets or personal finance is eagerly waiting to see whether the Bank of England will decide an increase in interest rates today.

We currently have a base rate of 5.25% which means that the Bank of England (BoE) charges 5.25% interest for loans that high-street banks take out in order to lend money to their customers. That means when the BoE decides to increase interest rates, any retail bank that seeks to borrow money will have to pay more interest on it. Since banks don’t usually like to decrease their profit margins, an increase in the base rate will almost certainly be passed on to consumers.

Now, how does that help with inflation? Inflation is the result of more money being spent than output produced - prices increase in order to bring down demand. As a matter of fact (and especially with the growing debt level in the UK) the money people spend isn’t necessarily money they have earned (i.e. a salary) but frequently money they have previously borrowed from a financial institution. Think houses, cars but also any balances carried forward on credit cards…

If the BoE now increases interest rates, borrowing money gets more expensive as high street banks adjust their offers. While you might be able to borrow £10,000 with 5% interest in a time where the base rate is 4%, you will certainly have to pay at least 7% when the base rate approaches 5.5%-6%. Assuming a loan period of 3 years, this results in a difference of roughly &pound20 a month. While £20 doesn’t sound too much, you still end up paying £300 in interest more a year. Therefore, with an increase in the base rate, it gets more expensive for people to take out loans or a mortgage. This in turn should make people think harder about whether they really need to take out this loan, and hence reduce demand and thus spending.

On the other hand an increased base rate means that people are likely to get more interest on their savings (because banks get more money for theirs at the Bank of England…). If you can suddenly earn 7% a year in interest when before only a meagre 4% were available, you are more likely to leave your money in the bank, rather than go out and buy some more shoes . It’s easy to see that more money in savings means less money being spent…

The overall effect of an increase in interest rates is therefore a reduction in demand and associated spending. This in turn reduces inflation as now production can keep up with demand and we (theoretically) return to the equilibrium price for our goods. If you’re keen to find out more about how monetary policy works, the Bank of England website is a very good place to start reading…

Back to real life - the interest rates meeting is on today. Analysts and the City in general have been speculating for weeks what the outcome of said meeting might be. While about a week ago, the BBC published an article that proclaimed interest rates would have to be raised to at least 5.75%, predictions got a lot more modest now.

One of the strongest indicators for a potential increase in interest rates on Friday is the fact that the Bank of England failed to hold its 2% (CPI) inflation target. Inflation was at 3.1% in March and in order to bring this back down, raising interest rates seems like a sensible option. And while you could panic because an increase would bring the interest rate to its highest value since 2001, putting it into perspective shows that it has been, in fact, hovering around a historically low value - especially if you compare it to figures for the early 90s.

However, there are some voices in the market who suggest that a raise in interest rates might not at all be necessary. First of all, the effect of the high energy prices that contributed to the rise in inflation is coming to an end as utility companies (are being forced to) pass on their cost savings, which will reduce people’s utility bills. Further, the growth in house prices is finally slowing down (yes! ) and the number of approved mortgages is even decreasing! All these signs could mean that we’ll be back on track with 2% inflation by the end of the year.

Let me know whether you think an increase is likely, and why (or why not). We can later check who got it right and even though the first person who guessed correctly won’t be getting a freebie, you can still prance around knowing you’ve got it all figured out.

Update: The Bank of England announced an interest rate increase of 0.25% to 5.5%.

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Trent @ The Simple Dollar has recently dedicated many posts on how to set and reach goals. Especially when you’re just starting the whole “money business” there is hardly anything that is more important than having clearly defined goals in order to track your progress and ultimately reach your goals - one of the reasons I’m writing this blog!

The article lays out three major reasons why people not reach their goals, and surprise, surprise - it’s not really much to do with not having enough will power to keep focussed on a particular goal. The reasons for failure have their roots very early on, namely in the phase the goals are defined. Trent argues that any goals that are unclear, overly optimistic or too distant have a high chance of under-achieving or failing (depends on how you put it…).

Trent’s post reminded me of an acronym that’s commonly used in business and that you might have come across - SMART. SMART goals have the following characteristics:

• S - specific, significant (you don’t micro-manage…)
• M - measurable, meaningful
• A - achievable, action-oriented (you can influence the outcome)
• R - realistic, relevant
• T - timely, tangible, trackable

I’m not usually a big fan of “miracle cures” but I think it’s at least worth checking your goals against the above to make sure you stand a chance at actually achieving them.

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I don’t know about you but I’m starting to feel a little dizzy with all these investment options available. Until I’ve properly tackled all the options I’ve covered so far, I decided to not add any more to the (already) extensive list.

Of course I could go on talking about options, futures, exotic derivatives, commodities, currencies, real estate… but since I don’t see myself investing in any of those very soon, I won’t bother researching any details on them - yet.

In case you’ve missed a post of the “Investment Choices” series, here a brief overview:

• Shares: a very gentle introduction to what shares/stocks are
• ETFs: a first dive into the world of funds with exchange traded funds
• Index funds: passively-manged funds that aim to track the performance of a stock index. Commonly called “tracker funds” in the UK.
• Mutual funds: actively-managed funds where the fund manager picks shares in order to beat the stock market or achieve a certain objective. In the UK referred to as “investment trusts”.
• Bonds - part 1 and part 2: an excursion into debt securities with a gentle reminder that - assuming you’re young - this investment should by no means dominate your portfolio since the associated low risk won’t earn you decent (enough) returns.
• Bond funds: through the advantages of debt securities joined with the advantages of funds, bond funds are a good way of generating passive income.
• Unit trusts: UK investment jargon explained - part 1
• Investment trusts: UK investment jargon explained - part 2
• OEICs: UK investment jargon explained - part 3

Reading through the above list I feel re-confirmed that there are plenty of options to choose from when building a first portfolio. Let me know if you disagree or want to know more about anything else I haven’t covered so far!

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And finally, let’s solve the last remaining secret of investment choices - open ended investment companies. One of the reasons I wrote about investment trusts yesterday, is that OEICs are a hybrid form of units and investment trusts.

They are companies issuing shares on the London Stock Exchange and subsequently use the money from their shareholders for other investments - essentially what investment trusts do. The difference to investment trusts is (and here’s where the similarity to unit trusts comes into play - which makes the OEIC a hybrid form) that OEICs are open-ended.

As I’ve already explained in the post about unit trusts, an open-ended investment means that the fund manager can keep issuing shares so that the price reflects the true underlying value of the fund (rather than some inflated number that merely represents a stock market hype for example).

But there is one difference between OEICs and unit trusts: OEICs don’t have the bid-offer spread that you’ll find with unit trusts. Therefore, you will always be able to buy and sell your shares for the same price, rather than having to sell for less than what you originally paid.

I think we’ve now covered a wide range of investment choices in this series and it’s about time to wrap it up. Yes, I could go into lots and lots of detail about options, futures, exotic derivatives, currencies, commodities, real estate and so on and so forth (the list is endless), but that would be missing the point, because I don’t intend to buy any of these (yet?). So why bother?

If you really feel like you want to know more about any of the above, leave a comment and I might re-consider…

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Anyone up for more UK stockmarket jargon? Yes? Well, here’s what the English understand by an investment trust:

“A company quoted on the London Stock Exchange which invests its shareholders’ funds in the shares of other companies.” (www.finance-glossary.com)

Therefore an investment trust is essentially a company that exists solely to invest your money in other companies’ shares. Unlike unit trusts, investment trusts are closed-end funds in that they have a fixed number of shares whose prices are determined by market supply (fixed in this case…) and demand. This means that they often trade at either a discount or premium to the value of their underlying assets.

In short - I couldn’t find a difference between investment trusts and what American’s broadly classify as mutual funds. So unless someone tells me what the difference is, I will assume they are the same securities that simply go under different names in different countries. Just like people in the US refer to funds that mirror a stock index as index funds (which seems reasonable…), British people prefer to call them tracker funds.

So no real mysteries with investment trusts. Feel free to re-read the post on mutual funds and substitute “investment trust” every time you come across the words “mutual fund”.

Read part 10 of “Investment Choices” on OEICs >>

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