Simple Pound

I can proudly announce that I have worked on my top 5 blogging mistakes (as mentioned here) and as of yesterday all of them have vanished.

There is now an easy way to contact me by using the contact form, which can be found here or simply by clicking on “Contact” in the menu above. I strongly encourage you to make use of it and email all your requests, suggestions and general feedback so I can improve the site and make it as useful as possible for a wide group of readers.

Secondly, I have created a short “About the Author” page which is also accessible directly from the menu and contains some basic information about me, the site and its purpose. I have included a reference to the “Simple Pound Network”, so if you have a financial goal of any sort that you want to track here, give me a shout!

The third mistake of not utilising the blog’s trackback capabilities wasn’t actually a mistake since I was already making use of this. Trackback essentially “informs” other bloggers when you are linking back to their site or a particular post and thus builds, maintains and extends the community (not to mention the extra traffic you’re getting…). The reason I included this mistake was to double-check whether it was activated and to randomly check a couple of sites to see whether the ping-backs show. They did .

To stronger publicise my best posts and hence work on blogging mistake number 4, I have also created a “Best Of…” page, which highlights the top 10 posts written here since the site’s inauguration as well as the month’s top 5. The monthly list will always refer back to last month’s posts (i.e. in June we’ll see a list of the top 5 May posts) because the month obviously has to finish before I can proclaim any “winners”. Thus the “Best Of…” page will get updated along with my financial end of the month review. Since the latter usually attract some good traffic, I have also included an overview of the monthly progress reports for your convenience. Go and check it out!

And finally, I am now proclaiming ownership of this blog by including a link to SimplePound in all my email signatures. I’m quite proud of this site, so it was about time to celebrate it in public…

If you are reading this through a feed reader (the number of subscriptions is growing!), make sure you head over to the site to check out the new pages and let me know what you think!

On a slightly unrelated note: Accelerated by a lot of traffic through the Carnival of Personal Finance, SimplePound has now had over 1,000 visits (1,079 as of 5am this morning) from 566 unique visitors within two and a half months of its existence. I am aware that many bloggers achieve numbers like these within a day or two, but since the personal finance topic is much less popular in the UK than it is in the States, I am nevertheless proud and happy about this achievement.

Special thanks to |[P]| at meewella.com and Rob at money-watch.co.uk for their links to this site, which has generated some decent amounts of traffic over the last weeks.

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For those of you unfamiliar with the term, the Carnival of Personal Finance is a way for bloggers to share their week’s best posts and have it aggregated by a fellow blogger in the community. This week’s Carnival of Personal Finance is hosted by J.D. @ Get Rich Slowly and is a special edition in that it marks the two year anniversary of the carnival. Therefore J.D. asked the bloggers to submit what they deemed to be their best post of the last two years.

Since I haven’t been blogging for two years I simply submitted the post that took the most effort and research to write: Interest rates and inflation. This is the first time I have submitted something and I’m very happy that J.D. thought it was good enough to be included.

He included 82 submissions of which the following are my personal favourites (in no particular order):

• Who do you think you are? A post about how your lifestyle and thus spending habits are effected by the social groups you identify with.
• Money isn’t everything and it isn’t you. Probably one of the most important things to bear in mind as you go through life, struggling more or less to keep your finances in order: Life is about happiness, not money.
• How to beat the car dealer at his own game. Insights from someone who has worked as a car salesman for a month.
• What’s a sound financial lifestyle? 17 of the most important bloggers in the personal finance community contribute thoughts to this question. The dominant response: living within one’s financial means.
• Tips for having a successful budget. Very detailed and well written how-to for anyone wanting to get to grips with that dreadful b-word.
• The best place to hide money: Conversation with a burglar. The title says it all. A must read. Part 2 can be found here.

I hope you enjoy the articles as much as I did!

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After I shared half of my wisdom about fund selection, I’ll continue today with the remaining features to look out for when deciding which fund(s) to include in your portfolio.

I discussed the Morningstar category, returns, volatility and costs yesterday.

Risk. Based on the category your fund belongs to, Morningstar makes a relative comparison for returns and risk. For example, this fund had consistently high returns (relative to the UK Large-Cap Blend Equity category) but is exposed to a higher than average risk as well. This essentially means that you could get the same category exposure at lower risk. Ideally one would find a fund that has higher than average returns for the category while maintaining average risk. (This information can be found in the subsection “Risk and Rating”)

Investment objectives. Every fund manager has some high-level objectives that (s)he tries to achieve with her security selection. Look out for buzzwords like growth, risk or income to get an idea whether the fund is more conservative or aggressive. I suggest you diversify across different objectives as well to be sure to include some defensive funds that will achieve moderate returns no matter what. (This information can be found on the fund overview page)

Morningstar Style Box. This mainly applies to equity funds and illustrates the area of concentration in terms of large-cap, mid-cap or small-cap as well as value, blend or growth where blend effectively describes an even mix between value and growth (refer back to my shares introduction if you don’t know what I’m talking about). Your portfolio should contain at least one representative for every “box” to make sure you have diversified well enough across different capitalisation sizes and equity types. The fund that I used as an example earlier has the following style box:

and has therefore a nearly even mix between large-cap growth and large-cap value stocks. (This information can be found in the subsection “Portfolio”)

Morningstar Rating. This rating is probably one of the more important numbers you should consider, and personally I would not invest in a fund that doesn’t achieve at least 4 (out of 5) stars. 5 stars are awarded to funds that belong to the top 10% of the category’s risk-adjusted returns, while 4 stars are awarded to funds that achieved a risk-adjusted return in line with the next 22.5%. Therefore, by investing only in 4- and 5-star rated funds you only include funds that belonged to the top third in their category (in the past). Bear in mind though that past performance is never a good indicator of future performance and we can only hope that the “good” funds will continue to be lucky. (This information can be found in the subsection “Portfolio”)

There are many many other things you can learn about the fund of your choice, including important facts about the world regions and economy sectors your fund invests in (Portfolio section). You can also learn about the top 10 holdings of each fund in terms of weighting (i.e. the shares that the fund has most heavily invested in) and get a more detailed break-down of the market-capitalisation represented within your fund. Unless you are very keen and good with Excel I suggest you make use of a very useful tool on the Morningstar website called “Instant X-Ray“.

This tool gives you an overview of your portfolio once you have decided which funds to include and what percentage of your portfolio those funds will assume. After running Instant X-Ray you will have a much better idea of how well you diversified across regions, sectors, styles, risk and so forth. Once I finish my fund allocation for the life insurance, I’ll post my X-Ray results so you get a better idea of what I’m talking about.

In my next post on this topic I will compare two funds to see which one is better suitable as a base fund for your portfolio.

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I recently mentioned that I wanted to change the fund allocation of my life insurance and a couple of days ago I finally sat down with a list of available funds to figure out which ones to include. Since the selection is limited by the life insurance company to about 50, this is a much easier task than starting from scratch and having to navigate through the vast amount of mutual funds available. Nevertheless, the same criteria apply and I have compiled a list of features that I’ve checked before making final decisions.

If you’re completely new to investing, I suggest you familiarise yourself with the Morningstar website, which I think is one of the best and most comprehensive websites available for fund comparison. And most importantly, the key features are completely free of charge.

Assuming you have a list of funds that - for one reason or the other - seem attractive to you, here’s what I look at to determine whether or not to include them in my portfolio (or life insurance in my case). The list is not meant to be in order of importance; it simply reflects the order I’ve looked at information. All of the following are (almost) equally important and should be considered in a bigger context to see whether you end up with a sound overall performance picture.

Morningstar Category. Each fund is classified by assigning it to a main category that most closely reflects its purpose, e.g. UK Large-Cap, India Equity or Sector Equity Biotechnology. Using the categories is also a good way to start looking for certain additions to your portfolio as you should have a good idea what sort of countries or sectors you’re after. If you don’t, I suggest you do some more reading and get yourself a model portfolio that can be used as an initial guideline. Mine is here. When selecting funds, make sure you are diversifying across different categories and don’t rely too heavily on a single selection. (This information can be found on the fund overview page)

Returns. We’re trying to earn some money, so surely the actual returns that a particular fund has achieved are important. I usually look at the 3-year mean return to see how the fund performed in the recent past. Some people look back even further than that (5 or 10 years), but if you do certain other considerations like the fund management should be researched as well. The key point is that you should avoid the “best fund picks” of the year, especially if they have only achieved mediocre performances before. We’re looking for stable long-term performance and many funds that outperform the market this year will underperform it subsequently. (This information can be found on the fund overview page and in the subsection “Risk and Rating”)

Volatility. Those of you, who have read my chapter reviews for Richard Ferri’s book “All About Asset Allocation” will know that we want to reduce volatility in order to maximise long-term returns. Volatility measures the degree to which you can expect your returns to deviate from the average. The lower the volatility, the more likely you are to achieve a certain return. There will often be a trade-off between return and volatility and it is essentially a personal decision how much risk you feel comfortable with. Regardless what you decide, you should always opt for funds with lower volatility given the same return. (This information can be found in the subsection “Risk and Rating”)

Costs. There is no such thing as a free lunch and you will have to pay your fund manager for his (or her) work by paying an annual administration fee. This fee varies considerably and also depends on whether your fund is actively or passively managed. You should only pay a higher admin fee if you are convinced (and the numbers prove it at least for the past) that the fund will severely outperform the index. Otherwise you might as well invest in an index fund. When you compare funds, make sure you always compare the net return, i.e. the annual return minus the annual management fee. Only then you have a true picture of how successful your investment strategy was / would be.

Another important cost factor to look out for is the initial charge some funds require. This is usually give as a percentage of the money you’re investing and can exceed 5% quite easily. Again, don’t forget that the fund has to earn back any money you paid before you can make any profits. Therefore, you should only pay this fee if you are convinced of your choice, or else opt for a no-load mutual fund which doesn’t charge the initial fee. On the other hand, many fund supermarkets (online websites you can use to buy funds) have special deals that significantly reduce these upfront charges. Make sure you shop around! (This information can be found in the subsection “Fees”)

There’s plenty of other things to consider before buying a particular fund, so make sure you check back for more evaluation criteria in part 2!

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Reading the Healthcare Economist, I came across an article from the Economist that discusses the world’s wealth distribution. While the global income distribution has been debated frequently, no one ever attempted to measure the wealth distribution because the underlying data was (and is) somewhat patchy.

The first study was now undertaken by the World Institute for Development Economics Research (WIDER) and is supposed to give further insights into the distribution of financial assets, real estate, consumer durables and livestock (!) around the world in 2000.

Unsurprisingly, the world’s wealthiest can be found in the States, Europe and Japan while Asia-Pacific, India and Africa dominate the poorest deciles. In numbers, you are deemed to belong to the richer 50% of the world if your financial assets amount to at least US$2,161 or (currently) just over £1,000. With assets worth more than US$514,512 you already belong to the top 1% of the wealthiest people in the world.

As with any global information, these numbers are of limited applicability to the UK or even US because our higher living standards accordingly require higher expenses than the average African family can expect. Nevertheless, these figures should be a gentle reminder that a little can go a long way in developing countries and that the £20 you won’t miss can make an enormous difference somewhere else..

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One of the mantras in the personal finance community is to have a budget in order to take control of your expenses and thus (hopefully) free up some money to save and/or invest in the long run.

Budgeting isn’t always easy and it’s especially hard if you don’t know where to start and have no idea where the money went that used to be in your account two weeks ago. This whole scenario gets even more complicated when you owe money, i.e. you’re in debt and various people/institutions expect payments from you on a regular basis.

I’ve just found an excellent starting point, that doesn’t just give you an idea where your money is going but also helps figuring out what you can afford given certain fixed costs. Make sure you check out the “State of Affairs Calculator” to get a better picture of your financial situation!

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