Category Archives: Section 1

1.1 It’s Your Money

its-your-moneyChapter Overview

An introduction to some basic principles and themes repeated throughout the book.

IRS Approved: The Internal Revenue Service in the US collects taxes on behalf of the government. The UK equivalent is Her Majesty’s Revenue and Customs (HMRC).  Of course tax rules differ significantly between the two countries – and that’s an important distinction.  Making tax-efficient investments is a key component of Tony’s advice, so I’ll be trying to figure out what that means as a UK taxpayer.

Dow Jones Industrial AverageA price-weighted average of the stocks of 30 US blue-chip companies (Disney, Coca-Cola, General Electric, Microsoft) traded on the New York Stock Exchange. It was invented by Charles Dow back in 1896 as a shortcut way to judge how the entire stock market was faring.

If the index goes higher, the overall value of those 30 important stocks went up (on average) and, by implication, all stock prices (in the US) rose.

The UK equivalent is the FTSE 100 – an index of 100 of the most highly capitalised companies traded on the London Stock Exchange (British Airways, Cadbury-Schweppes, Rolls-Royce, GlaxoSmithKline). Although the companies are British, many conduct significant portions of their business internationally.

The purpose of the FTSE 100 is identical to that of the DJIA – to provide a single number that conveys how the weighted average value of companies listed on the London Stock Exchange is changing

Federal Reserve: The Fed is the central bank of the US and was created in 1913. The Bank of England is the UK’s central bank and was created in 1694 – one of the oldest banks in the world.  It’s current governor is Canadian!

Bridgewater Associates: A US investment management firm founded by Ray Dalio in 1975 serving institutional clients – foreign governments and central banks. I’m sure there are UK equivalents but I didn’t look because I’m not an institutional investor and, if I were, I would (hopefully) know enough not to need to write this blog!

Stronghold Wealth Management: A Securities and Exchange Commission (SEC) Registered Investment Advisor (RIA).

The SEC in the US is responsible for regulating the securities industry and for enforcing federal securities law. It is meant to protect the public against fraudulent and manipulative practices in the securities markets.

In the US, Investment Advisors (IA) also exist which are not registered with the SEC.  IA’s and RIA’s both have fiduciary responsibility which means that they are legally obligated to offer advice serving the best interest of their clients.

In the UK, we use the term Independent Financial Advisor (IFA) and the governing body for them is the Financial Conduct Authority (FCA).

An IFA, might be restricted in the products and services they can advise about.  If you go to a high street bank for financial advice, chances are that they’ll only be able to talk about their own products.

The FCA has a register of individuals and companies authorised to act in this capacity in the UK.  If something goes wrong and an FCA registered IFA can be shown to have neglected their fiduciary duty, you can get the FCA to investigate and possibly award damages via the Financial Services Compensation Scheme (FSCS) with the help of the Financial Ombudsman Service.

I have some second-hand experience of this process actually working!  A family member was mis-advised about the suitability of a financial product and (eventually) received a financial settlement. So, as unwieldy as it seems and however paperwork and form-filling intensive the claim process, I think it’s better to have this kind of protection than not.

In a nutshell, it seems prudent to look for a non-restricted IFA who is authorised and registered with the FCA and is based in the UK.  Stronghold Wealth Management isn’t registered in the UK, so they’re a non-starter from my point of view.

HighTower: Another SEC registered RIA.  Somehow similar but different to Stronghold – but the same issue for me – no UK presence or regulation.

For both Stronghold and HighTower, as my knowledge and understanding improve (hopefully), I’ll see if I can explain their do-different’s and possibly find some UK equivalents.

1.2 Create an income for life

scrooge mc duckChapter Overview

How we defer making difficult (investment) decisions and why that kills the benefits of compounding interest.

S&P 500: The Standard & Poor’s 500 is a US stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

It differs from the Dow Jones Industrial Average (chapter 1.1) because of its diversity and weighting methodology. It is one of the most commonly followed equity indices, and is considered to be one of the best representations of the US stock market, and an accurate forecast of the state of the US economy in general.

The closest UK equivalent is, again, the FTSE 100 (chapter 1.1) although other indices also exist, for example, the FTSE All Share Index which includes stocks of about 1,000 companies.

401(k): A tax-deferred, pension account defined in subsection 401(k) of the US Internal Revenue Code – introduced by Congress in 1978. Contributions are deducted directly from the employee’s payslip before taxation, and sometimes matched by the employer.

The main benefits of this system are:

  • Automatic deduction of contributions
  • Contribution matching by the employer
  • Contributions not taxed at source

Roth 401(k): Although not mentioned specifically in this chapter, this seems a good place to deal with it.

“Roth” refers to Senator William Roth of Delaware who promoted setting up a new kind of Individual Retirement Account (IRA) in 1997. A Roth 401(k) is a hybrid of a traditional 401(k) and a Roth IRA.

Essentially, contributions to a Roth 401(k) are made after deducting tax rather than before tax in a traditional 401(k). When a traditional 401(k) plan pays out, tax is then deducted at the rate current at that time, but income from a Roth 401(k) is tax free as long as some basic conditions are met.

The Roth IRA advantage is that income is tax-free which can help with future tax planning. It also allows people to contribute beyond the permitted limits of the traditional 401(k).

This is clearly a complicated subject with a lot of US-specific tax rules and regulations which I’ve not made much (more) of an effort to understand. What I do need to know is what the UK equivalents are – and what tax rules are currently in place.

If you’re employed, and your employer also contributes to your pension pot, the UK equivalent of a US 401(k) appears to be a Defined Contributions Pension Scheme – where contributions have tax reductions applied to both the investment and returns.

If the employer isn’t so generous or you’re self-employed, a Self Invested Personal Pension (SIPP) seems to be the equivalent of the US IRA.

Then, of course, there’s the state pension for those who have paid enough National Insurance contributions during their working life.

I used the government online estimator which says that I’ll get (roughly) £110 a week as a state pension in 2027 when I’ll be almost 67 years old. Even if that amount is inflation-adjusted, it isn’t worth very much today – so I think I can safely ignore the state pension as any kind of a ray of future financial sunshine or hope.  It might pay for an occasional luxury in my old age, but it’s clearly never going to be the backbone of my retirement plan.

As ever, Wikipedia has a pretty good summary about the different kinds of UK pensions available.

I’m mostly interested in what’s available to the self-employed and, if the state pension won’t save me (and I never thought for a moment it would), what other option are available to me?

It seems like a Self-Invested Personal Pension Plan (SIPP) or Personal Pension Scheme (PPS) are the most likely candidates – although that’s currently the sum total of my knowledge.

Having pored over both those Wikipedia pages, it seems the first thing I need to do is choose and IFA (chapter 1.1) to advise me. It’ll be the (devil in the)  detail of current tax legislation that’ll decide what makes sense and what doesn’t – and there’s no point me guessing when it’s someone’s job to know and advise me.

When I find an IFA and get some pension-specific advice, I’ll let you know.

1.3 Tap the power

tap the powerChapter Overview

Use psychology to make smarter saving choices.

Save More Tomorrow: or SMarT is a simple plan allowing employees to allocate a portion of their future salary increases towards retirement savings. In the US, this has been (somewhat) automated by participating companies and individuals. In the UK – not so much. In reality, what we have available here is whatever we decide to do individually. I like the way this advice is going and seems to fit with the general thrust of Tony’s book.

America’s best 401k: A semi-automated US service aimed at providing low-cost pension advice and pension plan performance analysis. As far as I can tell there is no UK equivalent company or service. Another reason to select a good IFA I can work with ..