You can have my credit card, baby 💳 🎶

This week on Vestpod: How millennials are planning retirement; how not to fall into the credit card trap and the case for active vs. passive investing.
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We are not certified financial advisers! This newsletter is for information and educational purposes only!
Instead of looking at the past, I put myself ahead twenty years and try to look at what I need to do now in order to get there then.” Diana Ross, actress & singer 
How millennials are planning retirement 
You know that feeling when you’re in a department store and you have no idea what you want, but then you see your friend trying on a pair of shoes and you're like - I need those in my life? The same logic applies when you get a glimpse of what other people are doing with their finances - it's almost like an #inspo board, but with less flamingo prints.

Let's take retirement as an example. If you're in your 20’s or 30’s, chances are you haven't given it much thought - after all, retirement implies wrinkles, watching too much Coronation Street and generally being quite bored. But what if retirement meant luxury spa breaks, sunsets in Bali and reading your favourite novel on a London to Venice Orient Express? Retirement can be an amazing thing, but you need to start saving early to make the most of compounding interest
So, back to the idea of financial inspiration and human curiosity - we recommend you check out this article by The New York Times which looks at five millennials at different stages of retirement planning. It very helpfully offers feedback on each person’s profile, and although the millennials interviewed are all based in the US, it still serves as a useful blueprint for us UK dwellers. Just keep in mind that a 401(k) is a retirement savings plan sponsored by an employer.

To summarise, we can take away two notable points:
  • Millennial investors should take advantage of employers’ pension plans and benefit from their tax advantages;
  • It may a good idea to contribute at least as much as an employer is willing to match.
On that note, we’d love to hear a little more from you - what are your retirement goals, and how are you planning to achieve them?
Beware of the credit card trap
Despite the fact that credit cards impart a sort of freewheeling spirit that is sometimes difficult to manage, they’re both useful and important.
  1. They are easy to use and you can get rewards on your spending;
  2. They help you build up your credit score, which in turn helps you get a mortgage, a business loan or simply a phone contract and;
  3. They make you feel like a Financially Responsible Adult (sort of).
Choosing the right credit card isn’t difficult. You can use this handy little tool to find one that best fits your needs, and they offer all kinds of perks from air miles to Amazon vouchers. This is all fantastic stuff, as long as you pay your debts off on time. We repeat - credit cards can be a beautiful thing - as long as you pay your debts off on time. Now, repeat after us…

Credit card debt is scary and pointless. It can sometimes feel like credit cards are almost begging us to go on a Selfridge’s shopping spree, but, unless you are confident you can comfortably pay your debts off on time, we suggest you resist the temptation. Credit card interest rates are painful, and the snowball effect that comes with not paying them off on time can be hugely damaging, which is why we strongly urge you do the following:
  • Work out how much debt you have on your card (or cards), and what the cards’ representative annual percentage rate (APR) is. Beware, though - on average in the UK, this figure is at 21% (according to an analysis by Moneyfacts);
  • Focus on the card that has the highest representative APR - aka the card that is likely to be most expensive. This should be the one you pay off first.
  • Instead of paying off the minimum each month, transfer the debt to a zero interest card;
  • Look at the balance, and see exactly how much you should repay to get the amount down to ZERO;
  • Set up a direct debit.
You can read more on Money Mentor by the Financial Times.

Active vs. passive investment - the endless debate

The predominant investment strategies today are active and passive management, and there’s plenty of arguments for both. Let’s take a closer look at the definitions and what they entail:

  • Active funds are run by professional fund managers who have extensive access to market research and make the investment decisions on your behalf. They build a portfolio by selecting the assets (stocks, bonds, etc), and seek to outperform the market.
  • Passive funds (ETFs, unit trusts or open-ended investment companies) involve tracking an index, such as the FTSE 100, or a market. Passive funds give a return that reflects how the market is performing, rather than trying to outperform it.

The biggest advantage of passive funds vs. active funds is the cost. Passive funds can cost as little as 0.15% compared to the 0.9% for an active managed fund.

Before you decide on the type of investment strategy you want to take, it’s important to understand the research: it shows that active funds performance hasn’t necessarily been top-notch. According to the Financial Timesalmost every actively managed equity fund in Europe investing in global, emerging and US markets has failed to beat its benchmark over the past decade, raising more questions about the value stock picking managers add”. And, in the opinion of Moody’s, a leading financial services company, the higher fees charged by actively managed funds are “more noticeable and impactful to investors” in the current low-yield environment.

Looking at the graph below, you can see how consistent the net outflows from traditional actively managed mutual funds into lower-fee passive investment products have been since 2007. Passive investments now constitute approximately one-third of the market and are likely to continue to grow.

Source: Moody’s Investors Services

In short, before deciding on a strategy, look at the details and returns of the fund and the fees you will be paying. Happy investing!

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We are not certified financial advisers! The articles and information made available on Vestpod are provided for information and educational purposes only and do not constitute financial advice. You are advised to consult with an independent financial advisor for advice on your specific circumstances. Read our Disclaimer  here.
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