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Interview with Bearded Finance

In this interview, we chat with Bearded Finance about his background in finance, his experiences in the financial markets, the value of compounding interest, and the importance of building a plan when making investments.

April 14, 2020

Understanding the principles of investing with Bearded Finance

In this interview, we chat with Bearded Finance about his background in finance, his experiences in the financial markets, the value of compounding interest, and the importance of building a plan when making investments.

1. You go by the name Bearded Finance on Twitter and talk about all things related to financial matters. Can you tell us a bit about your finance background and what your current role involves?

I studied Financial Economics at university and subsequently went on to work in a variety of finance roles in different industries. I’ve previously worked in logistics and tech companies where the company cultures varied drastically. Logistics is very fast paced, especially when it comes to liaising with large MNC’s like UPS and DHL.

Whereas, the tech company I worked for was stereotypically laid back which is quite a shock to the system when you move from logistics. It’s weird having meetings in jeans and a t-shirt!

Currently, I’m working for a private healthcare company. It’s been interesting to see the extent they’ve gone to to protect their employees and customers in light of the coronavirus pandemic.

My role itself is quite varied. Currently I’m working with our investors on strategies to expand the company around London and funding strategies for our new sites. Most of my day is spent on excel and attempting to create, and make sense of spreadsheets!

Other than that, I’m heavily involved in maintaining the balance sheets and P&L’s for all of our sites and reporting any discrepancies to the company CFO.

2. Financial education and knowledge is a key skill that many people feel they could improve upon. What advice can you give to our readers who wish to develop their financial skills when investing?

Firstly, I’d strongly advise against taking any sort of financial action solely based on the advice given from someone who isn’t qualified to give financial advice.

The first and probably only step to develop financial skills is research, research, research.

Investing can be a really intimidating subject matter to research, especially for people who don’t have a finance background. This is completely understandable as there’s always a risk of losing money, no matter what you invest in. Art can lose value just as the stock market can.

A great starting point to learn about investing is the website MoneySavingExpert. They have clear and concise sections on the website about investing, and it’s all tailored for beginners.

From there, I’d do some independent research and figure out what type of investor you are.

Some questions you need to ask yourself before you invest are:

  • What is my investment goal?
  • What is my risk appetite?
  • What is my time horizon? (The length of time you expect to hold an investment for your specific goal)
  • Am I diversified?

It may be obvious, but the more investing-related content you consume, the more you will know about investing.

Diversification is a major foundation in my investment strategy. In a nutshell, being diversified over a wide range of stocks minimises the risk of loss to your portfolio. You spread your risk somewhat evenly.

3. You often talk about compounding interest and the rewards over a sustained period of time. Can you break this down for our audience and illustrate the benefits?

Compound interest means you earn interest on top of interest, and this can generate a snowball effect that adds up over the long term.

For example, if you put money into your savings account and the Annual Equivalent Rate (AER) is 5%, it means that your £1,000 will grow to £1,050 after a year. If in the second year the interest rate is the same (5%) you will receive 5% of £1,050. After two years, your pot would be £1,102.50, and after 10 years, £1,628.89. This particular scenario assumes that you do not regularly deposit funds into the initial £1,000 pot. 

Regularly investing £100 every month for 10 months (instead of one £1,000 lump-sum investment) can help to ride out market movements. This is called pound cost averaging. This is a great read on pound cost averaging and is crucial for any serious investor to know this concept – https://www.nutmeg.com/nutmegonomics/pound-cost-averaging/

Personally, I am investing for the longer term and the investment vehicles my money is in have an average annual return of 7-10%. 

I’ll illustrate the power of compounding with a couple of diagrams below. In this hypothetical scenario, I am investing £200 per month for 20 years (with an average annual return of 7%). 

As you can see, my investment is fixed at £200 per month (£2,400 per year), however the “interest” (my return on investment) snowballs into a bigger value year after year.

This scenario assumes that you don’t withdraw any money from your investments and that the annual returns are 7% over the whole 20 years.

As you can see, by year 10, the annual interest earned is now more than the annual investment made, highlighting the power of compounding interest.

4. What are the benefits of a budget planner and how can someone maximise their income by sticking to it?

For me, having my own budget planner has totally changed the way I spend and save my money. I, like many people, rarely thought before I spent my money. I would spend recklessly on things I didn’t need which resulted in me not meeting my savings goals.

However, since I’ve been tracking my expenses, I make conscious decisions on what I spend my money on. This naturally results in an increase in the amount you save every month.

There are plenty of free budget planners out there but if you’d like the one that I use, just send me a DM on Twitter and I’ll gladly share it with you.

5. Do you think human emotion plays a role in how people manage/invest their money and how can it affect people?

I think human emotion is huge in money management and investing. The common theme, especially among younger people, is that they all want to get rich quick. It doesn’t matter how, they just want their bank balance to have as many comma’s as possible, in as little time as possible.

There’s a similar theme when it comes to spending money. Sure, that new designer jacket is nice but can you actually afford it? Are you buying it to impress others?

In my experience, I’ve found that saving/investing for a particular goal is much more satisfying than purchasing clothes or other materialistic goods. It’s that shift in mindset that allows you to truly get on top of your money.

That being said, it’s important to have a healthy balance. If I’ve managed to save more in the previous month, I will always treat myself the following month.

I’m a huge Chelsea fan and a lover of Air Max trainers (typical Londoner, I know). Going to a game can cost me up to £120 but I’m able to justify it by looking at my spending habits from last month.

We need to enjoy our lives after all!

6. What experiences and skills have you learnt to manage to control your own emotions when making investment decisions?

Whenever I’m investing, I always ask myself the same questions I stated earlier on. 

  • What is my investment goal?
  • What is my risk appetite?
  • What is my time horizon?
  • Am I diversified?

I will only invest if the answers to the above questions are in line with my own investing strategy. I find that this helps to manage my own emotions especially at a time when the markets aren’t functioning to their full capacity!

7. Wrapping up, what is your opinion on the current global markets and where do you see things heading at the end of the Corona Virus pandemic?

This is a very tough question as there was no indication that coronavirus would have spread at this speed and that it would have had such a detrimental effect on the markets. It’s obvious that the overall contraction in global economies is due to demand-side deficiencies, with people being unable to spend money due to self-isolation and with many shops, restaurants etc. being closed.

On top of this, there is currently huge levels of uncertainty in the job market, especially here in the UK. In recent weeks, a plethora of government policies have been introduced to ease the burden on employers and employees alike to provide some support during this pandemic. One such policy has been the furlough scheme. 

Essentially, an employee is furloughed when they remain on employer’s payroll (getting paid 80% of their wages up to a monthly cap of £2,500) even if the employer is unable to operate, or if they don’t have any work for the employee to do due to coronavirus.

I’m a strong believer in consumer confidence being a key driver in an economy and job uncertainty is a major factor in destabilizing that confidence. If you were worried about losing your job, would you be so reckless in spending money at the new steak restaurant that opened around the corner? The steak restaurant loses income and they may have to make a couple of chef’s redundant. These chef’s then may be required to cut back on their levels of personal spending as they no longer have a source of income. The knock-on effects can be huge.

Although I’ve taken a rather pessimistic look at things, I’m interested to see how businesses operate post-coronavirus.

Can employees work from home permanently? This would definitely save companies money on rent and electricity bills that they could potentially re-invest in activities such as R&D or salary boosts which would indirectly help the economy recover.

A big thanks to Bearded Finance for his insights, and for more insights to his thoughts around all things financial, check out his socials below.

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