It has been reported this week that ‘Anglo American’ has agreed to buy ‘Sirius Minerals’ for £405m in a deal that will rescue the deep mine currently under construction in North Yorkshire.
I have mixed emotions about this development, as I know of many people who have lost significant sums of money by investing in this single share. A former colleague of mine made an investment of £20,000 at a share price of 20p.
As the shareholders will receive around 5p per share (As reported in The Guardian), my former colleague will receive around £5,000 or 25% of his initial investment. I have friends who have invested £10,000 and one who has around £80,000 invested. I am not sure what price they all bought them at but you get the picture.
This single share has been a hot topic in my local area (Teeside) and I am sure there are many fellow Teesiders who have lost significant amounts of money on this investment. As I have said in previously, single shares are risky and this story really drives the point home.
On the plus side, the buy-out means that thousands of jobs will be saved and the area really needs some good news on the job front. Our area is built from heavy industry and we are proud of our industrial roots. We have lost the steel works and many more power plants and chemical plants have vanished as we have moved away from the industrial age.
Although I was aware of the risks of single shares last summer, I still had a little dabble with Sirius. My initial investment of £727 (seems a random figure and this is due to costs been deducted) is now worth £432.61. This is a loss of -£294.65 (or -40.52%).
Will I ever learn? Well, I fucking hope so as I have had my fill of poor investments.
Let me compare this with the set and forget investment I have in my ISA. It is a Vanguard Lifestrategy 80/20 fund. This is basically a stocks and shares fund that tracks a large proportion of the stock market (e.g. 100 of the top performing companies across various countries – North America, UK, Europe and even developing countries). For more detailed information on my interpretation of investments you can refer to an earlier post – ‘Investing Basics.’
My ISA (I use Vanguard as the costs are really low) LS 80/20 fund has returned +7.72% since my account opened. This means my £4000 investment (£800 for 5 months) is now worth £4177 (an increase of £177). The £177 may seem low but the set and forget method is all about patience and looking at the bigger picture. It is about focusing on compound interest over years of investing.
I am not expecting +7.72% going forward as there will be ups and downs. Some years I might get a return of -1.5% and other years it might jump to +16%. My expectation is that I will get an average of around 7% (with reversion to the mean kicking in).
It is ironic that the historical figures I keep hearing (when tracking the entire stock market – or a large portion of the stock market) are between 7 and 8% and my fund returns are within that range. With over 100 years of data, the books I have been reading (e.g. ‘The Little Book of Common Sense Investing’ – J. Bogle) seem to think that 7% is very achievable.
In 14 years I will be 50. I use this age because I want my FI (Financial Independence) when I am 50 (if not sooner). I am going to look at how my ISA will look if I get similar returns for the next 14 years.
With my initial contribution of £4177, I will look at my investment when I am 50. This is taking into account compound interest and based on the interest that my fund has returned thus far (7.72%). It is also base on a monthly contribution of £800. Putting this information into my compound interest calculator, I will end up with £239,689. Breaking the figure down, that is £138,577 in contributions and £101,112 in profit (compound interest).
It is clear that with a bit of time and momentum, compound interest can seriously work in your favor. Most of the people I talk to on a regular basis, don’t give compound interest the time of day. In fact, it is fair to say they have no idea what it even means. Not that I did until fairly recently but that is another story.
My interpretation of tracker funds versus single shares is very much tortoise and the hare. Although my inner gambler likes the idea of winning big money in a short space of time, I have to be disciplined and be more like the tortoise. The tortoise that is patient and is able to think long term over short term.