Home truths about shares

Lets take a look at a very simple idea that leads to a very radical conclusion.

Remember the ABC portfolios? Adventurous had two-thirds in equities, Balanced had half, and Cautious one-quarter. The rest was in cash/gilts/index-linked bonds - the boring bit. None had 100% equities, certainly none had 150% equities, which is what happens when you borrow to invest. That is called leverage - yet millions of ordinary investors [that's you and me] are leveraged without even knowing it.

To understand it, first you have to realise that a loan is like a negative cash balance. It's exactly equivalent if savings and loan rates are the same. If you can say borrow £100 at 4% and deposit £100 cash at 4%, it is the same portfolio as having £200 loan and £200 in cash. It sounds obvious but it has very important implications.

Before we run with it - let's look at the two possible alternatives to this rule, where cash either pays more or less than the loan rate.

First, its unusual if you can borrow at 3% and invest at 4%. In this case cash and loans would not be equivalent in terms of risk and return and it would make sense to borrow as much as possible.... It would be a free lunch. Lest we forget, this is what ratetarts and banks try to do.

Second - and more usual - you might have to pay more for your loans than you get for your savings. That's why, in the real world it makes sense to pay off loans with any spare cash, because we will be charged higher interest on the loan than we get on the savings. The classic example is credit card debt.

However for today we will make them precisely equivalent - a loan is negative cash. Having cash of £200 and a loan of £100 is just the same as having £100 and no loan.


So now we have two principles

1 No leverage. [Don't borrow money to buy shares]

2 A loan is negative cash.

So far, so bland. But it means that:

if you have a mortgage you shouldn't invest in shares

Let's see how we reach this rather startling conclusion by looking at Trisha's savings.

She has a balanced portfolio £20 000 in cash/gilts and £20 000 in shares She also has a mortgage of £100 000. She doesn't realise she is living her [financial] life on the wild side.

Straightaway we can see that she could pay off £20 000 of her mortgage using her cash. A portfolio of £20 000 in shares and an £80 000 mortgage would be exactly the same as what she has now. And yet now she has her savings in 100% equities.

Trisha examines her 'new' but exactly equivalent portfolio and is profoundly shocked. 100% equites? Scarey - this is not where she wanted to be at all. In fact she realises that things are even worse than she thought. She has effectively borrowed £20 000 to invest it all in shares.

She sells her shares and pays down her mortgage. The new Trisha portfolio is now: zero securities, zero cash. But her loan[mortgage] is down to £60 000.

Note there are two stages in this argument.

1 Loan is negative cash gets you a set of portfolios that are the same .

Savings of £50k in gilts/cash, and a loan of £50k is the same as savings of £100k in gilts/cash and a loan of £100k. There's nothing to choose between them. They are equivalent. But that equivalence gives us a powerful new way of looking at your own holdings. By removing cash from your portfolio (by paying off your loans), you can see the underlying structure [in risk terms]. Is your portfolio really as safe as you think?

2 Borrowing to buy equites gets you a set of portfolios that have the same [net ] value, but a range of risk/reward characteristics.

A loan of £50k and £10k in shares is very different [in risk terms] from a loan of £100k and £60k in shares. But the net loan outstanding [£40k] is the same in each case. There are real choices to be made here for professional [leveraged] traders. For vanilla investors the choice is simple. We don't do leverage, so we don't borrow to buy equities.

Don't hold any equites until the mortgage is paid off.

Which is another way of saying that once you have built up your cash balances to where you want them (the 'emergency cash fund' much beloved of financial advisors), all your savings should go into paying off the mortgage.

The Vanilla Test

If you are still paying off the mortgage, but don't quite believe this rule - try the vanilla test:

Add up all your savings - and deduct them from your mortgage. You have now reduced your borrowings to the minimum. [We are assuming here that vanilla investors do all their borrowings from their mortgage account, there are no other debts.] Now decide how much do you want to borrow to invest? Ok it's a trick question - because you don't want to borrow to take a punt on the stock market.

Let's take a look at Terry. He has a £50 000 left on his mortgage, and savings of £20 000 all in a global commodities unit trust. Terry does the vanilla test. It comes down to this.

If he had a mortgage of £30 000 would he really borrow another £20 000 to invest in the stock market?

There is no doubt is Terry's mind, the answer is absolutely not. He sells his shares, and chops his loan back to £30 000.


Reasons why you might ignore this rule

1 Cash in hand. Some people like having extra cash around for an emergency fund. So they will have £10 000 in cash and a mortgage. Or they worry they won't be able to borrow next year [maybe they are losing their job] and therefore they should keep/take loans while their credit rating is good. So they hang on to £25 000 in cash rather than pay off the mortgage. Note this is not strictly breaking the vanilla rule - you are just switching your cash/loan balance around - you are not borrowing to invest in equities.

2 You want to pay into a pension fund - and you will miss the tax breaks if you don't. For the average taxpayer the perks of a personal pension [run by an insurance company say] are not that great. For a 40% tax payer they are a bit better, but you do lose flexibility [ie you can't get all your money out again as a lump sum, just an income once you are 55]. Also - you can pay in more later, when your mortgage is paid off, but maybe you worry you won't be paying 40% tax by then.

3 Your employer makes a matching contribution into your pension scheme. This may be well- worth having, even if it means diverting some mortgage repayment money.

In these cases you may want to break the rules and channel money from paying off the mortgage into pension saving. But don't fool yourself, you are borrowing money to do so. You are carrying more debt than you have to. You may in the end decide it is a good idea - but at least the vanilla test lets you make an informed choice. It would, for example, have kept anyone [who was reasonably sane] from buying a with-profits endowment mortgage.

Remember that in an endowment mortgage the amount borrowed does not decrease. Instead the excess mortgage payments made [after paying the interest charges] are invested. You are investing with borrowed money. It's a leveraged punt on the stock market, although I doubt if it was sold in those terms.

But let's look at a successful £100 000 20-year endowment mortgage a month before it ends. The stock market fund holds £100 000 - enough to pay off your mortgage. Apply the vanilla test and you discover you have ended up borrowing £100 000 which is now all invested in the stock market. Is this what you wanted? Probably not. All you can do is sit tight, be glad your fund has reached £100 000, and just hope the stock market doesn't crash in the next 30days.


Frequently Unasked Questions

Listen - this is all nonsense. I only borrowed money to buy a house

Wasn't it Gertrude Stein who said 'A loan is a loan'. [No, it wasn't, it was Greta Garbo] . Use the vanilla test to figure out how low your borrowings could be - and then ask would you really want to increase your borrowings to get back to what you have today. You might do - which is fine.

But surely a mortgage only applies to a house not to shares?

A mortgage just means there is security for the debt [in this case a house]. But even if the house became worthless - you would still have to pay back the loan. Don't think of the debt as being attached to the house - its attached to you.


I do have a mortgage - but all my savings are in a cautious managed fund. That's not leverage is it?

A typical managed fund might have 40% equities and 60%bonds. The equities bit is your leveraged bit. Because in theory [but not in practice] you could sell off just the shares and thus reduce your borowings.

So the bonds bit is OK?

It's OK but pointless. Why are you borrowing at 3.5% from your building society to invest in a bond that pays 3.75%. Because you can be pretty sure the management charges and expenses will eat up any difference. Chances are you are losing money on the bond side, and playing with fire on the equity side.

You've made my portfolio far too volatile...

No I haven't

Last year I lost 5% - this year after I did the vanilla test I lost 20% in the same market conditions

Last year you had £75 000 in gilts and £25 000 in shares. When shares dropped 20% you lost £5000. This year you paid off your debts with the gilts and started with savings of £20 000 all in shares. When the market dropped 20% [again] you lost £4000.

But I lost 20% - thats far more volatile

The share moves have been unchanged - its just that you can see them now clearly. Don't forget that the net effect is still the same with the new portfolio make-up [all shares]. The vanilla test has highlighted something you didn't spot before.

But should anyone with a mortgage sell off their unit trusts and trackers and ..?

Yes, it would be a start. In fact it should be the start. As in - 'you start from here, and decide if you want to add to your borrowings so you can invest more'. That way people will have their eyes open.

But every financial advisor tells me I must have some money in shares..
Yes, and maybe 3 out of 4 years theylook good because shares handomely outstrip the mortgage rate. But every now and again you will wish you had put your borrowed money somewhere else. Or maybe not borrowed any in the first place. It's your choice; but most people don't realise they are investing with borowed money.

But I have a 25year mortgage to pay off..
You will be surprised how much quicker it goes when you pour all your savings into it.

And then what ..I end up at age 49 with no savings, and my mate has £40 000 stashed away
Yup - but your mate may still have £45 000 to pay off on his mortgage

Yeah I forget. Still it feels funny having no savings..

It feels funny because what you have got is no debt. Plus you own your home free and clear - that's an asset.


Even so - if I don't have any shares I will miss out any market rises for the next ten years

Yes you will. You will also miss out on any market falls. But a market rise would test your resolve severely. Just ask anyone who didn't buy internet shares during the tech boom of 1996-2000, while their friends got rich with very little effort.

So maybe I could put £5k into shares....?

You could - but only because you are aware of what you are doing. If you have done the vanilla test and say - I don't care I still want to borrow that extra [ie not pay off] £5k so at least I have a stake in the stockmarket. Fair enough - but it is leverage.

In GAD we trust?

Spending is harder than saving. When you are saving you have a retirement date to aim at and you know how much you are saving every month. There is only one unknown: what your rate of return will be. Figuring out how much you will have saved up when you retire in 30 years time is not an exact science. 

But when you get around to spending your savings [aka drawing a pension] the uncertainty is even worse. There are now two unknowns - the rate of return, and how long you will need the money for. Put crudely: you know when you will become a pensioner, but you don't know when you will cease to be one. And that's why spending is tougher than saving.

It's enough to make most savers run straight into the arms of an insurance company - swopping their £100000 of  pensions savings for a guaranteed pension [an annuity] that will pay them around £150/week for the rest of their lives. Actually the average UK  pension pot is nearer£30000, but £100 000 makes the numbers easier.

The annuity route is known in the jargon as a 'secured pension'. The alternative is an 'unsecured pension' where you can leave it invested - in a SIPP for example.

So here's the problem: if you reach retirement and have decided not to buy an annuity [yet], how much of  your £100000 can you pay yourself each year as your unsecured pension? Remember it has to last a lifetime.

Well the government actuary's department has come up with a set of guidelines - known as the GAD tables. They are roughly equivalent to the rate of payment from an annuity. Just plug in your personal details [age, sex] and the current interest rate [last month's long-term gilt rate].

For Albert [male, gilt rate 4%] the GAD rate is 6% at 60, 7% at 66, 8% at 70 and 9% at 73. The bad news for his wife Beth is that she has to wait an extra three years to reach the same levels, eg women don't hit the 7% mark until they are 69.

So at the GAD rate Albert would take £6000 a year from his pension fund. Suppose he wants more? Well he can take more. Up to 20% more. [Don't ask why  - it is just what the government rules say you can do].

So Albert has a choice of taking anything between zero and £7200 from his pension fund - no matter how well or badly it is doing. He can take this income for 5 years without having it reassessed. But at age 65 - after £36000 has been taken from his pension fund and some poor stock market returns - you can see that Albert's pension pot may well have shrunk considerably. The GAD tables guarantee neither consistency not security in pension drawdown.

What's Albert to do?

The short answer is Albert should think about taking  out the absolute maximum he can - the full £7200 - and then save half of it [say in an ISA]. Because spending the full £7200 is not 'safe', where safety means having a guaranteed fixed income until you die.

Determining what is the safe withdrawal rate has spawned a whole industry in itself - but many people believe it is around 4% - giving Albert a fixed £4000 for life but still not guaranteeing it.

The other route to go is to take a fixed percentage every year - say 5% - of the value of your fund.  Albert would get £5000 this year but couldn't be certain what he would get next year. It might be more or less than £5000 depending on how his investments had done in the meantime.

In GAD we trust? Only as a means of working out how to retrieve the  maximum amount of money from the pension tax regime. As guidelines to a sustainable fixed income in retirement they are seriously flawed. Remember:  a 70- year old could take out £8000 a year. Five years later, and after a big market drop, there would not be much left of his original £100000 pension pot.

FAQ

I don't see the point of this - why even consider settling for a still uncertain £4000 a year from a SIPP when I could get a guaranteed £6000 from an annuity.

Because the SIPP money is still partly in your control [by withdrawing the maximum allowed you can get your hands on a lot of it]. And if you die a year later, your pension pot is part of your estate [taxed at 35%]. With an annuity all your money is gone. Also if you have a SIPP, you can buy an annuity later. But once  you have got an annuity there is no changing your mind.

How come the GAD guidelines let you take out 7%; and many advisors don't recommend going  above 4-5%.

The GAD guidelines treat your money the way an insurance company would - making it last for your expected lifetime [say 20 years at 65]. And then letting you take a bit more.  Mainstream financial advisors would pencil in the need to sustain 25, 30 or even 35 years of retirement income. And that hammers the pension you can take out of your pot. [Adding eight years to your retirement calculations, from 25 to 33, could cut your pension by 25%].

So would using the GAD guidelines make my pension pot get smaller?

Probably - but don't forget that is what they are designed to do. The guidelines allow you to receive a portion of your capital back every year. All the 'income' you receive will not just be interest or dividends.

As easy as A, B or C

How well your savings do depends crucially on which asset classes they are invested in, of which there are around half a dozen. But this mix can be simplified even further to just two groups. The boring, which deliver a dependable return; and the bouncy, with  higher risk and potentially  higher return. 'Boring '  includes cash and government bonds [gilts]. 'Bouncy' includes shares and property. Deciding on this mix is one of the most important decisions a saver makes. Chances are they never actually make a conscious decision.  The split is normally described in shares/bonds terms; but bouncy/boring is what it means.

• Adventurous : 67/33. Two-thirds of your savings could be in shares
• Balanced: 50/50. An equal split
• Cautious: 25/75. Relatively cautious, but still a quarter in 'bouncy' assets.

Why not go for 100% shares in 'Adventurous'?

Studies have shown that you gain a smoother ride, without sacrificing a lot of the return by having  some boring assets in the mix. Besides savers often overestimate their appetite for risk. If [when] shares crash their instinct is to bail out, leaving themselves with a big loss.

I can take it, I am going for the max: 100%

The max isn't 100%. You could borrow money and invest 200% of your net wealth, or 500%. This is called leverage or gearing. It's a quick way to get rich. Or not rich. But either way it's quick.

What's so great about 50:50 then?

If markets are just bouncing around without going anywhere in particular, then 50:50 is the best place to be - because rebalancing takes advantage of these fluctuations.

And what so special about 25% shares, apart from a fascination with the ratios 1:1, 1:2, 1:3?

Well suppose you get a 3% return [dividends and interest] in a year, but your share portfolio crashes by half [that's 12.5% of your savings wiped out], you have still managed to keep your net losses to single figures for the year.

That's a psychological reason, not an economic one

True

I think I'll go for maximum safety - 100% bonds

Oddly, a slice of shares can even help here too, adding extra return without adding any extra 'bounce'.

And a slice is what exactly...?

8.3333%

!

Ok - say a twelfth. One study found 7% in shares, and 93% bonds, was smoother than 100% in bonds. You had to go all the way to 12%  shares before they started to add extra bounce [aka volatility]. Its one reason why it's common in the USA for advisors to suggest a minimum of 20% shares. That, and the commission. So suggesting that your  spinster aunt take £10 000 of her precious £120 000 life savings and invest it in shares is actually quite prudent.

So what is best for me?

It depends. On your willingness to take risks. On your likely future income. Stable [aka boring] job prospects allow you to take more risks. The career civil servant can afford to have a riskier mix than the  highly paid city trader with an uncertain future. Many pension funds opt for a 60/40 split between shares/bonds.

Thats for me then..

But you are not a pension fund. Your time horizons are shorter. In the USA many individuals nearing retirement hold 40/60. More bonds than shares.

Isn't there a simple rule?

There's lots. One is 'your age in bonds'.  The 'Cautious' portfolio would then fit a 75-year old. Another rule is to reduce your risks if you can't sleep at night. Don't forget vanilla investing requires that you buy more shares [aka rebalance] as they drop in value, to keep your asset allocation on track. Another rule is not to invest more than you can afford to lose.

I am OK about taking risks...

I know -  its just losses  you can't handle. One can have one's attitude to risk measured by answering a questionnaire, but its a bit like asking  the theoretical question: 'do you think you will get sea sick?'. Watching your net worth sink as your savings are caught in a financial storm is really sickening, and few people are prepared for it, despite their brave words beforehand. 

The DIY Annuity

An annuity is a death pact with your money. You both exit at the same time. With a  DIY annuity..

DIY  ... I didn't know there was such a thing.

Stick around, you may learn something. Stan is 60, he has saved £100000 in cash under his bed and decides on a DIY annuity. He's got a life expectancy of 25 years, so every year

Wait...

Every year he takes out 1/25th of his money.  4%. That makes £4000 a year.

But surely...

But surely he could put it in a bank for all those years, even as he is withdrawing it? True. And guess what - at 2.5% interest that money now lasts 38 years. Half as long again.

No no - suppose he lives longer than that... then his money runs out.

Yup - at age 99 he is in big trouble.

So that's not a proper annuity.... a proper annuity goes on until you die.

Ah, for that you have to go to a proper insurance company. And they do the same kind of sums. They will return  your money to you over your expected lifetime with interest, less a bit for their expenses. But the interest ain't great, because they invest the money in government bonds (gilts).

But it's better..

It's a better deal if you live longer than average. It's not if you die earlier than  your average life expectancy. Because your money is gone.

I get it... and it's an average deal if you live to exactly your life expectancy.

Nope - it's a poor deal, cos the insurance chops maybe 10% off for their expenses, commission to independent financial advisors and profit.

Hey - that's my money - can't I get that back.

Some of it. Try searching 'annuity, commission, rebate' on the internet. My search came up with Cavendishonline who will rebate around 1.5% of your annuity payment. 

About the DIY annuity...

It's useful to help you understand  why

• delaying buying an annuity increases your pension - because your life expectancy drops
  
• why income from an annuity seems poor - because it is invested in government bonds
  

It means a 55 year old woman in good health who wants to buy an index-linked pension is going to find it expensive: in October 2008  a payment of £100000 delivered her an annual pension of £3200. 

Isn't index-linked what we all  have to buy?

Not necessarily, certainty is expensive. If she bought a level pension [not index linked] her pension would  double. Or she could wait another 5-10 years. Or she could split the purchase, half now and half later.

Can't I do something else with my pension money?

You could have a self-invested pension plan, but that's another story.

STOP! Don't pay into that pension plan

Whoa!- I thought saving for a pension was a good idea

Well it can be - you just don't want to be saving into a pension plan too early...

Are you mad? I thought the whole point of pensions..

Let me finish. You know you get a tax break on pension saving

Yeah, sure

25% tax free cash on retirement

Oh that - I wasn't thinking about having to wait until I am 65

55

... I can get tax back today. £80 becomes £100 in my pension fund. Nice perk huh?

Not really. It's only tax deferment going in. You'll have to pay tax on the money when it comes out

Oh

But maybe when you are older - middle aged - you will be paying tax at 40%?

Hope so

Then £60 paid in effectively becomes £100. [Actually you still have to pay £80 in - but you get that extra £20 repaid at the end of the tax year - outside your pension fund]

But what shall I do with my savings in the meantime? That could be 10-20 years away

Stick 'em in an ISA or pay off the mortgage.

So delaying is worthwhile is it?

Yeah, it increases your pension by over 50%

Stop right there - that can't be right

OK - lets take this slowly. Compared to saving in an ISA the basic pension route [20% tax rebate in, 20% tax on the way out] gives you a 9% boost.

Hang on if I end up with £80k in an ISA and £100k in my pension scheme [thanks to the tax rebate] - and I take £25k tax free out of both. Then I will have £55k in ISA, and £75k in my pension pot. The pension is far better.

Yeah - but we are assuming your pension is taxed at 20% remember. So net pension pot is £60k and ISA is £55k. That's only a 9% boost. And the ISA is tax free money you can get at any time. Pension money is locked away. You get the income from the £60k, but you can't get at the £60k. Many people would rather have an ISA, despite the 9% uplift.

But if I am paying tax at 40% when I save into my pension plan...

Then if you pay [net] £60k into both: the ISA ends up at £35k after £25k tax free cash is removed, and the pension pot is at £60k [again assuming you pay only 20% income tax in retirement on the £75k thats left in your pension pot]. That's a 70% up lift over the ISA.

And you reckon a 50% uplift compared to a standard pension by waiting until I pay higher rate tax

Actually its 57%. A pension pot that once cost you £55k, only costs £35k if you can save it out of highly taxed [40%] earnings. That's after taking out your £25k tax free cash, and applying a 20% tax rate to what is left.

Why didn't anyone tell me this?

You can't run a business telling perfectly good customers to come back in 20 years

But there must be a catch right? - I mean 50% extra is so amazing...

Well if you never pay higher rate taxes you won't have gained anything, but you won't have lost anything either. And if you don't have any income at all that year, you are limited in the payments you can claim rebates on [currently £3600 per year]. Also, you might be tempted to spend all your ISA savings - pension savings are much harder to get at. And the comparison only works if you are paying into your own money purchase pension scheme. If you have one at work that your employer pays into, it would be foolish to turn down free money. And if you have a defined benefits scheme [where you can buy extra years] then check it out. And if you can get your National Insurance payments rebated...

No - its just me and my personal pension plan. And I am going to switch my savings elsewhere until my tax rate changes. Thats a killer fact

Killer Vanilla fact

saving into a pension too early can damage your wealth

How to double your money

You invest it at 1% for 70 years.

But that's just stupid.

Or 2.5% for 30 years,  or 4% for 18 years.

Is there a point to this?

Well one period is a lifetime, one a generation and one a childhood....

So?

Have you no poetry in your soul? Well how about this Mr Pragmatic:  they are roughly in the area of returns you might get from government bonds (gilts), corporate bonds and shares.

I'm not impressed - my financial advisor reckons  if shares return 7% then...

That's not real money - try knocking 4% off for inflation.

Oh - that's only 3% then. Even less than you are predicting.

I'm not predicting. And neither is he.  7% is one of the figures they have to use in their illustrations. 7% projected for 20years looks terrific. 9% [another mandatory figure] looks even better.

But that's meaningless surely - if you completely ignore inflation?

Yes

Figures in a landscape

It is useful to have a feel for expected returns in the financial landscape. Corporate bonds are expected to do better than government bonds, and shares better than both. The downside is that the risk of losing money is greater.  And 1%, 2.5% and 4% happen to be handy numbers when looking at the time it takes to double your money. 

The actual historical returns  of these three asset classes differ from a simple 1%/2.5%/4% split - but not by that much if you happen to pick the right 20year period. (In other words by picking the right start and end date you can usually get the outcome you want. Remember that  next time you see an advert  praising a product's fantastic performance).

So are you saying I should invest in shares?

I am saying that the chance of better returns come at a greater risk, that the only return worth talking about is your real (after-inflation) return, and if you can squeeze an extra 1% return a year it's well worth doing.

Didn't I already know that?

No - judging by the fact that all your savings  seem to be in a fund that just owns shares, the 7%growth illustration that so impressed you becomes ever more meaningless as inflation increases, and what little is left is being whittled away by the annual 1.5% service charge.

Does an annual 1.5% really make that much difference?

It could mean an extra 12 years of waiting.....

Because at 4% I double my money in 18 years; but if they knock 1.5% for annual charges it will take me 30 years?

You got it.

Why vanilla?

Vanilla investing is about doing simple things with your money in a complex world.

Investors are bamboozled by the finance industry and end up giving away too much of their hard-earned savings to unnecessary transaction charges and ineffective fund managers.

But the good news for vanilla investors is that their profound ignorance and indolence will serve them well.

Profund  adjective: of the greatest intensity; [of sleep] deep and complete

A deep respect for one's own ignorance stops you trying to outguess the market [ie buying the latest hot tip]. And complete indolence saves you the cost of endlessly trading - buying and selling as the next hot tip comes along.

Vanilla investing is for everyone who wants to spend less time with their money.

Where to stash your cash

There are only half a dozen places to invest your money. The Big Three are shares, property and loans [corporate bonds and government gilts]. 

The other three are cash, commodities and 'other' [mainly derivatives, like futures and options].

This may seem odd; the fact that your investment choices narrow down to just six categories. After all, at the back of the Financial Times there is a double-page spread listing thousands of share prices. And before that there are even more pages listing investment funds and unit trust prices. There are more funds than there are shares.....

This is how the personal finance industry makes its money, and relieves you of yours. By repackaging shares into their branded portfolios and charging the investor a fee. Every year. Usually around 1.5%. And yet the finance industry as a whole doesn't add any value. Some will do well one year, some won't. And you can't tell in advance which is which.

In short the investor is faced with a business model that has so many unattractive features than many regard it as broken. [Not my words, but those of the chairman of the Financial Services Authority in 2007].

So here's vanilla recipe no1.  You put half your money in shares [the risky bit] and half in loans [the safe bit].  Government gilts are considered safe.  A tracker fund or ETF should have lower charges than the usual unit trust. Taking  ishares as an example [not the only provider of ETFs but Barclays ishares brand is a big one] the final mix would be half in ishares FTSE 100 ETF and half in ishares £ index-linked gilts.

But isn't this too risky/too safe?

Yup - it might be.  Deciding what level of risk you are willing to live with is a key question for the vanilla investor.

No it isn't - my key question is how do I double my money?

Ah - that's easy. We will cover that next time.