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Transcript
Andy: Hello and welcome to episode number 63 of The Money to the Masses podcast with your resident expert as always, Damien Fahy and me, Andy Leeks. Damien welcome back. How we doing?
Damien: I'm wet, Andy.
Andy: Okay. Well I didn't think it was that kind of a podcast, but do tell me more.
Damien: Funnily enough I always seem to have some crisis, don't I, before I come on to the podcast. And no sooner did you text me to say, "Let's get this show on the road," I went downstairs and my kitchen was flooded as the plumbing for the dishwasher decided to disconnect of its own free will and empty the contents onto the kitchen floor. But I've managed to save everything and clear it up and hence why I'm slightly damp. But my spirits are still good.
Andy: Do you know what? I'm going to use that as another excuse as to why we're not going to get our dishwasher plumbed in where we live. Because we're currently still washing up by hand where we are. We moved into a new house and there was only space for either a dishwasher or a washing machine. Didn't quite have the space for two. So my wife is really keen to get the dishwasher plumbed in just round the corner in the utility bit of the garage and I just kept saying, "No, no." Because it's money, obviously. But now I'm going to say, "Look, Damien's had a flood." So thanks.
Damien: You should say, "Yeah, don't get a dishwasher because Damien couldn't plumb his dishwasher in correctly." It's not really a reason. But, yeah, apart from that, I'm all good, everything's chugging along quite nicely and my week is slightly less viral than last week, if people recall. If you don't know what I'm on about, go back and listen to podcast 62 and you'll hear the full story. So how's things with you anyway, Andy? You good?
Andy: Yeah. It's all good. I talked recently about me appearing on an ITV program. Unfortunately, I got cut from the program. I think I put the jinx on it because I remember saying to you that I'll probably end up on the cutting room floor. That's exactly what happened. So mildly disappointed, but these things happen and I'm a realist.
Damien: But you still did the filming though, And. You were cut from the final production but you actually were involved in the making of the program. They cut loads from these things, so I wouldn't be too disheartened.
Andy: Well they've asked me to keep my details with them and they've said they'll want to use me again on future programs. And also as one door closes, another one opens as well. A national newspaper has got in touch with me this week to say that they're definitely going to be running a story and we'll be doing something in early January to go to print, I think, just before Christmas or just after. I'm going to be doing something to do with diets and, yeah, it should be interesting.
Damien: Very exciting, Andy. Good.
Andy: Yeah.
Damien: You've had a good week. Despite the slight disappointment, very good. So what have we got this week on the podcast? Benchmarking, VAT loopholes and a slightly lighthearted piece on the most prosperous places to live in the UK. There's been a study that's found out and we're going to run through that in a slightly lighthearted way. So are you ready?
Andy: I'm ready. So benchmarking, VAT and prosperous places. Got it. Right. Which one first?
How to create a benchmark for your portfolio
Damien: Let's go with benchmarking. This is the investment piece, for listeners out there. Now, what I mean by benchmarking is if you think about a portfolio of funds and you're running some investments, the hardest thing for DIY investors is to work out how they're doing really. What I mean by that, let's just say for argument's sake, you made 5% in a year on a portfolio of funds. Now that might be pretty good. But then, you need to give these things a bit of perspective because, let's say for example that the market was up 10% or 20% in that year and you'd made 5%, then you will start thinking, "Well that actually it isn't as good as it first appeared."
But equally, if the market was down say 10%, then you've done brilliantly. So benchmarking gives you a point of reference and some perspective on how you're doing and whether you want to make any changes. The thing is that it's quite hard to do. Funds themselves and funds managers even have benchmarks. I don't know if you've ever noticed. You look at the fund, let's say it was a UK equity fund, then it will have a benchmark typically something like the FTSE All-Share Index. Fund managers pick whichever index they like and they use that as a reference point of what they're going to try and beat.
But for DIY investors, it's hard to work out a benchmark for their overall portfolio. So what I did this week is a part of a big piece of work that I've been doing for 80-20 Investor members. But I want to give people on the podcast a little, sort of, titbit of some of that because it is useful. So for 80-20 Investor members, what I've been doing over the last couple of weeks is teaching them how they can benchmark. So based on my experience in the city and with people who've got lots and lots of money and millions of pounds and revireing their portfolios, I reckon there are three ways to benchmark your portfolio which are of use. So I would say these are typically what I'd call goal benchmarking. Then something like an average benchmark and then an asset-based benchmark.
Now what I want to talk about today, because I'm not going to give away all of the research and stuff I did for 80-20 Investor members. By the way, if people are new to the podcast, 80-20 Investor is my DIY investment service where I teach people how to run their money. So check out the website, moneytothemasses.com and you'll see lots of information about it. But goal-based investing is when you...let's just say, that you've got £10,000 now and you want to have £100,000 by the time you're 50, so let's just say 30 years time. So you've got an investment term of 30 years. I've just made those numbers up. Now goal-based investing would be whereby you would then work back from what your desired outcome is and work out what your expected, or what your annual rate of return needs to be on your investment. So let's say you had those figures and let's pretend it worked out to be 5% a year. Now that is a benchmark and it's your own personal sort of goal, a benchmark. And what you need to do is always bear that in mind.
Whenever we're dealing with clients, what I would always try to say to them is, "Keep an eye on that benchmark." You could plot the line over time, where you need to be, like a straight line going up. Because what happens is, let's just say that you have a really good year and your portfolio goes up 15%, unfortunately what happens, people tend to have unrealistic expectations about what's going to happen the second year and then year three and year four. So by having a 5% mark you've worked out, that's what you need to get, that's the average over all that time. Then that means that when you're having a really good year, you'll just look at it as a positive that's putting some money in the bank for the down years. But equally when you have a year when you're down 10%, because trust me you will do when you're investing, then you don't panic.
It is a really good way of getting people to focus on the long-term because unfortunately, people will say, "Oh, I'm a long-term investor." But then they only look at the here and now. So when the market falls 10%, because of some crash or something that's going on in the world, then they will ring you up and say, "Why has it gone down 10%?" But when you have a goal-based benchmark, you can actually say to them, "Well you're actually still well ahead of target." Because they may be up, say 30% over a couple of years. And their benchmark of 5% a year means they only need to, by this point, to be up 15%. So can you see where I'm coming from, what this benchmark idea is?
So I would say to anybody, "Work out what that goal benchmark is." And that's easier said than done because there's quite complex maths that goes into it. If you Google anything like that and try and find a tool out there, you won't. I say that because I've obviously done it. I used to work out the mathematics myself using Excel. But I wanted to try and find something that was neat to allow people to find their own benchmark. And after a lot of searching I did find a site and the web address is calculator.net/investment-calculator.html, we'll put the link in the podcast notes and transcript. But if you go to that website, it's actually an American website and has all the numbers in dollars, but it doesn't matter. It's just arbitrary. It could be pounds, it could be anything.
They have a really neat calculator where you can put in how much money you've got today, or how much your portfolio is worth, how long your investment timeframe is, how much money you're going to put in regularly, if anything, and how regularly, whether it's monthly or yearly, then you can ask it to calculate. You put in a target portfolio figure in as well. And the calculator will calculate what your average annual return needs to be, which is a fantastic way of getting a benchmark, a goal benchmark, which any DIY investor should have. So it could be that when you do those numbers that you come back with something like 9%. Then that would mean that, based on the criteria you put in, then you're going to have to get on average 9% a year to achieve your goal. Now that's a lot, and the reason I mention it is because given that equities and shares on average produce 5% a year, that's typical if you go back about 60 years and averaged it out, that's what you would likely get.
Then if you have a really high number then what you need to do is change the amount you put in. So you might have to put in more a month, or reduce your expectations. But once you've done that, it's a very neat way for a DIY investor to get a realistic target and a realistic benchmark. It's also something you can hang on to when the markets go up and down, it also instills a bit of discipline and a long-term investing mentality.
Andy: I think that's fantastic. It's certainly going to help me. I'm going to go straight on to that website. Because actually I've got a set amount that I'm putting in but I don't really know how much that's going to get me or when it's going to get me. And it's interesting to be able to crunch the numbers. I'm an Excel wizard myself but I haven't been able to do anything with it myself, so good.
Damien: I'll just chuck in the other two bits I mentioned, I'm not going to go into the details. What happened with the 80-20 Investor research, I went on to the other two bits whereby if you had a whole range of funds, I taught people how you could quickly work out a benchmark based on the funds you bought and which sectors they were in. And that's okay, that works quite well because you can then get a rough idea, say you were in UK equities or North American equities and in certain sectors, you would then use the averages from those sectors to get a good benchmark, I told people how to do that.
But the best way you could ever do it is if you drill down into what every fund has. So you might get a managed fund. It can hold bonds, it can hold equities, it can hold things like commodities. You drill down into every fund and then you find out what your portfolio has as a whole, ignoring the funds themselves. That's the best way to benchmark. It's a slight plug here but I actually created a tool for 80-20 Investor members which they can download. It can analyse any range of funds, a portfolio, and tell you exactly what assets you are invested in. So if you had 20 investment funds, no matter which ones they were, it would tell you exactly what percentage you have in commodities, what percentage you have in UK shares, European shares, Japanese shares. That's a good way of being able to benchmark. So if you really want to benchmark properly then have a look at 80-20 Investor because I go into the details there.
VAT loophole
Andy: Okay. So VAT and a loophole. What's the score?
Damien: I don't know if you've seen recently but there's been a number of news articles about the VAT on various different items. So I think there was an MP recently, who stood up in the Houses of Commons and complained about the fact that there's VAT charged on tampons but there isn't on razor blades, I totally get that that's not fair.
Andy: That's not right, is it? It's not right. Whichever way you look at it, that's not right.
Damien: No. And because the argument is that VAT is added to things as a discretionary purchase, that's the kind of simplistic idea.
Andy: Is it kind of meant to be a luxury kind of purchase, like a non-essential?
Damien: Yeah. That is really what it's meant to be, in a very simple way. But the rules become very fuzzy and there's lots of grey areas, it's never quite black and white, so you get these things whereby unfortunately for women, sanitary products will actually have a VAT on them, yet they don't have a choice whether they need to use them. I suppose that was the original thinking behind no VAT on razor blades. So what I wanted to do was talk about VAT on products when you go to the supermarket. Because there are some very strange quirks in the VAT rules and I think a lot of people who listen to the podcast won't know them and will be quite intrigued as there are some money-saving angles in this as well.
Andy: Wow, okay. I sense a quiz coming. Is that what we're doing here?
Damien: No, no. The quiz is the next section.
Andy: Okay.
Damien: Two words for you Andy, Jaffa Cake.
Andy: Is it a cake or a biscuit? It's an argument that's being raised online and I can't remember which side of the...I think it is a cake. Here we go. A biscuit goes soft when it deteriorates and a cake goes hard. A Jaffa Cake, it goes hard, so it is classed as a cake.
Damien: Yeah. You would have got full marks. The reason I mentioned Jaffa Cakes, because this is a quirk, cakes do not have VAT on them, but biscuits do. And the Jaffa Cake debate came up when the tax man was trying to claim that there should be VAT on Jaffa Cakes basically because they claimed they were a biscuit. But definition of what makes a cake a cake and a biscuit a biscuit was probably never really defined that well. What you just brilliantly summed up, Andy, was the closing argument and the winning argument for McVitie's as to why Jaffa Cakes do not have VAT on them. They are cakes because they go hard, and biscuits are biscuits because they go soft. But apparently, in the court case to win that battle they made a giant Jaffa Cake to prove it is a cake, which I find hilarious. So the tip...
Andy: Is it wrong that I actually really want a Jaffa Cake now?
Damien: The tip there is Jaffa Cakes don't have VAT, so theoretically they should be about 20% cheaper than an equivalent biscuit of similar type. Now the next one I would say is nuts. Now buying nuts, did you know there was a difference in VAT on nuts, depending on how they're prepared?
Andy: No, I didn't and you're going to tell me.
Damien: You'll learn something new here, Andy. I didn't know this. But apparently, you should buy nuts that are in their shell. So nothing's been processed. They've not been de-shelled, they've not been roasted or salted. Nuts that have been processed in some way have VAT on them, whereas if you buy the good old-fashioned monkey nuts or something like that, then they do not have VAT on them. So save yourself some money, you won't save time, mind you, you've got to de-shell those things. But buy nuts in their original state and you'll avoid VAT.
Andy: Okay. So that annual purchase coming up to Christmas where I buy that big bag of nuts, where I get the old nutcracker out and stick it in the bowl in the corner at Christmas, you are saying that I'm actually making a good purchase there.
Damien: As an accountant, Andy, like you are, you are making an accountant's purchase by buying a tax-efficient food. Yeah.
Andy: There we go.
Damien: Yeah, there you go.
Andy: But then slinging it all in the bin when no one eats it and we get to February and they're looking a bit mouldy.
Damien: I always remember nutcrackers when I was younger and I don't remember anyone ever eating them or using them. So I just think they're probably, those nuts are probably lurking somewhere still where I was brought up. But yeah, so nuts, buy them in their shells. Now there are other quirks because...tea cakes. We've gone slightly back onto cakes but tea cakes. They are obviously cakes. So they were deemed as cakes and they don't have VAT, despite the bit of biscuit in them. And apparently, again, another court case was fought over this, Marks & Spencer's spent 12 years battling with the VAT man over the status of a tea cake to win...well they actually got £3.5 million refunded in terms of VAT. So it was probably worth the battle.
Andy: Hang on a minute. I'm an accountant, so I have to look at these numbers. They had £3.5 million refunded on the basis of an overturned decision on some tea cakes.
Damien: Yes.
Andy: Now, I mean that's a lot of tea cakes.
Damien: That is a lot of tea cakes, Andy, but they felt that they were unduly being taxed on their tea cakes. And they were cakes, they weren't biscuits and so they won their court case. Now, another slightly odd one. If you were to go down the cake aisle of a supermarket and buy, say, some products that you could put into a cake rather than being a savory snack. So if you went to the snack aisle and maybe bought something like, I don't know, dried fruit or things that you could actually put into a cake, if you bought them from that aisle they would have a VAT charge on them. But if you bought them from the cake aisle, they wouldn't. Because apparently the rules state that if a product is being purchased solely for the use of baking, and it's packaged in such a way to make it clear that it's meant to be for baking, then they're considered part of the cake and therefore are not subject to VAT. But the same thing could be packaged up as a snack in a different aisle, and because of the packaging, when you went to go and buy it, you would be charged VAT on it. A slightly ludicrous rule but you could just buy the same thing, not packaged as a confectionery item but as more as a baking item, then you would probably save some money.
Andy: I was going to say there's a good way of testing that. You could go down the baking aisle, find some raisins, sultanas packaged up a certain weight value. You could then go and search those out in a different section and probably see that there's a price difference. And if there isn't, then maybe you could speak to your local supermarket and ask why.
Damien: Well, it's funny you say that, Andy, because I was thinking that when I was doing the research for this piece I did wonder if there is a difference. I wouldn't mind betting there's a VAT scandal in there somewhere where they're not passing on the savings. Because do you remember that we did the podcast and we were talking about the airport vat scandal?
Andy: Yes. The airports. Yeah.
Damien: It was exactly the same thing where the airports weren't passing on the tax saving and the scandal came out. I mean I would never have known that had I not read it. So I believe there's probably some...even if it's by mistake, I wouldn't be surprised if there's some anomalies in the supermarkets.
Andy: I think supermarkets are potentially adding an extra 20% little "Brucey bonus" on the items down the baking aisle. But who know?s Maybe not.
Damien: Yeah. Next one, we'll rattle through a couple more. If you want to drink then avoid soft drinks, cordials, and bottled water. Instead buy tea, coffee or milkshakes because the latter three don't have VAT, whereas the former do.
Andy: Okay.
Damien: And another strange one I hear is crisps and savoury snacks. Now, did you know that crisps made from potatoes have VAT on them? But crisps and other savoury snacks made from alternatives do not have VAT on them.
Andy: So ones made from maize and corn and things like that...Do you know, that's really interesting you should say that because every time I go down the crisp aisle in a supermarket I've got children who unfortunately like the odd crisp snack. And I've actually recently noticed why don't the normal crisps, what we consider to be crisps, that are made from potato, they hardly ever have a deal on them when you could get them really, really cheap like for a pound or whatever. Yet I'm going to drop some names here. Maybe we should get this podcast sponsored but Wotsits, Quavers, all of these kinds of things that are made from sort of corn and maize, they're always dirt cheap.
Damien: Yeah, it could be one of them because given, like you said, chuck some name out there. Twiglets don't have VAT neither do prawn crackers or tortilla chips or any vegetable crisps. Because, you know you can get parsnip crisps. I mean, I don't particularly eat them but I know you can get them, they don't have VAT on them. So you are actually in a weird world where your children will be after the likes of a Monster Munch, which have VAT on them. But the things like Doritos or Skips, do you remember them? KP Skips? They don't have VAT on them. So we're in a bizarre world. It's because of, like you say, what they were made of. So be careful which snacks you pick. Pick something that doesn't have potato in it and you will get it, well, possibly 20% cheaper. You certainly won't be paying VAT in the price. So there you go. They are the quirks of our VAT system and you could save a little bit of money by picking an alternative.
Andy: Okay so we're rattling through them this week. What's the final piece we've gotten?
Most prosperous places to live in the UK
Damien: Prosperous places to live in the UK. Now, this is one of those quirky bits of research that I've dug up that appears every now and then in the newspapers. It's actually been produced by the Legatum Institute. I've never heard of them.
Andy: No, me either.
Damien: But they ran, or created, a geography prosperity index, is the official term. And what that means is they went through economic figures like GDP figures and the Office of National Statistics. So the stuff...you know when we do the census? It all goes into their numbers. And they went through there and crunched them and they looked at the average income per person and they created a happiness score. I don't know how they created their happiness score but they did and they combined these two things to say that prosperity is clearly a function of your income and how happy you are. And they produced a list of the best and worst places to live in the UK. So I apologise in advance if you live in one of the worst places but this is the...don't shoot the messenger, blame the Legatum Institute.
Andy: Do you know what's quite funny? I think I did see quoted recently the worst places to live in the UK because I think it just in a way makes a more sort of hard-hitting piece of news to throw at people. I haven't heard the happy side of this, which is the prosperous places. So this is good, yeah. So you're going to give us both sides?
Damien: I'm going to give you the top five and bottom five. Now the thing I like about these bits of research is they actually dismiss stereotypes. The England versus Scotland thing, I think that's quite nice. So anyway, back to the point. The most prosperous places to live, slightly disappointingly, they're very southern centric. So I'll give you a bit of a hint there. But have a guess of...just to see if you can get any of the top five.
Andy: Are they towns, boroughs, cities? Or a mixture of them?
Damien: I'll give you a major tip. There are one, two, three, four of them are boroughs of London and one of them is not anything. It's not anything to do with London, it's not even in the south.
Andy: Okay, so I'm going to go for Knightsbridge. No.
Damien: No. Not bad, nearly.
Andy: I'm not very good with boroughs of London so I'm not going to guess this very well.
Damien: It's Hammersmith, Fulham, Kensington, and Chelsea. So I would give you the Knightsbridge area.
Damien: How many people do you know that live in Westminster? But obviously some very rich people. The Camden City of London. The most interesting place is number five. And where do you think? I'll give you a tip. I would be amazed if they listen to this podcast. I would be amazed if they even have the broadband speed to download this podcast.
Andy: Okay. So Isles of Orkney or something like that.
Damien: Yes, the Outer Hebrides.
Andy: Yes, get in.
Damien: So it's a function of average income and happiness. The Outer Hebrides is the place to be. Well what about the worst one? I think you said you might have had an inkling as to one or two of the apparently least prosperous places to live?
Andy: Yeah. I think I might have read it in the news but it's one of those items that it quickly depresses you and then you move on and try not to take too much of it in because it's not exactly a positive story. So I wouldn't be able to hazard a guess and I'd be doing a disservice to people who live in the towns and areas that I would guess.
Damien: Well I'll name them. East Derbyshire was number five. Number four was Liverpool, I have a slight problem with that because I've got an affinity with Liverpool because I spent a lot of time out there when I was a student and I don't think...they must have had a happiness score that was off the chart and average income per person that was very off the bottom of the chart for them to be right at the bottom of the prosperous score. Blackpool was number three, I'm not surprised. Two is Sandwell and number one is Wolverhampton. So yeah, there you go. It's basically The Midlands and then the Northwest is taking a hammering in this prosperity league. Like you say, slightly unfair but there you go. Biased towards the south, as ever, but we've got the Outer Hebrides snuck in there.
Andy: So basically what we've learned from this is if you want to be prosperous, either stick to the south or make your way north but try and skirt by The Midlands. Don't stay too long.
Damien: I went to university in The Midlands and I've actually lived there for three years. And I wouldn't rush back there, I'll be honest. There's nothing wrong with the people. I just found it rained all the time when I was in The Midlands. I actually was not far from Birmingham and it just seemed to rain, I know it's an effect of the Welsh mountains but I did find The Midlands slightly depressing. I had so much fun there but I'm not quite sure I'd live there. Sorry about that, but that's me just being frankly honest.
Andy: Yeah, fair enough. I don't think there's anything wrong with that. Good. Okay. So I've learned something new there. Are we done?
Damien: We are done, Andy. We are done. The time's flown, I think we've gone way over half an hour anyway. So we are done and dusted. So as usual, we should do it at the beginning of the podcast, tell people to give us reviews. It boosts us up the podcast charts. We want to be the number one finance podcast in the UK. And if you don't leave reviews then we can't do that. So please leave a review and download our books and visit the website, moneytothemasses.com.
Andy: Tell your friends and family, too. Spread the word. And yeah, this podcast has been brought to you by Jaffa Cakes and thank you so much for your kind donation. They haven't given us anything, by the way. But yes, so until next week. Good stuff.
Damien: Good stuff. See you later, Andy.
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