Investment funds

This video is for educational purposes only. This should not be viewed as advice or a recommendation to invest.

Do you ever wonder if you're investing in the right way? Active? Passive? Shares? Pound cost averaging? I know, it's confusing, but we'll be demystifying it all in the next few minutes.

The Investing Master Plan

Episode 3: Navigating your investment options

Hello and welcome to episode number three of the Investing Master Plan. My name is Donato Boccardi, I'm the Head of Investments for Consumer Wealth at Aviva.

I've spent the last decade working across Europe and Asia, helping people make sense of their money and their future. It's no secret, even for professionals, investing can feel like a maze sometimes. But once you understand the strategies, it becomes a lot clearer.

You'll begin to see investing in a new light. If you've been following the series so far, you're probably starting to get a good feel for investing. Now it's time to dig a little deeper into some of the key strategies and how they work in practice.

In this episode, we’ll break down three key concepts.

What is share dealing?

What is pound cost averaging?

Active vs Passive investing

Chapter 1:

What is share dealing?

You might have heard of the phrase share dealing, but what is it? Well, share dealing is basically buying or selling shares in public companies with the goal of growing your investment over the long term. Think of it like walking through a market.

Each stall represents a company, but instead of buying their products or services, you're buying a small piece of the business itself. That's called the share. So how does share dealing work? Shares are traded on stock markets around the world, where a company's based usually decides which market it's listed on.

Here in the UK, for example, that's the London Stock Exchange. Each share has a price based on what investors think the company's worth. It's influenced by things like the company profits, its growth potential, and global events, and that price isn't fixed.

It moves throughout the day, depending on news and how many people are buying or selling. You've also probably heard the phrase buy low, sell high. It's a simple idea.

The cheaper you buy your shares, the more potential you have to make a profit when you sell it. Some companies pay dividends too, which is a small payout to company shareholders, a bit like a thank you. Over time, investing in shares can offer better returns than just keeping your money in a saving account or cash.

That's why they're often part of long-term plans like pensions. Of course, there's risk involved. If a company doesn't do well, the value of your shares can fall and you might get back less than what you put in.

And it's not just about individual companies. Entire markets can shift depending on what's happening in the economy or around the world. That's what we mean by market volatility.

Shares are best seen as long-term investments, ideally for five years or more, so they have time to grow and recover from short-term changes. I always tell people, buying shares is like planting a tree. You don't check it every day, you let it grow.

Chapter 2:

What is pound cost averaging?

When you start investing and the question becomes, how much should I invest? You've got two choices. Go all-in or drip feed your money over time. The second approach is called pound-cost averaging.

It's about investing little and often to try and smooth out the ups and downs of the market.

The value of all investments can go down as well as up, and you could get back less than what you’ve paid in.

There are no guarantees with this approach, but it can help you remove some of the intimidation of investing by focussing on consistency over time.

This chart shows how pound-cost averaging works. For example, the price of this asset moves up and down during the year, from £6, up to £8, up to £10, down to £4 and then up to £7. By investing the same amount regularly, you don't have to guess the best time to invest.

Sometimes your money buys more units, sometimes fewer, depending on the price of the asset at the point of the year. Over time, this gives you an average cost. In this example, £7, that helps you smooth out the ups and downs of the asset.

I use this approach myself when setting up my SIPP. It helps me stay consistent by investing regularly, especially during volatile periods, like early 2020. Pound-cost averaging, like any investment strategy, comes with its pros and cons.

Let's start with the positives. When you invest regularly, say monthly, you're spreading your money across different market conditions. That means you're not putting everything in when prices are high, which helps smooth out the ups and downs over time.

If the market dips, you're buying shares at a lower price, and when it recovers, those cheaper shares could give you a better return. It's a strategy that can really help in volatile markets. It's also a great way to ease into investing.

If you're just starting out, putting in a little at a time feels a lot less daunting than making one big decision. It takes the pressure off and helps you build confidence. And there's another benefit.

It builds good habits. You're investing consistently, sticking to a routine, and letting time do the heavy lifting. Little and often really adds up.

That's exactly how our workplace pensions work, for example. Regular contributions, consistency, and time do the heavy lifting for you. It's pound-cost averaging in action, and it's one of the reasons why pensions remain one of the most powerful ways to invest for your future.

On the other side, if markets are rising steadily, putting in a lump sum right at the start might actually help give you better returns than spreading things out.

Investment Insight: Stick to a plan and avoid the temptation to time the market. Or, set a fixed monthly amount you can afford.

And if you've got money sitting on the sidelines waiting to be invested, inflation can chip away at its value. Things get more expensive while your money just sits there, so having a clear plan and time frame is key.

So, to bring it all together, staying consistent beats chasing the perfect timing. Even something as simple as a fixed monthly contribution can go a long way over time.

Chapter 3:

Active vs Passive investing

All investing, in particular your pension, has the same one goal, building your wealth for the future.

There are different ways to get there, though. In this chapter, we'll explore the benefits and drawbacks on both active and passive investing, so you can start to decide which is best for you.

Let's start with active investing. With this approach, the fund managers use their expertise to pick investments they believe will outperform the market. So when fund managers choose where to invest, they really get under the skin of a company.

They look at what's coming down the pipeline, for example new products, services or trends, and how businesses are run on a day-to-day basis. They even consider things like how committed the company is to sustainability and who's leading it. But it doesn't stop there.

They keep an eye on the bigger picture, politics, global events, anything that might shake the markets. If they spot a company that looks set to do well, they can buy more of it. And if things start to go south, they can act quickly to sell it and protect the value of the fund.

Now, the upside of this approach is pretty clear. Fund managers aim to beat the market, so if they get it right, there's potential for higher returns. They have the flexibility to respond fast when markets shift, which can be a real advantage in uncertain times.

Back when I was working in Singapore, I remember one of our regular investment calls with colleagues across Aviva. During that session, there was a deep dive into the electric scooter industry and how a major boom was on the horizon. Insights like that can be game-changing, but they require significant effort and expertise to uncover.

Actively managed funds tend to have higher fees, and over time, those fees can eat into your profits and slow down your money's growth. While a fund manager aims to outperform the market, there's no guarantee they will. Their strategy might involve taking more risk, and poor decisions can hurt returns.

If a successful manager leaves the company, or if they stay invested in companies that take a hit, performance can drop. So if you're thinking of doing active investing yourself, just know it's not a passive hobby. It takes time, research, constant monitoring, and a fair bit of confidence.

I'd say it's not impossible, but definitely not for everyone. Passive investing, on the other hand, is a bit like setting your GPS and letting it guide you. You're not trying to outsmart your route, just follow it steadily.

Instead of trying to beat the market, you aim to match it. This is usually done by tracking something called an index, like the FTSE 100, which is made up of 100 biggest companies in the UK, or the S&P 500 in the United States. Funds that follow these indexes invest in all the companies that make up the index.

Once the fund is set up, there's not much buying or selling. The idea is simple. When the index goes down, the fund also goes down.

When the index goes up, the fund goes up too. Now, the benefits? It's usually cheaper. Passive funds tend to have lower fees than active ones, which means you get to keep more of any gains.

It's also less risky in some ways. You're not chasing trends or betting big on individual companies, you're just following the market. But there are trade-offs.

Passive funds don't have the flexibility to jump on opportunities. If one company looks like it's about to take off, a passive fund cannot suddenly invest more in it. And when the market dips, you ride that wave too.

There's no quick switch to avoid the drop. So it's a steady, long-term approach, great for people who want simplicity and lower costs, but it's not built for reacting to fast-moving changes. Taking both sides of investing into account, this is why most pensions use a mix of active and passive strategies, combining the potential for growth with the stability of a long-term approach.

The value of your investment can go down as well as up and you could get back less than what you’ve paid in.

So how do you choose between active and passive investing? Well, here's a simple way to think about it. Active investing has higher fees and more involvement, but it offers the potential to outperform the market. It can suit those seeking more opportunities and willing to take on more risk.

Passive investing typically has lower costs and aims to mirror the market performance, making it appealing for investors who value simplicity and consistency, though it limits the chance of beating the market. Both approaches work best if you're in for the long run, typically five years or more. So before you decide, ask yourself, what matters more? The potential to outperform the market and tailor your strategy, or a lower-cost one that tracks the market performance?

Whether you're just starting out or refining your approach, understanding the different ways to invest can make a real difference. Today we've unpacked the basics of shared dealing, explored how pound-cost averaging works, and looked at active and passive strategies. If there's one thing I'd encourage you to take away, it's this.

Choose the approach that fits you best and stick with it. Whether that's going active, staying passive, investing bit by bit, or mixing things up, having a clear strategy and staying consistent over time can really work out. Next time, we'll talk about annual account charges, how Aviva approaches fees, and why transparency matters.

Thanks for watching, see you in episode 4.

This video is for educational purposes only. This should not be viewed as advice or recommendation to invest. Investing offers the potential for better returns than cash savings over the long term (5+ years).  But there are risks, the value of your investments may go down as well as up, and you may get back less than invested.  
If you want advice on investment choices, then we’d recommend speaking to a financial adviser. There may be a charge for advice.