Making Your Money Work For You!
There's so many strategies, philosophies and ideas on investing. If you're starting out then it can be very confusing even bewildering.
Different strategies have unique hooks that may appeal to your specific character traits. So, you might come across ones that really appeal to you. Then you find another one that someone else uses that contradicts the one you like.
In fact it’s a lot like the diet or fitness industry, in that there’s a diet or fitness plan to please everyone.
Do they all work? Well, I think that you know the answer to that.
Some strategies are going to be realistic for you as an individual investor. Whilst others are beyond your reach. For example if you wanted to copy what Warren Buffet does then that's not going to work for you.
You can try as hard as you like, though you’ll never come close to the great man’s returns. Not unless you own several insurance companies. That’s because he uses the premium income from them to provide interest free loans for his portfolio. This boosts his returns and gives him a massive advantage over any of us.
Having said that everyone can learn from him even if you can’t replicate what he does. Though his investment principle's are sound and are inline with what we're going to talk about.
In reality you’re not going to have time to start day trading shares, currencies, options or futures. You want to start investing in a way that fits in with your professional and personal lifestyle.
So, let’s start taking a look at these fundamentals. Here are the “10 Essential Wealth Creation Principles for Everyone”.
Before we do that though, let's have a quick look at this...
Sound financial planning starts with protection. As an expat you can find that your life insurance isn't going to do what it should.
So, here's an opportunity to get a copy of our...
"Expat Life Insurance Confirmation Pack".
It's completely FREE and has resources to help you confirm your life cover still works. Plus it gives you a step buy step guide of how to do that and gives you questions that you should be asking.
So CLICK the image below and get your's NOW!
1) Dump The Debt to Kickstart Your Wealth Creation!
Generally debt isn’t good when it comes to wealth creation. If you're not careful then It can lead to asset depletion which makes investment pointless.
So, using your capital to clear as much debt as possible now will yield big benefits later.
Though right now we want to say this...
"Not all debt is equal"
For example it's crazy to say that you shouldn’t be investing because you’ve got a mortgage. Whereas if you’re financing a big chunk of credit card debt it makes sense to clear this before you invest.
Mortgage and secured loan interest is much lower than credit card or unsecured debt. The returns needed to offset the credit card debt is going to be much higher.
There’s a common adage which is "as long as you make more than it costs to borrow debt is fine". Unfortunately this is easier said than done. For starters investment growth isn’t uniform. In reality it's completely lumpy and comes in fits and starts. Whereas interest on debt is very uniform and it keeps coming regardless of market conditions.
Another thing is that interest charged on debt never turns negative. Whereas growth on every investment will dip into the red at some time or another.
Then we have the fact that rising interest rates tend to stifle investment returns. They’re used as a way to slowdown an economy which reduces growth. So, whilst financing our debt gets more expensive our investment returns get smaller.
Paying 27%pa interest on your credit card and trying to outperform that over the long term isn’t realistic. And that isn’t going to happen.
Even when it comes to mortgages there’s a time when you should think about paying it down.
Property investors very rarely factor in the cost of debt when working out their returns. They tend to look at the price the property was bought for and what it's valued or sold at.
That's their returns!
If you’re paying upwards of 8% APR on your debt then look to pay it down. Once you’ve done this then start investing again.
2) Keep Putting Something Away
So, here’s the next wealth creation principle and this one may sound a bit obvious. Though you'd be surprised how common it is for people to put it off!
You need to put some money away. Invest on a regular basis, in a way that suites you best and keep doing it.
Spend less than you make, as we’ve already established you can’t build wealth if you’re servicing debt.
It’s pretty surprising the number of people who want to build wealth, yet never put anything away.
Be careful that you don’t get into the habit of living life to or beyond your means. This is not the formula for wealth creation.
3) The Sooner You Start The Better
If you start saving early in your 20’s as soon as you start working. Putting away 12.5% of your pre-tax income will get you well on your way.
Starting in your 30’s means you’re going to need to put away more to get to the same place. In fact it's between 15-17.5% of your pre-tax income to get the same results as if you’d started in your 20’s.
Beginning in your 40’s and you’ll be looking at over 25% to get anywhere near where you would like to be.
We’ve met many a 55 year old who hopes to retire at 65. Yet they have no pension and very little savings.
How that's going to happen is a total mystery.
They’ve paid off their mortgage, whatever happens they’ve got somewhere to live. Kids have grown up and flown the nest so they’re not paying for them anymore. Now it’s time to get serious!
Panic has set in and reality’s bitting. They’re prepared to do some hardcore saving.
This is what we make today and we’re going to need this much income when we retire.
“What do we need to do?”
When they find out what they have to do with the time that they've got to get what they want. Well, let's say they freak out...
That's because they have to save a ton and by that we mean 60-70% of what they earn, sometimes even more.
It’s called the ostrich approach to financial planning. The outcome is that they own a house (which they’ll have to sell) and have no money to live on.
Doing nothing makes the whole situation even worse.
Instead of ignoring it, address it and make changes. For example revise your income goals and delay your retirement age. Both options would improve the situation for the better.
The sooner you start to save the more wealth you'll accumulate. Time can be your friend or it can be a cruel enemy when it comes to wealth creation.
So, starting to save earlier makes a big difference to your wealth and has less of an impact on your lifestyle.
4) Your Investment Strategy & Timeframe Should Match
What do we mean by this?
Your investment strategy should be suitable for the time that you have. That is how long do you have before you need to use the money that you’re investing.
For example, if you’re saving for a deposit on a house. The plan is to buy the property within the next 24 months.
If this is the case you shouldn’t be investing into assets that might fall in value. This means no shares, share based funds, hedge funds, REITS, property funds, bonds, bond funds and all forms of cryptocurrency.
Instead you should be investing in are cash based assets. Find the best deposit account that meets your timeframe and use that.
You might be saying,
“Surely, I could have a little punt on Bitcoin or some hot tech stock and get a bigger deposit.”
If you’re lucky, then yes you could.
Or you could be explaining to your wife/husband/partner why you can’t buy the house of their dreams. All because your deposit is now worth half of what it should be.
The rule here is if you don’t have the time to wait for an asset to recover before you need to take money from it…
Then don’t invest in that strategy!
If you do have time to wait then it's a different story…
For example, you have a 10+ year time horizon, then you should go for it and take some risk. Sticking your money into a bank account isn’t going to do much towards your retirement.
You won’t build wealth with assets that pay interest only. All this does is keep your money safe for now or so you think.
In reality when you come to need it, it will buy you a lot less as inflation will have devalued it.
5) Accept That Markets Go Up & Down
This is a natural progression from wealth creation principle 4.
Only if you’ve invested inline with your timeframe will this make any sense. That’s because you’ll have time to allow markets you're invested in to recover.
This means that you're maximising your returns inline with the time that you’ve got.
All markets go up and down in the short term and some of these shifts look dramatic as they happen. Over the longer term those same movements flatten as markets recover and move on.
This means that the shorter the time you’ve got in the markets the less chance you have of making money. Conversely, the longer you're invested for the more chance you have of making money.
If you accept that markets go up and down, don’t panic and stick to your strategy. You’ll be fine and make great returns over the long-term.
A Word On Market Timing
If you have the ability to predict the future, what, where and when then the world is your oyster my friend.
Give us a call because we want to be along for the ride!
If you believe that you can time the market then you should be shorting them when they fall.
Right?
For those unfamiliar with this term it is a way of making money when markets fall. The longer you do it for the more expensive it gets. So, making the call too early can lead to financial ruin.
Hey, but you can time the markets so it shouldn't be a problem.
If we’re talking about just pulling your money out when they fall and moving into cash. Or investing into them when they're on the way back up.
Then this isn't market timing!
What it means is there’s times when your money isn’t doing anything.
The question is when exactly should you go back into the markets? When is the best time to actually sell and come out?
If you’re selling when markets start falling and buying when they’re on the rise. The chances are you’re going to end up buying high and selling low as most market timers do.
By the time most investors want to invest again they’ve already missed a big chunk of the upside.
So if you accept that markets move in both directions and you have the time to ride out the falls you’ll do well. Panic when the market is going against you and start selling down your portfolio then you’ll lose money.
Let me ask you this...
If you owned a house and the property market fell by 40% then would you sell it?
Everyone without doubt gives the same answer which is "No, I'd keep it and wait for it to recover"
Guess what your other investments are the same, so do the same thing.
Losses only become real when you make them so. And you can only do that by selling the holdings when they’re down.
That's something that we can guarantee. Remember growth isn’t uniform, usually it comes in chunks.
6) Invest Regularly or When You Don't Want To!
One of the best ways to build wealth over the long term is to make some kind of regular investment. The reason being is you invest across the whole market cycle and buy at the lows.
Also, as with any kind of regular payment such as a mortgage or loan you adjust your lifestyle around it. You end up so you don’t notice the money going out anymore.
There's a comforting thing about regular investing for the more nervous amongst you. And that is that you’re not committing big lumps of capital to the market at any one time, so you should be less anxious.
When it comes to regular investments, market volatility is your friend in the long-run.
If investing every month or quarter isn't for you and you prefer ad-hoc contributions. Then this next part is for you...
You have a warm fuzzy feeling about the markets, everything is going well. New market highs every week and you want to invest.
DON’T!
Or, markets are awful. The thought of investing sends shivers down your spine. You’d sooner do anything else but invest at this present moment in time.
Then this is the time to invest!
Our natural instinct is to invest when things are going well and to avoid markets when they’re not. This amounts to self sabotage, a modus operandi of buy high and sell low.
By the way whatever your reason for not making regular investments, it’s not a good one. Get over yourself and start making them you won’t regret it.
7) Rebalance
Out of all the wealth creation tips we see, this is the most important and yet it is the most overlooked.
If you’re using a managed fund or discretionary manger then they should be doing this for you. If you’re not then make sure your portfolio gets rebalanced. If your financial adviser runs your portfolio insist they rebalance every 12 months.
For those of you managing your own portfolio rebalancing is an important part of doing a proper job. Once a year is enough anymore more often is overkill and any less could prove costly.
What is rebalancing and why is it so important?
When your portfolio is set up there should be based on an allocation model. This model defines how your money is split between each of the assets in the portfolio. This model should be determined by your risk profile.
Over a year these assets will grow at different rates. Some assets will have made gains and others may have lost money all to varying degrees.
And this means that the portfolio doesn’t conform to the asset allocation model anymore. This will result in the risk profile of the portfolio changing. Meaning it's more or less risky than you'd like.
When we rebalance, we bring the portfolio and the risk profile back in line with the original model. This is done by selling assets that had strong performance and buying those that have lost money
Crazy Talk, Right?
“Are you ******* mad, we should be selling those dogs and buying more of the good stuff”. Is what you might be thinking at this present moment.
Not rebalancing is exactly why most people had nothing left after the tech boom of the late 90’s. It’s also why most investors will lose their gains in the cryptocurrency boom.
Firstly, all the assets in your portfolio shouldn’t grow at the same time. If they do it will normally mean that they all go down at the same time as well.
As long you’re good with that then (you have our total respect) you’ll be fine. Though you should still rebalance.
Most people aren’t OK with all their holdings falling at the same time. This means they need to have some diversity in their portfolios. Different asset classes doing different things. This helps to reduce the overall risk and volatility of a portfolio.
The likelihood is that the assets that performed well this year may not be as strong next year. The assets that were weak this year will probably be stronger over the coming 12-24 months.
Rebalancing helps us lock in the gains from those winners and make sure that we buy the losers at a reduced price.
This also means that the losers don’t have to recover completely before you’re making money again. And when they do recover completely you'll be making even more money.
Rebalancing also means you're taking the portfolio back to it's original risk profile. After all that's what you're comfortable with.
Next we're going to move onto principle 8 but before we get onto that...
Here's another opportunity to get a copy of our...
"Expat Life Insurance Confirmation Pack".
It's completely FREE and has resources to help you confirm your life cover still works. Plus it gives you a step buy step guide of how to do that and gives you questions that you should be asking.
So CLICK the image below and get your's NOW!
8) Use Multi-Dimensional Investments
Multi-Dimensional investments what are we talking about?
Well, what we mean is that you shouldn’t just have assets which only make money when the price goes up.
Commodities, crypto, art, wine you get the picture (pardon the pun). If these assets fall in value you can only wait for them to recover or sell at a loss.
The stupidest investment that anyone can make is to buy a property and then leave it empty. You have to have more money than sense, it doesn’t matter how wealthy you are. You can do something way better.
One of the most attractive parts of property investment is the rental income. This is because as it supercharges returns and offsets any borrowing costs.
This holds true for any investment dividends on shares and the coupon on bonds. They’re essential as they boost your annualised returns.
As we already mentioned any market has good and bad spells, even property.
When we get an income from our investments it makes those bad spells better. Even though valuations may have fallen it makes the situation more palatable.
It also means that the investment is making you money even when it isn’t growing. If you reinvest the income it averages out your position and makes the most of any market falls.
In the long run your investment will be much more efficient.
It’s OK to have some commodities or other similar assets (never empty property). It will diversify your portfolio and in turn make the portfolio more resilient.
This is because you have more unrelated assets doing different things. Too much though isn’t good as you start to forego that lovely income.
9) Minimise Investment Costs
Investments cost money and no one does anything for free. Nor should you expect them to even those nice people at Vanguard have charges.
If you want your portfolio managing for you then you'll pay more. If you’re happy to manage it for yourself then you are going to pay less though you’ll have more work.
You might want to take control of your own assets, though, this isn’t for everyone. Whatever you decide it’s important to keep investment costs as low as possible.
Get good value, because if costs are too high then your portfolio won’t grow.
Any investment strategy has layers of costs though some more than others. Going direct to a fund manager means that your cost structure will be simpler, which is great.
The downside though is the manager may not have a full range funds. They certainly won’t be strong in every market sector. As a result, you may lose more in growth than you’re saving in fees.
We’re not going to get embroiled in investment strategy today, it isn’t what this article is about. What we'll say is whatever your preferences, investment platforms makes the most sense.
Not all platforms are equal so it is important to make sure that you get the right one for you.
Firstly you should be able to buy the assets that you want through it, cost effectively.
If you're a passive investor then you wouldn’t want a platform that requires a minimum number of trades.
If you want someone else to manage your portfolio then make sure that you find a platform that allows this.
Expats Be Warned
A note of caution to expats past, present and future.
The complete opposite of keeping costs down is an offshore life assurance product.
Today things have moved on and there are much better options.
10) Become A Gardener or Hire One That You Like
Investing is a lot like gardening. You need to have a plan and if you don’t then you could get into an awful mess.
First you want to do the research, what goes where and works well in which conditions.
Then you have to see what you like and what you don’t.
What are you going to be using it for? Determining all this has a significant impact on what you’ll do. Making sure that you have the right plants in the first place will save you time and money later.
Once you’ve got your plan together then you need to start planting.
It may not look great at first because things need time to settle, bed in before they start to grow. Though at this point you need to be patient, leave things alone and give them the time they need.
Keep digging things up because they’re not growing fast enough and they never will.
And sometimes the weather's going take its toll, there’s no need to dig everything up and start again.
Instead tidy up add some more plants to the areas that got damaged, the most and carry on. Otherwise just keep things tidy and do the maintenance that’s needed when its needed.
Gardening may not be your thing and yet you’ve got a garden. You may or may not know what you want from it.
If you don’t want to do all this yourself then find someone to do it for you and pay them. Make sure that you can work with them and get going.
Apply these principles to your investment strategy and you’ll do well. Financial freedom will be close at hand.
Finally, here's another opportunity to get a copy of our...
"Expat Life Insurance Confirmation Pack".
It's completely FREE and has resources to help you confirm your life cover still works. Plus it gives you a step buy step guide of how to do that and gives you questions that you should be asking.
So CLICK the image below and get your's NOW!
Thanks for reading we'll be back again next week.
コメント