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Weekend reading: Earning more and spending less is the best investment

Weekend reading

Good reads from around the Web.

When I were a lad in the late 1990s, it was common for 20-somethings to put £500 into shares of some tech company or another that we felt we knew something about – or perhaps even knew somebody working at.

Our parents were mostly still to get onto email. It was easy to feel you had an extra insight into the dotcom boom.

As it happens, my colleagues and friends and I probably did know something about the ‘new economy’. But we knew very little about investing.

And we all know how that turned out.

These days the stock market is about as fashionable as fondue parties and donkey rides at Blackpool, so there’s not much need to warn anyone of the dangers of investing. Few have spare cash, anyway. While young people are rich in many ways, in 2012 it’s certainly not in terms of the folding stuff.

Some of the new generation are drawn to the markets, however. One young UK blogger, Rob, looked this week at investing on a salary of £18,000, for example.

I would never want to put anyone off investing, but be sure you have a sense of proportion. Putting £50 a month into an ISA to get a feel for market fluctuations while cash is tight I’d heartily endorse. But trying to invest your way to wealth on this level isn’t a great strategy, simply because it’s going to be decades before this sort of money moves the dial. You’d do better to focus on a side income.

As it happens Rob thinks he can save and invest thousands of pounds a year, thanks to low living costs in the North and great budgeting. If so, investing early could make a big difference to his future life.

But many young people will do better to focus on the basics at this stage of their life – which means growing their income and cutting their spending.

As TheZikmoLetter put it this week:

There are other ways you can achieve high returns on your excess cash, without incurring the fees and risks of Wall Street.

You often will not hear these options recommended by anyone who gets paid based on transactions, fees or a percent of assets, but they often offer the best risk-adjusted returns, net of fees, taxes and inflation.

Its suggestions – pay off debt, cut spending, build an emergency fund, and invest in yourself – will be familiar to Monevator readers, but still seem to be novel in the wider world. One reader of Mr Money Mustache reported this week that following sensible money management techniques did more for his net worth than doubling his salary.

As the Mustached mister writes:

… until you see it applied to a real life like this, where the graph of your wealth takes a sudden bend and your mandatory work career is suddenly chopped in half, it can be hard to convince people of just how useful it is to understand your spending, instead of just endlessly chasing more income.

Investing from an early age is an excellent habit to adopt for long-term wealth.

But not getting addicted to fancy cars, cigarettes, or living paycheque to paycheque is even better.

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

  • How to be a great investor, by choice – UK Value Investor
  • Why Apple’s falling share price could be good news – Asymco
  • Valuation investing drives the market long-term – Aleph blog

Other articles

Product of the week: A reminder that BACIT Ltd listed on the stock market last month, and can now be traded like any other investment trust. BACIT gives you access to a portfolio of active funds who are waving their fees for Cancer Research. The ticker is BACT. It seems to be priced a little above estimated NAV. Read the prospectus.

Mainstream media money

Highlights from the wall of noise…

Passive investing

Active investing

  • Salmon: Is there something better than Vanguard? – Reuters
  • Thumbs down for Stobart’s retail bond – Fixed Income Investor
  • Swedroe: Why IPOs underperform – MarketWatch
  • China’s GDP growth not reflected in its returns – FT beyondbrics
  • …indeed, Merryn says Chinese shares cannot be cheap enough – FT
  • Like Moneyballed baseball teams, quants eventually flag – Morningstar

Other stuff worth reading

  • Why women don’t take risks with their money – The Atlantic
  • Japan’s hottest commodity: water – Bloomberg
  • Ten ways HMRC checks if you’re cheating on tax – FT
  • Families now need £25,000 a year to survive – Telegraph
  • Even The Guardian is now explaining how to keep child benefitGuardian
  • Peston: No Lloyds or RBS government sales until 2014 – BBC

Book of the week: If you’ve been reading this blog for a while, you’ll know that much of what’s written about investing is nonsense. This is a well that never runs dry though, as Jack Schwager explains in his new book, Market Sense and Nonsense.

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{ 11 comments… add one and remember nothing here is personal advice }
  • 1 RetirementInvestingToday November 17, 2012, 1:41 pm

    Hi TI

    Great post as always however I’m wondering if you are a litte pessimistic with “Putting £50 a month into an ISA to get a feel for market fluctuations while cash is tight I’d heartily endorse. But trying to invest your way to wealth on this level isn’t a great strategy, simply because it’s going to be decades before this sort of money moves the dial. You’d do better to focus on a side income.”

    I agree that if you can develop a side income then it would certainly help however that revenue does not exist today. What does exist today is that it is immediately possible to start cutting back and practicing a more frugal life. This can start with the weekly supermarket shop tomorrow, putting an extra layer on with a little less heating and turning any lights off which you aren’t using (Fuel and Light costs are up 146% since January 2000 which I’m preparing a post on for next week). In maturity it’s shunning consumerism, not aspiring for a McMansion (which then saves heating and lighting as well as giving more money for investing), using less paid for transport, make do and mend, insulation and depending on how extreme you are maybe even growing some of your own food.

    Since I’ve been practicing frugality, in the hunt for Early Retirement, I’ve really been amazed at how little money one really does need to live well and at how quickly savings/investments amass. I’m living well in one of the most expensive cities in the world and to me £18,000 is a lot of money. The amazing thing is that I don’t miss the old consumerist lifestyle and feel far happier and am certainly healthier.

    By following this strategy as you know I’ve moved the needle far more than a savings rate of £50 per month however if somebody practices frugality and can only save £50 then that is far better than going into debt by £50 per month. You mention that it will be decades before this moves the needle. My thought is that you have decades if you are young so that £50 will make a big difference. Practice frugality and that £50 could be larger, then as you develop in your career don’t ramp your standard of living to match but instead increase that £50 to £100 then to £150 then to… Before you know it financial independence is on your door step.

    Cheers
    RIT

  • 2 Drew @ Objective Wealth November 17, 2012, 2:00 pm

    Thanks TI. Just making a start with sensibly investing any amount of money is a good move. If only I’d started socking away £50 a month as a teenage shelf-stacker at college…We’re not born with automatic knowledge, so any first-hand experiences and feedback as an investor while you still have plenty of time on your side is invaluable, whether it turns out you get your fingers burnt or a good move doesn’t matter too much provided you learn from it.

  • 3 The Investor November 17, 2012, 2:23 pm

    Chaps, just quickly as I’m headed to a friends for a Thanksgiving dinner (my first!) but we’re in agreement.

    I’m not saying don’t invest £50 a month. I’m saying do that!

    And I’m not saying don’t live more frugally and save more. I’m saying do that. 🙂

    Perhaps I wasn’t clear… My point was in my early 20s people would invest in single stock ideas with the idea of making a lot of money, whilst spending everything in their bank account each month. Close to nobody ever achieved any real wealth that way.

    Sure, if you can increase your £50 a month ‘apprenticeship savings’ to £250 a month or more when you’re still young, then you’re up and away — I couldn’t agree more.

    Cheers!

  • 4 OldPro November 17, 2012, 2:50 pm

    Agree and don’t agree… £50 per month is £600 per annum… compounded for 45 years (working life from 20) that would be £100,000 real assuming 5% real growth a year. Worth having compared to the penniless masses and could achieve something more ebullient with tax relief in later life (assuming HRT) even on the piddly £50 per month.

    Fear would be that income £100K pot would be taxed away… or means-tested away… in 2055!

  • 5 ermine November 17, 2012, 4:15 pm

    When I were a lad in the late 1990s, it was common for 20-somethings to put £500 into shares of some tech company or another that we felt we knew something about – or perhaps even knew somebody working at.

    Oh don’t remind me, me and the guys at work were going to make our fortunes in tech stocks in the dotcom boom. One guy got into trouble owing capital gains tax, he’d ploughed the gains into more tech stock, and it all went titsup in the dotcom bust. Charges were so shocking in those days – even execution only with ESI/sharelink/Schwab. I was hardly aware of dividends in those days – dotcoms didn’t pay them. Churning on a weekly basis. I got slaughtered. I’m still not sure that overall across all time I’m up on shareholdings because of that torrid period, but it’s getting better. Some things you gotta learn the hard way 😉

  • 6 Mike Edwards November 19, 2012, 11:27 am

    (Link to Rob’s blog post throws a ‘page not found’ error)

  • 7 The Investor November 19, 2012, 11:48 am

    @Mike — Argh! You’re quite right. Fixed now, thanks for sharing.

  • 8 SemiPassive November 20, 2012, 10:27 am

    Ah, the dot com days, in hindsight you’d have been better off ignoring the stockmarket and just borrowing as much money as possible to buy property. The beauty of leverage is that even modest gains can have a sizeable impact on your net worth.

    I’d also like to comment that sometimes too much emphasis is placed on frugality while not examining what people can do to maximise their income. If you’re on a lower than average wage then your time could be spent studying and retraining for a more lucrative job. Or just overcoming inertia to find another similar job with a better paying company.
    Going self employed or becoming a contractor may also be options to increase income. This can multiply the amount of spare cash you
    have for investing by hundreds of percent.

  • 9 Rob November 21, 2012, 6:47 pm

    Only just found my way here due to internet issues, but although I’m not going to take your advice, you are right. Logically you should try and be sensible and passively, but the old romantic in me can’t resist trying to shoot the moon. I’ll probably pay for it in a few years, but I guess that’s just one of my weaknesses… I want things to work too much.

  • 10 The Investor November 22, 2012, 10:03 am

    @Rob — Confidence and time are both priceless gifts enjoyed by the young. You go for what feels right! 🙂

  • 11 Steve November 23, 2012, 7:38 pm

    –“If you’re on a lower than average wage then your time could be spent studying and retraining for a more lucrative job. ” —

    I worked in a lab in London a year or so after graduating with no chance of getting on. Terrible salary and renting a small room in a house full of other hospital workers.
    I did a part time MSc at Birkbeck College at Univ London and ended up owing money to Barclaycard. I saw no future whatsoever and was so depressed I seriously thought about topping myself. This was in 1989 when the property hysteria was at its peak.
    Due to my MSc I found a job with a large company in France.
    Three countries and twenty years later, I have a great job, speak three foreign languages and thank God for making me invest in my own education!
    Steve

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