The internet can swamp the best of intentions. When you want to know how to do something, there’s nothing like 274 million Google hits to make you think that you’re never going to find the time.
This fire hose of human knowledge can all too quickly become a water cannon.
But one of investing’s oft-neglected truisms is that the important stuff is actually very simple.
If you get the basics right and resist the urge [1] to ‘optimise’ before you even know where to start then you’re likely to do just fine.
Know why you’re doing it
Are you investing:
- For retirement [2]?
- To pay off [3] a mortgage?
- For your kids? [4]
- To create a nest egg [5]?
Is investing success critical to your future happiness or would it just be nice to have?
Only by knowing how big the task is will you be able to calculate what it will take [5] to achieve it.
Only by knowing how important it is will you find the gumption to stick with it [6].
Save enough to make a difference
A big goal – a comfortable retirement, for example – takes many years to achieve. It will soak up a lot of your financial firepower.
Thanks to the power of compound interest [7] , the more you save now, the less money it will require overall.
Also, the more you save now, the less income you will need to live on [8], too – reducing the scale of the money mountain you need to climb.
Don’t listen to sticking-plaster merchants who bandy around some random percentage of your salary to put away. That kind of advice is aimed at winning your business, rather than helping you win your financial freedom.
It’s not hard to work out your own plan once you know how [2].
Keep costs low
The only worthwhile predictor of future investment performance [9] is cost. That’s why we recommend most people narrow the field of investment options to low-cost index trackers [10].
The best trackers are cheap [11], simple, and will beat [12] the majority of expensive alternatives.
You can buy them yourself using an online broker [13].
Diversify
Famously, diversification [14] is the only free lunch in investing. Spreading your bets across the main asset classes [15] is the best way to future-proof yourself against dire loss for any one of them.
Choose an asset allocation [16] that invests in funds offering broad exposure to equities, government bonds, and property. These are the assets that have a long history of solid returns.
Invest across as many regions of the world and types of company as you can for a reasonable cost.
Don’t get sucked into believing that some guru can predict whether Russia will make you a killing next year, or that an aging population means that drugs companies a sure-fire bet.
If forecasters were any better [17] than Mystic Meg then they would make a fortune by acting on their secrets for themselves, not sharing them.
Also understand that there’s no special gain [18] to be made from predicting future trends. Everyone else has the same information so it’s already factored into the price.
Take cover from tax
Use your pension options [19] (workplace, SIPP, stakeholder and so on), employer matches, and ISA allowances [20] to maximise your returns.
Every pound that someone gives you – or doesn’t nab from you [21] – is a pound that’s working for you and not someone else.
Automate it
The less you interfere the better. Humans are psychologically geared to goof up investing [22].
- Use direct debits and your broker’s regular investment scheme to automatically [23] invest monthly.
- Use accumulation funds [24] to reinvest your dividends.
- Rebalance [25] your funds once a year but otherwise leave your bread in the oven to rise.
The more you tinker, over-complicate and second-guess the future, the more likely you are to end up making the wrong decisions [26].
Don’t panic
The world always seems to be on the brink of some disaster. Slowdowns and recessions lurk around the corner. Some region or other is gonna blow. War, Famine, Pestilence and Death are always due in town.
Yet somehow civilisation soldiers on.
The media is designed to feed our fears. Ignore it, or better still don’t listen to it and then it won’t bother you.
You can expect equities to fall often: one year in every three on average. But they have always bounced back. Your allocation of bonds [27] is there to cushion the blow in the meantime.
Rebalancing is the self-righting mechanism that ensures you buy asset classes when they’re cheap and you cash in when they bounce back.
Despite two World Wars, the flu pandemic, the Great Depression, the Great Recession, the loss of Empire, stagflation and The Krankies, UK equities have delivered an annualised 5% real growth [28] over the long-term.
Stick to the plan [29], keep things simple, and remember investing is a long-term [30] game.
Oh, and picking up a good book [31] to help you learn more is a capital idea, too.
Take it steady,
The Accumulator