I may not yet be able to claim to be wizened, but even just a few years into my journey towards my objective of FIRE (Financially Independent, Retired Early) there are things I wish I’d known at the outset that could have made a difference.
FIRE is described as a ‘movement’ in the States and there is something attractive about the idea of people coming together to ‘overthrow’ or ‘usurp’ the evil financial sector; I don’t really subscribe to that but I do believe that we will inevitably have to take more personal control of our finances and I personally like to feel in control.
So, five years out of university, I don’t suppose my circumstances are wildly different from a very large number of people – for better or worse. I’m working hard, for relatively little and I’m living frugally because I know where I want to end up.
Time is an investor’s best friend; with good financial education and appropriate skills, the more time you have, the more you are going to earn.
As Brexit approaches (or not?) markets are becoming more unpredictable; the Trump Bump may be about to be eroded, and there is an increasing belief that the good times are coming to an end.
with good financial education and appropriate skills, the more time you have, the more you are going to earn
Some commentators believe that the super-heated valuations attached to tech companies (Apple has just become the first public company to be valued at £1trillion) mean that we are staring down the barrel of the next dotcom crash.
With conditions getting worse with the passage of time, who is going to trust that there will be a state pension or health care available when we need it? Not me, for sure, so I believe young investors are going to have to do it for themselves – however badly that scans as a song title.
Many options exist for a young investor, each with benefits and demerits; it depends on the investor’s purpose and how much involvement the individual wants – as Muckle’s sister site DIY Investor would have it – Do it Yourself, Do it With me, Do it For me – just don’t do nothing!
Here’s something that caught my eye – if you start saving for your retirement at age 25 with a £300 regular monthly deposit and can achieve an average annual rate of return of 9% until age 65, your pot will be worth £1,420,000; sure, £300 is a lot (at the moment) and 9% is ballsy – but one-and-a-half million seems worth making an effort for.
So here are my seven ‘pearls’ for young investors; I have said that I will update these along the way, and if you would like to contact me, or share your own experiences, you can do so at email@example.com.
Start investing as early as possible
The earlier you start investing, the less financial burdens you will have later in your life. For example, a spouse, expensive children, mortgages etc. will come at a later point in your life. Hence, you can easily make a regular substantial monthly payment in your youth. Investing early will also have more interest compounding, meaning you can invest in high risk – high return stocks.
Do it Yourself, Do it With me, Do it For me – just don’t do nothing!
Invest in your financial education
It’s essential to be familiar with the market, and understand the business you’re investing in; in my above example, £1.5 million may look a huge sum but its real future value may only be equivalent to that of £40000 of today.
That will not be enough for a couple that wants to use it after their retirement for another twenty or potentially many more years; it is essential that you know the process; the costs involved in the stocks and equity options.
Shares or Bonds?
Young investors can find it difficult to choose between bonds and shares; shares are more risky but have a higher return than bonds in the long term.
Over a long time frame, shares can be seen to deliver better real returns – once inflation is factored in – than gilts or corporate bonds.
However bonds do have an advantage over stocks for those that believe, like Mark Twain, that the return of their money eclipses the return on their money; they deliver the promise of payment, whereas a stock may not have any form of payout in the future.
Save rather than spend
To be an investor, you need money; to have money you need to save rather than spend. This advice is the most obvious I can dispense, but to be a successful investor you must do something that nobody in the world wants you to do: save some of your money instead of spending it!
Diversifying your portfolio (and a ‘portfolio’ is just a bagfull of your assets – belongings, savings and investments) means you should maintain a mix of all kinds of ‘assets’ (things) – from high risk to medium risk to low risk.
The medium and low risk asset compensates the high risk one and overall returns are generally higher than investing in a single asset.
A wise decision is to always re-invest your returns, rather than spend them (more); this is the best way to prevent a big setback.
Studies show that asset allocation is the most important aspect affecting performance and volatility of your investment; 91% of the portfolio return is based on asset allocation, just 2% on market timing, 5% on stock selection and 2% on other factors. Worth boning up on.
Manage your savings and your debts
There is little point investing if you are servicing expensive debt at a rate higher than you can achieve from your investments.
Likewise, spending money based on future expected inflows is rarely a good idea; don’t rely on an increase in income that has not yet been confirmed. Always choose to spend your money based on your actual and current financial state as this can prevent some serious credit crunch issues in the future and free up extra money for investments.
Be inflation smart and tax smarter
Often investors forget how much inflation and taxation can affect their returns; if inflation is high your real returns (the buying power of what you have gained) will be lowered. The future inflation rate will also impact your future earnings. For example, if you have earned a return of 9% in a year on your portfolio and the inflation is 3% you have actually earned 6%.
Inflation affects returns badly, but there is relatively little you can do to counter that, aside perhaps for looking for some of the index linked bonds – ‘linkers’ – that can be found at Retail Bond Expert.
However, what you can do, is to make sure that whatever investments you make are as tax efficient as possible and because the government is so keen for you to take personal control of your finances (the last thing they want to have to do is prop you up in your declining years) you can now shelter up to £20,000 a year in a range of ISA wrappers. Much more here.
So, look at me, all growed up and talking about money! Well, I claim no great insight, what I have described are just common sense steps to take to ensure that your path to financial independence is just that little bit easier.
Certainly, I wish I’d been told, or perhaps taken an interest earlier, but I’m on my way!
About the author:
Adrian (‘Seb’ ever since he came last by a country mile in a school sports day) graduated from UEA with a degree in politics and currently works as a relationship manager for an events business. He shares a house in Bow, East London, with three friends and gets back to his parents’ house in Poole as often as he can to fulfil his love of kite-surfing.