A bit of Common Sense goes a long way.
As in most areas of life, applying a bit of common sense to managing your money gets you a long way.
Here are 10 common sense concepts, which we believe are key to long term prosperity, and underpin our advisory and investment processes.
1. Your prosperity is largely in your hands.
- How you balance current saving and spending will directly affect how much you have to spend later.
- “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery." Mr Micawber was right here at least.
- To build up a good level of savings you need to save a lot, for a long time, or a little for a very long time!
2. Be realistic.
- About your goals.
- About investment returns.
- About life expectancy. We are living longer. Don’t think short term if you, or your partner, could live for another 20 or 30 years.
3. Expect Inflation.
- If you need £1 today, you will need nearly £1.50 in ten years and £2.20 in 20 years, assuming inflation ran at 4% pa.
- In the long term inflation will bite. Beating it is vital.
- An investment return of 6% with inflation at 5% is “worse” than a return of 3% with inflation at 1%.
- The headline or “nominal” return is less important than the inflation adjusted or “real” return.
4. Accept that Risk and Return are inextricably linked.
- Low risk investments cannot produce high long term returns.
- Long term broadly based investment in the stock market is not gambling. It does involve risk but that diminishes over time.
- Buying the latest “tipped” share is gambling, not investment.
- Understand the risks associated with different types of investment before you use them.
- If an investment looks too good to be true - it is!
5. Ride out the storms.
- Don’t jump in and out of markets. It adds cost and risk. A few win – most lose.
- Historically the best returns often follow immediately after the worst periods.
- By the time you know the worst is over, the market will have already jumped.
- If you are investing for the long term stay invested.
- Spread investments widely within and across varied asset classes and sectors.
- This reduces risk, without necessarily reducing returns.
- If you need to draw down on investment or pension funds, build in enough liquidity to ensure long term investments need not be sold at a bad time.
7. Work on the assumption that Stock markets are "efficient".
- Every share is traded at the "right" price for that share at that time.
- Sellers think the share is overpriced, buyers that it is underpriced. Half believe one thing, half the other, but both are happy to deal at that price.
- Don’t fall into the trap of thinking you (or anyone else) will be in the “right” half more than half the time.
8. Conventional active fund management is flawed.
- However brilliant, no fund manager can consistently predict the future.
- It is impossible for managers, en masse, to beat the market in which they invest. They try by trading. This activity creates volatility and cost, but on average no gain.
- Trading costs mean most managers underperform the market in which they invest.
- Of those who outperform, most don't repeat that outperformance.
- Spotting the few who have outperformed is easy, spotting those who will outperform is another matter altogether.
9. Invest Scientifically not Emotionally.
- Don't let short term market movements, and the emotions they stir up, get in the way of you sticking with a considered, rational long term plan.
- Use Investment strategies based on academic research and the science of investing. They give the best chance of capturing the market's long term return.
- If in doubt use simple low cost passive funds. They are cheaper, more consistent, and outperform most conventional active funds.
10. Be tax efficient.
- Reducing tax on your savings and investments can make an enormous difference over the longer term.
- Use Pensions, ISAs, or other tax efficient vehicles wherever possible.
- Don’t waste CGT or Income tax allowances.
- If you can reduce potential Inheritance tax, whilst ensuring you have all you need, then do it. It's your family or the Exchequer who will ultimately get your money.
For some more common sense and sanity, why not have a look at Carl Richard's excellent little book "The Behavior Gap". It's sane, funny and very readable. (Ed; please excuse the US spelling, Carl is American, but still bright, witty, and a dab hand with a "sharpie"; so we'll let him off!)