It’s been a strange few weeks. Less than a month ago we were going to work, watching football, and seeing friends and family while being urged to carefully wash our hands. At the time of writing the country is in lockdown in an attempt to save the lives of thousands.
It’s at times like this when it’s good to reflect on what really matters. Maybe you’ve managed to spend more quality time with your family? Maybe you’ve filled the time reconnecting with a hobby or passion that you enjoy? Or maybe you’ve just had time to sort out those little admin jobs you’ve been putting off for weeks?
Going back to basics can sometimes be really helpful. So, in these precarious times, I thought it might be time to go back to some of the very basic money principles that we should all live by.
1. You must have a financial plan
You may be in control of your finances. You may even have seen a financial adviser. But do you have a financial plan?
A plan is not a portfolio of investments. It’s not the allocation of assets that you hold. It’s a clear vision of where you are now, where you want to be in the future, and the steps you need to take to get there.
Your plan will also evolve as your circumstances change (I have written before about why it’s so important to review and update your plan).
Putting a plan in place, and keeping it updated at least once a year, is critical.
2. Behaviour is the key to success
Benjamin Graham said: “The investor’s chief problem—and even his worst enemy—is likely to be himself.”
We all have deep-rooted psychological biases. While they can serve us well in our day-to-day lives, they can have the opposite effect when it comes to investing. Our emotions can take over, and these impulses or intuitions can result in you acting based on feelings instead of facts.
Being aware of your psychological overconfidence, or aversion to losses, can help you to make better decisions. And just because you’re genetically inclined towards something doesn’t mean you are bound to that fate. Behaviour can make all the difference.
Warren Buffett once said that as an investor, “it is wise to be fearful when others are greedy and greedy when others are fearful.”
3. There are two great ways to build wealth
On any given day you’re bombarded with messages offering you great ways to make money. From obvious scams to more plausible investments, social media and the web will highlight how you can make guaranteed returns in 2020.
In truth, there are two asset classes that really matter: companies and property.
Yes, there are bonds, cash and commodities such as gold. But shares and property are the most consistent ways of building wealth. Why? They are reliable, given enough time and with some common sense applied.
- Shares are easy to trade, liquid and can be cheap to own
- Property is reliable and can be bought using other people’s money
If you buy shares in one company and it goes bust, you’ll lose everything. But, if you diversify your assets around good companies (around the world) then, in time, you will almost always win. Don’t look for the needle – buy the haystack.
4. Focus on what you can control
Much of what happens to stock markets or the economy is out of our control. We can’t influence inflation, oil prices or Donald Trump’s social media updates. So, all we can focus on is what we can control.
So, what can we control? The main thing is our spending. What you spend highlights where your priorities lie. If you are proactive and keep control of your spending, you’ll find that you are better placed to achieve your overall objectives.
If you’re unsure about your spending, speak to a financial planner and undertake a cash flow analysis. This can help you to formulate a plan, and change course if necessary.
5. Filter out the noise
In times of crisis, we often turn to the news to make sense of what is happening in an uncertain world. However, you only have to look at recent headlines to be panicked by what is happening to the global economy.
- BBC: “FTSE 100, Dow, S&P 500 in worst day since 1987”
- Telegraph: “Stock markets crash after oil prices collapse”
- Wall Street Journal: “Global Stocks on Track for Worst Quarter Since 2008 Despite Daily Gains”
It is easy for your plan to be blown off course by listening to the ‘noise’ from the media. If you read article after article that tells you a market crash is imminent, it’s hard not to be psychologically affected by that news, which may leave you tempted to sell.
Be very careful what you read, watch or listen to. Discipline is one of the hardest things to manage, but constantly reminding yourself of what you are trying to achieve will motivate you to stay the distance.
6. Don’t worry about making mistakes
Over your lifetime, you’ll probably make some financial mistakes. You didn’t include an add-on on an insurance policy that would have paid out for precisely the problem you’re experiencing. You invested in a dud fund. You didn’t pay enough into your pension in your early working life.
However, there’s very little that you can do (or not do) that will completely destroy your chances of financial success. Most decisions are quite small – do I increase my pension contributions? Should I pay into an ISA for my child?
So, it’s important to worry less about making a financial mistake and resolve to learn from the ones you will probably make. Failing to invest because you’re unsure could end up being a much worse decision.
7. Good advice is worth it
As respected firefighter Red Adair once said: “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”
Seeking professional financial advice can pay dividends. A recent report from the International Longevity Centre (ILC) found that individuals who seek advice are better off than those who don’t. The report found:
- People who received financial advice between 2001 and 2006 were, on average, over £47,000 better off by 2014/16 than those who didn’t take advice
- Seeing an adviser more than once is even more beneficial, with pension pots on average 50% higher for those regularly seeing an adviser than for those who took one-off advice at the start.
If you want to have a chat about your financial plan or you’d like advice in meeting your goals, please give me a call on 07769 156 250.
The value of your investment can go down as well as up and you may not get back the full amount invested. Potential investors should be aware that past performance is not an indication of future performance.
Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.