For those seeking ways to build wealth (or just to get rich quick), there’s no shortage of advice out there.
Personal finance sites abound online, and self-styled radio talk show experts dispense wisdom with varying degrees of accuracy.
But one study found that your fundamental attitudes about money can be a predictor of your ability to accumulate wealth.
The study, published in the Journal of Financial Planning, looked at the correlation between certain behaviors and four “money scripts” — or, put another way, four money personalities.
And, spoiler alert: Only one of the four money scripts is particularly conducive to getting wealthy.
But Tom Murphy, a certified financial planner and CEO of Murphy and Sylvest, said the good news is, like anything, once you recognize that you look at money a certain way, you can take steps to change.
“Recognizing why you are doing what you’re doing is strongly correlated with changing it,” he said. “Lots of times, once people understand their money personality, how they deal with money, they can actually go in and change their behavior.”
Murphy said that money beliefs shaped by childhood trauma are, of course, much harder to overcome.
Nevertheless, parents who are conscious about the way they talk about money to their children — even in tough times — can help teach fundamental lessons about saving.
“Here’s how you teach the right lesson: When the child wants something, you tell them that’s fine, but they have to use their own money, and in two weeks, when it’s broken ... then they don’t have it anymore,” Murphy said. “Give the child the opportunity to make a bad decision.”
He gave similar advice about investing: If you manage small amounts of money as a kid, you have a better sense for how it works when you’re an adult.
“They either like it or they don’t — that’s a hugely valuable lesson to learn,” Murphy said. “And lots of people don’t learn that until their 20s or 30s.”
So which money personality do you have? Here’s how the four break down:
1. Money avoidance: Money avoiders believe money is morally corrupting — that rich people are greedy and therefore they, themselves, don’t try to amass wealth when they get it.
2. Money worship: Money worshippers believe that money will solve all their problems, and that their happiness and power is tied exclusively to having enough money.
3. Money status: Those who follow the money-as-status script believe that their self-worth is equal only to their money. They tend to believe that it’s important to buy new things as a marker of status, rather than because they really need them.
4. Money vigilance: People who are money-vigilant emphasize frugality and saving — and they’re also a little bit secretive about how much money they have.
You can probably guess which one tends to produce the most wealth over time: No. 4, or money vigilance.
But Murphy said lots of people hold a mix of these beliefs — and can exhibit combinations of unhealthy behaviors, like compulsive gambling or giving too much of your money away to charity. Even hoarding money and being unwilling to spend any can be emotionally detrimental.
Still, Murphy said that, above all, it’s important to pay attention.
When I first started investing, I had many questions. Fortunately, I had helpful and experienced investors around me who were able to guide me through my first steps as a stock market investor. However, others may not be so fortunate and may, as a result, be put off from investing due to fears of making a mistake.
Because of this, I thought I would answer three common questions that new investors might have.
How much should I invest in my first stock?
This may be the first question that many new investors might have. In reality, there is no simple answer to this question. It depends on a multitude of factors such as your risk appetite, portfolio size, and investment strategy.
Having said that, I believe that all investors should still follow a few rules of thumb before making a decision on this.
First, our investment size should be large enough such that the commission charges do not exceed 1%.
For instance, investors should try not to make a transaction below $1000 while using brokerages that charge a minimum of $10 per transaction. Overlooking the effects of these transaction fees could be detrimental to our overall portfolio returns.
Second, investors should diversify their portfolio adequately and each stock should ideally not exceed 10% of your entire portfolio. This is to ensure that any bad investments cannot overly affect your total portfolio returns.
Where can I get stock ideas?
Recently, I wrote an article on three good ways we can screen for stocks. Firstly, by screening for stocks those are undervalued or trading at low premiums. Investors can also take a top-down approach and seek out growing industries, before narrowing their options to specific companies within that industry.
Finally, and maybe the best option for new investors would be to use a stock recommendation service that provides monthly new stock picks for investors. It is important to choose a reasonably priced stock recommendation service that has a long history of beating the market.
Should I actively manage my own portfolio or use professionals?
Before deciding whether to manage your own portfolio, it is important that we understand our own investment capabilities.
Investing requires patience, good control of emotions, and an understanding of businesses and stocks. New investors who are looking for above average returns and have the confidence and knowledge on stocks should consider managing their own portfolio. This is because we can have better control over our finances and can avoid paying hefty management fees.
Unfortunately, there are also often numerous retail investors who over-estimate their capabilities or are prone to investing mistakes due to greed and fear. This has led to retail investors underperforming the index by a considerable amount.
For instance, between 1990-2000, the S&P 500 index returned 7.81% annually. On the contrary, retail investors averaged only 3.49%. If you fear that you are unable to make good investment decisions due to poor control of emotions, seeking a professional for help may be your best option.
The Foolish bottom line
New investors will unsurprisingly have many questions before they start investing. Hopefully, this article adds a little bit of insight for new investors who are just starting out on their investment journey.
Saving money and cutting costs is often as exciting as watching paint dry.
But finance guru and Sugar Mamma founder Canna Campbell has revealed her seven top tips to get you enthusiastic and confident about growing your bank account.
The Australian video blogger says getting yourself into a healthy routine with money is the best starting point for saving money and making every dollar count.
In her latest YouTube video, Canna shared seven simple ways you can cut costs and squeeze every penny so you can sit back and watch your savings flourish.
1. Have a Deadline
Canna says setting yourself a reasonable but clear deadline for your savings goal is the first step towards maximizing your money.
If you have a goal of saving $10,000 in five months, the finance expert recommends pinpointing a specific date on your calendar for your deadline - which instills a sense of urgency in your mind every time you see it.
'That way you feel feel a lot more accountable and realize that time is ticking for your end date,' Canna said in her video.
2. Have a Budget
The second step in Canna's seven saving tips is to outline a tight budget for your spending money.
Setting a budget helps savers identify spending habits and provides a clear picture of what you really value.
Knowing what you are spending your money on every month is also a great way to realise what needs to be culled and what is necessary.
'Budgeting is a good way to show you problem areas and opportunities for saving money,' Canna adds.
3. Make a Dedicated Savings Account
Without a dedicated savings account to watch your money grow, Canna warns it is difficult to stop yourself from recklessly spending.
Designating a specific account, preferably with a nickname which mentions your goal, is a surefire way to prompt yourself to keep accumulating cash.
Canna says a savings account gives your goal direction, flow and purpose.
'A feeling of progress fuels continued commitment and dedication. Try to make sure the account is low fee or no fee at all too,' she adds.
4. Regularly Contribute
Creating a healthy routine and frequently depositing into your nest egg can excite you and encourages yourself to keep going because of how elated you feel as you watch it rise.
Creating a healthy routine and frequently depositing into your nest egg can excite you and encourages yourself to keep going because of how elated you feel as you watch it rise.
Canna also recommends putting aside every single extra dollar you may have leftover each month so your spending habits don't suffer.
'Every time you get a pay rise put the extra cash into your savings account so you aren't tempted to change your lifestyle,' she explains.
5. Remove Temptation
It may sound like a no-brainer, but removing any and all temptation to spend money from your daily routine is also an essential habit for maximum saving.
If you are inclined to duck into the shops whenever there is a sale or peruse your favourite fashion website, Canna says avoid this like the plague.
Instead, she says you should direct your free time to activities which centre around your savings goal.
'So if you are saving for a property, spend your time perusing property sites or going to open homes,' Canna suggests.
6. Review Progress Carefully
As your savings journey wears on Canna says it is good practice to review how you are tracking every so often.
It is a good idea to regularly check your account so you can feel a sense of elation or progress when you have a reasonable chunk of money.
Reviewing your progress can also give your ideas on what else you could be doing to bolster your savings or if there is any other saving opportunities.
'Little things really add up,' Canna says.
7. Reward Yourself
Lastly, Canna recommends giving yourself rewards and pit-stops every so often on your savings journey.
'We're all human beings with normal emotions, so sometimes saving can be painfully slow or painfully boring,' she said.
'But other times it can be amazing or exhilarating to give yourself a sense of achievement.'
Taking the time to reward good behavior it important but Canna also advises not to take too long of a hiatus otherwise you may fall off the bandwagon completely.
'Break down your goals into bite-size, manageable pieces and you will watch your savings grow.'
OLD age pensioners are the salt of the earth.
Most soldier on, without complaints.
They are not whingers.
Most went through hard times where seeking second-hand goods were a habit as there was no money to buy anything brand new.
They survived to become great, unheralded, true blue Australians.
Luckily in those days, the only drugs were tobacco and alcohol, not the "killers" we see on the streets today.
Now, on small pensions, they must learn how to top up those empty pockets.
Below are some tips and information that could work for you.
Be determined, be lucky.
First of all, don't regard the shopping catalogues that are shoved into your letterbox as junk mail. Far from it. They are valuable and your guide to cheaper shopping. We study them; make our lists and do our thrice-weekly shopping trip - what we call our "big shop".
Because the big supermarkets are grouped together, it is not physically exhausting to visit each one, if your object is to save money.
It's not a wise thing to limit all you’re shopping to one supermarket.
With the fierce competition at present with the half-price specials they offer, study each catalogue carefully and mark off the items that interest you and will benefit your pocket. Relax with a cup of tea or coffee, and a nice digestive biscuit. Be at peace but alert. If a supermarket offers you a regularly used item at half price but it's a big quantity, talk to a friend or a relative and go halves.
With these half-price specials, you are buying two for the price of one, therefore not increasing your spending.
Now write down your shopping list and set out for the shops.
Remember, if you have a certain day for your shopping and your pension is not paid the same day, you can ask Centrelink to change the day you receive the pension.
For example, we changed our pension day from a Thursday to Wednesday, to suit us.
Take it easy at the shops. Sit down in the air-conditioning, have a cup of tea or coffee and relax. Remember, this day you are saving money. Don't rush, be calm and save.
Buying meat at a supermarket is not a wise option. The only advantage to you, the shopper, is that it's in the same place you buy your groceries.
The supermarket meat packages are eye-catching as they concentrate on a price point. A single piece of meat, in a small tray, could be, say, $7 but when you look at the price per kilo, it is sky high, (pop a Valium)
If you are curious, visit your local butcher and compare the price, you will be surprised.
We shop at a local butcher in Burnett St, Bundaberg, where you can buy a couple of kilos of pork spare ribs for just under $10 a kilo.
We mention shops as a guide. We do not gain financially from this. It's your choice. The same meat in a supermarket could be pushing to $20 a kilo.
We remember a time when breast of lamb, a fatty cut, was so cheap. Now one supermarket advertises this as lamb riblets. The price we are not sure on, but it must be $10 a kilo or more.
Once upon a time dog bones were free, a gesture of goodwill, from the butcher to his regular customer.
Fruit and Veg
The same principle applies to fruit and vegetables.
We shop at a greengrocer where they sell a lot of local produce, bought from nearby farmers.
Prices are very cheap on bucket lots but don't be surprised by a couple of duds.
Look at the price and save.
Shalom markets, on a Sunday morning, are where you can get bargains on fresh produce. I reckon many stallholders are farmers themselves.
But this market, besides being cheap, has a variety of goods on offer.
We buy our bread from Coles at $3 a loaf. It's an Italian-style Pane de Casa, which, when toasted with two free-range eggs, is a trip to paradise at breakfast each morning. That's our indulgence.
We find it essential to make a weekly menu.
You are able to see what you plan to eat each day, so shop for those ingredients.
If you're not making casseroles or stews, you won't need carrots, for example. Leaving carrots in the fridge for too long will make them soft.
Keep to your shopping list; don't be tempted to buy items not on your list. Also, if you make shepherd's pie or bolognaise sauce and you are only a couple or single, buy twice enough meat.
The extra portions that you make can be put in the fridge for the next day. Heated and served, it often tastes better as the sauce/pie is rested. Most importantly you have an evening off from cooking.
TV programs like Masterchef and MKR are okay to watch but expensive to copy.
I don't think your partner would be impressed with a small portion of something exotic with a sprig of parsley on the top.
The important thing to remember is "you are what you eat".
My wife and I eat fruit, vegetables and salads each day. Fruit and veg, or fruit and salad. When you really think, these are natural and fresh and should contain all the natural ingredients and vitamins to satisfy your body.
I know fresh and natural have sustained my body and possibly made me look a bit younger for my age. I don't need expensive anti-ageing cream, I get mine in an apple or similar.
Remember, an apple a day keeps the doctor away, and the dentist at bay.
Pensioners receive their pension every fortnight, which means there are 26 pensions in a year.
Now, instead of spending your pension every two weeks, spend it every three weeks.
Therefore, in your mind, you receive 17 pensions.
Okay, still with me?
Because it's become three weeks, that should become your main shopping day.
Obviously you will have to top up with the basics, such as milk and bread, and perhaps a beer in between main shopping days.
You will need determination to get it to work for you, otherwise be lackadaisical and you will fail.
Now because you are only using your new 17 pensions, you have what we call "nine free pensions" (your 26 fortnightly pensions have become 17 three-weekly pensions.
With those nine free pensions you can put money aside for rent, rates, power bills and holidays, which you deserve.
Also splurge on a new dress, a new took box, whatever.
We managed to save money, once the system was working, for a cruise to New Zealand. With the extra though, it's important to "kill" those big bills quickly.
But be careful with your money.
It will take a bit of time getting used to changing that fortnightly pension into a pension you start spending every three weeks.
It works very well for our household, a married couple. It's all about being strict with you and then enjoying the benefits of those nine extra pensions.
Other Ways to Save
Look at other ways to save money. Look at growing vegetables in pots if you yearn for that "younger look" and want to eat fresh. Good starters are lettuce, silverbeet and herbs if you're an inventive cook.
An herb assortment relates to your cooking requirements, so easy starters are parsley and basil.
With lettuce you buy a punnet containing, say, six seedlings. You can get those six into a big pot. Water them well, give them a nitrogen fertilizer weekly and you will harvest six lovely lettuce.
They'll cost you about 50c each. In the shops you'll pay up to $2 a lettuce, but yours is fresh from the pot and chemical free.
Another good tip is put all your gold loose change in a moneybox. Open it in December and have a very merry Christmas.
Another is, if you are a couple, open separate bank accounts away from your usual joint accounts. Use it to put the odd $5 or more into this account.
Just let it grow, don't use it.
Open the account with someone like Bendigo Bank, it's fee-free. In no time you have $100 or more, enough to take your "old dutch" out for dinner.
Now a reminder to your health providers at the end of the telephone line.
The Home Doctor phone number is 13 55 66. If you have an illness of just feel crook, remember this is a free service. It's bulk-billed to Medicare, so you do not need money and they come to you.
If your mind fails you at times, like the writer, keep your scripts with your chemist. They oversee your health for free. They supply you with blister packs containing your medicines. If you are sick, many will deliver to your door.
Also remember chemists are professionals. If you occasionally question your doctor's view, medicines, the chemist is a good bloke or lady (better not say sheila) to talk to. Also they have a sense of humour, like mine.
You come out with a grin on your face. A laugh a day is a good target.
That's all folks. We hope you succeed. It took us a bit of time getting used to it, but we made it work to our benefit.
Now it's natural for us to think of 17 pensions a year and nine free ones.
In the coming weeks, hundreds of thousands of excited 18-year-olds will be heading to university. It is daunting for both the new generation of undergraduates and their parents.
University will be a long list of firsts – and many of these will involve money. Having a bank account with an overdraft (and very likely the offer of a credit card, too) will be just the start. There will be rental contracts and deposits, student loan borrowing and, for some, the eye-opening experience of doing a grocery shop.
What is the most useful financial advice a parent or grandparent can impart? Here are five suggestions.
Many 18-year-olds will never have budgeted properly in their lives, and having to meet essential food, housing and other costs could come as a shock.
Helen Saxon, the chief money analyst at moneysavingexpert.com, said: “They’ll need to sit down – and maybe parents can help in these remaining weeks – and work out how much cash they’ll have coming in, including their student loan, anything parents are giving them and any earned income from work.
“If parents impart one tip to their son or daughter, make it this: don’t spend everything at the outset. They may want to join every university society, but unless they’ll be doing paid work during term the money they have at the outset needs to last.”
Ms. Saxon said it would be helpful to plan their spending in terms of weeks or months. It’s important to point out that spending on socialising is fine – and a big part of university life – but it needs to be affordable.
The allure of an overdraft
A student bank account with a 0pc overdraft can be an incredibly useful safety net. But the dangers of an overdraft – which can seem like free money – are obvious.
Ms. Saxon said treating the overdraft as a “buffer” rather than accessible funds is imperative. “That overdraft is a safety net, and needs to last all year,” she added. “While 0pc overdrafts are useful and should help with cash-flow, they should not be treated as available funds. An overdraft is a loan that must be repaid.”
Telegraph Money’s favorite student current accounts are the Santander 123 account, which pays 3pc interest on balances between £300 and £2,000, and Nationwide FlexStudent, which has an overdraft rising to £3,000 by your third year and pays 1pc on credit.
The HSBC student account is great for freebies – it comes with a £60 Amazon voucher and a year’s free membership to Amazon Prime, but pays only 1.5pc on credit balances.
Unless their parents are wealthy and generous, most students will have cash crises at university – and a credit card could seem the answer. It’s incredibly important, however, to make sure borrowers understand that credit isn’t interest-free in the same way as a student overdraft.
Highly organized borrowers can make use of credit cards and, by paying them off soon enough, avoid costs while benefiting from the perks – but that’s a steep ask of a student.
The HSBC Student Visa Credit Card, connected to the student account (see above) provides up to £500 of credit with an interest rate of 18.9pc. It also offers cashback on some purchases, and the chance to win NFL tickets.
The Nectar Low Rate Credit Card, offered by Sainsbury’s, has an interest rate of just 5.94pc with a credit limit of £1,200. The student can collect Nectar points too, which could help them save on the weekly shop.
Understand your student loan
Getting to grips with this controversial and complex arrangement now could help indebted graduates down the line.
In the post-2012 student loans system, those graduates earning less than £21,000 (the threshold for repayments) are charged interest at RPI, currently 3.1pc. Those earning more than £41,000 are charged RPI plus 3pc – so 6.1pc – with a sliding scale in between.
Bizarrely, the maximum possible interest applies to the debt while they are studying, meaning that it will do nothing but grow. Student debt is cancelled after 30 years of repayment, so for many the size of the ultimate borrowing will not be relevant.
Safeguard your credit rating
Numbers disclosed by Telegraph Money last month showed that the typical student has a credit score 15pc lower than the national average.
While a student loan won’t show up on a credit report, other outstanding debts do so loans and credit cards need to be managed. ClearScore, the firm behind the research, found a quarter of students have a personal loan.
A quarter of students had also admitted to defaulting on a debt – most likely a mobile phone contract – and this too can wreak havoc. Regularly spending on a credit card while paying it off can actually help a credit rating. But using it to fund their lifestyle could land them in hot water.
The easiest trap to fall into is with utility bills. Half of students reported being listed on bills alongside housemates. In most cases, providers won’t treat you as financially linked, but if you set up a joint bank account to pay bills then a default could hurt your credit rating.
Ewan Armstrong, 20, a human biosciences student at Exeter, shares his experience
I decided not to have an arranged overdraft when I started uni a year ago: I have always dreaded feeling indebted. Instead, I keep a buffer of at least £100 in my account as a self-imposed overdraft that I promise myself I will never touch.
I have friends who’ve developed the terrible habit of refusing to check their account balance. This out-of-sight, out-of-mind mindset will catch up with them in the long run. I look at my balance and account summary on the NatWest app every other day.
A recent phenomenon among students is Monzo cards. It’s a debit card but one that tells you how much you’re spending on groceries, eating out, transport or bills.
I make most of my transactions via contactless or Apple Pay on my phone. Not even needing to enter a Pin runs the risk of making it easier to spend more, and I have found myself leaving the supermarket having paid contactlessly and not knowing exactly what I’ve spent.
Even so, I think the danger of thoughtlessly paying via contactless is offset by how using cards makes it easier to track spending.
There’s a perception that students can’t or shouldn’t invest money. But without a doubt the money-related achievement I’m proudest of is finding an app called Moneybox.
It rounds your card purchases up to the nearest pound and invests the pennies into a fund depending on your stated level of risk (for example, it invests 15p after you buy an 85p coffee). It has seamlessly invested about £1 a day for me over the past year. Aside from being an easy introduction to the world of investing, finding £300 tucked away in an app is every student’s dream.
1. Maintain three to six months of savings in your account. “As a contractor or part-time worker, your income will tend to ebb and flow,” Gugliuzza says. “Having an emergency fund with enough savings to cover three to six months’ worth of your critical expenses can help ensure you can pay your bills, even during times of low employment.” Figure out what this necessary dollar amount is and make sure your bank account is ready to go before you take the full leap into the gig economy.
2. Keep a handle on your debts. As part of the gig economy, you’re still responsible for paying taxes on what you earn, and bad news: You don’t have an in-house HR or accounting department to make that happen for you. “If you’re doing contract work and don’t want taxes withheld from your pay, you’ll need to make quarterly estimated state and federal tax payments,” Gugliuzza says. You’ll save yourself a lot of stress comes tax time if you are careful to put away a portion of each payment you receive and flag it as a tax payment before you accidentally spend it. Consider reaching out to a professional now to walk you through the specifics of the tax code in the area where you live.
3. Understand how much you need to save. While you may be feeling somewhat removed from your pals who are working in more traditional jobs (go on with your bad self!), the truth is that many of your financial needs are still the same as theirs. Take some time to establish some goals for what you’ll need to save for retirement or other long-term goals. There are plenty of tools and calculators available online to help you crunch these crucial numbers on your own.
4. Investigate investment opportunities. You can still take advantage of investment opportunities, even if you’re not working in a traditional full-time job. A 529 college savings plan can help you stash away funds to further your own education (and is a good way to save for your children’s future tuition as well). You should also do your homework on IRAs, which can help you grow your retirement nest egg so you’ll be sittin’ pretty when the time comes for you to quit that side hustle life. There are a lot of misconceptions out there about IRAs — for one thing, that you need to work a corporate nine-to-five to invest in one — so be sure to do your research!
5. Seek expert advice. There’s no shame in asking for help, especially if you’re new to working in the gig economy. A financial or business adviser will be able to help you figure out what your specific goals are, and they can help you put together a plan to make them happen. An action plan like this should make it a whole lot easier for you to follow through on the other four tips — and to do it effectively.
Money is something that individuals usually need more of but frequently find in short supply.
People worry about money.... a lot. According to the YouGov poll for the Institute of Financial Planning and National Savings and Investments in Great Britain, nearly two-thirds of respondents worried about their finances, with 43 percent saying they worried about money "more often than not." Things aren't much different in the United States, where a recent survey from Lincoln Financial Group showed that 53 percent of respondents worried about having enough money for retirement.
Taking charge of personal finances may seem like a difficult undertaking, but you don't have to make drastic lifestyle changes to grow your savings. Try these tips to save more and live a more financially-conscious life.
· Keep financial records. It's hard to determine your financial standing if you do not prioritize record-keeping. Find a method that you can stick with consistently. Some people prefer old-fashioned bookkeeping with pen and paper, while others may like the convenience of software and mobile apps. Having financial matters clearly visible in black and white can show a clear picture of how much money is coming in and how much is being spent.
· Explore auto-withdrawal and deposit. Many financial institutions offer several services to customers that can make banking and money management easier. You can set up a savings account and have money automatically deducted from your paycheck and deposited into this account. Even small deposits add up over time. You also can arrange for automatic bill pay so you don't have to worry about accruing late fees for missed payments. Check with your bank or credit union about these types of services.
· Put a change jar in your house. Change might not be popular, but it is money. Having a jar or bucket in a location of the house where you set your wallet or purse may encourage you to save that loose change for something larger. Place loose change in the jar and watch it add up. Some banks have coin-counting machines, which can make it even easier to cash in your change.
· Sign up for shop-and-earn programs. Everyone from credit card companies to major retailers offer incentives to repeat customers. These include cash-back or other perks for a percentage of the money spent on purchases. These programs equate to built-in discounts and can help you squirrel away even more money without making a conscious effort.
· Consider investing. Investing can put your money to work in exchange for a return. There are many different types of investments available. If you are an investing novice, work with a financial planner or broker who can help you find a level of risk you are comfortable with.
· Pay off debt. The earlier you can get rid of outstanding debt, the better. Put money toward high-interest loans and credit cards so you aren't paying so much in costly interest charges. Afterward, you can start saving in earnest.
Learning to take charge of personal finances early on can set you on a course for financial stability throughout your life.
The equity market is on a high these days. The Sensex hit 31,291 on June 22 2017, rising about 17 per cent from a year ago and about 19 per cent year to date (YTD). Given the phenomenal rise, should investors continue to park funds in stocks?
Different people have different investing styles. While some follow aggressive styles with shorter investment horizons, most believe in investing for the long term with a minimum of three- to five-year outlook.
During a discussion at work, a colleague made an interesting point - his equity mutual fund SIP opened in January 2008 (the high point of that market cycle) has yielded him an annual compounded return of 12 per cent till date; he continues to hold on to the same.
While one may argue that this is no great feat as the return in absolute terms is not much to write home about, the key takeaway here for readers is that despite investing at a time when valuations and markets were at a peak, this particular investment has yielded him 1.5 times returns of what he would have otherwise got had he invested in a debt instrument at the time. That too pre-tax!
What we are trying to infer is that long-term investing works. And taking such an approach, especially now, would be the right way to go about things.
One may raise a point, the fund my colleague invested in may be one of the few that have done well over the long term, thanks to the fund manager whose wisdom allowed the unit holders to garner such returns.
While that may be true, here are some interesting data points that seem encouraging enough for an investor to take up this approach on his own.
From the market peak on January 10, 2008, the Sensex has risen by around 4.5 per cent per annum. The comparable number for the BSE500 index is about 4.8 per cent per annum. But if we look at the returns of the constituents of the BSE500 index since then (considering only 80 per cent of the index companies were listed nine-and-a-half years ago), some interesting data points can be observed.
A little less than a fourth of the stocks continue to trade below their January 10, 2008 closing levels. About 11 per cent of the stocks have given positive returns, but underperformed the BSE500 index i.e. compounded returns have been positive but less than 4.8 per cent. About 9 per cent of stocks have outperformed the BSE500 index, but have generated returns less than what they would have otherwise got through debt instruments (assumed at 8 per cent). A little more than 8 per cent of the stocks have beaten the returns on debt instrument, but have been lower than the minimum return that one should expect from Indian stocks (1.5 times of 8 per cent).
What is particularly interesting is that 48 debt instrument of the index stocks have given compounded annual returns in excess of 12 per cent. The median of this basket of stocks was a high figure of 20.8 per cent.
What does all of this point towards? Three things I believe -
First, equities have the tendency to outperform other asset classes over long periods.
Second, one should have a long-term investment horizon.
And finally, stock selection is critical.
But how should a lay investor go about doing the same?
We believe the Indian economy is at an inflection point, with strong structural changes being observed within the economy. And thus, growth levels are only going to remain firm, if not rise, going forward.
All one needs to do is weed out the companies with poor fundamentals. A simple approach one can follow is to invest in companies that have a long runway of growth: companies that possess pricing power; companies whose strong historical performances are likely to remain intact in future; companies where disruption and competitive pressures are unlikely to hamper their quality of earnings; companies that are market leaders in their respective domains.
We recommend a systematic transfer plan-like structure wherein investors can park their lump sum fund in a short term debt fund, with the funds getting systematically transferred from such accounts to directly purchase shares of the shortlisted companies on a monthly or quarterly basis, thereby allowing the investors’ idle money to work for them while making the most of the market movements.
This process also helps in keeping the market noise out in the decision making process, while allowing regular financial savings – those that would form the basis of long-term wealth creation.
We are currently investing in an extremely noisy political and economic environment. While markets have remained remarkably subdued during recent times, it is inevitable that greater volatility will emerge. The question is: how should we respond?
As investors, our natural impulse when faced with arresting news or growing uncertainty is to react. Our instincts tell us to take action to protect portfolios or to profit from a particular outcome. This adrenaline fuelled ‘fight or flight’ response is deeply ingrained within us and exists for good evolutionary reasons as early humans who did not have these instincts were less likely to have decedents.
However, this impulse towards action causes a real challenge for investors.
There is an abundance of great research on this topic; however one of the most relevant was a study by Barber & Odean which shows a clear link between portfolio turnover and the results generated by individual investors.
Those portfolios in the highest quintile of turnover delivered returns more than a third lower than those in the lowest quintile of turnover. To say this simply, the impulse towards action is not beneficial to returns.
The Impulse to Action
Alongside the evolutionary impulse and incentives, action is also being encouraged by an array of behavioral biases that revolve around overconfidence, the rejection of opposing views and a preference to recall the recent past.
Most vividly, the ‘recency bias’ makes our recent experience easier to imagine than those experiences that are more distant. This leads us to believe that current trends will continue indefinitely. In contrast, the ‘law of small numbers’ is another behavioral trap that creates an expectation of mean-reversion in small sample sizes, thus encouraging investors to risk too much capital on positions designed to capture small market deviations.
In view of this, it is hardly surprising that most portfolios managers and advisers are far too active in their investment operations. We typically see this via increased costs and poor performance.
Overcoming the Impulse towards Action?
To get practical, there are several strategies to help overcome this impulse to action. The key is to prepare rather than react, as it is likely too late to address the impulse for action when it arises. For the portfolio manager or adviser to overcome the urge to make unnecessary changes to the portfolio, it is important to initiate the strategies beforehand. A good example of how to do this is provided by the story of Odysseus facing the Island of the Sirens as he returned from the Trojan War.
Our hero knew the encounter with Sirens was both inevitable and dangerous and so he prepared himself beforehand.
In this sense, the best preparation was education. Most clients are unaware of both their behavioral biases and the impact that those biases have on a portfolio. A basic education in behavioral science is therefore the first step, as investors who are aware of their biases are less likely to fall foul of them and more likely to be understanding of the adviser’s attempts to overcome them.
Second, one should ensure they have good navigation aids. Our biases create structure to our decision-making that results in predictable mistakes, much like a poorly drawn chart creates repeated navigation errors. In order to overcome this, we need to ensure that we use navigation tools that are fit for the job and enable us to overcome the inevitable obstacles in our path. One of the more popular ways is to create a core set of investment principles that are drawn from the observations of how great investors overcome their biases.
The third is to change the narrative of market movements. Much of the impulse to action comes from the type of investment data we consume and how we consume it. For example, many investors are drawn to recent past performance with an upward moving graph and green numbers. In contrast, red numbers and falling charts create a negative connotation. This naturally exposes us to loss aversion.
Avoid overhyped financial news and broker research designed to prompt action. Instead, one should be incentivised to focus on long-term prospective returns using a fundamental valuation framework.
By doing so, we change the itch to ‘buy high and sell low’ and turn it into a compulsion to ‘buy low and sell high’. Said another way, a rise in prices is viewed as a fall in prospective returns. While this helps address the recency bias, it also reduces exposure to the law of small numbers as most daily movements in asset prices appear to be vanishingly small in the context of a decade long return expectation.
With $1 million to invest, do some comparison shopping and look at average costs.
I would rather have a million friends than a million dollars.--Eddie Rickenbacker
Mr. Rickenbacker is entitled to his preferences, but many of us would rather have the million dollars -- and perhaps just 10 or 20 or even 100 friends. Some of us even have a million dollars -- by having saved and invested over many years, via a lucky inheritance, or by some other means.
When you have a lot of money, you need to be sure to invest it wisely, preserving much or all of its value. That's where private asset management or an account management advisor can come in handy. It's smart to do a comparison of your options, assessing the cost and fee schedule and typical charges for each one. You may also want to invest the money on your own, with a potential focus on dividend-paying stocks, annuities, and other income-generating assets.
Here are some key ways to invest $1 million.
Private asset management or account management advisory services
One option for investing your million dollars is to let someone else do it -- or have someone tell you what to do. Lots of companies, including very possibly your own brokerage, offer wealth management services, ranging from having professionals manage your money for you to simply holding your hand and offering advice.
What they charge will vary, and if you're interested in such services, you should do some comparison shopping -- comparing not only their average fees but also the specific services offered.
Some companies' wealth management services define wealth rather specifically, seeking clients with at least several million dollars. A mere million might not let you in every door. That's OK, because many services can be rather costly, charging you 1% or 3% or more of your total assets under management each year. (Some do charge less than 0.50%, so it's well worth doing comparison shopping of typical charges.)
If you parked your million dollars with an outfit charging 1% or 2% annually, they'd be charging you $10,000 or $20,000 per year for their services. That kind of fee can sometimes be worth it, if they're delivering more than that in value, but many financial pros find it hard to outperform the overall stock market -- when you can earn the market's average return simply by investing in a low-cost broad-market index fund. Many services charge 0.25% or less per year in fees.
Be sure to also consider independent financial advisors -- especially "fee-only" ones who have few or no conflicts of interest and earn no commissions from steering you into specific investments. (You can look up such pros at www.napfa.org.) A good one can serve you quite well, reviewing your overall financial health and coming up with a plan to help you meet your financial goals, such as having sufficient retirement income. They might recommend strategies such as dividend-paying stocks or annuities -- which you can read about below.
Investing on your own
You can invest the money on your own too, of course, calling your own shots. If you're a young millionaire, you'll want your money to grow, and the stock market is where it's likely to grow the most quickly over the long run. One or more simple index funds could work well here -- ideally ones focused on the broad market, such as the S&P 500 or the total U.S. or world stock market. They will likely outperform most managed stock mutual funds. There are bond index funds, too. Even Warren Buffett recommends S&P 500 index funds for most investors.
If you're approaching retirement, you'll be most interested in preserving those million dollars, or deploying it in ways that will generate income.
Consider dividend income
Another good option for wisely investing a million dollars -- or a significant portion of it -- is to buy dividend-paying stocks. It's true that dividends are never guaranteed, but if you stick with healthy and growing companies that have a good track record of paying dividends, and you spread your money among a bunch of them, you'll likely do well over the long run.
If you park, say, $500,000 in healthy, stable, dividend-paying stocks with an overall dividend yield of 4%, you can look forward to $20,000 annually, while expecting the dividends and the stock prices to rise over time. Put the entire million dollars in the dividend payers, and you might enjoy $40,000 or more in annual income.
Just to give you an idea of what's out there, here are a few well-regarded stocks with significant dividend yields:
Invest in annuities
Another smart way to invest a million dollars (or a big portion of it) is in an annuity or two (or three). Since an annuity is only as reliable as the company paying it, it's wise to divide your annuity investment among several top-rated insurance companies, to minimize any risk.
In exchange for a big bundle of money, fixed annuities (as opposed to the more problematic variable or indexed variety) can start paying you immediately or on a deferred basis. Below are examples of the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the recent economic environment. (You'll generally be offered higher payments in times of higher prevailing interest rates.)
If you have a million dollars and you take just half of it -- $500,000 -- and invest it in annuities, you could be collecting about $38,000 annually, if you're a 70-year-old man. Spend the whole million and you're looking at almost $76,000, a very respectable income in retirement, especially when complemented by Social Security.
If you're a 65-year-old couple, you could get about $28,000 in annual income for $500,000, and more than $56,000 if you spend the whole million. It might not seem worth getting a joint annuity instead of two separate single ones, but remember that when one spouse dies, the survivor will be left with a substantially lower income. A joint annuity can keep payments steady until both parties die.
If you're fortunate enough to have a million dollars, invest it wisely so that it lasts and serves you well -- perhaps even continuing to grow over time. Remember that you might opt for all of the options above, devoting a chunk of your million to each.