If you’ve been following along with my previous articles you know that I have covered a lot of different topics. However, the unifying subject has been helping you to discover how to invest. It is a crucial skill and it is a crime that this is not taught in school. Our paltry school education leaves us vulnerable, not knowing where to invest our money for the best return possible. Many of us wind up keeping our money in the banks and as you will see, this is a serious mistake!
You can’t rely on banks or the government!
Nobody wants to get to retirement and have to rely on the state to cover their day to day expenses. You don’t want to become a burden on your family. Yet many of us will wind up in that helpless situation. This is can easily happen even if you save your money in a bank account.
banks can cause you to lose money!
I showed in a previous article how keeping your money in banks can cause you to lose money! You can actually wind up moving away from your goal instead of towards it. This is because of the negative interest rates you receive on bank deposits.
Eight steps to successful investing
I previously explained how you can invest successfully without the fear of loss. You can accomplish this by following these steps:
- Set your goals
- Quantify your goals
- Set your return objective
- Set your risk objective
- Determine your constraints
- Identify which types of assets you want to invest in
- Set your asset allocation (the ratio of stocks to bonds)
- Calculate how much money to contribute each month to the portfolio
For more information on this you can see the previous article. But in this article, I would like to talk to you about one of my clients who followed these steps and created an amazing investment strategy with stunning results. And you can too.
How Simon more than doubled his wealth!
I want to talk to you about Simon. Simon is a school teacher in the North of England. He has a wife and three children. Simon is an aerospace engineer by education but shortly after starting his career he decided that he wanted to teach the nation’s children. He is dedicated to helping the people around him. This is a deeply honorable goal and certainly one I can sympathize with. It’s why I do what I do now.
Before Simon and I met, he had looked at different options. But he lacked direction. For example, he invested in a pensions scheme for teachers. He paid in for 5 years and then stopped. There was no support and he was not satisfied with the results. Pension schemes can be excellent investments. But while many companies offer these schemes they provide with little to no information on how you can get the most from them.
How do you choose between investments?
Simon also dabbled in some foreign exchange trading and investigated buying gold from banks. He read books by Tony Robbins and Grant Cardone. From this he discovered that real estate is not necessarily the most lucrative investment. There were definitely other options which he wanted to explore before making any more investments.
investing is the way forward
One thing Simon knew for certain was that investing is the way forward. He wanted to put his money in the right place but he didn’t know where. He needed someone to take him by the hand and tell him where to put it. “This much here, that much there and how much will I get?” he asked me.
This is a common problem. Many of my clients, usually men with children, have explored various means of investing. But without a framework it was difficult to settle on just one. And so, a framework is what I gave Simon.
Maintain your lifestyle…
To answer the question of how much where and what would he get back, the first thing Simon needed to do was to set his goals. He told me that by 45 or 50 years old he would like to be in a position where if he can’t work he can fall back on his wealth. Take it easy if need be. It was important to him that he could maintain his lifestyle. And also, that his children and his wife could live comfortably. Not only that, “my wife is used to shopping!” he told me with a wry smile…
So, we had a broad goal here. Retire at 45 or 50 years old. Have a portfolio large enough to maintain his lifestyle into retirement and also that of his wife and children. But next we needed to put a number on it. What size portfolio did Simon need?
How to get a million dollars!
After talking with Simon, we determined that he needed a pre-tax income of $50,000 to live comfortably in retirement. If we decided that he could conservatively earn 5% from his retirement portfolio this meant that he needed a portfolio amount of $1m. What return would Simon require to get to a portfolio size of $1m? Well, this depends on his starting point and how much money he can contribute to his portfolio over time. And also, his time horizon.
Simon was 33, so he had 12 years to reach his ideal retirement age of 45. His current portfolio was relatively small – around $30,000. Well we found that perhaps Simon was being a touch optimistic about retiring at 45 at his current level of contributions (around $20,000 per year). This meant that he needed a return of 19% per year! This was not likely to happen.
Make sure your goals are realistic!
This was not what Simon wanted to hear. But in a way it was good news. It was better to discover this now than in 12 years time. Consequently, we decided to change his retirement age to 55. In the meantime, Simon would explore ways of increasing his income to see if he could bring his retirement age forward. He was interested in pursuing real estate as a business. I promised that we could explore that option at a later date.
Before that we need to determine a more realistic goal. If Simon retired at age 55 he needed an annual return of 6.25%. Not too outlandish. Next, we explored Simon’s risk tolerance.
How much risk can you take?
We agreed that Simon had an above average willingness to take risk. Small losses didn’t bother him. He didn’t do a lot of research, analysis or looking at statistics. But he did spend a lot of time reviewing individual investments. He wanted to be sure that a particular investment gave him what he needed. As an investor Simon is quite individualist, relying on his own judgement. But he could be spontaneous from time to time.
However, Simon’s ability to take risk was below average. His small portfolio was largely from savings accumulated over the years. Simon did not have a lot of experience in risk taking activities. What was on his side was his relative youth at 33. This gave him time to recover from any mistakes and find ways to increase his income. That said, we agreed that Simon had a below average ability to take risk.
Investment constraints…
We looked to see if Simon had any serious constraints. We have already established that Simon had a time horizon of 22 years. He did have a liquidity issue. He did want to buy a house and the deposit would be $100,000. Simon had already put this money aside in a cash account and so it would not be included as part of his portfolio.
Simon’s average tax rate was 21%. There were no legal or regulatory factors impacting his investment decisions. I have explained these previously. They only really apply to financial institutions such as banks, pension funds and insurance companies. Lastly, I asked Simon if there were any unique circumstances that might affect his investment decisions. He assured me that he had no strong personal or moral objections to certain businesses (such as tobacco, alcohol or gambling).
Given Simon’s below average risk tolerance it didn’t make sense for him to begin making high risk or speculative investments (such as putting all his money in cryptocurrencies!). A conservative approach would be more likely to work.
A diversified portfolio can work for most people…
So, a diversified portfolio was the way forward. Simon could easily accomplish this by investing in a mutual fund invested in stocks. He wouldn’t need to pick individual stocks. This is a highly specialized approach and I would not advise this for a casual investor.
But a 100% stock portfolio would probably also be just a bit too risky. Stocks are generally three times more volatile than bonds. This means that they have greater swings in price. Therefore, if you include bonds in your portfolio they will reduce some of the riskiness. This is at the cost of the higher return of the stocks. There is, sadly, a trade-off between risk and return. Generally speaking, the lower your risk, the lower your return.
How do bonds affect portfolio returns?
A fairly conservative allocation for a man of Simon’s age is around 60% stocks and 40% bonds. The long-term average return of the S&P 500 is around 10%. The S&P is a broad market index that tracks the value of the 500 most widely held stocks on the New York Stock Exchange or NASDAQ electronic exchange. S&P stands for Standard and Poor’s, a financial services company.
The long-term average return on US bonds is about 5.5%. So a 60/40 split stocks and bonds will give us an expected annual pre-tax return of 8.20%, or 6.48% if we adjust it for Simon’s tax rate of 21%. This actually gives Simon a slight cushion of 0.23% cushion over his required return. This is good.
There are no guarantees…
Keep in mind that these returns are not guaranteed. They are based on historical average of the past 90 years. In the future the returns could be very different. They could be much higher or much lower. But with a long time horizon of 22 years Simon can probably recover from any economic collapses. But as he gets closer to retirement, Simon will need to consider a more prudent approach.
What has this done for Simon?
To be fair, Simon was skeptical that he would just lose money on something that will not give him any value in return. He wondered “what can someone say to me that will magically make things right?”
But that perception changed after the sessions we had together. I asked Simon a series of questions that allowed him to get crystal clear on his investment goals. This changed his perception from being pessimistic to being much more optimistic about his next move with his investments.
In money terms, Simon realized that at his current level of contributions he would not be able to save enough money to retire at 45 years old. In fact, since Simon kept his money in the bank, he would never have enough to retire! Not even at 55 years old!
Simon increased his potential outcome by $600,000!
For example, once you adjust bank savings rates for inflation, you have interest rates at minus 2%! If Simon kept everything the same but kept his money in the bank he would have a retirement amount of $400,000. Thanks to my intervention, Simon increased his potential outcome by $600,000 to $1m! This is a crucial result and gives Simon confidence that he will reach his goals and retire on time. Simon beat the banks and you can too!
Banks destroy your wealth!
You can see clearly how banks destroy your wealth! And this is only how they do it directly. The entire banking system is essentially one large system of wealth transfer. Your wealth being transferred to banks. At the top of the banking system you have the central bank. In the US this is the Fed.
The Fed sets interest rates. When they lower them virtually down to zero this creates inflation. Subsequently, when you calculate how much interest you are earning in your savings account you have to deduct the current inflation rate. Typically, this gives you a negative interest rate. So, saving money at the banks reduces your wealth.
The Fed works for the banks…
Why on earth would the Fed do this? They did it to bail out the banks after the crisis of 2008. The banks got themselves in trouble by making lots of high risk loans. So, when you pay that negative interest rate to the banks you are also helping to bail them out. So, a responsible person like you is literally being robbed to help irresponsible people. In later articles, I’ll go deeper with just how badly this nefarious process affects you.
You need someone in your corner…
Simon knew that investment can be a tricky especially if you have no knowledge of how to secure your hard-earned money from inflation. He discovered that having a specialist who works in your own interest is probably the smartest thing to do if you want to accumulate wealth. We all know it’s better to invest rather than having the money sitting in an account losing its value.
When you have someone to break it down for you… investing becomes easy…
Simon realized that generally speaking, most people don’t have a clue about investment and usually it’s the upper class who tend to know about this stuff. When you have someone to break it down for you and do the hard work, investing becomes easy. You know you are not gambling with your money anymore. Instead, you are being smart about it and this is what everyone needs; a dedicated money coach.
If you’re still not sure…
If you’re on the fence about deciding if you should begin investing, I can tell you exactly what to do and where to invest so that your money will grow. This would of course be based entirely on your personal situation. If you take a minute to tell me a little bit about your situation I’ll be able to point you to the best possible free resource for you. So, go ahead and click here and I’ll see you on the other side.
In the meantime, in my next blog post I’ll go over some of the common objections and fears that people have about investing and address them for you. See you then!
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