10 Tips For Smarter Investing
The challenge most people face is that they start off assuming this should be complicated.
This is possibly because at every turn, we’re being given bad information that influences our views on investing.
Whether it’s the financial news making stock recommendations, or even friends buying and selling shares.
It’s easy to face the Fear Of Missing Out, and jump into investing without due consideration.
Investing should not be complicated. It does require learning and some time devoted to it.
However, it should overall be simple and your confidence should increase the more you spend time considering what and why you invest.
Given that you’re likely to have many goals for the future, it’s important to move beyond emotions and convert those goals into numbers.
Investing is the vehicle that will help you achieve those goals if done properly.
As such, below are 10 tips for smarter investing that will serve you well for the future:
1. Don’t Aim To Beat The Market
People who pick stocks do it because they believe they can beat the market returns.
Whilst there are some that do e.g. Warren Buffett, for most of us with smaller balance sheets, this makes no sense.
What to do instead is to buy index funds that track the market as close as possible.
This way you actually own the market.
Another way of doing it is via Exchange Traded Funds (ETFs).
Buy in and stay put. There is cost tied to trading in and out too often.
Smarter investing tip: Stay invested at all times. This way, you buy cheaper when markets fall.
2. Own The Market
To own the market, you want funds that capture the broad spectrum of the market.
Avoid focusing on specific sectors or even trying to follow themes or trends.
In the UK, the FTSE All-Share index covers the entire market. In the US, the Wilshire 5000 does it and captures small and large companies.
If you want a global capture, then you want to look at the MSCI World Index.
A light reminder that the word “index” pretty much just refers to a list. A bit like a shopping list.
Instead you have companies rather than groceries.
When look for funds that track these indexes, look for keywords such as “broad market” or “total market”.
Smarter investing tip: Focus on owning the world and invest consistently
3. Keep Costs Low Always
Costs are a big part of what destroys your wealth over time.
I’ve written to you about the need to understand fees and why they matter.
Whenever your want to make an investment, don’t be too quick to click the buy button.
First you must do some due diligence.
Remember, money is hard to make! As such, give it your time and attention when it comes to investing.
All funds must now have a Key Information Document (KID). It’s usually a 2 pager that covers key risks and costs.
Pay very close attention to the costs.
These are usually called the Total Expense Ratio (TER) or ongoing charge.
This is essentially what it should cost you in total to invest in that fund.
You must know what this figure is and what it means for ALL investments you make.
It’s usually stated as a percentage (%) and you pay this every year.
Also make sure there are no hidden fees. Take the time to read the fund document.
Smarter investing tip: Aim for a TER of less than 0.5% (also called 50 basis points). Record this on a spreadsheet for all investments you make.
4. Only Buy What You Understand
This particular point frustrates me a little.
A guy takes a cab somewhere and the cab driver talks about Cryptocurrencies, and all of a sudden he too wants crypto!
This is seriously foolish thinking and is definitely closer to gambling than investing.
Just because I’m telling you to consider passive investing doesn’t mean you should jump at it and do it!
Do your research. Understand the body of evidence that supports this strategy of investing.
Invest your time and learn, and it will be apparent that I’m not writing this to waste your time.
Smarter investing tip: Investing is meant to be simple. Keep it that way.
5. Stay On Top Of Taxes
There is a difference between tax evasion (illegal) and tax avoidance (legal).
When you invest your money, consider taxes very carefully.
Luckily, there are legal ways to reduce tax, which have been created by the government.
Capital Gains Tax (CGT) is the tax you pay on all your investments.
You and I get a CGT allowance each year, with the current allowance at £11,700. Use them.
If you invest outside a tax-free environment, then the above allowance comes into play.
However, you should aim to invest in tax free environments.
Stocks and Shares ISAs and SIPPs offer a tax efficient and exempt you from paying CGT.
SIPPs take things further by giving you a tax rebate whenever you put money into them.
Smarter investing tip: Aim to use up annual allowances for your Stock and Shares and SIPPs.
6. Limit Portfolio Withdrawals
You might be aiming to begin taking out an income from your portfolio in the near future.
This is usually the case for those who want to retire early in the future.
To ensure you never run out of money before you die, focus on withdrawing a maximum of 4%.
If your portfolio is returning a real rate of return above this, then you’d pretty much be sorted for the future.
To keep things even more sensible, aim for around 3% as a withdrawal rate.
This ofcourse means that you’d need a slightly larger pot to meet your expenses.
E.g. If you need £24k per annum income, then a 3% and 4% withdrawal rate means that you need £800k and £600k pots respectively.
I.e. £24k divided by 3% and 4% respectively.
Smarter investing tip: Where possible, keep withdrawals low and focus on managing costs. You have a better chance of not running out of money.
7. Get Your Investment Horizon Right
Chances are you’ll have multiple financial goals in parallel.
Possibly goals on education for your children or your first home or even early retirement.
Each of these goals will have a different horizon and as such require a different mix of equities and bonds.
The longer your investing horizon, the better as you can be a little bit more aggressive with your allocation to equities.
A long term horizon would be 20 years plus, although anything more than 5 years is decent.
Conversely, the shorter your horizon, the closer you want to stay to safety.
Smarter investing tip: Be intentional about your individual goals and related investing horizons.
8. Focus On Asset Allocation
Many millennials and a lot of those older are not investing and at worst, keep most of their money in cash.
It's no surprise many struggle to build up a decent sized portfolio for the near future.
It is important to understand that it's the mix of assets you have that drive how quickly your portfolio grows.
If you're in the accumulation phase of life and have a long horizon, the focus should be majority in equities.
Then the goal then becomes establishing a good balance between equities and bonds as time passes.
Smarter Investing tip: Get your asset allocation right from the start and keep to it in the short and medium term.
9. Stay Diversified With Funds
Don't bother with trying to pick stocks in order to then create a diversified portfolio.
This is a waste of time, effort and money as better and cheaper portfolios already exist.
You just need to choose the right ones that will help you achieve your goals.
Invest instead through a fund (basket of companies), which are structured as OEICs (Open Ended Investment Companies) in the UK. Also called Mutual funds in the U.S.
Doing this eliminates specific risks you might have with individual companies and you'll mainly get affected by overall market risk as time passes.
Related post: Investing Risks You Should Be Aware Of
Smarter Investing tip: Invest this way if you have a fear of losing your money in the markets. Potential loss isn't removed. It's reduced.
10. Avoid Looking At Your Portfolio Often
A fidelity study on how account had performed over time showed something remarkable.
The best performers were either dead people or those who forgot they had an investment account.
Looking at your portfolio too often isn’t smarter investing. You get too emotionally involved and risk making decisions you haven’t applied logic to.
A lot of people who hold individual stocks get drawn down this path as they like to see how their companies are performing.
This is also the case for those with a short term horizon or those desperate for quick returns.
To paraphrase John Bogle from his book The Little Book Of Common Sense Investing.
The way to wealth for those in the investing business is to persuade their clients, “Don’t just stand there. Do Something”. I.e. Go stock picking.
But the way to wealth for their clients in the aggregate should be the opposite, “Don’t do something. Just stand there”. I.e. Ride the index and let time work!
Keep away from your investments and don’t look too often. It will serve you well with the passage of time.
Smarter investing tip: Aim to look at your portfolio about once or twice a year.
I’m creating a course called FIRE SuperPower to help anyone create an actionable plan for Financial Independence.
It will practically cover investing in-depth along with many other key areas that have helped us on the journey.
Do subscribe below if interested and I’ll keep you posted when it launches:
- 9 Smart Ways To Invest £1,000
- How To Teach Kids The Magic Of Compounding Interest
- Recommended books on Investing etc
- How Index Trackers Work To Make You Rich
- Why Saving Money Should Be Prioritised Over Investing
What smarter investing tips have made your investing journey successful? Have you made mistakes we can learn from?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.