Nine (Money) Lessons for Christmas

With the Christmas shopping and spending in full flow here are a few short thoughts on money and wealth.

Know your run rate
This is not rocket science – just Mr Micawber accounting. All you have to do is keep a record of your income and spending. Ah but “All you have to do” turns out to be tough, most of us hate doing that, we have a tendency to bury bad news (over spending, poor investment decisions etc.) and then wait /hope/pray that things will turn for the better.

Don’t spend capital to live
Your capital is your seed corn – it needs to be preserved to generate future growth and income. It should be guarded very carefully – certainly not blown away on day to day living. Frugal spending is important, if not a little dull.

Don’t borrow to buy a wasting asset
What is the most stupid money decision we make – well borrowing money to buy a car must be right up there. Borrowing and paying interest to buy an asset that will collapse in value over a short number of years is madness.

Save first
This is a great little rule from none other than Warren Buffet. If you plan to save and invest regularly, make sure you deduct the savings from your earnings first. Most people spend and try to save anything leftover. This often means regular savings and investments get curtailed or cancelled completely.

Re-invest your investment income
This simply exploits the joys of compound interest. If you can compound your portfolio at just over 7% pa (7.2% to be exact) you double your money every 10 years. Taxes and inflation will hurt of course but nevertheless it’s a simple way to grow your investments.

Forget stock picking – pick managers
You may be lucky and get a winner now and then – but unless you are a professional fund manager don’t even try stock picking, it’s highly likely you won’t be very good. Of course picking managers is not easy – far from it, many are somewhat mediocre, and they often turn out to be shadowing an index whilst trousering large fees. So perhaps better to be in passive investments i.e. index tracking?

Be cautious of index investments
Buy the index and reinvest the income and leave well alone – this seems the best approach? Well up to a point Lord Copper. Tracking doesn’t allow you (or your active fund manager) to step aside and take a defensive approach at any time nor to weight yourself towards potential winners. This brings us full circle as to whether or not you can pick an above average active fund performer. Unfortunately, research shows active managers tend to disproportionally either outperform or underperform in a portfolio of active and passive managers. So you pay your money…………

Forget speculation
Forget it – you are highly likely lose. Remember the 90-90-90 rule in margin trading. 90% of clients lose 90% of their money in 90 days!
In the UK – Spread betting companies now have to put a warning on possible losses – here is a recent one I saw:
75% of retail investors lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money
Enough said!

And finally beware of exciting investments
I make it a point to always avoid fads and “exciting” new investments. Excitement often comes at the top of a market – In investment the aim is consistency, not chasing the latest bit of froth.

Merry Christmas and a Prosperous New Year!