The end of the year is a great time to reflect on your progress and achievements, and it’s a good opportunity to plan for the new year ahead. When it comes to investing, having a comprehensive and realistic plan to refer to can be beneficial to staying on top of your goals and making sure you’re on track to success.
For our Christmas guide to investing, we’ll be referencing Phil Town’s Rule #1 Investing strategy. Phil Town is a hedge fund manager and author of several best-selling investment books, and he has narrowed down his top investment tips. These include:
· Don’t lose money
· Pay off all bad debt
· Live within your means
· Remember the 4 M’s
· Find the big five numbers
· Know your retirement number
· Coattail the best investors
· Invest in what you know
We will also touch on a few great financial gifting ideas, so if you’re struggling to find something truly special for a loved one this Christmas, we have a few suggestions that could help you find a unique money-based gift that will keep on giving.
Don’t lose money
This may sound obvious, but this important first step can be easy to forget and tricky to navigate. Realistically, every investor is likely to lose money at one point or another, but this step is more concerned with the attitude towards loss. Ideally, any losses that may come up shouldn’t be larger than you can afford, therefore, a risk evaluation is important before you commit to an investment, and your attitude to loss is the key component that can determine recovery.
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”Warren Buffet
In order words, some investments may not go to plan, and whilst it’s a difficult decision to make, it could be more financially beneficial to abandon the investment that isn’t working and move on. Don’t forget that an investment can have an emotional attachment, so it’s important to approach a loss logically and try to avoid digging a bigger hole.
Pay off all bad debt
Whilst many people are getting into debt in the lead-up to Christmas, investors are looking for ways to pay off any bad bad debt. Having debt isn’t always a bad thing if approached correctly, but there’s a difference between “good” and “bad” debt, both of which can have very different impacts on the success of your investment.
Good debt is one that adds value to your life and, ultimately, builds wealth. For example, a mortgage or property investment is considered good debt as it allows you to invest in a valuable asset that is likely to appreciate in value over time. On the other hand, bad debt is one that diminishes your wealth over time and is mainly based on high-interest rates. The most common examples of bad debt are payday loans (short-term and unsecured with notoriously high-interest rates) and car finance (the value of a car generally drops over time). Credit cards are also thought to be a form of bad debt as they can come with high-interest rates, but they can be useful if you’re looking to improve your credit score.
Taking control of your finances is a crucial step towards investing in a way that’s beneficial to you, and clearing any active bad debt before getting started can help maximise your returns by 12-24% without any interest payments eating into them.
Live within your means
This point stems from the previous point of clearing all bad debt. Credit cards and loans can help you spend more than your salary would normally allow, which can lead to irresponsible spending and an unsustainable financial lifestyle, so to develop financially responsible habits, living within your means can be a useful method.
To live within your means is to spend less than your monthly take-home salary. It also means avoiding any luxury unnecessary spending and acknowledging the difference between necessity and indulgence can help you understand the best uses for funds to help build and manage your wealth.
To live within your means, you’ll need to know what those means are, so a great place to start is to understand your salary (if you don’t already). You should be familiar with your net pay, how often you get paid, and when payments come in. You should also be aware of your monthly bills and when they come out of your bank account. Ultimately, the goal is to spend less than you bring in each month, which may require some personalised cost-cutting solutions, budgeting, and planning your expenses.
Remember the 4 Ms
There are four signposts that can help with evaluating your next investment to make sure it’s the right decision for you.
- Meaning: What does the investment or business mean to you? An investment is a personal commitment, so investing in an asset or company that’s important to you can help shape the success of your investment.
- Moat: Consider the future of the investment that you’re making. What does the health of the business or industry look like and is it future-proof?
- Management: Investing your own money into a company is a big obligation, so it’s important to understand the management team behind that company, making sure that your financial and business values align.
- Margin of safety: This is normally 50% of the investment’s face value. To get the most out of your returns and achieve rule #1, find your margin of safety that’ll make sure you’re achieving a suitable profit.
Find the big five numbers
Doing your research before investing is a huge part of the journey and it’s vital to make sure that the company you’re investing in can continue to deliver in years to come. To do this, try to find the big five numbers in relation to the company’s historic performance, all of which should be equal to or greater than 10% per year for the last 10 years.
- Return on investment (ROI)
- Sales growth rate
- Earning per share (EPS) growth rate
- Equity growth rate
- Operating cash flow growth rate
Running these calculations before committing can offer peace of mind and assurance that you’re making the right investment choice and that you’ll achieve your expected returns. It can also particularly help narrow down your options in terms of viable and smart investment decisions.
Know your retirement number
Most of us will find some time away from our phones and emails over the Christmas period, so when you’re with family and friends, this is a great opportunity to reflect on your retirement plans.
To help you be best prepared for later life, it’s important to understand how much money you’ll need to save each year for a comfortable future. You should think about factors like:
· Lifestyle cost: how much do you live on now and how much will you need to live on during retirement?
· Inflation: Don’t forget to account for the rate of inflation in your retirement planning
· Years left: How many years do you have left until you’re expected to retire?
· Years in retirement: How long do you estimate to be in retirement? This will help you determine how many years you’ll need to sustain yourself.
· Available investment funds: How much money do you have available to start investing today?
· Annual savings: How much do you need to save each year to reach your retirement goal?
This can be an overwhelming process, so a simple pension calculator can help you get started.
Coattail the best investors
Put simply, stay in the loop. Christmas is a great time to be doing your research and keeping up with the latest investment news and strategies. For example, if you’re interested in property investing, you could keep an eye on how buy-to-let (BTL) investment trends are changing in the current high-inflationary market or how to navigate falling property prices. In the instance of stocks, you can monitor the top performers, although, these can change quite sporadically, and you can examine how different stock markets have been performing in the latest financial climate and what the investment opportunities are under the existing circumstances.
There are many different ways to stay informed. Narrow down the investment area that you’re interested in and follow investors and businesses on social media, subscribe to news and updates, look at past performance, and see what other people are doing.
Invest in what you know
Keep it simple and invest in what you know. An investment process can be difficult and confusing, so it’s useful to make it as easy for yourself as possible and make sure you understand what you’re buying. Being knowledgeable in your investment area can also help you stay on track, make logical and sensible decisions if things change along the way, and make you feel proud of a successful investment that you truly understand.
A useful way of visualising what you know and, therefore, suitable investment opportunities, is to brainstorm the following areas:
· Talents: what are your strengths? What are you good at? What are you confident in?
· Passion: What do you enjoy? This can be professional or recreational.
· Money: How do you spend your money now? Where do your funds tend to go?
Consider the above as a Venn diagram, focusing on the points that overlap. This will help you determine the industries that are most suited to your likes and interests, and by investing in a sector that means something to you, you can achieve a successful and rewarding investment.
Financial gift ideas
As part of our investor’s guide to Christmas, gifting is another area that can get tricky. As your family grows and people get older, it can become difficult to keep finding a unique gift every year that they’ll love. So, if you’re struggling to find something truly special for a loved one this Christmas, you could consider these financial gifts that could benefit them in the long-term.
· Premium bonds: You can earn interest on premium bonds whilst being entered into a monthly prize draw with a chance to win up to £1m tax-free. The minimum investment is £25 and you can invest on behalf of a child under 16 years old, so it could be a great gifting option for your child or grandchild.
· Savings accounts: A great financial gift for a child under 18 years old is a savings account or a tax-free Junior ISA. You can open an account in their name and help them start saving early to build up a solid financial future. The limit on Junior ISAs is £9,000 for the current tax year and the interest gained is tax-free. The child can then manage their own account from the age of 16 and withdraw funds from the age of 18.
· Pension contribution: Contributing to a loved one’s pension fund can be a thoughtful Christmas gift idea that can help someone special prepare for later life.
· Gift an asset: Gifting your assets away can be a good way of giving a thoughtful and valuable gift to a loved one whilst reducing your family’s inheritance tax bill.
· Charity donation: The festive season is a time to encourage helping those in need, so a charity donation in a loved one’s name could make a meaningful and humble gift.
· Piggy bank: If you’re looking for something easier, a simple piggy bank filled with starter funds could be a great gifting option for a child to help encourage the habit of saving.
On top of the above guidelines, a few other key things to consider are:
· For any level of investor, doing research into what you’re buying is crucial and helps with making sensible investment decisions.
· Set aside a suitable portion of your monthly salary and pay yourself first.
· Always be grateful for your success.
Whether you’re a new or an experienced investor, taking control of your finances, managing your money sensibly, and doing your homework can help you make the most of your next investment. The wind-down during the festive season could be the perfect time to reflect on your circumstances and curate a plan that works for you, making sure that you’re well set for the next successful journey.
If you find some down-time this Christmas, why not take a look at the Propiteer Capital social channels and follow us for regular financial news, investment tips, and company updates? You’ll find us on LinkedIn, Facebook, Twitter, and Instagram.
Recommended Read: How to Teach your Children about Money