In this article, I share 10 important investment lessons I learned from Tony Robbins.
In brief, the top investment lessons are:
Bear markets are your best friends;
Watch fees, charges and tax like a hawk;
Think about potential loss before you think about potential gain;
Master the ‘asymmetry of risk/reward’ rule and use it all the time; and
Stay for the long run even when it is bumpy.
Investing is easy, you may think. Why do I need investment lessons?
Not so fast, friend. Investing is easy; masterful investing so that you win never mind what (except major catastrophes, of course, like war and the end of the world) not so. For masterful investing, you need investment lessons.
In this blog post, I’ll share with you ten important lessons for masterful investing I learned from a Master: Tony Robbins.
Tony Robbins is not everyone’s cup of tea; he happens to be my very special tequila shot. I enjoy his dedication to mastery and his unbounded enthusiasm; this guy lives his life with greedy joy that I find contagious. Must say that I’m not that convinced by his more general self-help books but like the ones about money.
My take away from Unshakable is more about investment lessons. Frankly, I’m not sure whether this is about the nature of the books or my sensitivities now. I do worry about the level of volatility in the economy, financial markets and our lives and have been researching ways to make our finances if not ‘unshakeable’ than able to withstand high magnitude of shake up.
I believe that the investing lessons from Tony Robins I share here, can be helpful to two groups of people:
People who can see the need to invest but are worried about the risks this entails; and
People who already invest and are puzzling over the changes in their portfolios that will give the peace of mind.
Here are the ten investing lessons from Tony Robins (in no particular order of importance).
#1. Market corrections come regularly and often
The other day I was talking to my niece and nephew-in-law who have quite a bit of money in a savings account; telling them about the different investing options open to them.
“But the market can go down and you can lose this money.” – my nephew-in-law said.
They keep their money in a savings account and lose between 2-4% annually guaranteed (exactly how much they lose depends on the level of inflation.)
Are you worried about losing your money if you invest in the market?
It is a natural worry – I was worried until I learned that:
Market corrections of up to 15% occur at least once per year; and always have done so. Bear market (this is a correction of 40% and over) comes around every three to four years (we are long overdue one).
(And for the record, ‘correction’ is an acceptable way to refer to loss.)
Good news is that the market always recovers. Don’t believe me?
Have a look at this:
Market corrections should be expected. Don’t sell; sit them out. Your investment will recover and make gains. (Most likely.)
#2. Buy during drop in market value
Our natural inclination is to see drops in the market as a threat to our long term financial security and to fear the loss of our hard-earned cash.
Please get this out of your mind and let’s think rationally.
We know that market corrections should be expected.
We know that the market has always recovered and gained (historically speaking).
Market corrections are like the bargains you hunt at the Christmas sales!
Buy more stock during market corrections because this is your best chance to end up with some great bargains (you still must be clever about selecting).
#3. Bear markets are the greatest investment opportunity ever
See the previous lesson. It is just that buying bargains during a bear market is like picking a priceless diamond at a car-boot sale for a tenner.
Really can’t beat this one.
Don’t dread bear markets. See them for the incredible investment opportunity they are.
#4. Keep money for opportunities
This lesson follows immediately and directly from the previous one. Things are simple:
You are not going to be able to take advantage of the stocks and shares deals that come up during market corrections and bear markets if you are fully invested in stocks and shares.
Make sure that you always keep:
Easy access cash in a standard savings account;
Money invested in very conservative investment instruments like bonds;
Any other easy access cash you can think off (gold coins, easy to sell objects etc.)
(Note: Having a cash reserve is not a bad idea more generally. After our adventures with paying off debt, I never go below a certain amount of cash.)
Always keep easily accessible cash for opportunities. What form you keep your cash in is not important if you could cash it within 24 hours.
#5. Watch these fees
Investing comes with fees. Sometimes these fees are hefty and sometimes they look light but there are a lot of hidden charges.
Fees and charges erode your investment to a degree that may the difference between a healthy return and prosperous future, and virtually no return (or even loss) and misery in all senses.
Watch the fees and charges you incur when putting your money in managed investment funds, pension funds and investment platforms. Make sure you read the small script and that you do your arithmetic.
Make it part of your ‘due diligence’ routine to check all fees and charges and to make your calculations.
#6. Optimise your tax
I’m the first to say that my dream is to pay a lot of tax. Sounds silly, I know; but only at first. Think about it: paying a lot of tax means that you make a lot of money and that you are contributing your fair share to the services in your country/region/city.
This investment lesson in not about avoiding tax; it is about optimising your tax. Translated, this means that you shouldn’t pay more tax than necessary.
Tax rules on investment gains are different in different countries. One constant is that there are investment instruments that are exempt from tax. In the UK, ISAs are such an instrument (here is how to select the best ISA for your needs).
Check the tax regulation regarding investment in your country and make sure that you optimise the tax you pay. If you need help to do that, ask a professional financial planner.
#7. Be aware of the potential loss
Most people in personal finance will tell you to look for high potential gain.
What I learned from Tony Robbins is that highly successful investors, without exception, look at the potential loss before they look at the gain.
It makes sense in a weird kind of way: you make money by minimising your losses.
For instance, when I do some of my more wild investments – like buying a rally car – I always consider the worst outcome (the potential for loss). If it looks like the worst outcome is recovered capital or a small profit, it is a no brainer. If it is a large loss, I won’t go for it – large potential loss and large potential gain is what you get in gambling, not investing.
Before you commit to an investment, look at the potential loss first.
#8. Know the potential gain
This is rather obvious.
Indeed, I doubt that anyone would argue with the need to know (and assess) the potential gain.
What I learned from Tony Robbins is the notion of ‘asymmetric risk/reward’. This is a fancy way to say that the estimated rewards of an investment should vastly outweigh the estimated risks (losses).
Some investors use a ‘five-to-one’ ration: they risk one dollar in the expectation they’ll make five dollars. This also means that you can be wrong in your estimates 80% of the time and will still turn profit.
Make a realistic estimate of your potential gain because this will help you decide whether to invest. Perfect the ‘asymmetric risk/reward’ rule and apply it every time.
#9. Keep diversified
Did your mother ever mention the saying ‘never put all your eggs in the same basket’?
Keeping ‘your eggs’ in different baskets is particularly important in investing.
Okay, you get it I suppose. Don’t over complicate it but keep diversified.
Diversification is what ultimately makes your investments more stable.
#10. Stay in the market
What is the first thought that enters your head when you check your investments and their value has gone down?
Yes, I also think that I should sell out and keep my money under the mattress. Or, sell out and go on a trip around the world flying first class and sleeping in five star hotels (if my investments stretch that far).
Don’t. I know it is hard but history tells us that the market has recovered and prospered every time.
You’ll only lose if you get out of the market on a low; so, stay in the market.
Don’t mistake fear for intuition. Use your rationality and when corrections occur stay in the market.
Do you know why I decided to tell you what are the 10 important investment lessons I learned from Tony Robbins?
Because if someone told me these investment lessons when I was thinking about starting to invest (or even after I finally took the plunge) I would have felt more confident and avoided some rookie mistakes.
Do you know which ones of these investment lessons surprised me?
These should be the counter-intuitive ones about buying when markets go down and thinking much more carefully about potential loss.
Which of these investment lessons do you find surprising?
Investing for mavericks is less traditional than other forms of investing. It is fun and it doesn’t have to be risky. To invest like a maverick you must remember its three rules:
You make money when you buy.
You have to be an expert in the niche or work with an expert.
You must be connected in the niche.
Investing for mavericks is not everybody’s cup of tea but it is certainly my brandy shot.
You see, I like my investing just as I like my life: unique, interesting, full of adventure and discovery, and somewhat off the beaten track. Yes, I could put my money in index funds, digital wealth managers and select stocks and shares. To a degree I have done.
Still, where is the fun in that? Where is the adventure and the profound satisfaction of success?
Couple of years ago, I got interested in what I call investing for mavericks. I told you about fun ways to spice up your portfolio and that this can be very profitable: some classic cars can return up to 500% over a decade.
Do you know what? A month ago, we were offered for the MOT and car service garage eight times what we paid for it. No bad (but we are not selling because the garage is not a gig, it is an opportunity).
Since I live what I preach, I also bought a half share of a rally car.
Investing for Mavericks: Meet Fordy
Are you wondering what I’m doing sitting in this very snazzy rally car?
Well, meet Fordy. Fordy, as I affectionately call it, is in fact a Ford Escort MK 1 classic rally car with Pinto 2 litre engine.
It is not that I know very well what this means, right. And so that you don’t get overly excited no I have not taken to rallying cars.
This my friends, is my latest investment. You see, I told you about spicing up your portfolios with non-traditional investments. As non-traditional investments go rally cars now are a very good one.
“But Maria, we get this ‘investing for mavericks’ stuff. But isn’t this very risky?”- you may wish to ask.
Yes, it can be risky. Still you can minimise the risk if you remember the one rule for success in this kind of investment, namely, that you make money when you buy not when you sell. Also, when you buy you either need to know the trade you are buying into well; or you should be in partnership with somebody whom you can trust with your life who know the trade inside out.
We could buy Fordy because we are already in the motor car business and are in the productive partnership with somebody who knows about cars and more importantly knows a good rally car when he sees one. What we do is that our partner spots great deals and we buy a share into it.
Fordy is half ours. We are hoping to double our investment in the car. Even if we don’t achieve this kind of return we know that we will always recover our investment and make a modest profit.
Three rules of investing for mavericks:
#1. You make money when you buy not when you sell: This kind of investing is (potentially) very profitable under two conditions: you either find a great deal or you find a classic car and keep it for a long time.
#2. You must know what you invest in: it won’t even occur to me to buy a rally car without consulting with, getting into partnership with, somebody who knows a lot about rally cars.
#3. Make sure you are well connected in the niche: we bought this car at a very good price. Still if we don’t have solid connections in the rally car communities we don’t stand a very good chance of saying it. I very much doubt that this car will sell on eBay.
This is it and we’ll see how this one goes; I’ll keep you posted.
For now, I’ll sit here in Fordy and who knows, I may even take it for a spin.
I didn’t take Fordy for a spin because being a rally car it has no hand brake (it is illegal on the road).
It was such a pain getting out of it, though. I regret I asked John to stop the camera – the ‘getting out of a rally car’ part of the video would have become an instant comic success of innuendo and antics.
So, you’ve heard all the advice about how you should be investing, and you can’t wait to get going. You are considering your first investments and there’s only one problem – you don’t have much money.
You’re not alone in this regard. Every investor would like to have tens of thousands to start, but many begin investing with much less. The truth is that it’s not about saving up a huge amount of money to invest, it’s about taking that first step and investing what you can. That’s how you make investing a habit, and once you do that, you’ll find yourself saving more and contributing it to your investment account.
If you put off investing because you feel like you don’t have enough money, you’ll likely keep putting it off. By understanding some key concepts, you can start investing with a few hundred dollars or less.
Your First Goal Is Risk Management
You can lose your money any time you invest it, but the level of risk involved varies significantly depending on the investments you choose. The best investors manage their risk no matter how much money they have, but this becomes even more important when you don’t have much money to lose.
Now, low-risk investments aren’t as exciting as high-risk investments. You aren’t going to make huge money quickly, and instead, you’ll be earning a steady return on your money. What you need to realize is that if you’re making high-risk investments in hopes of a big win, that’s not investing, it’s gambling. You may get lucky, but you could also get lucky at the casino.
What are low-risk investment opportunities that don’t require much money upfront? There are several great options.
An index fund is one of the best investment options for the beginning investor. This is a portfolio of many different stocks and bonds, and the benefit is that it allows you to hold a diverse portfolio without committing a large amount of money.
By holding so many different stocks and bonds, your money isn’t at the mercy of a single company’s performance. Let’s say that you get an index fund with stocks on the S&P 500 Index. The S&P 500 Index is 500 of the leading stocks in the United States. Some of these stocks will go up while others will go down.
But when you look at the performance of the stock market over a period of decades, you can see a clear trend – it goes up consistently, so you can expect your index fund to increase in value over the years. You could easily earn 8 to 10 percent every year, which will add up as your money compounds.
You can invest in an index fund for just $250, although your options will be limited. If you have $500, there will be more index funds available. You can always invest more money later as you save more.
Dividend Reinvestment Plans
With a dividend reinvestment plan (DRIP), you’re purchasing a small amount of a stock from a company directly. Since you’re not going through a broker like you would with other stock purchases, you won’t pay any broker fees.
As you earn dividends on your investment, you can then reinvest those dividends, hence the name of the plan. There are many large companies that offer DRIPs, such as Coca-Cola and Home Depot. While you won’t have a diverse portfolio to start, this option is available for a very small amount of money, as some DRIPs allow you to start investing with just $20.
Loans are an Option
With peer-to-peer (P2P) lending, you can invest in another person’s loan. This is a relatively new type of lending that came out in the United States in 2006. The borrower applies through a P2P lending site, such as Peerform, Lending Club or LendingTree. The site runs that borrower’s credit score and other financial information to assign him a risk score. Then, the loan request is put on the marketplace, along with information about him, including that risk score. Investors can choose loans on the marketplace that they want to fund.
The interest on the loan is the return you receive on your investment. Since groups of investors fund the loans, you don’t need to commit a large amount of money to any one loan. You could get started with $50 or less. The important thing is to check the borrower’s risk score, as you don’t want to fund a loan for a borrower who will end up defaulting.
Choosing Stocks with Little Money
One thing that doesn’t get brought up much for investors without much money is choosing individual stocks. When you’re starting out, it’s smarter to go with an index fund to minimize your risk.
Can you start investing with individual stocks? Yes, but you’ll need to spend more time finding the right ones.
The best options are companies with a long track record of success and continued growth. These are less likely to tank, although that can still happen. Many once-successful companies end up closing – just look at a chain like Blockbuster. That’s the risk you take with this approach.
If you’re very interested in learning about investing, then picking your own stocks is the best way to learn. But for most investors, keeping it simple is the superior approach. Researching companies to try and predict which ones will do well in the future is a time-consuming process.
You can go as deep into the investing world as you’d like. If you want to make it a serious hobby or even a full-time job, you can do that given enough time and hard work.
In the early stages, especially when you’re investing with limited funds, don’t let your ambition convince you to take unnecessary risks. Start small and focus on earning a consistent return. When you have more money saved, then consider using a small amount for higher-risk ventures.
Editor’s note: Andrew Altman is the editor-in-chief of SlickBucks.com which is a website dedicated to growing your wealth through investing your hard-earned cash cleverly. For that, Andrew publishes reviews, informative articles and guides that help you achieve your financial goals.
One question my readers seem to ask me regularly is whether ISAs are a good investment. Here I’d tell you why I believe ISAs are one of the best investments around and how you can select the ISA for you.
But let me tell you a story first.
The other day, I met and old friend of mine and, as often happens these days, our conversation over coffee turned to retirement dreams and the provisions we have made. (There was time when we didn’t talk about retirement and minor maladies but about nights spent partying and career ambitions. Oh well…). I mentioned my stocks and shares ISA with Nutmeg, proud that I maxed it out and hopeful that it is the foundation to a more secure future.
“But why are you doing this?” – my friend asked. “I didn’t put much in my ISA last year. The interest rates are so low now that it hardly matters whether you keep your cash in a savings account, under the mattress or in an ISA, right.”
Contributing to an ISA, and maxing it out when the opportunity is there, is still very much worth it. It is worth contributing even to a cash ISA though the interest this will bring is on the low side. According to Money Week, the best interest rate on a cash ISA today is 1.95% with building society Principality’s five-year bond and this is branch based and available only if you live in Wales or the Welsh borders. The next best is Paragon Bank’s five-year bond paying 1.75% which is online only. You get the picture.
Despite the low interest rates, cash ISA can be a great saving vehicle.
Now let’s talk about stocks and shares ISAs.
Here are four features that make stocks and shares ISAs a good investment:
#1. Stocks and shares ISAs are a good investment because they are very tax efficient. You know that profit from investments is taxed, right? Well, if you keep your ISA contribution within the tax-free ISA limit (for 2017-2018 this has gone up to £20,000 in case you didn’t know) you won’t pay any tax. This is how ISAs are ‘tax-free’ (remember though that the Government has already taken its cut because you contribute after tax income).
#2. Stocks and shares ISAs are very flexible. This is most easily understood by imagining your investment as a delicious piece of chocolate and the ISA as the rapper around it. You can do two things:
Blend the chocolate and rap it in an ISA. This means that you can select the kind of investments that you can ‘rap’ in an ISA. There are some rules about what kind of investments are allowed but most stocks and shares play. (You are in full charge of selecting, rebalancing etc. your portfolio though it is in an ISA.)
Get a Lindt Dark Chocolate (or another variety you like) that is already rapped. This is the case when you start stocks and shares ISA with a specialised provider and they look after your portfolio for you. You still have to let them know some of your preferences. (An example here will be the Nutmeg ISA; or Scalable Capital ISA.)
#3. Stocks and shares ISAs can start you investing. Okay, to be more specific, the ‘off the shelf’ stocks and shares ISA could start you investing because they take away some of the responsibility for selecting stocks and, through this, some of the paralysing fear of making a mistake. These ISAs also make investing a ‘low entry’ activity since you don’t really need to know much about the technicalities of investing to dip in.
#4. Stocks and shares ISAs are ‘untouchable’. Do you find that you do this on going moving of money between your savings account and your current account? (For my readers in the US ‘checking’ account.) So do I. And do you know why I do it? Because I can always replace the money in my savings account. Guess what? ISAs are not like that. Whatever happens you cannot put in it more than the yearly amount (tax free). As a result, I’ve never ever taken a single penny out of my ISA. This is why I say that ISAs are ‘untouchable’ (and this is exactly as it should be).
Four rules to select the ISA for you
Now that I hope to have convinced you that ISAs are a good investment, particularly stocks and shares ISAs, let me tell you the four things I believe you should consider to select the one for you.
These are not something that I’ve plucked out of thin air. Quite the reverse; these are the four rules that according to Tony Roberts (in his book Unshakable) ensure that our investments are sound without being overly conservative.
Rule 1: Risk awareness or what is the potential loss?
Before you go and open a stocks and shares ISA (never mind the provider) you have to be aware that it is extremely unlikely it will only make profits. There will be times when the value of your ISA (your investment) will go down.
You also need to be aware that I’m not talking about your ISA going a little bit down. Research shows that at least once per year there are dips of 10% or more. Scary stuff, uh?
Well, not really. Despite these steep drops most years the stock market recovers and finishes up (there are very few exceptions).
Apart from that, roughly every three-four years we experience what is known as ‘bear’ market. This is when the stock market drops by 40% or more. This is real scary…in the short run. Again, research shows that the market always recovers and over-recovers; but it may take couple of years or so.
Your ISA doesn’t have to behave so erratically but this will depend some of the things we’ll discuss later. What is important is that you know that dips are normal so that you can ‘sit them out’. The worse thing for you and your ISA would be to pull out of it during a dip.
Rule 2: Profit awareness or what is the potential return?
Profit awareness when selecting an ISA is important but not that easy to judge. One thing you could do – when opening an “off the shelf” stocks and shares ISA – is to look at the returns that the provider has achieved historically.
Not perfect but still something.
Rule 3: Tax/fee awareness or what tax and charges you have to pay?
Taxes and fees can obliterate your earned interest; when compounded it gets really scary.
When you select the ISA for you, please make sure that you understand all fees and taxes you’d incur. Remember when I told you that one of the best things about ISAs, is that they are tax-free?
True. You still need to watch these fees. Some managed ISAs can have rather steep fees and even digital wealth managers divide their fees in several categories.
Remember: the lower the fee, the more likely it is that your ISA is a good investment.
Rule 4: Diversity awareness or how diversified is your ISA?
Any investor, even a beginner, knows that diversification reduces risk (there are caveats but we won’t get into these now).
When selecting an ISA you should make sure that it is diversified across:
Financial instruments: your ISA is a portfolio that can contain equities, bonds, real estate funds, commodities and cash. Usually the proportions would depend on your risk tolerance and the type of market.
Industrial sectors. Having a stocks and shares portfolio of companies from one sector is risky.
Location. Experience shows that the stock market rarely collapses globally at the same time. This means that if you own only UK companies (or US companies) you are exposed to rather severe drops in value. Owning shares in companies in different countries can lower the drop substantially.
The ideal stocks and shares ISA formula:
Ideal ISA = (Relatively) low risk + high (potential) returns + low fees + high diversity
I have to tell you, friends, that my Nutmeg stocks and shares ISA seems to be ideal; particularly given that it is also very low maintenance because it is fully managed by the Nutmeg team.
How does you ISA score on the ideal ISA formula? (If your ISA doesn’t match the ideal formula it may be time for you to start looking around.)
Editor’s note: This is The Money Principle interview with Adam French, founder and CEO of Scalable Capital. Scalable Capital is an online wealth manager and has been in the news lately as the only European start-up included by CNBC in the list of the top 25 in the world. You’ll learn what this online wealth manager is, what it does and how it is different from other online wealth managers.
Maria: Hello, Adam, and let me say first how pleased I am to have you on The Money Principle.
Adam: Thank you very much for having me, Maria.
Maria: My pleasure. Adam, you are the CEO of Scalable Capital. Could you please tell my readers what is Scalable Capital and what does it do?
Adam: Yes sure. Scalable capital is well… we call ourselves a digital wealth manager. What we essentially do is, we provide investment management but digitally: online and through our mobile apps.
We do this for UK investors but also for European investors; we have a regulated entity in Germany. We are one of the few players in the market that operate cross-border and we currently have UK clients and we also have German clients.
What we’re looking to do is to build long-term globally diversified portfolios for our clients so that they can really build their wealth for the future. That is in essence what we are trying to do.
Maria: Adam, I’d like to ask you what is the unique value that scalable capital offers to investors?
Adam: What we are trying to do is to build a technology platform that not only makes the investment journey more convenient and more accessible; you know, having smooth customer journey and having low entry point, we are using technology to improve the investment methodology itself.
Maria: One of the things I’m trying to do on The Money Principle is to encourage more people to invest and particularly women. There is a problem with women and investing; as I put it when we invest we rock but unfortunately very few women invest. How easy, would you say, it is for a beginner to open an account on Scalable Capital?
Adam: I totally believe in what you’re trying to do the because if you look at the data there is a big problem in trying to get women to invest and we will hopefully form a part of the solution to this matter.
Yes, it is easy to open an account on Scalable Capital.
We have a minimum investment of £10,000 which is a hurdle that you will have to reach. We need this money because of the way in which our algorithm for calculating risk works; we need £10,000 for this to work robustly. But the onboarding is very simple. (Note: ‘onboarding’ translates as ‘opening an account’)
Look, investing is complicated and modelling it is complicated as well. But at the end of the day we are doing everything for you. This is very similar to buying a car. When you buy a car, you don’t understand fully how it works but you trust that it will; and if something goes wrong with the car you go and see a mechanic to get it fixed.
People need to think the same way about their finances. The markets are very complicated so they have to outsource investing to someone who is doing something very smart in terms of modelling the markets.
Opening an account on Scalable Capital is very straightforward. At the beginning, there is a questionnaire that guides you to decide on the risk categories that are most appropriate for you. Our clients can get on board within 15 minutes. We provide a lot of information on the way to help people decide whether this is something for them.
Obviously, there’s the website that uses building blocks that start simple but then get into the detail if people are interested in the detail.
We also host regular webinars where people can ask anything and during which I try to present a bit about the company and also a bit about our methodology. We host investment seminars and if you go to the website there is a banner at the top which you can use to get on one of those.
You can also come and meet the team in person. You see, computers are used to do the things that humans are not very good at; mainly number-crunching and removing emotion. We also have a team of 45 people who provide client services, monitor methodology etc. There are real people here and I believe that it should be made clear that it is a digital proposition but this doesn’t mean that there are no people behind it.
Maria: Adam, I may as well tell you that I’m a great admirer of Nutmeg. I have been investing with them since the moment they started. Could you tell my readers what are the main differences between Scalable Capital and Nutmeg?
Adam: I have a lot of respect for Nutmeg and I know the team there. We are different in one main aspect, that we have already covered a little bit, which is the way in which we invest money.
We take risks targeted approach. By focusing on risk, and particularly downside risk, by focusing on the amount you could lose in a certain year and then dynamically changing your allocation to make sure that the risk remains constant we are trying to keep you invested for as long as possible so you can sleep better at night.
The idea of using risk targeted approach, as compared to fixed allocation portfolio or even a human who is making buying and selling decisions, is what really sets us apart from everybody.
When it comes to Nutmeg we’re both low cost, we are both convenient, we both have apps; you know, we are both trying to do good things. I think it is the investment methodology that really differentiates us from each other.
Maria: Adam, I may as well tell you that I’ve opened an account with Scalable Capital and my £10,000 is moving in as we speak. I intend to have a little race and pitch you against Nutmeg. Who would you put your money on: Scalable Capital or Nutmeg?
Adam: This is a loaded question, I think. Still it is an interesting one; I mean nobody is doing this right now. As I said before nobody is looking under the hood. A lot of people compare services, you know, what does it look like, what does it feel like but no one is really looking at what they’re doing. What you are proposing is one way to do that.
I would actually add third instrument into the race: I will do something like a FTSE 100 tracker and compare the three services. Where, I think, you’ll see the difference is…
You see, it is very hard to compare performance over short periods of time because it can take years for the benefits of a particular investment strategy to show themselves against another strategy.
For example, in an upmarket when you invested hundred percent in equities you will do very, very well. But in a downmarket it will obviously do terribly. This is when the risk control strategy comes into its own because in a downmarket you have more protection and it keeps you in the market for longer.
To compare the performance of different investment instruments you will have to go through a full investment cycle.
What is easier for me than trying to predict what will happen in the future, which is difficult for me to predict with certainty, is to have a look at the data. So, using the data that we have, running all the simulations that we have, I am a big fan of the risk targeted approach. Because one it shows versus passive and active investment management strategies that it can outperform them and also from emotional point of view it keeps you, as the end investor, invested for longer.
I like to back the data so that is where my position will be.
Maria: Okay. So, you’re betting on Scalable Capital and I’ll let you know what the result of the race is in about a year.
Adam: Perfect. Sounds like a great idea.
Maria: My final question is: if you were to give one piece of advice to beginner investors what would it be?
Adam: I think it will be start early. You know, the power of compounding is one of the most powerful financial concepts in the world. Getting interest, dividends and income streams from investments and letting it compound really helps.
The flipside of this is obviously if you are in debt which is compounding against you because you have to pay interest on it.
My biggest advice would be: if you have debt pay it off. If you have the opportunity to start saving, start now.
Because, at the end of the day, and this is what people forget, investing is like buying your future self a present. You are not buying something now but in the future, you can buy something nicer. Hopefully it is not buying something nicer, it is getting a great retirement and a great life.
Start early, I think, would be my key advice.
Maria: Adam, thank you so much for coming on The Money Principle.
Editor’s note: Tonight I give you an article on dividend growth investing. Dividend growth investing is the kind of investing I’m yet to learn more about and experiment with. This is why, this post is written by Lewys Thomas who by day is studying for his university degree and by night blogs about dividend investing on his blog FrugalStudent.co.uk. Hope you find this blog post helpful.
Interest rates are rock bottom – The Bank of England cut them another 0.25% because of the uncertainty around Brexit. Banks are slashing the interest rates they are paying customers with the popular Club Lloyds account and Santander 123 account reducing the interest they pay.
Today you have a few choices:
Leave your money in your account and watch it get eroded by inflation; or
Give peer-to-peer lending a try.
With peer to peer lending you could get anything between 2.8 – 7% a year in interest on your money. My problem with peer-to-peer lending was that I was investing in smaller, very risky companies. Sure, RateSetter and Zopa offer fixed rates backed up by solid ‘safeguard funds’ that protect you from bad debts but locking up for 4.2% for 5 years or earning just 2.8%-3.9% for 1years didn’t really appeal to me.
I’m not knocking Peer to Peer lending – it is a good way for people to make a modest return on their money. If you’re interested you can explore the main options below. Just remember that peer-to-peer lending isn’t covered by the FSCS and there’s no ISA option at the time of writing.
Right, since peer-to-peer lending didn’t appeal to me, so what did I do with my cash?
There’s another option that is less well known and needs a higher level of knowledge and understanding; it can also bring decent return.
I present to you
Dividend growth investing
Now, many people share a certain perception of the stock market. They imagine a floor full of screaming traders and the possibility of huge gains and even larger losses. This is the world of complex charts and big earners, right?
Guess what? This is not how it works, really. There are no longer over-excited traders, not that we can see anyway. In fact, today investing in the stock market is relatively silent and solitary activity: it is between you and the internet platform you use to buy and sell shares.
Buying shares, and making profit from it, is always about buying a small part of a very high quality company. There are two main ways to make profit known as value investing and dividend growth investing. In the former case you make money only from the increase in the value of the company, in the latter you make money also through the share of the profit that this company awards its shareholders, or dividend.
These payments, or dividends, are the seeds of dividend growth investing.
Now some of you may be asking ‘What’s a dividend?’
Simply put a dividend is a company’s way of rewarding you for owning their shares.
For example, I own shares in McDonald’s. For every share, I own they pay me close to £4 (depending on currency exchange) dividend. So owning 10 shares would pay a yearly dividend of around £40.
How do you know what to expect? You can check the percent of ‘interest’ a company pays by taking a look at its Dividend Yield. For example, investing £100 (less fees) into a stock that has a 3% dividend yield, means you’ll receive £3 a year in dividends.
The formula for dividend yield is:
Dividend per share/Price per share
Let’s take a look at a real life example!
By going over to Hargreaves Lansdown’s website and searching for ‘Lloyds Banking Group’ in the top right search bar we get the information below:
Highlighted in red here is Lloyds Banking Group’s dividend yield. A 3.45% yield means that £100 invested in Lloyds would pay you £3.45 yearly.
Not that complicated right?
Ok, so now that we understand what dividends are we need to go a step further to understand what dividend growth investing is.
Quite simply, dividend growth investing is investing in dividend paying stocks for a return. I’m a Dividend Growth Investor which means that I buy dividend paying stock in companies that have very long history of increasing their dividend payments. This tells me that pay-out is relatively reliable. Not only that, but as these companies consistently raise their dividend I can expect that my pay-out will rise too!
Look, for example, at Johnson and Johnson’s dividend history.
We can see clearly that Johnson and Johnson has increased its dividend payment, for the last 22 years; were we to take this further back in history, we’ll see that Johnson and Johnson has in fact grown its dividend for the past 54 years! Imagine the power of those increases and what will happen if you reinvest the dividend over just 30 years.
Now, I know that Maria has written an excellent article on ‘the myth’ of compound interest but I do want to show the other side of the coin on this issue. Maria is right – compound interest is somewhat overrated. People usually get the maths wrong and overestimate their future returns.
Nevertheless, compound interest remains a powerful tool if time is on your side and you combine compound interest with yearly increases in this ‘interest’ through dividend increases. Here’s how compound interest works with dividend growth stocks.
It is also worth remembering that you can get up to £5,000 worth of dividends TAX FREE and that you can invest in dividend stocks through an ISA which means you are not going to pay tax on your dividends and on capital gains.
My investing style goes beyond dividend growth investing but I’m trying to keep things simple here. The important point is that my net-worth has gone from zero to over £13,000 invested in the market. I also have a steady, although still small, stream of dividend income.
Dividend growth investing isn’t going to make you rich overnight. It takes patience and perseverance. But a 3% return from dividend payments sounds a lot better than most bank accounts offer right now – and 3.3% the next year sounds even better. Re-invest your dividend payments for long enough and compound interest will start working its magic.
Have you fallen in love with dividend growth investing yet?
I believe it’s wrong to live with the worry about the next debt payment, about losing your house, your job or whether you’d have dignity in old age. So I’ve dedicated myself to teaching people in financial trouble how to build sustainable wealth.