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Money Rules – Get These Right First.

This money stuff can be a royal pain the backside if not managed properly. And like anything else in your life, if it’s not managed it soon turns into a bit of a mess. With that in mind I thought I hand out a couple of tips – that make more sense in 2020 than they ever did.  

The good news is, they have been around for years. Aeons in fact. They have been around for so long most of the financial industry has forgotten them.  

So not for the first time.  

Spend less than you earn and invest the rest. Simply keep an eye on your expenses, monitor and review. Spend mindfully – think about what you are about to do. Apply the sound mind test – do I really need [insert item] today, can it wait? If there is any doubt, make a note in your journal (you do have one, right?) And see if that [item] is still needed in a week or so’s time. 

You can only ever reduce your spending down to an x figure. Whatever your x is will depend on your lifestyle and your spending patterns. But you can improve your income exponentially to whatever amount you want it to be. Your leverage, your best option is to reduce spending or at least review spending but focus on improving income in whatever way you can. 

When considering how you should put your money to work, always opt for something you understand, and if you don’t understand something then Google is always your friend. Also, if you can’t explain it in full to your elderly mother or to a seven-year-old – it’s probably bollocks. Like Bitcoin or derivatives.  

Invest only for income. When you are looking around to make the most of your money, you will see things like – annual interest/monthly interest – always go for monthly. You will see things like income/growth funds – it’s always income.  

You will see charges compared – investment charges are one of the only things you can control. We have no idea about the future investment performance of x or y investment – it is simply an unknown.  Which means there are just two things you can control… 

Charges – normally expressed as an annual fee, annual charge. Total Expense Ratio will give you a guide, that should be accurate.  But remember it makes assumptions about future trading expenses and can be wildly inaccurate. You may also see ‘ocf’ which is the ongoing charge %, you may also have ongoing fees levied by the provider, adviser. All of which eat into your investment.  

Examples of this are TER of 1.8% Adviser fee .5% making a total of 2.3% per annum but normally deducted monthly. Over a ten year period that’s at least 23% of your investment being dragged along a hedge.  

Note especially that if you invest in a pension or an individual savings account you may have additional product fees of .25% (often more) making your annual costs 2.55% of your fund – over ten years more than a quarter of your fund.  Charges are important.  

Timing The Market – Buy on the Dips. So you are in the market for apples. Not sure if you should buy them now or wait. Investing in anything is a decision you make, when you are ready – unless you really want to eat apples now in which case the market, not you decides the price.  Let’s accept you are not in a hurry.  

At the moment apples are £2.40 per kilo and if you buy (invest now) your £100 investment will buy (100/2.40) or 41.66kg when you come to sell these later on at £2.60 per kilo your sale proceeds are £108.33 (and eight percent return) of course less the costs of storing (managing) the apples. 

Still with me.  

Now, the market for apples fluctuates over the year and it’s possible that you can buy them for as low as £1.90 per kilo or as high as £2.95kg. Key is, you and I don’t really know when the price will be right, but we know that often the price of apples dips and with some great storage facilities available you can be sure that buying now when the price is a little lower makes sense. 

Going back to the £2.40kg price and your £100 investment. You have a Google alert set up and you are notified that the “market in apples dropped yesterday” and you login into your online platform and see that today, apples are priced at £2.30kg and you decide to invest £100 you now own 43.47kg of nice juicy apples.  

A few weeks later the price fluctuates up and down.  A solid fall in the price of apples means that you invest a further £100 at 2.10 per kilo (47.61kg). You now own 91.08kg.  

You decide to hold on to the apples in the value rises, later on in the year a Google alert tells you that the apple price is up and they are now at £2.66 per kilo and your investment is worth or £242.27. 

Investing (buying) when markets have fallen is one of the easiest ways to invest and secure a better return on your investment. You never have to invest today, why would you when you know for sure that the market price fluctuates.  

Asset Allocation you and I have no idea which market sector, which share, which area of business is going to do well this year, sure we can read the news and try and make our own decision, to try an ‘call the market’ as it were. Problem is we just don’t know enough – even the experts get it wrong more often than not.  

It is often said that looking for the right share, the right investment is like looking for the needle in a haystack. With that in mind, why not buy the whole haystack?  

In investment terms, the entire haystack is a called a ‘tracker fund’ or an ‘index ETF’ (exchange-traded fund) that effectively buys an entire market or index which includes all of the needles in the haystack.