investing

In my previous blog, ‘Becoming a Rich Dad’, I talked about how one of the actions I was taking, after reading Rich Dad Poor Dad, was to invest our money in order to help grow our assets over time. Since writing that blog I have read a really good book about investing called ‘The Long and Short of It‘ by John Kay. So now I am going to put this book into action!

This isn’t a typical ‘how to invest’ book as it doesn’t focus on how to pick individual stocks and read a company’s balance sheet. Instead, it helps avoid common mistakes people make when they invest. In no particular order the three things to avoid are:

1- Paying too much in fees – as you don’t get rewarded for them over the long term

2- Portfolio too concentrated – putting too many eggs in one basket i.e. you can lose a lot if those few ‘bets’ go wrong

3- Trying to time the market – most people change their portfolio too often (which costs money) and end up losing money by trying to switch investments based on changes in market conditions.

Taking these three learning points from the book, I’m going to make sure I don’t make the same mistakes as other people. Below is what we have done with our investments.

 

1- Ensure we don’t pay too much in fees

Opened an online investment account

I ended up opening an account with Interactive Investor (a UK firm, www.iii.co.uk) as they are cheap and provide access to cheap funds. There are of course lots of others to choose from.

Invested in index tracking funds

We invested in an index tracking equity fund.  These are funds that doesn’t try and beat the market, just follow the market in a very low cost manner. As the book highlights, most funds try and beat the market and charge you a lot for doing so. If they do poorly, the fund manager still gets their fees. It is very hard for a fund to outperform the market over the long-term and most just follow the market as they need to manage their risk (i.e. their reputation).

The index tracking funds we invest in have fees of less than 0.15% pa, which means we are about 0.85% pa better off than most people from the start as they are paying 1% pa in fees. I’m sure there aren’t many personal financial advisors that would recommend an index tracking funds, as they wouldn’t get too much commission (read more on my thoughts on this point in my blog ‘What is my issue with financial advisors?‘)

 

2- Made sure we are not too concentrated

Investing in the stock market

I found a fund which looks to track the global equity market index. I feel this is appropriate for us as it does what the books says  and diversifies our risk across lots of countries (we don’t want to be exposed to a fall in any particular market).  It also reduces our exposure to any particular company as it invests in thousands of different companies. This does mean that we are unlikely to see super high returns in the short term but that’s ok. We are long-term investors so would be happy with good returns over a long timeframe. I feel in this day and age, too many people are looking for instant gratification. There is too much focus on the short term. Contact me here to let me know if you are interested in this topic and i’ll do a blog on short term gratification.

We haven’t invested in specific companies. I feel that if 75% of professional investors can’t beat the market by investing in specific companies, how can I!?!

Investing in the bond market

We also invested in a global bond market index, although, only a relatively small amount as we want to be taking risk to hopefully make a greater return given our long time horizon. Again, we invested in an index tracking fund to save on fees.

Other investments

The book also talks about property investments. We already own a property so I feel that we have good diversification from holding that along side the stock and bond investments above. Then we hold some cash for every day living and emergencies.

 

3- Do not attempt to ‘time the market’

Monthly investments

In the book, it talked about how retail investors (you and me) too often try to copy the market. This generally means investing when things have been going up. If the market has been going up it means that it is expensive so arguably you shouldn’t buy. As a result retail investors lose money as they pay to switch their money and generally put their money in a market that is about to lose money.

To avoid this issue, the book talks about ‘dollar cost averaging’. My understanding from this is that you are better off investing regularly rather than at any particular point in time. So we have set up our account to transfer and invest money each month. I’m sure there are other books which go into this in more detail.  I’ll let you know once I’ve found them!

 

I’m going to read more books related to investing :

Whilst I rate ‘The Long and Short of it‘ highly, there are still some bits that I would like more information on. Therefore, i’m going to read a few more books. In particular, I’m keen to lean more about taking a contrary view when investing. Especially as from time to time we have extra money to invest (from our bonuses) and want to invest this sooner rather than later. At the moment, I wouldn’t feel comfortable putting all that into my current investments.  This is because I don’t have a strong enough view that now is the right time to do so.

Also, I’m keen to see what other investment books say as there are so many. Are they all saying the same thing?

There you have it – I’ve taken action based on another book that I’ve read. I’m going to update my monthly tracking spreadsheet to capture our investments over time. We are also going to follow this when you invest our kids money. Investing from an early age can make a big difference to them. See more on the topic of kids in my blog ‘How to make your kids rich?

 

Disclaimer: I’m not a personal financial advisor. The actions I have taken are for my own purposes and are using the knowledge I have gained from reading books. Please do not take what I have done above as a direct recommendation for what you should do.

I do, however, recommend that you read the book ‘The Long and Short of it‘ before you invest. This book provides a lot of information and can help you make your own decisions.  If not, at least put you in a knowledgeable position when you seek advice.

The long and short of investing to become a ‘Rich Dad’

2 thoughts on “The long and short of investing to become a ‘Rich Dad’

  • March 26, 2017 at 4:31 pm
    Permalink

    What is your view on when to sell your existing shares? Do you subscribe to the theory of percentage selling, i.e. If a share falls by 10% sell or if it rises by 10% sell?
    Re. Your monthly buying plan, I understand the concept, but would it not be better, ( time permitting) to make a purchase call, taking into account the reasons for the share price movement?

    Good blog.

    • March 27, 2017 at 9:56 am
      Permalink

      Hi – Thanks for the comment! After reading ‘Unshakeable’ by Tony Robbins, I can confidently say that I don’t subscribe to the theory of percentage selling. If markets fall then I’m going to be buying, not selling. See more in my blog about this topic here.

      Market timing is a very interesting topic. At the moment, there is a lot of talk about digital currencies (Bitcoin, for example) which has seen material growth. A few people I know are investing in it as it is going to be the ‘next big thing’ and make them loads of money. I ask them if they have an exit plan or are they going to keep it for a long time. The answer to both of these seems to be ‘No’ (they haven’t thought about that yet). If you are going to try and time the markets – good luck and make sure you have an ‘exit plan’ (i.e. a plan to sell at a certain price and be happy with it regardless of what happens thereafter).

      Always happy to hear what people think about this topic.

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