In Keren-Jo Thomas’ thirty years of working with clients from all backgrounds and with different levels of wealth, she has only come across three different types of people:
1. Those who do not have enough money – their bucket is going to run out.
2. Those who have too much money – their bucket is going to overflow.
3. Those who have just the right amount of money.
Do you know which you are?
Until you have a clear understanding of what having enough looks like to you, it is hard to know what to do with your money. Can you afford to have that special meal out or trip of a lifetime? Or do you need to save or invest more? How much risk do you need to take to achieve financial security? How many more years will you need to work for before you retire?
Once you know the answers to these questions, you can work on your financial strategy. A good financial planner will help you to understand your current position and explain the options for moving forward.
There are six lessons we can learn from history that will help to bring us financial security:
Starting young gives your money plenty of time to grow. If it’s too late to start young, start today.
If earnings are reinvested, returns grow at a faster rate.
When inflation runs higher than your interest rate, the value of your cash is eroded.
If you invest in the stock market, the value of your investments will fluctuate. With a high-risk strategy, those fluctuations – both up and down – could be significant. With a low-risk strategy, the returns are likely to be lower overall, and the fluctuations are usually smaller.
If we look back over history, there have always been market drops, but they tend to correct quickly to reduce the loss. This is the nature of stock markets.
We can manage the risk of market drops through diversification and buying more when markets are low, as explained in the final two lessons below.
5. Diversification, diversification, diversification
Diversification simply means that you don’t have all your eggs in one basket. It minimises risk while maximising exposure to gains. It is more important than ever to diversify your investments because the markets are more susceptible than ever to geographical events. The good news is that it is easier than ever to diversify because there is a wider range of assets available.
There are three main ways in which you can diversify your investment portfolio:
1. Holding a variety of asset classes. For example, holding a mixture of company shares, government and corporate bonds, property, alternatives such as precious metals or collectables, and cash.
2. Investing in a range of geographical areas. For example, investing in a mixture of your home country, developed markets and emerging economies.
3. Investing in a range of sectors. If one sector drops, then another might still be growing. You can look for sectors with a low correlation, i.e. they tend to rise and drop independently of each other, or simply have a wide range to reduce the risk of them all dropping simultaneously.
6. Keep your emotions in check
This may be sixth on our list, but emotions create the biggest barrier to successful investing that Keren sees with her clients, particularly women.
When we let our emotions get the better of us, they can lead us to:
Delay investing because we are waiting for the ‘right time’.
Invest when the market is doing well. This gives us more confidence in what we are buying, but we will be buying when prices are high.
Sell when the market is doing badly. We lose confidence in the market, so we sell our holdings. This is when prices are low, so returns will be poor – or possibly negative.
Invest too little – or sometimes not at all - for fear of losing money.
Only buy shares in companies we know and are confident about, rather than having a diverse range of investments.
When it comes to investing, our emotions are our worst enemy.
An alternative investment strategy that has been successful for decades is known as dollar-cost averaging. When you invest the same amount each month, regardless of what is happening in the market, you end up buying more shares when prices are low and fewer shares when prices are high.
In other words, you buy more when it costs less, which gives you a better return overall. If you invest monthly, you eliminate your chances of investing at the wrong moment.
Using this strategy takes the emotion out of investing. There’s no need to try to second-guess the market, and there’s no need to worry about whether it is doing well or badly because you benefit either way.
Following this strategy means that you can go through your life knowing that
You are continuously saving money
You are constantly investing
And with all of that, you are working towards financial security
While also planning for your retirement.
In short, with regular investing, you can sleep better at night and have more confidence in what is yet to come in your life.
What matters most is to get started now and implement the steps you need to invest automatically, regardless of whether the market is high or low.
A word of advice
Do keep an eye on your investments, but an annual review is all that is necessary to make sure that you are on track. There is no need to keep looking for valuation updates. And there is certainly no need to check on your net worth when the markets have just dropped – that would risk letting your emotions get involved.
When it comes to retirement, please remember that your investments will need to last you on average for 25-30 years. This means that you still need to think like a long-term investor. There is no need to switch everything into cash, and you still need to remain wary of splashing out on luxury items unless you have more than enough. Either of these actions at retirement could mean that for the rest of your life, you will need to adjust to a lower level of lifestyle than you had intended. Remember, it is all about knowing how much is enough for you and making sure that you reach and maintain that financial position.
Please also remember that this blog does not constitute financial advice. We (Julia Goodfellow-Smith and Keren-Jo Thomas) are merely providing information that we think you will find useful. If you need advice, please arrange to speak to a qualified financial planner. If you are in Switzerland, Keren would be pleased to help. You can contact her at kerenjo@kerenjothomas.com. If you are in the UK, the Financial Conduct Authority provides advice on how to find a financial advisor here.
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