2. CONTENTS
1. Shock Warning 2
2. Income is not wealth 3
3. No debt is a good debt 4
4. Do things differently 8
5. Find out what your boss earns 9
6. Make sure you love what you do for a living 10
7. Recognise the value of time 11
8. Ideas are the new hard graft
9. Invest from your surplus 13
10. Get a good broker 15
11. Be tax smart 16
12. Invest in money-makers, not flashy pipe dreams 17
13. Diversify, Diversify, Diversify 18
14. 19
15. Invest for income 20
16. Understand how to recover from losses 25
17. Avoid Investment/Trading Seminar Scams 27
18. Understand that conflicting advice may all be correct 29
19. Investing on news 30
20. Understand the jargon and the charts 31
21. Do not under-estimate your life-expectancy 32
22. -fashioned saving 32
23. Enjoy without addiction 33
24. All bulletin boards are positive 34
25. Aim for multiple income streams 35
26. You never know enough 36
27. 37
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3. SHOCK WARNING
This Guide is not going to make you rich overnight (at least not tonight,
unless you are extremely lucky).
This guide is not for those who are hoping for a get rich quick
because, although it is unfashionable to say it there is not really any
such thing.
No, this guide is different. You have not just wasted money on yet
another scheme or system which will ultimately fail despite the claims
made in the advertising.
What is it then?
Well this is a guide to help you accumulate wealth steadily and sensibly.
You may indeed have great rises in financial wealth in short periods of
time. You may also have to take some losses. That is all part and parcel
of this experience. What we are aiming for is that in the long term, your
gains will outweigh your losses by some considerable distance. You should
also avoid some of the mistakes that many people make.
In fact, you should be able to avoid making the mistakes that MOST
people make.
In the wealth building game that is certainly true. Those who have the
knowledge are able to capitalise on how the system works. The rest are
simply going about their daily lives hoping that somehow things will be
different next year, without actually doing anything about it.
Well now is your chance to do something about it!
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4. Secret Number 1
Income is not wealth
Your biggest barrier to attaining wealth is yourself. It is no use blaming
everything and everybody else if you are actually living your life in a way
which is not helping you to build your wealth.
Ultimately, you will only become wealthy if you spend less than you make
each month. Most people think that you need to have an enormously high
monthly income to be considered wealthy. Actually there are many
people who have lower level incomes but act more sensibly with their
money and so overall are wealthier. Any fool can get a high income but
the same fool will spend it all so that there is nothing left when that
income ceases.
Please understand Income is NOT wealth.
In financial terms (for there are other types of wealth), your wealth is the
part of your net worth that makes you money (either income or capital
growth) without you needing to work hard for it. So for example, whilst a
teacher may work hard each week to get their monthly salary, somebody
with a property portfolio can be paid each week in terms of rental and
capital gain on their houses, for doing relatively little. If they were to add
to this some high dividend paying stocks, and maybe some regular
returns on sales of a book they wrote some time ago, you can see how
they would be considered wealthier than the teacher. They could actually
continue to live in the manner they have become accustomed for as long
as their portfolio paid out which would normally be longer than a normal
salary. Even better, they would not have worked themselves into an early
grave in the process!
Ask yourself this question.
How long could you continue with your normal spending habits, if your
regular monthly pay were to be stopped? Your aim should be to make it
so that a regular monthly salary from an employer becomes a nice bonus!
- you will forever be bound by the lie that it takes a high
income to become wealthy, and it requires working all the hours in the
day and night to achieve that salary. Believe that - and financial
independence and security will always be just out of reach.
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5. Secret Number 2
Although most of us will go through life needing to borrow money at some
point or other, be it to ease cash flow by the use of a credit card, or by
taking out a mortgage on a family home the paying of interest will of
necessity mean that we have paid back much more than we borrowed.
This is a sure fire way to eat at your wealth. The more debt you take on,
the more difficult it will be to get out of it. It is like a drug, and it can
destroy you in the same way. Any debts you take on need to be targeted
and cleared as soon as possible Yes, even your mortgage.
What should I do first clear the debts or invest?
As I said, we all have some debts at some point in our lives. It may be
that we are still faced with a student loan after university. It may be that
we needed to take on a loan to buy a new car (more on that later), or it
without exception, we will have a mortgage. And then comes the
quandary: If all my money is pumped into paying off the debts, I will not
be doing any saving for a rainy day or for my life when I have retired.
Thankfully, this dilemma can be solved with a fairly simple calculation.
The answer depends on two variables:
1. How much interest you are paying on your debt, after tax.
2. How much interest you expect to earn on your investments, after tax.
Please note that there are two types of debt. At one side we have the
worst kind - very high-interest debt that comes from things like credit
cards and store cards. This kind of dead is lethal and should really be
avoided unless absolutely necessary. It should only really be used to aid
cash flow, and it should be paid off each and every month if at all
possible. The second kind of debt is the lower interest variety;; things like
the mortgage or student loan. Often, the interest on this kind of debt is
low enough that it may worth holding onto the debt for its full term.
The bottom line is:
If you can guarantee a higher after-tax return by investing than
the after-tax interest rate you would pay on your debt, you should
go ahead and invest. If not, you should clear the debt first.
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6. Here are some examples for you:
Example 1
Imagine you have a 30 year, £150,000 mortgage with a 4 percent rate. If
you expect to earn an after-tax return higher than 4% on your
investments (the odds are reasonable that you will if you have a long-
term view), then you should invest rather than pump additional funds into
the mortgage.
Example 2
Imagine you have a £10,000 credit card debt with a 22% interest rate.
You should only invest if you think you can earn a 22% after tax return
on your investments. The average return on the stock market has been
somewhere around 11-13%, so this seems a risky proposition. In this
case, it would be foolish to invest and you should instead work on clearing
the debt first.
KEY POINT:
You need to do what is best for building wealth long term. Many people
cannot see that paying off a debt is actually saving them more money
than they would be able to make any other way. Do the calculation and
work out what is best for you.
Credit Card Debt is Deadly
How to find the money get out of credit card debt
Many people struggle to pay more than the minimum balance off each
month, and as such, they never eat into the debt. Here are a few tips
about how to get rid of the most deadly debt of all. Until this has gone,
1. Do you have any investments you can use at this stage?
As you will have seen from the last calculation about whether to invest or
pay off the debt with credit cards it is always better to pay it off first.
Therefore, if you have money in savings accounts or invested in bonds or
stock, it is more than likely in your best interests to use that investment
to clear your debt at this stage. Remember, if your investment is not
inside an ISA, it is taxable. It is subject to capital gains tax and you will
pay tax on the dividends. As pointed out earlier, it is debateable whether
you will ever beat the 25-29% needed to make it worth keeping the
investment rather than paying off the debt first (even if it is inside an
ISA). Cash in the investment and use it to lower your debt.
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7. 2. Do you need all that stuff?
A life-laundry is a useful way of cutting down our debts. When was the
last time you read those books or rode that bike? Are you likely to use the
tent again? Why not sell it all on eBay or Amazon Marketplace. Making a
few hundred pounds at a car-boot sale could also help to cut down your
debt.
3. Ditch the subscription lifestyle
Many of us subscribe to Sky and to a daily newspaper, or a monthly
magazine. We also pay for extra insurance plans on our mobile phones
and electrical appliances. We love the fact that we can use 900 minutes of
talk time and 3000 texts, with unlimited data download on our mobile
plan. However, all this adds up and we need to decide whether we want
to become wealthy or not! When was the last time you exceeded the data
download of the mobile package below yours? What about the talk time?
TV? How often do you actually read the paper? Could you pick one up on
your way to work instead of having it delivered?
Small changes in your monthly subscriptions can actually save hundreds
of pounds which can be channelled to paying off debts.
4. pay for the brands wh
We are all suckers for advertising (otherwise companies would not invest
-
alternatives in the super-market. Fill up the car with fuel from the
supermarket rather than paying the premium price of the named brands.
Go to the local café rather than the big brand and big price COSTA or
STARBUCKS. All the money you save will help you to cut down on your
debt.
5. The Snowball effect
The idea behind getting rid of your debts is that once gone, you will have
more disposable income available to put towards your goal of becoming
wealthy. People often wonder whether they should attempt to target the
largest debts first, because they are accruing the most in terms of
interest. However, it is quite demoralising to see how little difference you
are making to a large debt. Meanwhile, your smaller debts are also
growing and you end up standing still. You should pay the minimum
balance on each debt, and channel all the extra money you have made by
following steps 1-4 above, into clearing the balance of the lowest debt.
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8. Once that debt has gone altogether, you take the money you were paying
to that and channel it onto the next largest debt. Now repeat the process
until you have only one debt left. All spare income can now be targeted at
removing the final debt. In effect, you have gradually increased the
amount of spare money simply by knocking off one debt at a time. This is
ffect.
Remember, even small amounts will make a difference. It only takes a
handful of snowflakes to make a snowball this will get the ball rolling.
And in the long run even a few pounds a week extra will save a
thousand pounds over the year on a credit card bill.
KEEP AT IT it is really worth it and will unlock all the other secrets in
this guide.
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9. Secret Number 3
Most people, believe it or not, will continue to do the same things that
they have always done and the same things that their parents have
always done even when they know it has not brought them success.
If you look at your parents, and discover that they worked extremely hard
all their life to earn a reasonable salary, and then had to cope with a
reduced income upon retirement do you want to be in the same boat?
If not, check yourself.
Are you doing anything differently?
Are you planning at the moment on relying on your company pension (or
even your state pension) to get you through your retirement years? Are
you hoping that things will just be alright? Well wise up. If their method
You have made a good start by buying this guide. This will help you to
think differently.
But remember, you will also need to DO things differently.
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10. Secret Number 4
OK So I said that income is not wealth. That is true. However, whilst
you are working on building your wealth you will be relying on your
income, and a high income is a much easier starting point.
Now whatever your line of work is, it is important to aim for a job in
which you can rise up the ranks. It is also important to recognise that
with each promotion, you should be getting a rise in pay. Now here is the
thing that most people simply do not consider:
much of a pay-rise?
You will find that in offices and schools all over the country people take on
new responsibility at work for what amounts to a token gesture more a
badge of honour than a pay-rise. People convince themselves that they
are doing it more for the experience! However, in other offices and
schools, people are doing the same jobs for much more money. The
reason for this is simple the Top Earner is on a great salary.
If the top man or woman has a very healthy salary, there is
more scope for those under that boss to be paid well.
If your boss earns £60,000 and his or her second in command earns
£50,000 why should you be offered much more than £40,000 for simply
running a department? Instead, apply to run a department at another
firm where the boss is on £150,000 and you should find that your salary
has risen in the same way.
take on the post of responsibility
-load. All it will do is drain
your time and patience, for little financial reward.
There are better ways of using that spare time to make money (more of
that later) instead of investing time in a company that will not invest its
cash in you.
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11. Secret Number 5
All over the developed world there are people who are in the rat race, and
It may well pay them handsomely, but it gives them no joy. This is a
sure-fire way to eat at your wealth.
People who hate their day-jobs end up spending all their money trying to
find ways of improving their lives and bringing some joy back in to an
otherwise dull and frustrating existence. This will ultimately leave nothing
left for the time it is most needed that is, when the job finally stops at
retirement and you are able to enjoy it. At this point, your lifestyle would
have to change because there are no funds left. The job has taken all the
best years away from you.
The best thing is to find a job you love and then you will be paid every
day for doing something you actually enjoy. In fact, it could be said that
you never actually work at all!
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12. Secret Number 6
Many people who strive to be wealthy have little understanding of the
value of time. They work all the hours under the sun in order to gain just
a few more pounds on the pay slip each month. However, they have
neglected to notice one important fact. They are not finding the time to
enjoy their income. In fact, they have no time to enjoy their income
because of the hours they are working!
You know you are truly wealthy when you have the ability to control your
time and use it as you see fit. You are only wealthy if you are able to
spend your time doing the things you really love doing. It may well be
that you do really love your job, and that is absolutely fine. The key thing
is to be able to have the freedom to do it when you want to and not do it
when you
the confidence that you will be able to continue to live in your current
house and with your current life-style. You need to be able to enjoy the
same holidays and eat the same kinds of foods.
If there is a need to cut-back and tighten the belt immediately, this will
mean that your free time is not as enjoyable as it could be.
Sadly, this is the situation most retired people find themselves in. Despite
working hard all their lives, their pension and investments simply do not
provide them with the lifestyle they had dreamed of.
Right now, then, you need to work smarter. Enjoy your life whilst you
can. Value your time.
Make your income work for you, rather than simply
working for your income.
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13. Secret Number 7
the new
Gone are the days of needing a trade in order to support yourself. Gone
are the days of the protestant work ethic, in which we are told to feel
Because of the internet, ideas and products can be presented and
marketed by every man woman and child on the planet (well-almost).
And yet, people still fall into the age-old trap of assuming that the only
way to live is to give up all their energy and time to a company in
exchange for being paid at the end of the month.
What you need to do, whilst doing your day-job, is to experiment on
finding your own marketable product. It could be something you make
and sell. It could be a service you offer. It could be something you buy
and sell on for a profit. Or, it could simply be the smart use of the pay
y
You get your pay each month what do you do with it then?
go back to my advice on how to free up some additional income.
What is left over will be enough for you to start a business. Yes, I am
absolutely serious. You can start a business on the internet for as little as
£5.00 a year it just takes the setting up of a website, and of course a
product. Now that is where you use your time and energy. Be creative.
What would YOU buy? What would your friends buy? What do YOU know
that others would be interested in? Which service would YOU pay for?
Give it a try. You only need to make a small amount of money to have
more than you have now. Once you have that small amount of money
coming in, you can put it to good use by investing it.
Money is like a seed. It will only grow if you plant it wisely.
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14. Secret Number 8
Building wealth takes time. You may make small amounts relatively
quickly, but using these amounts to make the serious money is where the
The way to lose money quickly is to invest from money you cannot afford
to lose. There are always losses in investing and if you invest money you
cannot afford to lose and subsequently lose it, so begins a downward
spiral of loss chasing. This is an emotional roller-coaster which eats away
at funds. Each new investment becomes more risky as an attempt to
recoup the previous losses, and wherever emotion is involved in investing
there is likely to be disaster.
All investment portfolios need to have a spread of different types of
. This way, if one area
(manufacturing, for example) is hit hard and drops in the market, your
bounce to compensate. I will show you how to create such a portfolio
later.
However, on each and every day, the markets move up and down. Three
out of four stocks will follow the direction of the market in the long term.
This means that if there is a big reason for the market to take a tumble,
the chances are your portfolio will also drop down. This is no use if you
were hoping to use some of this money to pay your weekly shopping and
food bills or mortgage.
You should be aware too of what is called the BID/OFFER spread (or
BID/ASK). This is essentially the difference between the asking price that
you have to pay to buy a share and the selling price that you will get if
you sell. At any fixed point, the selling price is always less than the
buying price. For this reason, as soon as you purchase some shares (and
assuming the price stays the same for a while) you will have lost money.
Factor in the stamp duty (Tax) you have to pay on your purchase and the
commission you have to pay your broker for carrying out the deal and you
will have lost even more on the deal. In fact, the price of the shares will
have to rise considerably, just for you to break even. As soon as you sell
the shares you will have to pay a commission charge and potentially some
capital gains tax too, so to really make money the rise has to have been
worthwhile.
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15. Trading too frequently (a temptation if you are desperate for the money)
is a sure-fire way to see your gains eaten up in bid/offer spread and
commission losses.
With this in mind, you should see that you simply cannot expect to make
money easily and quickly and it is therefore beyond stupid to invest
money that you need for other purposes like paying bills.
Only invest what you are prepared to lose
This is a psychological state of mind, but a very important one. Emotion
has no place in investing. Nobody is happy to see money go down the
drain. However, with investing, you simply have to be prepared to see it
course, is to win more than you lose, so that in the long term your
portfolio grows and your net wealth increases. It is simply a fact that you
will have to take some losses along the way.
So is it worth it?
Yes. The growth of money is exponential. By that, I mean that it grows at
a faster rate as the size of the sum increases. This is because of the
beauty of compounding.
Earning a 10% return on £10,000 is only going to get you £1,000 before
tax. However, 10% return on a £1,000,000 portfolio is £100,000. This is
naturally far more impressive, despite needing no more effort or work on
your part. Once this return is compounded every year, the larger sum will
grow at a considerably faster rate.
With compounding (assuming just a 10% return per year),
even £10,000 can turn into £44,402 over 15 years!
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16. Secret Number 9
Get a good broker
There are countless good brokers out there who can purchase and sell
your stock for you. They offer many different levels of service and you
need to decide what it is you want and need.
You can get a fully managed portfolio whereby you pay your broker a fee
and a percentage of your gains. They will discuss with you and advise any
major decisions to buy or sell and will then make the transactions for you.
This kind of service can be useful for people who do not want to make the
effort of getting their feet wet and doing the research themselves. It
tends to be for the more risk averse people. The problem with such a
scheme of course is the additional cost of the brokerage and the loss of
money in commission.
You can also go to brokers who will let you make all the decisions, and
will simply act as executors of your decisions. They will charge you a flat
fee per trade. Some will charge a quarterly or even monthly fee for the
privilege of having the account and there will often be an additional fee
- meaning that you have not made enough trades in the
month. These brokers can act by telephone and many now have platforms
where you can do it all yourself on-line.
Personally, I recommend the newest breed of broker the online
investment platform. There are some great deals out there and depending
on your trading frequency, you can get considerably lower execution fees
than with traditional telephone brokers. Some do not charge for the
account or have any inactivity fees. The best will have a portfolio
manager section on the website which enables you to see all your stock
holdings, and their current position in terms of price, profit and loss. You
can action buys and sells in real time, or as regular subscriptions. You can
choose to purchase (or sell) a set number of shares, or a set cash value.
I like to use the Interactive Investor platform (www.iii.co.uk) and I tell
you that without prejudice or any commission. As I said, there may be
better deals out there for you at any given stage, so do shop around.
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17. Secret Number 10
Most people know very little about their tax entitlements, possible reliefs,
and the ways in which some of their money can be allowed to grow tax
free.
to have my bins emptied, the roads mended, emergency services and the
like provided. I should pay my fair share. I even believe the wealthy
should pay more than those in relative poverty. That is only fair. But the
key thing here is that I should pay my FAIR share. I should not pay more
than that simply because I am unaware of the rules.
The wealthy know all about how to play the system to their advantage.
They are not cheating (well not the decent upright ones). They are doing
nothing illegal. It is simply that they are better informed.
So your first task is to investigate whether you are paying more in tax
than you should. You can do this in one of two ways. The easiest is to
book a tax accountant to come round and go through all your paperwork
and advise you. This will cost, however, an ly. The
other route is to go online to the government website for the Inland
Revenue and read all the help guides. Take your time. It is inertia that
prevents people doing this, and they end up paying thousands of pounds
more than they should every single year. Many do this for their whole
working career and never know about it.
The second thing is to make sure that you use your ISA allowance for
saving and investing. ISAs are tax free wrappers for your money. Any
capital gain inside the ISA wrapper is tax free. Any dividends paid as
income inside an ISA wrapper are (reduced tax) and income
tax is not charged. A little bit of advice on investing tax-efficiently from an
Independent Financial Advisor will go a long way.
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wealth grows at a faster rate, because you are not constantly giving it
away again in particular, you are not giving MORE than your fair share.
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18. Secret Number 11
makers not flashy pipe-
Too many people are wooed by the latest technological advance and
assume that because it is new it must be set to make millions. Well, just
occasionally, they are right. However, very often these technological ideas
fail. -
need or want and therefore do not have. If you invest in the company
that makes these things, your portfolio is likely to go down-hill fast.
Instead, you need to think about true-value. What do people really need?
Yes, the technology to listen to different music in every room in the house
all controlled from your phone sounds like a great idea and it may sell
most recession proof companies in the UK. It has achieved year on year
profits despite not being a trendy company with any new technology. And
what about refuse processing companies? These are very un-trendy but
are absolutely necessary and will ride out a recession happily.
Again I say keep emotion out of your investment decisions. Go for the
investment that is going to give you the best return on your money. Ask
yourself, is the product essential? Is the demand rock solid? Is the need
for this product going to continue? Is the company going to pay the
shareholders well?
right track.
Of course, it is worth taking a punt occasionally on a few new and trendy
companies hoping to create a new market. The returns can be
phenomenal when they come off. However, you must remember what I
said about a diversified portfolio. There should be a predominance of
regular companies in necessary sectors even if they are boring.
You will be interested to know that if you look at the careers of people
who can afford to send their children to independent education you are
are the children of a doctor. You are certainly more likely to find the
children of builders and plumbers than you are the children of cutting
edge technology developers.
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19. Secret Number 12
Not all investments are the same. Some are the kind that will grow
(hopefully rapidly) in terms of their capital value. Others are the kind that
are fairly static in terms of capital value, but pay a dividend (an income
per share).
You should invest in different types of company and in different markets
For example:
A Mining company and an Oil company
A Telecommunications company
Something in the Financial Services area like Insurance
A Biotech company (like a drug manufacturer)
You should also look to diversify in terms of growth and income. The
balance of this depends on your time of life. What I mean is - if you are
young you should favour growth. If you are nearing retirement you should
aim for income.
The companies that are likely to have the greatest growth are usually the
most risky in terms of the possible loss of the investment. For example, if
you invest in a speculative oil company you have two outcomes. Either
they will strike oil and your investment will go through the roof, or they
won t and it will gradually dwindle away to nothing until the company runs
out of money and goes bust. Always edge of the seat stuff! It is foolish to
have all your money in such companies, of course.
On the other hand, there are companies which over ten years may not
really change much in terms of their capital value. This means that you
are not going to lose on your investment (although nothing is absolutely
certain). If you choose wisely, you should be able to pick a company like
this which also treats its shareholders well by paying dividends. This is a
share of the profits. If you get it right, this kind of investing can be the
one which brings you an income for life.
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20. Secret Number 13
r
It is usually the case that private investors favour the country in which
they live in terms of their investment decisions. For some reason, people
tend to believe, for example, that because they themselves are British,
their money will perform better if invested in British companies. It is as
though they think they understand the business better and have some
input.
This is dangerous thinking though. If all your investments are in one
country, then the basic economic performance of that country will
influence the growth of your portfolio. Government decisions on interest
rates or on corporation tax rules (for example) could have a massive
effect on your whole investment, rather than just a part of it.
Just as it is important to diversify into different types of stock,
it is also important to spread your investments into different
countries.
You can do this either by going through a broker who allows you to
purchase stock in a foreign exchange directly, or by investing in funds
which focus in overseas markets. Once this psychological barrier has been
crossed, you will find that you are fishing for investments in the ocean
rather than a small lake. There are far more opportunities to find some
bigger fish!
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21. Secret Number 14
for income
This secret is dynamite. What many investors are simply not aware of
is that investing for income can actually also lead to capital growth in two
different ways, as I will explain. Therefore, it is actually a very sensible
idea to invest for income almost entirely, and leave only a small amount
of your portfolio for speculative growth.
Time and time again, this has been shown to provide a lower risk
investment, which actually grown in the longer term. You will not have
the white-knuckle ride or the overnight riches. But nor will you have the
obvious and real danger of losing the lot! You will have the possibility of
financial freedom and true wealth that you dream of.
How can these companies grow?
Well putting it bluntly, companies that are able to spend some of their
profits on the share-holders are by and large the companies that are
doing well enough to have no financial worries. This means that they are
generally safer bets. This means that over the long term, they will grow
at least in line with the stock-market (an average of 12 13%) and often
better. In addition to this, you have the dividend payments and using
them wisely will make you even more money.
Dividend Paying Stocks
You need to check what is called the Dividend Yield of a stock. Generally,
if it is paying upwards of 4%, this is considered good. If you can get over
6% this is considered excellent. However, some companies seem to pay
out exceptional dividends (at about 12%) but on closer inspection this is
seen to be unsustainable for the growth of the business.
The best companies will only give 40-50% of the profit back to
shareholders in dividends. The rest is reinvested into the company to
ensure growth. Companies which give much higher dividends are in
danger of being excellent payers for a few years and then either going
bust or having to stop the dividend altogether. Neither of these is good
for an investor.
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22. Remember I spoke of how compounding interest gives ever increasing
Imagine you own 1000 shares in a company, and for the sake of ease,
the share price is £1.00. That company pays you 10 pence per share as a
dividend. Obviously, you would earn £100.00 from this dividend issue.
Now you have a choice, you can spend that money on a treat, rather like
an unexpected bonus (choice 1). Or, you can reinvest the dividends
now.
Assuming the share price is still £1.00 (it may not be, of course). At the
next dividend payment (still at 10p per share) there is an obvious
difference depending on whether you took choice 1 or 2.
Choice 1 would mean you still had 1000 shares and would be paid a
dividend of £100 again.
Choice 2 would mean that you now have 1100 shares and would be paid
£110.
If this cycle were repeated exactly again, choice 1 would have received
£300 in total. Choice 2, with dividend reinvestment would have received
£321.
With each new reinvestment of the dividend, the growth of the next
payout becomes larger. Growth is exponential.
Now, I have not factored in dealing costs or stamp duty. Neither have I
factored in the rising and falling dividend payments. Neither have I taken
into account a rising and falling share-price. Nevertheless, even with all
this taken into account, the brute fact remains dividend reinvestment
will make a portfolio grow exponentially, whereas taking the dividend as a
cash withdrawal will leave it on capital growth alone.
offered by your broker). This will automatically purchase more stock with
the dividend payment, and commission will be much reduced in
comparison with organising a separate trade yourself.
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23. There are other important things to remember regarding dividends.
Declaration date: The declaration date is the day the Board of
that they will pay a dividend. Once this has been
done, the company now must pay that money to the stockholders. At
this point, the Board will also announce a date of record and a
payment date. It is usually about the same time each year, but there
are fluctuations
Date of record: This date is usually - This is the
day on which the company checks its record of shareholders and sees
who need to be paid a dividend. If you bought shares after the ex-
dividend date, you would not be entitled to the next dividend payment.
In fact, the investor who sold you those shares would, despite no
longer being a holder! This is the dividend trap. Buying a dividend
paying stock once it has gone ex-dividend means that you actually
miss out on that dividend (although you do get any subsequent
dividends if they are paid and you are holding at the next date of
record).
Payment date: This is the date the dividend will actually be given to
the shareholders of company.
Some dividends are paid four times a year on a quarterly basis. Others
companies pay dividends only on an annual basis.
Tax on Dividends
The best place to invest in dividend paying stocks is, as I said earlier,
inside an ISA.
If you are a basic rate tax payer in the UK, you pay a low rate of tax on
your dividends which is taken as a tax credit before you receive the
dividend. If you are a higher rate tax payer, you would normally pay
above 32% (at current rates) on dividend income and then get back the
10% tax credit, but inside the ISA although losing the 10% tax credit you
will not pay any additional tax. In addition, any capital gain on your
investment inside your ISA is capital gains tax free. Very beneficial to
your investment!
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24. Bonds
There are many types of bonds that you can buy. Unlike a share, you
you have loaned money to it (or the
government). Basically, a bond is an investment that promises to pay a
certain level of interest if the investment is held for a set period. There
are variations, of course, and some will promise to pay a set amount only
if a few conditions in the market are met. This means that some bonds
are higher yielding in interest than others, but are also higher risk. You
should also remember that your capital is tied up in the bond for the set
period of time. You either cannot withdraw it at all, or will lose all the
accrued interest if you cash it in early. It is best not to tie up money for
more than 5 years in a bond. Interest rates can fluctuate a great deal in
this time and it is impossible to know now whether the bond will still be
the best place for your money in five years time.
In terms of how many bonds or bond funds to invest in you should
typically stick to the rule that the percentage of your portfolio in this type
of investment should equal your age. For example, a 40 year old ought to
have around 40% of their portfolio in bonds. Any more than this will
hamper the potential growth of the portfolio and any less will probably
mean that the portfolio is too risk orientated. You will see that as you get
older, the risk level needs to drop to guarantee income and capital growth
is less important.
Property
Investing in property can be done in several ways. The most obvious
(although costly to start up) is to purchase the property directly. Once
being the rightful owner of a property (even with a mortgage) it is
possible to let it and take a rental income. This has the advantage of
helping to pay off the mortgage (if a repayment mortgage deal is taken)
and then eventually being an income for doing next to nothing each
month. In addition, there is likely to be a rise in the capital value of the
property, which can be released at a future date.
This cannot be put inside an ISA, of course, so is subject to capital gains
and income tax.
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25. The second approach is to purchase shares in a property based fund. This
is essentially the same thing, as you then get a share of the capital gain
in the properties the fund owns, and a share in the income of those
properties that are let.
This kind of fund can be wrapped in an ISA. This is a cheaper way of
investing in property, but unlike the first, you do not actually own the
property itself. For this reason, if the value of property falls dramatically,
the investment can become almost worthless, whereas in the first case,
the House (or commercial building) can still actually be used by the
owner. It therefore has a practical value and is also inflation busting.
What this means is that as inflation erodes the value of the currency, the
property itself still exists. This is why some people have mortgages which
were once difficult to afford each month, but now many years later cost
them less per year than having their daily newspaper delivered!
The danger with investing in property is that there are additional costs,
such as legal costs, void periods when the property is empty,
refurbishment costs and the like which do not occur in stock market
investing. In addition, over the long term, the stock market has always
out-performed the property market. However, having some property is
essential in a diversified portfolio and when in the right area can bring in
a good and regular income.
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26. Secret Number 15
Understand how to recover from l
The stock market can be an unfriendly place. There are days when
hundreds or even thousands of points are wiped off the value of shares in
one day - the famous
and the thing you need to know is that it is almost impossible to predict.
Equally, it is almost impossible as a private investor to do anything about
it. When trying to sell out to limit losses, you find that your broker simply
cannot get you a price, and yet at the same time you can see the price
falling. It is, as I said, a frightening place to be.
However, if you follow the secrets I have given you so far, you should be
protected against some of this. A diversified portfolio will help. Investing
in good dividend paying stocks will also help, as these tend to be
It must be expected, however, that there will be losses. They may not be
as dramatic as a complete stock market crash but nevertheless, you
may wake up one day to find a large percentage fall on your portfolio.
Thank fully, whilst it is certainly not a comfortable place to be, and whilst
what I am about to tell you seems counter intuitive, there is a stack of
research and experience which will back up the fact that it works.
The basic trick here is to purchase more of the same stocks, even as they
continue to fall. I will say that again as the price goes down, buy more
of the shares.
There is a psychological state of mind you need to get into. If you
believed the stock was worth purchasing at, for example, £4.00 a share.
And then the price slides down to £3.05. You need to ask yourself a
make it worth less,
falling, then what you are now seeing is that the price of your share is
now at even better value than on your first purchase. It therefore stands
to reason that you ought to be buying more at such a bargain price! If the
price falls again, you should then buy more for the same reason.
Now many people will point out to you that it can sometimes take years
for a stock market (or even an individual sector or share) to get back to
are simply completely wrong.
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27. As the markets recover even if it is 10 years later, the value of your
investment is now going to be considerably more than it was when you
first bought in at that level. In fact, if you have consistently and regularly
invested into the stock during that low period, then when the bounce back
considerable margin. This
price of your share purchases. You will be able to see outstanding growth
I have already mentioned dividend reinvestment. This is particularly
important during a bear market. Consistent dividend reinvestment will
also average down a share price purchase level and the bounce back will
again be all the more profitable.
out of investing, you are likely to have more success. Investors
(particularly inexperienced ones) are likely to either attempt to sell a
stock and take a loss (sometimes a huge loss) or to simply hold. As I
have shown, neither of these is a good recovery plan.
An Example
Imagine you bought 105 shares of a dividend paying company. You paid
£27.29 per share and the total cost including commission and stamp duty
was £2,900. Thanks to reinvested dividends, in four years you would own
perhaps 124 shares, almost 20 shares more than you started with.
If we imagine that the market is a bear market, and the stock has
crashed (along with everything else) to £23.62 - despite a drop of 13% in
the price you would actually show a slight gain on the investment. In bear
markets, where 50% losses are not uncommon, you will agree that this is
pretty impressive. Also, the dividends would continue to be reinvested
buying more shares as the stock price falls.
Here comes the best bit:
Imagine that now the price begins to get bullish and the stock gradually
rises up to previous levels. Well, if it were to reach your original purchase
price, you would now be showing a gain of nearly 18.5%!
Naturally, this will only work if the company is robust and does not go
under in the falling market. This emphasises again the importance of
choosing decent dividend paying companies who are likely to be around a
long time!
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28. Secret Number 16
Avoid Investment/Trading Seminar Scams
We all want to be better investors. There is always the dream that out
there somewhere is the system which allows you to pick perfect stocks
and perfect funds every time. We would love to have insider information
which would enable us to time the markets perfectly, jumping in at the
start of a bull market and out at the top of a bear market.
It is this desire which is then exploited by others, who claim to be able to
give you the skills you need to become stock-market millionaires in next
to no time and with no understanding necessary.
Unfortunately, these people are skilful scammers. They have the funds to
produce glossy leaflets and book top London conference centres to add to
their appeal. They are able to offer free meals with their conferences, and
even free conferences. However, the cost of buying into their schemes
could be enough to set your investment profile back by several years and
in some cases, it can lead to financial ruin. In addition, it can be very
difficult to avoid buying in as the sales pitch is extremely persuasive.
Remember these guys are pros.
ALWAYS RESEARCH THE COMPANY OFFERING THE SEMINAR
There are some alarms that you should listen out for when investigating
such schemes.
1. Does it require a big up-front payment? The dodgiest scams
demand a large up-front payment as this enables them to cover all
their costs and then some. They can also be long gone and have
disappeared completely (call centres and everything) when their
recent victims try to return the schemes or ring for support when
work.
2. . Remember my mantra there is
always risk and you should never invest what you cannot afford to
lose. When these guys try to sell you the pot of gold that will pay
out in-perpetuity and never lose, you should get out of there. When
pros and they can disappear into thin air.
3. This irritates
me beyond belief. I have seen systems advertised which claim they
will only take 200 people on to ensure that they can provide good
customer service. In fact, they are taking 200 every day that week
and every week and providing nothing at all. Always take your time.
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29. 4. Whatever people tell you, it is highly unlikely that you will miss the
boat on a share or scheme. There is always fluctuation up and down
in prices and steady rises take years of up and down movements
(just look at some charts) in most cases. Taking a week to think
about it could well save you your whole investment pot.
5. -
Scammers love to say such things as the average punter who is
seeking their golden ticket to financial freedom is less savvy about
such things. Off-shore investing and hidden markets in China or
Brazil are often used as a way to make it all seem plausible. They
may even tell you they spend half the year out there getting to
know the way things work
love to tell you that investing overseas means you can avoid paying
tax (which is not true).
6.
If this were the case they would offer
the whole lot for free with no charge EVER. These guys make
money by selling the system only. They probably never trade at all.
Do some internet research on them, Find some bulletin boards dedicated
to discussing investment systems and investment scams. Ask a few
questions. Have others been stung or are these people legitimate?
Again TAKE YOUR TIME.
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30. Secret Number 17
At the moment, I am hearing advice to invest only in funds, and to pick
the best fund managers irrespective of the area in which they are
investing, as statistically they will out-perform the market. I am also
hearing advice to ignore funds as the commission paid to the fund
manager will kill your profits. Instead, people are advised to attempt to
mirror the fund managers or pick the stocks themselves.
I am hearing advice that the only safe way to make money on the
markets at the moment is to stay out of them altogether, and instead to
betting which way the markets will go. This
enables a win from a rising and falling market. I am also hearing advice
that spread betting is a dangerous game likely to bring some hefty losses
of more than the original stake.
I hear advice that the way to go is to stick to penny shares on the
alternative investment markets, as this is where the big growth potential
is. I also hear that people should avoid the risky penny shares and stick
So which way is a private investor supposed to go?
Well the answer will take you back to Secret Number 12. Diversify.
You should have some funds. Leave these to boil over the long term.
Subscribe to them regularly. Treat them as your buy and hold
investments.
You should also have a diversified range of other stocks. Some of these
you will treat in the same way as your funds, with reinvested dividends
and regular subscriptions. Others, you may trade more frequently even
taking advantage of some large swings in the price occasionally by buying
in and out on the same day or several times a week.
You should have some high-octane and risky penny shares. You may
lose the lot, but you may have a massive growth in share price. You
should also make sure that there are some defensive stocks the
dividend payers who remain fairly static in the market.
And yes, you may engage in some spread betting of the markets as this
may be a very lucrative thing to do, whatever the market is doing
providing you engage in some careful money management and that you
minimise your risk with stop losses. This takes you back to my mantra
again.
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31. Secret Number 18
Many private investors read the bulletin boards and press releases about
various companies. They subscribe to tipping services which will advise
about what a company is about to do, or the new breakthrough they are
soon to launch. The mistake they make at this point is assuming that
somehow as a result of the news the share-price will go higher from that
point and therefore buying in.
In fact, it is usually the case that when there is good news from a
company, the share-price rises a little for a short period and then falls
rapidly for a longer period. This leaves the new private investor with a
loss on their recently bought share.
Why does it happen?
Well all this information is in the public domain. If you have heard about
the share tip or the news (or even the likelihood of good news) so will
others. Pro-traders will certainly have heard about it. The share price you
are seeing is in fact one which has anticipated the news already. Any
spike after this is where inexperienced private investors are buying in.
Once this spike has happened, the pro-traders all sell either all or most of
their investment in large volumes, causing the price to drop like a stone.
Once it is low down, they buy in again perhaps, or they may go to
another share which is also expecting news and repeat the action there.
Unfortunately, this causes the poor private investor to own shares which
they bought at the top of the spike. Worse than this, some will panic and
sell out as the share drops, taking a loss along the way.
Thankfully, because of Secret Number 15, you know what to do in this
scenario. Simply buy more on the way down. If you have no spare capital
immediately available for such an additional investment, never mind. Hold
on to it until you do. It will rise again.
So, the trick is to understand what it is that drives a share price.
Remember the rule of supply and demand. The price goes up as more
demand the share. They do this in anticipation of the news. Once the
news is out, demand has gone and so they sell again. Please note that
technically it is investor sentiment that is driving the price and not the
news at all! Investors behave like a herd. Bizarrely, people spend more
money investing as a share price rises, and then sell again as it is falling.
It is all about greed and fear. Try to remove your emotional response and
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32. Secret Number 19
Understand the Jargon and Charts
with both feet and then have to learn by their mistakes. Unfortunately,
this is a costly way of doing things.
It is also the case that inexperienced investors become over-confident in
their own ability. Psychologically, it is easy to see a few gains and think
that you therefore know what you are doing. This is compounded by the
fact that we do not like to think about and dwell on financial losses as
they are painful.
It is true that a little knowledge goes a long way. It is truer, however,
that a lot of knowledge goes a long way. Understanding some of the
fundamentals of investing (that you do now because of this guide) will be
some of the jargon and having a rudimentary understanding of chart
technical analysis.
You can study for weeks and weeks and still be only scratching the
surface of technical analysis (TA). However, some basic understanding of
charts is quick to gain. I would say that you need to understand the fact
that the direction and trend of the price is shown by the chart, and the
volume of shares purchased is also shown. The higher the volume on any
rise or fall, the more momentum there is behind the move.
Basic indicators should also be known. Simple moving averages (usually
the 20, 50 and 200 day) can be used to see where the current price is in
relation to its average over time. If the price crosses a moving average
with any momentum, this is often a signal that the direction of the price
has turned for more than a short term.
Using Google to sear
and reading around a bit will also give you a good
grounding in some of the more complex aspects of TA. Again, knowing
these in a rudimentary way will actually put you miles ahead of most
private investors who know only that the price is going up or down.
Spend some time searching the meanings of investment jargon in order
that you can engage fully in what advisors are saying. It is no use
thinking that it is time to buy in a bear market or when people are
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33. Secret Number 20
-estimate your life-
Life-expectancy is only going one way and that is up. Enforced retirement
age in Europe has just been dropped as it is clear that people are living
longer and longer and are obviously still capable of working much older
than before.
When planning your investments, it is important to recognise that your
retirement is going to last a long time and that there is a high probability
you will need to have money to live off for longer than even you imagine.
Medical breakthroughs are happening all the time. Our understanding of
the need for exercise and a healthy diet has increased or life span hugely.
Standards of living are considerably improved, but in our old age we will
need the necessary funds to keep us in the comfort we desire.
Secret Number 21
Saving money and investing money are different things. With investment
there is always a risk. You will read over and over again that the value of
your portfolio can go down as well as up. In fact, as I have explained, in
essential to remember that some money needs to be saved in very low
risk ordinary bank savings deposit accounts. This will be there for a rainy
day (or a much needed holiday), and may enable you to siphon off some
of it occasionally to invest, but you should aim for a certain amount to be
saved in this type of account each month. As a general rule, and this is
not always easy, you should aim to save enough to cover your mortgage
and any other regular bills for a few months if you suddenly found
yourself out of work. This gives you a couple of months grace to get
yourself sorted out. You cannot rely on investments to do that as the
volatility in value and the illiquid nature of the money (relatively
inaccessible) is too great.
You should always shop around for savings accounts. Banks rely on
competitor because it is easier to keep things all under one roof. They
hope t
customers. BE DEMANDING! Ask for the better deal or you will take all
your accounts elsewhere. They need your business and will actually bend
over backwards to keep you on their books.
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34. Secret Number 22
Enjoy without addiction
Once you start investing, you will find that it becomes extremely tempting
to watch your investments going up and down all day every day. In fact,
you can spend hours doing it. This is counter-productive. You could find
that you have spent three hours watching a £2.50 rise on your portfolio.
In terms of the use of your time, this is very poor. You would be better off
spending that time stacking shelves in TESCO and it would give you more
money to invest!
It is important to remember that there are always short term swings in
the market. Watching every one of them will not actually serve any
-
(and have the time to do so), I would advise only a cursory check of your
investments each day. This will certainly allow you to top up your shares
when they have fallen, but will not take so much time that it becomes a
very poor hourly rate.
Remember also to have a clear strategy as to how much you are prepared
to risk each month. Secret 8 was to only invest from your surplus. Too
much portfolio watching can encourage you to invest beyond this amount
as the temptation to buy new shares or top-up others is very strong.
tional trading
is always safer in the long run.
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35. Secret Number 23
All Bulletin Boards are positive
If you join an online investing community, you will see that each share
has a group of investors who will watch the price rise and fall and
regularly comment. Some are very experienced investors and others are
very new to this game. The key thing to know is that the comments will
be almost entirely positive.
People who comment on share bulletin boards are almost without
exception holders of that share. -
talk down a share as it will potentially damage their own investment. In
fact, if people do post negative information or views about the share,
these posts are often met with hostility and derision. This has the effect of
making such posters tread carefully before considering giving any balance
to the views on the board.
As a source of information about a particular investment, the bulletin
boards can be very useful. Private investors are often very good at doing
research into the fundamentals of a company. However, you need to be
aware that negative comments will be few and far between and that
almost every share will be portrayed as the share pick of the decade!
Using bulletin boards to make a decision on whether or not to invest is a
dangerous game. The information presented should be only part of what
you take into consideration. Remember also that all this information is in
the public domain and was known by the pro-traders long ago.
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36. Secret Number 24
Aim for multiple income streams
A poll of wealthy people would very quickly show that most of them made
their money in more than one way. I have already mentioned that income
is not wealth. However, this is particularly the case if your income comes
entirely from one source.
What do I mean?
Well, if you have a good job which pays a very healthy salary but that
job stops, your income will stop too. You will be left only with what you
have managed to put by in the form of investments.
However, if you have managed to build up a group of income providers
alongside your regular job and investments, then your income will be able
to continue for longer without the regular salary.
What kind of income providers?
I have already explained about investing for income. This is a good place
to start. However, you should investigate the possibility of generating
other income on the side. There are plenty of part time and flexible
working opportunities where you can make a small amount of cash for a
small amount of time. Some of the best are the multi-level marketing
schemes. Providing the company is a sound one (like Telecom Plus PLC),
these can generate a reasonable (or outstanding) income which goes on
paying long after the initial work was done.
The other area in which to look is the service industry. Can you set up a
unwanted jobs? Cleaning Homes, Washing
Cars, Washing Windows, Doing Ironing the list is endless. The secret,
however, is for you to act as a manager who sets up the deals and
employs others to do the hard graft. This way, you get the profits only
needing to do a minimal amount of work each week or month. You can
expand the business as much or as little as you wish depending on your
free time.
The beauty of such an opportunity is that once it is rolling it takes very
little time to generate the income. Naturally there are some start-up costs
and effort, but beyond that not much.
Finally you could consider writing a guide on something you love and
selling it!
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37. Secret Number 25
You never know enough
It is always important to remember the value of education. We all
continue to learn throughout life, but some will be more active in that
learning than others. I am not suggesting that you should go out and do a
higher degree (although you may, and it could be the best thing you ever
did). What I am saying is that when dealing with the challenges that life
brings your way and particularly when attempting to move into new areas
out of your comfort zone, there is no substitute for education.
There are countless books, for example, on technical analysis of charts. It
is worth reading some of these. There are weekly eNewsletters you can
sign up to which will let you know what is going on in the markets and
give analytical comment from experts. There are websites with
discussions between opposing views. All of these things you should
digest.
However, reading the manuals is not enough. You would not expect to be
able to win the world snooker tournament simply by reading a manual
about how to hold the cue and strike the ball. Nor would you expect to be
able to play the violin by reading about the techniques. There is no
substitute for practice and exposure to that which you are trying to learn.
Many brokers allow you to open virtual trading accounts and you can
-
before hurting your finances. It also enables you to put into practice what
you have learned in theory. This part of learning is invaluable.
Once you have got the hang of what you are doing and you are familiar
with the trading platform you have chosen to use, you can venture into
the real account and put some real money in. Jumping in with both feet
without any knowledge or practice is rarely a good thing to do.
Remember, there is always time to learn something new.
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38.
Try not to lose sight of what you are doing all this for. What is it you
actually desire? I began this guide by saying that it would help you
accumulate wealth steadily and sensibly. However, you have to know why
you want to be wealthy.
Those who seek money for the sake of money are actually following a
blind alley. Those who seek riches in order to be rich will find their life
ultimately empty.
Instead, you need to visualise what it is you will use the money for.
Perhaps you would like to take more holidays with the family.
Perhaps you would like to live in a bigger house with more space to
unwind and entertain.
Perhaps you simply want to be comfortably off without having to give all
your time to your employer.
Perhaps you would like to retire early so that you can see the world.
Perhaps you would like to give to worthy causes all over the world.
Perhaps you want to put your children through private education.
Perhaps you want security in old age.
Whatever it is try to focus on this when you are investing. Watching the
pounds and pence grow is of no consequence if you have nothing to aim
for. Once you have decided what it is you are working towards, fix that
image in your mind and factor it in to all your decisions. You will be much
more sensible in your approach if you know what it is you are risking.
I hope that you have found this to be a valuable guide. I wish you every
future success.
U.K. Government Required Disclaimer The information in this guide is believed to be accurate and
sound according to the best information available to the author. The past is not necessarily a guide
to future performance. The value of any investment, and the income derived from it, can go down as
well as up. You may get back less than the amount invested. Never invest more than you can safely
afford to lose. There is an extra risk of losing money when shares are bought in some smaller
companies including penny shares. Before investing, or if in doubt about the suitability of an
investment please seek independent financial advice.
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