Many people I know are afraid of investing their money themselves. They think is is too risky and leave this job to financial advisors and other ‘professionals’. If you are one of these people,don’t feel bad. There are countless people who treat investing the way you do. But this has got to change. You can not let someone else manage your money, plan for your retirement, pick your stocks, take your money and leave you with any losses. And don’t get me started on the fees they charge. This is counterintuitive to any wealth building philosophy.
The investment industry wants you to believe that managing your own money is too risky. That it takes special knowledge. Lots of time. Professional experience. And a sprinkle of magic. But don’t be fooled by this marketing ploy. You should instead learn to take control of your own money. And this is not as hard or as scary as it sounds. By managing your own money as opposed to using a so called professional, you could make more money and worry less about your investments.
Here is the secret for managing your own money and beating the returns you get from professionals: Pound Cost average your money into a low-cost index tracking fund.
It is really that simple. Most people expect investing to be complex but it doesn’t have to be be, investing can be hassle-free and straight forward. This low cost index fund approach is great way of benefitting from the stock market’s ability to rise over the long-term whilst also spending less time worrying about the ups and downs of the market, interest rates and other noise.
By Pound costing your money into the market, you are investing a fixed amount of money in the market on a fixed basis. This means that you are befitting from the ups and downs. So when the market is up, you are happy that your net worth has increased and when the market is down you are happy as you get to but more units of the index fund at a discount.
The best part about this approach is that you don’t need to be interested in investing nor set aside countless hours pouring over various options. Simply open an account with a low cost online broker and make an automatic transfer from your bank account into the low cost index fund.
Don’t get me wrong, whilst this low cost index investing approach is simple, it is not a get rich quick scheme. Historically, the FTSE 100 has produced an average return of 8% a year whilst the FTSE ALL share has produced a return of £10%. By simply investing £600 a month into the FTSE All Share index earning 10% per annum, you could be a millionaire in 30 years.
The approach is basically meant to be simple, slow, steady and cheap – you would be hard pressed to find a single investment or fund manager who could consistently do better.
The point is you don’t have to make investing more complicated than it is. It shouldn’t be complicated. It doesn’t have to be. It is as easy as buying an index fund and regularly contributing to it.
What if I am interested in investing and want to pick individual shares?
If you are really interested in investing and willing to put in the hours and learn the accountancy rules behind earning statements, you can go further and reap higher rewards than by simply investing in a low cost index fund. Whilst this approach can be time consuming, there is another more simpler approach where you only need to know the basics such as Dividend Yield, Dividend Cover and P/E Ratio.
If you want to pick individual shares and get great returns, the best approach to take is to buy high yielding UK stocks and never sell them.
Yes, once again, it really is that simple. The stuff I am telling you is not revolutionary but it is amazing how few people take advantage of it. I get the impression that sometimes people want things to be complicated so they can throw money at things to make it feel like they’re doing something. It’s human nature. But I say it again, investing does not have to be complicated!
The reason I have chosen UK shares is they seem to be more attractively valued at the moment compared to most of the worlds market and thus offer a higher yield. In addition, as UK investor, I need to pay withholding tax on foreign dividends and this tax can be as high as 30% for countries like Germany and Switzerland. Even our great trading partner, the United States, charges UK investors a 15% withholding tax rate (with a W8-BEN) for dividends paid out from US listed companies. This high withholding tax amount erodes away wealth and I would much rather prefer to avoid it.
I am currently using this approach of buying high yielding UK stock as seen by the Journey I have been documenting for me to reach financial freedom. The great thing about the stock I am selecting is that they are big names; you’d practically recognise all of them and may even own some of them). And the greatest think is that they pay a chunky dividend.
It’s no secret that dividends are the true source of stock market wealth. The media and professional investors try to ignore it because capital gains are far more fashionable and much more great to talk about. The benefit of dividends are hidden as they do not show up in stock prices. Most people are seduced by seeing a stock constantly move in an upward trajectory but often ignore the higher returning dividend.
For proof of this, just look at the below chart showing the returns of the UK stock market with and without dividends.
Simply re-invested any dividends you receive can lead to your portfolio growing exponentially. Based on the UK market over the past 45 years, you could have made 5 times your money by simply doing the simple task of reinvesting your dividends.
The best part about this approach is that it can be truly passive once you have invested in these world beating high yielding companies. By simply re-investing nay money you get, you can let compounding do the heavy lifting and make your portfolio grow to new ver increasing heights. Say for instance you invest £250,000 in a portfolio of dividend paying stocks and earn a 4% dividend yield. By paying little interest in your portfolio and simply clicking on the reinvest button, your portfolio can grow to £311,545 in 5 years and you would have a dividend income of £14,000 a year. IF you let your money further compound, after 10 years you would have £388,242 and an income stream of £17,471 a year. Wait 20 years to take your money out and you could have a portfolio worth £602,929 that produces dividends amounting to £27,132 a year – higher than the Uk average salary! How great is that for simply buying high yielding companies and pressing the re-invest button?!
The golden rules for this approach are as follows:
- Buy and never sell – As investing legend Warren Buffet says, ‘our favourite holding period is forever.’
- Ignore the noise – Life is much easier when you ignore all the noise and the media (LINK). When investing, try and ignore any views of the long term future of the economy, the sector or the individual company. History has shown that these views often have very little or no merit.
- Don’t deviate from the plan – you might have the temptation to shun the plan and do something else but in order of achieving the goals of getting great returns, you need to be constant in your approach.
By implementing this high yielding UK stocks approach and by following the 3 rules above, you could well be on your way to achieving better rates of returns than your financial advisor ever could. As is always the case, make sure you do your own research before buying into any asset. Always be diligent for it could save you a lot of money!