When I started working my godfather offered some advice; “save as much money as you can”.
I took his advice and over a few years invested in several ten-year investment plans. As time moved on the amount of money I had grew, and it became central to everything I did. By the time the dot.com frenzy took hold I was looking at ways of making more money; choosing investments with the biggest returns (based on the previous year’s performance). Added to this the mortgage was set to be paid off by the time I was 40…as a family we were pretty much sorted.
Then the dot.com bubble burst, 9/11 happened and everything started to unravel. Added to the mix during the noughties we had two children, our income dropped by 50% and over two periods I was without work. Very soon all that money was gone, the mortgage remained outstanding…what a difference 10 years makes.
So where did it go wrong?
When I look back I see this more as a life lesson than a mistake because it now underpins everything we do as a family. Very simply, the advice by my godfather was sound but it missed one crucial element and that was, what was I planning to do?
In this blog, I want to tackle a subject we often see as boring, even irrelevant but I feel is essential to our financial wellbeing and can be fun and very relevant. I read a book recently and it said a doctor doesn’t give you a prescription without diagnosing the problem. In the same way, there is little point in accumulating money without knowing what it is there for, because we will become emotionally attached to it, and this often leads to irrational behaviour.
The big question
We really don’t like talking about money; along with politics and religion. But before we consider investing the big question is, “why is money important to us?”
We are all at different stages of our lives and for some of us we might be just starting out on the journey, for others we will have accumulated money already. Money could be important because it gives us freedom, flexibility etc but the big question is does it give us what we really want. Turning this around perhaps the next question is “what do we want?”
Over time I have come to understand that an important aspect of having a financial planner (adviser) is that they will help identify why money is important. Because only once they can understand what you want from your money can they develop solutions. Effectively they are developing a road map for the future.
Looking back over the last twenty years one question I was never asked, and therefore never answered, was why was I saving as much as I was and what was I hoping to achieve. And also, could I actually afford to save what I was saving!
When we consider the question, there is no simple answer; we are all very different. It could be about giving our children/grand-children opportunities, it could be that we don’t want to worry about money etc. But what it will do is identify how we value money, and how we plan for the future.
Developing a plan
When I sat down with my financial planner one of the key aspects was not to focus on the past but look to the future. In hindsight, you could argue that the past was messy but it was because of that we can look to the future.
One aspect of the past was that I was spending too much time on the wrong things; money became my core focus. I wanted to be in control! Whilst the investments were going up this was fine but the reality was that I was not in control, markets will do what they do and can go down!
News can sometimes be crazy, markets can be scary but it is about letting go and focusing on those things we can have some control over; family, activities etc. And for me that was a big eye opener.
Building up money for no set purpose provided a false sense of security which was extremely fragile. Developing a plan is all about understanding what we want to achieve, and will depend on where we are in our life cycle and how much is needed to fund those goals.
There still must be a plan in retirement and this might include:
- Inheritance tax planning / mitigation
- Receipt of income in the most tax efficient manner
- Enabling pension funds to be distributed to family members on death
- Long term health care
Within this we need to identify what we want to do with our time and money; which could be about spending time with children/grandchildren, travelling, voluntary work and so on.
Pre-retirement planning can be very different but there are similarities. There may be a stage when we want to slow down at work and do things like travelling, spending time with children/grandchildren, but money is required to enable us to achieve this.
Aspects of financial plans may vary but could include:
- Building an emergency fund in case of redundancy, inability to work due to ill-health etc
- Paying down debt / mortgage
- Saving for a holiday / new car
- Retirement planning / contributions to a pension
Each plan is specific to each person, as no-one has exactly the same goals. We can develop a list of goals and then we need to determine which ones are important to us, and what we can afford to fund because in reality we are unlikely to be able to afford to fund every single one – so priority is given to the most important one(s).
One thing to remember is that nothing is perfect and things do and will change. Having a plan with goals is movable and should be reviewed at least once a year.
When we talk about investing it is very easy to assume we mean physical investing but investing is much more than that.
Investing falls into different areas and can include:
- Life assurance – certainly pre-retirement this is important to cover any potential shortfall which could ensue hardship for a spouse or dependents. But it could be tied in with mitigating inheritance tax liabilities
- Paying down debt – there is little point in saving lots of money and yet being piled high with credit card and personal debt. So, investing money in paying down debt is important
- Paying down mortgage debt
Physical investing is needed to achieve goals like a holiday, retirement etc and forms part of the overall mix. The difficulty with investing in assets (equities, property etc) is that much of what we do is based on data from the past, there is no indication of what the future will hold! Equally although we should know that investments go down, when they do it can hurt a lot more than it should!
Some goals will be short term and so cash makes the most sense, but otherwise it’s about how to invest money for the long term. Investing is about diversification; this means avoiding betting on a particular sector, share and even trying to predict how the market will respond. We can’t guess which sectors will do well, which stock will shine, when a crash might happen or interest rates move; these will happen but trying to time these events clouds our ability to make good financial decisions.
Good examples would be the dot.com bubble and investing on the assumption that because it has always gone up, it will always do so. Or perhaps buying into the buy-to-let property party now, based on what happened in the past. Sometimes these investments work out well but it is about ensuring that not everything is in one type of asset.
One of the soundest ways of investing is doing nothing!
Our focus should always be on the goals and how those are delivered over the long term; negative investment periods happen but over time the returns will come through. One of the most counterintuitive aspects of investing is rebalancing at least once a year. For me, this takes out the emotional attachment to investing, it simply puts everything back to the same position it was 12 months previously so I can’t get attached to an investment because it has been doing well.
It’s not that we can’t “gamble” with some of our money but it is deciding how much of our money we would be prepared to lose. Some people may say they are prepared to invest 10% of their money in speculative investments but this will not be for everyone.
I read recently that investing is a bit like planting a tree; you don’t dig it up every week and move it around. You leave it to grow slowly; it’s boring, unexciting but in the long term we will be rewarded. It is worth considering this, if we invested on 1 January 1987 by the end of the year we would have had a positive return. For those too young to remember 1987, google Black Monday!
There is a misconception about what financial planning is all about, and whether it is worth paying for.
At the start of the blog I explained about the sound advice I received on saving money, but for what purpose? The big question is if we had money what would we do with it? Investing is important because it helps us to achieve the goals we have, but we shouldn’t just focus on the aspect of ‘making money’.
Financial planning is not just about products and investing but also understanding our plans. If we are clear on what our goals are whether in retirement or not, then it makes it a little easier and less emotional. If I have a pot of money I am saving for retirement in 20 plus years, I don’t need to worry about what the markets do today or tomorrow. However, if I need to pay for a new car tomorrow then I don’t want to take that risk.
Earlier we said that investors should rebalance investments at least once a year. This is no different to our relationship with a financial planner. This is a long-term commitment and plans should be reviewed at least every 12 months because things change, and we may need a flexible approach which we can adjust when appropriate.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.