Early retirement is often something discussed but not always acted on for fear of losing out financially. As the founder of Goldsmith Financial Solutions, I have made it my business to make your money work for you, and here are five rules you need to follow should early retirement be on your horizon – and they are probably not what you’re thinking:
- Trust the markets:
With more than 98 million trades a day, across the global markets, the probability is remote that a committee discussing where to invest your money will spot a favourable discrepancy in a stock price.Instead, buy a diversified basket of global index tracker funds and let the markets work for you. A wide basket of stocks from around the world linked directly to market returns can reduce the risk of trying to outguess the markets or worse, paying somebody else to outguess the markets.
- Diversification is key:
Investment returns are random; they cannot be predicted with any certainty, so don’t let your financial adviser visit you each year moving and changing your funds to justify their existence and their fees. They are wasting your money.Also, limiting your investment universe to a handful of stocks, or even to one stock market, is a concentrated strategy with high risk implications.Instead, buy the global market using a diversified basket of index tracker funds and leave the speculation to the gamblers.
- The Financial Services Industry does not have your best interest at heart:
Conventional wealth management institutions are happiest when the status quo prevails; it’s more profitable for them and their shareholders. These corporates are in business to maximise shareholder value – not your investment returns.
It is therefore essential to take back control of your money and ensure that the ‘hidden’ ongoing portfolio costs are kept to the bare minimum. Aim to keep the costs of managing your portfolio at under 1%. The industry average is in the region of 2.3%, so if you save yourself even 1% a year you will have made a substantial amount of money using compounding interest over the life of your portfolio.
For example; if you invested £100,000 with a traditional financial services company paying a total fee of 2.3%, and you received a 7% return on your money for 25 years, you will have a projected future value of £329,332. As £100,000 was yours to start with you will have made a £229,332 profit. The overall cost to you, to make that profit, will have been £109,912.
If you invested £100,000 in a low fee portfolio, paying a total fee of 1.11% and received a 7% return on your money for 25 years you will have a projected future value of £441,601. As £100,000 was yours to start with you will have made a £341,601 profit. The overall cost to you would be £63,718.
This additional £112,269 can be used by you and your family, rather than just giving it away to an industry that feeds the ‘fat cats’. Remember it’s your money … don’t give it away.
- Don’t let fear rule you:
When there is a decline in markets, investors want to jump and wait for the markets to recover before going back in. However, market timing cannot be predicted. Most people don’t reinvest until they get their optimism back, which is often too late; by then the stocks have risen, you’ve missed out on the gains, and you still have your losses to make up.
Manage your emotions by investing in a risk portfolio that is correlated to your capacity for loss. Not one that is based purely on your search for the highest returns.
- Invest – don’t just save:
Your capital deposited in a Bank is being eaten by inflation at 2-3% every year. Over the last 10 years, whilst the stock markets have gone up, the buying power of your bank deposited savings has decreased dramatically and will continue to do so for the immediate future.
My advice is to look at investing, rather than ‘saving’ with a bank; diversify your portfolio; let the markets work for you; and ensure you keep your management fees to around 1%. By following these rules you’ll increase your fund faster and the day you can retire (or splash the money on your dream) will arrive much sooner.
ABOUT THE AUTHOR
Hannah Goldsmith is founder of Goldsmith Financial Solutions and author of ‘Retire Faster’. Hannah specialises in Low Fee Investing and is challenging the way financial services are delivered to consumers in the UK, by enabling each client to understand the nature of investment costs and the impact these costs have on their future lifestyle.
Goldsmiths complimentary ‘Second Opinion Service’ reviews investors’ existing portfolios and makes recommendations on Risk, Diversification, Performance, Cost and Tax efficiency, making investors’ money grow in a more transparent and financially efficient way.