So, you’ve worked hard to save more for your financial investment and are amazingly putting away £2k/$2k of money each month into your savings. What could possibly go wrong? I mean saving that much money you are surely guaranteed to have an easy life in the future? That dream car is just waiting around the corner…
Not necessarily… It can be hard to carve out savings. But if you then invest those savings in the wrong place then you could be wasting a lot of effort. If you want to retire early then you need to make every penny or cent work for you. You need to invest your savings in the right place. Sure you can put you savings in cash account and reduce the risk of losing it. But if you do that every year you can guarantee inflation will be higher than whatever interest rate you can get on your savings account.
Know your risk appetite
Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing.
Each of us will have a different appetite to risk. Some will be willing to lose some money for the chance of a 10% return, whilst others will carefully make sure there is no risk of ever losing any of our financial investment. You need to have an investment strategy that
- you are happy with, and
- will help you get to where you want.
It is a balancing act though. Take too much of risk and you could lose everything. Take no risk and you money will hardly grow at all. The good news is that since 1989 the UK stock market has risen by over 5% each year on average. Yes, there are risks attached, but if you can get an investment that tracks the stock market you are massively boosting your chances.
If you’re constantly worried about where your investments are held then you need to reconsider things. Take a step back. What is the point? The whole idea of financial independence and early retirement is to live a more fulfilling and enjoyable life. If your financial investment decisions are stressing you out, then maybe you’d be better choosing something less risky. It may take a little longer, but you can enjoy your life!
Whatever your risk appetite, there are some pointers though that are be helpful for all of us.
Don’t leave it all in cash
Cash is great. I love cash. But it shouldn’t form the majority of your financial plan. Put simply, anything you have sitting in cash is almost certainly losing you money.
In the UK at the moment interest rates for most cash accounts aren’t even 1%. But inflation is running at over 2.5%. So every year, you will lose c1.5% of the value of anything left in cash deposits.
When building your retirement pot many people therefore decide to only hold in cash what is needed for short term emergencies.
Some people also hold some cash ready to invest should the market drop, but you will need to consider if you are confident you can time the market. Most people can’t…
But if cash isn’t a good idea, where should you hold you financial investment?
Invest in stocks and shares, or something you know you can grow
There are many, many options that you can choose that will provide a better return than cash. You could invest in property and become a landlord. You could invest in your company to improve its growth and value.
For most people though, unless there are better alternatives, the stock market is the place to invest.
But if the stock market is the place for your financial investment, how do you do it?
Don’t over complicate your financial investment
Life can be complicated enough so don’t add more complications.
The simpler your financial investment plans, the easier it will be for you to keep track.
For this reason, as with the lower fees point just mentioned, many in the financial independence community focus their investments in Exchange Traded Funds (ETFs). These funds “mimic” a given market by having a selection of shares representative of it. This means you don’t need to have a portfolio of various shares – just leave it to the ETF. This takes out the difficulty of picking shares. You are not trying to beat the market, but track it. The reason for this approach is that over time the performance of the market should produce a good return. Over time = 5-10 years at least.
If you do decide to invest in shares, then again simplicity is a good approach. You don’t need to have hundreds of different shares to try to get a balanced portfolio.
Keep fees as low as possible
A golden rule of investment is to keep fees as low as possible. The difference this has on your returns can be huge.
- Lets say that your investment grows by 4% every year.
- If you are paying fees of 1.5% then you will only see net growth of 2.5%.
- However, if your fees are only 0.5% then you will see net growth of 3.5%.
Of course, if a slightly higher fee produces an even higher return then it is worth paying the premium. But if you consider many fund managers struggle to beat the market higher fees will not guarantee a better return. This is the reason many people are now using Exchange Traded Funds (ETFs) as they have low fees, and will broadly track a selected market.
Don’t rush your decisions – plan well
There are many decisions to make about your financial investment, and we’ve not even scraped the surface in this article. Any retirement plans you have will be a long term decision, so there is not need to rush your choices.