There are no general answers to questions like these as each person has
different goals and different means to achieve them.
What I did a long time ago, to permanently answer all the above
questions for me, was to write out an investment plan that clearly
states how and what I want to achieve with my investments.
And I urge you to do the same.
It can be done quickly and easily, with a huge benefit to you, as it
gives you a clear foundation from which you can make all your financial
decisions.
Please take the time to do this; I know that you have 200 other things
that require your attention.
It will take a bit of thinking but will be
more than worthwhile. Not just for your own peace of mind but it will also
get rid if a lot of the continuous decisions you have to make
concerning your finances because they will already be answered.
I have put together four questions to quickly get you 80% of the way to planning your financial future. Make yourself a cup of coffee or tea and take 15 minutes to answer the
following questions.
What do you want to achieve financially?
How much money do you want to have accumulated or what income do you
want to have at what age.
How and where will you save?
How much will you save monthly and yearly and where will it be held.
I have a goal of saving 20% of my net salary. It was difficult at first
until I implemented a system where the amount gets deducted from by
salary as I receive it. I save automatically and because I do not have
the money I don’t spend it.
I have found that budgeting, where you try to save something at the end
of the month, just does not work.
I have a separate investment account that is used exclusively used for
investments. This is to ensure that I use the funds only for investments
and am not tempted to spend it on anything else. Also the proceeds of
investments sold are re-deposited into this account to be used for
further investment.
How will I manage it?
How are you going to invest the savings you have accumulated, in
investment funds or in equities directly? This will largely be
determined by your risk tolerance. The lower your tolerance for risk the
larger the bond part of your portfolio.
I have decided that my funds will be invested in equities using a value
based framework. Investments will be made in companies with low price to
earnings and price to book ratios as well as low debt levels with good
cash generation. Investments will be held for long periods in order to
maximise profits as well as keep dealing costs and taxes as low as
possible.
When and why will I take money out?
As mentioned I do not withdrawn any funds from this account for
spending. The bulk of profits and savings are added to the account to be
utilised for further investment.
After answering all the questions you have to make sure that the
answers fit together. For example, if your have a low tolerance for
risk you cannot use equity return expectations to achieve your goals.
Also you have to make sure that your end goal can be reached with your
current savings, additional savings and historical returns of the
instruments (equities, bonds, savings accounts) you are going to invest
in.
What I have also found valuable is to visualise yourself at the age of
80 looking back and reviewing your investment successes and failures.
This will give you a few additional ideas you may want to incorporate
into your plan.
Review your plan every six months to keep it fresh in your mind and to
ensure that you stick to it and the process does not break down.
You have to feel so confident with your plan that you will be able to
stay with it in good and bad times.
This has been my way to formulate your financial plan. A more
comprehensive questionnaire can be found on the Morningstar website
titled Creating Your Investment Policy Statement
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Policy
On to something different.
PIMCO’s Investment Outlook written by Bill Gross is always a worthwhile
read. The February 2010 issue titled The Ring of Fire is no exception.
It mentions the following two very interesting studies:
Two excellent studies provide assistance in that regard –
the first, a study of eight centuries of financial crisis by Carmen
Reinhart and Kenneth Rogoff titled This Time is Different, and the
second, a study by the McKinsey Global Institute speaking to “Debt and
deleveraging: The global credit bubble and its economic consequences.”
The
Reinhart/Rogoff book speaks primarily to public debt that balloons in
response to financial crises. It is a voluminous, somewhat academic
production but it has numerous critical conclusions gleaned from an
analysis of centuries of creditor/sovereign debt cycles. It states:
1.
The true legacy of banking crises is greater public indebtedness, far
beyond the direct headline costs of bailout packages. On average a
country’s outstanding debt nearly doubles within three years following
the crisis.
2.
The aftermath of banking crises is associated with an average increase
of seven percentage points in the unemployment rate, which remains
elevated for five years.
3.
Once a country’s public debt exceeds 90% of GDP, its economic growth
rate slows by 1%.
The second study he mentions was
A different study by the McKinsey Group analyzes current
leverage in the total economy (household, corporate and government debt)
and looks to history, finding 32 examples of sustained deleveraging in
the aftermath of a financial crisis. It concludes:
1.
Typically deleveraging begins two years after the beginning of the
crisis (2008 in this case) and lasts for six to seven years.
2.
In about 50% of the cases the deleveraging results in a prolonged period
of belt-tightening exerting a significant drag on GDP growth. In the
remainder, deleveraging results in a base case of outright corporate and
sovereign defaults or accelerating inflation, all of which are anathema
to an investor.
I urge you to read the whole letter, it is worth 10 minutes of your time, just click the link below.
PIMCO February investment Outlook “The Ring of Fire”
Prosperous investing
Tim du Toit
P.S. A company the market forgot about
Last month while running my stock screeners to find attractively valued companies I stumbled onto something that will interest you.
As you know I look for the absolute cheapest companies in Europe, the UK and the USA, irrespective of size and market they are trading on.
This time however I discovered “a gem lying in plain sight”.
It’s a really large company (that you can buy nearly anywhere) that has gotten really cheap. But is so large and obvious that it is completely overlooked by the market.
Something like a diamond lying on the sidewalk, you do not believe that it is a diamond and thus ignore it as you walk by.
Another reason I like the company it that it recently got rid of quite a large millstone around its neck, another factor that should help it perform better in future.
I immediately analysed the company and recommended it to my subscribers.
To find out how you can also get ideas like this monthly click here.
