5 financial rules to follow if you want to retire sooner

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If you’re looking to grow your money, whether for retirement or some other dream, then there are five rules you need to follow. And they are probably not what you are thinking.

1) Do trust the markets The global market is an effective information processing machine. Millions of participants worldwide buy and sell securities in the world markets every day. The real time information they bring to the market helps set the market price. With more than 98 million trades a day, the probability is minuscule that a committee, sitting in a board room and discussing where to invest your money, will spot a favourable discrepancy in a stock price. It is possible, but it is also highly improbable.

Instead, of buying retail funds selected by a fund manager, buy a diversified basket of global index tracker funds and let the markets work for you. Holding 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, pay somebody to outguess the markets.

2) Don’t think the Financial Services Industry has your best interest at heart Conventional wealth management institutions have internal systems set up to deliver a particular service in a particular way. They are, therefore, far happier when the status quo prevails; it’s more profitable for them and their shareholders. Bearing that in mind, why would you expect them to provide you with an opportunity to move your money to a competitor at their expense, even if it was in your best financial interest? These corporates are in business to maximise shareholder value and get rewarded for doing so. They are not in the game to make sure that each investor’s financial outcomes are catered for. It is therefore essential that you take back control of your money and ensures that the ‘hidden’ ongoing portfolio costs are kept to the bare minimum.

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Aim to keep the costs of managing your portfolio at under 1%. The industry’s average cost of using a conventional financial service company is in the region of 2.3%. 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.

3) Do diversify Investment returns cannot be predicted with any great future certainty. Therefore, limiting one’s investment universe to a handful of stocks, or even to one stock market, is a concentrated strategy with high risk implications. Do not try and guess which parts of the world will outperform others, or whether bonds will outperform equities, or if large stocks will outperform small stocks. Therefore, 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.

Trying to make predictions in a random world is tantamount to gambling with your pension or investment portfolio and can have a serious effect on your long-term wealth. If you do not want to gamble with your nest egg, buy the global market using a diversified basket of index tracker funds and leave the speculation to the gamblers.

4) Do be brave… and patient Anyone can make money when the markets are moving favourably. And if you have a cost-effective portfolio, you will earn even more during this stage of the financial cycle, thanks to compounding interest. When things are good, investors are full of optimism. However, when there is a long slow decline in markets, investors want to jump ship and wait for the markets to recover before they jump back in. The problem is market timing cannot be predicted. If you take money out in falling markets you will lose real money, all thanks to fear. 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. Remember, investing is for the longer term. History says that you will be rewarded for your bravery, and your patience.

5) Don’t be put off. Do invest Although the banks’ advertising agencies tell us how wonderful and safe these institutions are, I am still reminded of the chaos and misery they caused when they needed bailing out by the tax payer. This was due to what was described by the Financial Crisis Inquiry Commission as a ‘systematic breakdown in accountability and ethics’.

Also, where is the transparency? If we deposit our money with a bank, they will use it as they see fit. They will lend out to credit cards at 29%, and commercial loans at 5%+. They will lend for mortgages and charge big fees if we pay it off early. They will invest our money in the global stock markets and are happy to pocket the profit they generate for their shareholders. But what if they mess up again and we want our money out? We may be denied immediate access and could only receive up to £85,000 compensation.

Also, remember that 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 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 whatever you dream you have), will arrive much sooner.

ABOUT THE AUTHOR Hannah Goldsmith is founder of Goldsmiths 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.

Goldsmith’s 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.

The case studies included in her book drive the main message home. It’s amazing what you can achieve with your retirement planning and be able to retire faster following the author’s practical advice. What she shares is dynamite common sense that’s simply not common practice.

Fraser J. Hay, Grow Your Business