1. What is the ultimate long-term purpose for your money?
The ultimate long-term purpose of my money is that it will provide for me and my family while I am working and during my retirement and/or leave something behind for my loved ones or my beloved causes.
2. How should you think about investing your money?
1. Think about investing for the entirety of your life. When you make an investing plan, think about what are your goals and how you can increase the odds of achieving your goals.
2. Choose a proper benchmark that will increase the odds that you will meet your long-term goals.
3. When you think about financial planning, think about saving and budgeting, investing and insurance and estate planning.
4. Do not wait for tomorrow to invest. Start investing now. This is the only way that you can allow time to use the power of compounding to create wealth.
5. The investing process and investing goals are personal. The benchmark you choose is also personal. How much money you view as prosperity is personal. However you should be realistic about these.
3. Why is thinking about investing in this way hard?
The reason it is hard is because of two emotions: fear and greed. When the stock market tanks and you lose money, you fear you will lose money and you stop investing in the stock market. When the stock market does very well, you become greedy and you want more money and you invest a lot of money. You do not think long-term and you think you can easily beat the market by doing this. But you cannot.
4. What should be your investment goals?
There is one thing that is constant. This is inflation. It varies from country to country but over the long run it is around 3% for the US. So if your investments grow by less than 3%, then you are really losing money, after you factor in inflation.
So one of the investing goals for us is that your investments should grow by more than the rate of inflation. Depending on how much money you have already, it may be be a lot more( like say 10%) or a lot less(like say 6%). How much you need determines what your investments should be. If you need 10% then you need to start early and in 20-30 years you will have that growth if you invest everything in equities. Yes, there will be a lot of volatility but that is probably the least risky method if you have the long horizon. If you need less growth, then investing in a combination of bonds and stocks will be enough.
Then you need cash flow from the investments to meet your expenses. The cash flow can be from the dividends and coupons your equities or bonds generate or from capital growth. But it cannot be a lot( usually less than 4%), if your money has to survive long enough.
You cannot have capital preservation without growth. Because inflation will eat away the value of your capital.
5. What should be the benchmark for your investment goals?
You have thought about your investing goals and decide that you need 10% growth long-term. Then you need to have a benchmark which has delivered 10% over the long-term. By long-term we mean 20-30 years. This benchmark is usually a well constructed index, a marked capitalisation weighted index, usually. It can be a global index( like MSCI ACWI) or regional( MSCI EAFE) or country(like S&P CNX 500). This benchmark is your long-term asset allocation. It can also be a combination of equities and bonds(70% equities, 30% bonds). This can change over time depending on personal circumstances. Age is a factor, but is not the only factor.
6. How does your time horizon help you to choose your benchmark?
For truly long-term investors who want to maximise their wealth and are not dependent on their investments for their daily expenses, it has to be 100% equities. Why? Read this.
7. What are the five key signs of potential financial fraud?
- A manager who also has custody of your assets.
- Returns too good to be true.
- An investing strategy that is murky, flashy or “too complicated” for the adviser to describe so you easily understand.
- The adviser promotes benefits like exclusivity, which don’t impact performance.
- You didn’t do your own due diligence, but a trusted intermediary did.
inspired by the book “Plan Your Prosperity by Kenneth Fisher”