Monday, March 30, 2020

Understanding Growth – Part Two

Understanding Growth – Part Two

Financial First Principles

In the previous post, we looked at what growth is, and everything you need to know about it. This time, we'll look at what you need to do.

Everything You Need to DO

 1. Buy Real Assets

First, buy real assets to grow your money. Hold enough cash for emergencies (between 3-6 months of outgoings, and keep money for any significant expenditure coming in the next couple of years too, like paying for a wedding).

Get the best rate you can, but don’t risk the possibility of a market dip days before you need to write a cheque for your new motor – keep the money safe from the inevitable ups and downs of the stock market.

2. Favour Equities

Specifically, the easiest and most liquid way to invest in real assets is to buy shares. Financial wonks like me tend to use the term equities to refer to shares. A lot of people have had bad experiences with shares, which makes them afraid of them.

But what does it mean to buy shares? Well, you might buy shares in one company, which is engaged in a trade of some kind. It might be selling widgets, or providing experiences like holidays, or an essential service like boiler maintenance.

Whatever that company is doing, it needs customers who are prepared to spend money, and it needs to keep its cost low enough so that it makes a profit. A company succeeds (and its share price will be healthy) as long as it turns a profit, and ideally an increasing profit year on year. In order to do that, it needs a healthy economy, and people willing to spend money.

When you buy shares, you’re investing in capitalism. Capitalism, for all its imperfections, still seems the best option. People have always traded, and will continue to do so in one form or another.

For that reason, companies and their shares will always be a vital, and I would argue the most important asset class of all. Now, individual companies will fail. Whole sectors or national economies will struggle at different points in time. But given enough time, any investment in shares will increase in value as long as you remember three things:

  1. Spread the money around – buy lots of different shares in lots of different kinds of companies
  2. Invest for the long term – time in the market is a better determinant of success than trying to time the market, which you’re quite likely to get wrong
  3. Hold your nerve – when things get rocky, and they inevitably will, can you cope with watching the value of your investments fall?

Equities come in all shapes and sizes, with SMEs, big businesses, start-ups, centuries-old companies and based both in the UK and all over the world. Such an array of choice often leads to inertia, so how do you know which shares to buy?

I always recommend investing in funds rather than individual shares. Funds hold lots of shares, and a manager takes responsibility for them. Even better, buy a tracker fund which aims to track share markets.

For instance, the Vanguard FTSE UK All Share Index fund aims to track the FTSE ALL Share index and holds shares in 569 UK companies and it’s cheap. There are a huge range of funds, so I’m not recommending Vanguard, it's just one example.

3. Include Property and Bonds

As well as equities, you should consider property and bonds too. We all understand how property works: if you own a property and rent it out to tenants, you get an income, and hopefully the value of the house will increase over time. In the meantime, you’re responsible for making sure that the house remains fit for habitation.

The biggest downside of property is that it is illiquid. That is, it can be hard to sell quickly, because you’ll need an estate agent to organise the listing, which can take time. Add in solicitors and the possibility of the buyer being part of a chain; house-selling is a long-winded and sometimes precarious process, and if you need your money in the next two weeks, it’s probably not going to happen.

Property behaves differently to shares, and is worth holding for that reason alone. Things which behave differently often complement each other – when one is struggling, the other might hold up. Be aware that property can and does fall in value more often than you’d think.

Bonds are a very different proposition. They’re essentially loans to governments and companies, in return for which you get interest, and the value of the loan goes up and down too, if you buy and sell bonds on the stock market.

Bonds are usually used in a portfolio – which, remember, is a blend of assets – to temper the volatility of shares a little. They are a smoothing element against the sometimes rollercoaster nature of shares. Bonds can and do grow in value, so they are a useful asset class in their own right.

By blending equities with property, bonds and some other asset classes too, you can build wealth and grow your money over time. Remember that multi-asset funds do this for you. They have a percentage of equities, balanced with other stuff, and as such are suitable for most people with different levels of risk tolerance.

4. Go Global

The last thing you should definitely consider when looking for growth is to go global. If you stick with the UK, you are missing out on a world of growth potential, because those shares only represent about 8% of total share markets by value.

Around the world you have developed markets, like North America and Japan, then the ‘emerging markets’, such as Russia and China, and frontier markets, including Egypt and Cambodia.

Developed markets tend to be more predictable and less volatile than the emerging and frontier markets. You should weight towards the developed markets, but have some exposure to the others, depending on your risk profile.

So, growth is about real assets, and there is literally a world of possibilities. You can blend shares with property and bonds and other stuff. You can go global. You can opt for smaller companies or larger companies. You can target income or aim for growth or both. Where on earth do you start? Well, you can listen to my episode on how to choose a multi-asset fund to help you get started.

The post Understanding Growth – Part Two appeared first on Meaningful Money – Making sense of Money with Pete Matthew | Financial FAQ.



* This article was originally published here

No comments:

Post a Comment