Suggestions to an investor

A reader asks,

“I’m in my early 30’s and was wondering what advice you might have for someone in my position who is in full time employment, invests in the stock market as a hobby and with the exception of a mortgage doesn’t have many other financial commitments?”

This is a big question. I started making a few notes and soon realised a half decent reply would fill an average sized book. Well it turns out being retired is a lot busier than most people realise, and I don’t have the time to write a book tonight. Therefore here are a few pointers in the form of a brain-dump. I hope readers might find a few nuggets buried in this post that they find helpful.

  • Keeps costs low, so avoid expensive funds, expensive brokers, etc.
  • My investment strategy is to invest in both ETFs and directly in company stocks. For EFTs I look for Ongoing Charging Factor (OCF) or Total Expense Ratio (TER) of <0.1% for UK & USA indexes, or <0.25% for world indexes. Low cost ETFs are available from Vanguard, I-share, HSBC, and a few other providers. Passive tracker funds may be more applicable than ETFs for smaller transactions such as monthly drip feeding, but I prefer to invest lump sums and prefer the transparency of ETFs. (For comments on direct share ownership please see further down this brain-dump).
  • For finding a broker I suggest the “compare brokers” page from the Monevator site . All legitimate brokers will be registered on the FCA site. As your portfolio grows larger, you may want more than one broker (to avoid all eggs in one basket).
  • Keep taxes low, so maximize ISA allowances, learn how to fully exploit a SIPP.
  • Make the most of any employer’s pension contribution matching.
  • Manage your living costs, live well but don’t go overboard! So look for the most economical ways to have a good life.
  • Back in the day when interest rates were high, it was considered good practice to pay down your mortgage (or at least most of it) before investing for non-guaranteed returns such as on the stock market. Some might say with low interest rates this advice is no longer applicable. My thoughts are to do your own risk assessment, but be sure to only invest what you can afford to loose. So you might pay down enough of your mortgage that it would not be too much of a problem if disaster stuck (such as redundancy and taking on a lower paid job, or if interest rates were to double).
  • Keep a cash float. This will be useful to fix the roof (or whatever other unforeseen disaster) without becoming a forced seller at times of market weakness.
  • Don’t allow excessive lifestyle inflation, so invest any pay rises & windfalls in your chosen investment strategy.
  • Make sure you understand everything you invest in. If an investment product is even slightly complex, then it is probably ripping you off! Simple is always best.
  • If investing in stock markets then make sure you have exposure to the markets throughout the cycle. This is hard to do when shares fall, but if you bail out the chances are you will miss the recovery. I have a FTSE100 chart printed out and pinned on my pin-board that covers the dot-com crash (just as I started my investing career), the banking crisis and the other smaller corrections. These events were very hard at the time, but now are just blimps on the chart. It is reassuring to look at this chart when the markets are down. However I generally stop investing new money during periods of rapidly falling prices, but…
  • When the stock market is on its knees & everyone is running scared, invest all you can afford to loose. John’s “FTSE100/FTSE250 Valuation” posts are useful for knowing when the market is cheap. Again buying into a low market is hard to do when all the talking heads are predicting the end of capitalism as we know it, but this is the time when you stand to make the most.
  • Have a clear investment strategy. Maybe write it down (I’ve not written mine down – shame on me). Stick to the strategy, although it is okay to adjust the strategy as you learn more.
  • Read a lot. Read investment blogs, investment books, media articles etc. Pass everything through a bullshit filter and adsorb the valuable stuff. Act on what you learn.
  • Specifically read about cognitive biases.
  • But avoid reading some of the popular and very busy bulletin boards, as it is too easy to get swept along with the positive vibes coming from those who are blinkered by various cognitive biases. Stick to reading only trusted information sources.
  • If you are going to pick individual stocks (rather than sticking 100% to ETFs) then..
    • Learn about the balance sheet and the cash flow statement. In my opinion these are the most important parts of a financial statement. For example, you need to knowing when profits are inflated by capitalising development costs without appropriate amortisation, and to know about free cash flow conversion, etc. You could fill a few books with this stuff, but don’t be put off if this is new to you. Start with the basics and aim to improve (see Stockopedia mentioned below for an easy way to access data and education on this topic).

    • Subscribe to a RNS feed such as Investegate, The London Stock Exchange or Vox Markets. These are free but do require a registration. Other services are also available.

    • To take away the guess work when finding shares that meet your criteria I use Stockopedia (affiliate link) for data, screening, portfolio management and more. This is a paid service, but you can apply for a 14 day free trial. Another popular data source is ShareScope, which I previously used. Other services are available. Don’t underestimate the time it takes to source all the data you need from free sources.

    • Screening for stocks is a personal thing, I screen for a large number of attributes designed to weed out poor value, poor quality and unsafe earnings. There is usually help for this, and model screens available on popular data sources such as those mentioned above (at least there is on Stockopedia).

    • However this is just the start of the research, for me it is also necessary to read the financial statements, visit the company’s web site (to see what it offers its customers and to check out the investors’ pages), check out any coverage on Stockopedia or sites such as PIWorld. It can also help to research competitors.

    • I avoid “jam tomorrow” stocks. Much better to have real earnings, real growth, and real dividends, although for certain special situations my strategy allows a very small number of non-dividend paying companies.

I hope this quick brain-dump is useful.

None of this should be considered advice as I am not a professional. You should do your own research before making up your own mind what course of action to take.

Thanks for reading.

Retired early

I last posted here on 16th April 2015. That is a long time ago and posting so infrequently is not the best way to run a blog. However I’ve been going through a lot of changes in the intervening time, and a lot of those changes are still to fully play out. Therefore this post is really nothing more than a place holder, until I’m in a position to be comfortable spending more time here.

In my last post I had achieved my magic number that represented my financial freedom, but had a sense of “what next”. So for the sake of completeness here are the milestones of what happened next since I last posted:

  • July 2015: This is when I finally I decided to leave work, with a planned exit date of 31st March 2016. I opted for this date for a number of reasons. It was a good clean date for tax purposes. I could fully exploit my SIPP and ISA contributions in tax year 15/16, then move to super simple tax affairs from the start of the 16/17 tax year. Also it worked out well for the family and me, as it allowed me to work through the dark and damp winter days that are of less value to free souls, but we were still free in time to enjoy the bright and long days of a typical British spring and summer. Above all I liked the idea of updating my Linked-in profile on April first (all fools day) to say I’d left work.
  • November 2015: This is when I handed in my notice to leave work (I had a three month notice period, but gave them extra notice just because I could).
  • 31st March 2016: Left work!

My plan is to allow one year to decompress and to catch up with my neglected life. Also in this time I should make a plan for what comes next.

Catching up with my own life includes looking up friends I’ve not seen in a while, sorting out domestic stuff (filing or shredding years of paperwork, moving utility, phone and financial suppliers to better deals, de-cluttering, household maintenance and garden jobs, etc).

Also I’ve been spending time with my father who is seriously ill, and being able to do this is so far perhaps the most valuable benefit of financial independence. When my time with my farther sadly ends, I expect I’ll be back here with posts and thoughts on a slightly more frequent basis. Thanks for reading.

FIRS

I’ve now reached financial independence (at least on paper) although I will not be retiring just yet. So not so much a case of FIRE (Financial Independence, Retire Early) as FIRS (Financial Independence, Retiring Sometime).

It was a strange moment when I realised I’d made the magic number that represented my financial freedom, a little sooner than I’d predicted. The weird thing about it was the sense of “what next” that came over me. No matter how much you’ve thought about the big day when you can explain to your boss in language of your own choosing what exactly he can do with his WENUS report, it still feels like something you’ve totally failed to prepare for. In truth I have prepared for it, at least on paper. The problem is it’s arrived a bit sooner than planned, and I’ve been caught off guard.

So what next …

  1. I’ve still got some work to do to make myself tax efficient. So I’m going to invest a little effort into organising some more SIPP and ISA contributions.
  2. I still have some ongoing family financial obligations which I wish to fulfil before retirement.
  3. My calculations are a little “back of a postcard” so my confidence level that I’ve enough is a little low. Frankly I’ve not bothered to collect the data to be totally sure. So I’ll do a dry-run for a few months by living only on the monthly budget I’ve set aside for my  financial independence. The wages I earn in this period will build a margin of safety.
  4. I need to expand on my vague “what next” plans. I need a sense of direction for my post retirement phase of life.  I need to prioritise all the things I want to do into some order and structure, otherwise I’ll wake up each day and waste my time in aimless indecision.
  5. My investing hobby will continue to take a fair amount of time, but this is how I relax so I’m happy with that!
  6. Who knows, I might start posting more updates here.
  7. Finally I feel I owe it to my loyal and dedicated team at work (back at The Firm) to complete an going major project that I’m running. So I’ll see this through before I retire, and of course it’ll good good on the CV when I’m done, although that hardly matters any more!

So that is all for this post. Thanks for reading. I’d like to hear in the comments below if you’ve experienced something like this sense of “what next” after gaining financial independence, or if you have any other comments to contribute.

Ric.