In an age where we seem to be encouraged to lead tomorrow’s lifestyle today, funded by debt in order to maintain consumption, investing has been confused with speculating in “get rich quick” ideas.
The tried and tested methods of creating, maintaining and preserving wealth look boring by comparison and therefore seem to have lost their appeal.
Investing is a disciplined, diversified and structured process with a longer term focus yielding measurable returns and demonstrable value. The accumulation of wealth is a function of time, regular saving or investments, and compound interest. They are the three variables. That’s it, there are no short cuts.
At Money Tools we only employ tried and tested wealth management strategies for the purpose of growing, protecting and eventually transferring family wealth. These strategies are not speculative but are proven to work and are supported by Nobel Prize winning academic research.
The whole purpose of investing is to get long- term returns that exceed cash deposits. If you are not achieving long term compound returns which exceed cash deposits then what’s the point in taking the risk, you might as well leave it in cash!
We hold the following beliefs:
Investing is not speculating
Investing and speculating are two very different things. Investing is a long-term diverse strategy which uses compounded growth to generate returns.
Speculating is taking a position where you could win or lose. By speculating for every given winner there is a loser. We always hear about the people who have won whilst speculating, but usually very little from those who have lost!
By making an investment it is an automatic right that you should demand a return from your capital. This return does not always come each year but you will be rewarded over the long term for making an investment. This is the prime function of wealth creation under a capitalist society.
The role of a marketplace is to match those who require capital with those who have capital to invest and require a return. Over time the market place is efficient at pricing risk. Therefore, instead of wasting time trying to pick the best fund managers and probably getting it wrong! At Money Tools we concentrate on trying to capture the average market return which carries a degree of predictability.
Risk and return
There is a relationship between risk and return, the more risk you are prepared to take then the greater the expected return. The riskier the asset class the greater the expected return, there is no free lunch!
Therefore if you are adding risk to your capital you should expect to receive a higher rate of return, if not why take on the risk in the first place, leave your money in the bank!
A structured disciplined approach to investing yields greater returns over the longer term than speculating on individual stocks and market mis-pricing. Academic research has proven that over 90% of investment returns are down to which asset classes you invest rather than which fund you select or how good you can be at timing the market.
Diversification reduces risk and enhances returns
By spreading the risk amongst different asset classes it reduces the level of downside risk whilst also increasing the expected returns.
It is not possible to achieve long- term returns in excess of the risk- free rate (cash deposits) without taking on any extra risk.
Should you put all your eggs in one basket and keep a close eye on the basket? Or spread your eggs amongst a number of baskets? At Money Tools we think “diversify to multiply”.
Lower expenses increase investment returns
Fund management costs affect portfolio returns, and are measured by a Total Expense Ratio (TER). Stockbrokers and Active Fund Managers have relatively high costs. All those analysts, sales glossies and star fund manager fees have to be paid from somewhere!
In periods of low equity growth, TERs can dramatically eat into returns. By using institutional grade asset class strategies which are very low cost, this increases returns and leaves more money with the client.
By reducing leakage and not paying more in taxation than in necessary, this has a similar effect as reducing charges on a portfolio. There are tax planning strategies which can be employed which maximise efficiency across the portfolio.