Taking specialist advice on financial planning can do wonders for squeezing the maximum juice out of your finances. But for most of us with a few thousand pounds to invest, it needn’t be complex. We speak to independent financial adviser (IFA) Felix Milton to get his five top tips for the everyday investor.
A good financial planner is much like a good accountant: what they can save you more than pays for what they can cost you. That said, the work might not be necessary or too costly if you have anything up to £150,000 to invest. But this doesn’t mean some simple tips won’t go a long way. Chartered financial planner and IFA Felix Milton knows his onions when it comes to financial planning, and thinks private investors make some fairly common mistakes. Here’s five tips for your financial planning.
A big ‘no-no’ to cash and credit card debt
Milton says his clients frequently make the mistake of having both cash and credit card debt:
“Oh yes, I have £20k in savings, and about £10k in credit card debt, paying 18% APR”. When pressed they answer that the cash is their “rainy-day fund”.
Milton recommends building a rainy-day fund of between 3 – 6 months expenses prior to any stock market investing, in case of emergency. But getting rid of expensive debt must preclude this. Beating credit card ARR’s is hard to do with sensible investing.
“If you can afford to reduce the debt and the servicing on that debt, you should do so. People forget that if they have an emergency, they could always borrow again on their credit card, and borrow just the amount needed for that specific emergency.”
Pensions are a must in any financial planning
“People get their fingers burnt with pensions when they don’t use them. Particularly young people who think a pension is wasted money because they want to live life now.”
There are benefits aplenty with pensions. You get the most out of them the longer you are in the market. Milton thinks starting as soon as possible is the best approach.
“The younger you start, the less you have to save. The first ten years from a compounding perspective are more important than the subsequent 20 years. So, if you can save as much as you can between the ages of 20 and 30 in your pension, you can almost take your foot off the gas a little bit for the next 20 years.”
Stop touching your portfolio
Milton thinks one of the “biggest impacts to returns” in investor portfolios is excessive trading.
“Come up with a plan, stick to it, and review it once a year to check-in that it’s all ticking over – unless you’re in a situation where goals have changed.”
He refers to some breath-taking research released by Bank of America recently. Analysts there looked at S&P500 stock market data going back to the 1930s. If, in each decade, you missed the ten best days, by now your investment would have increased by 91% – which is actually fairly pathetic considering the length of time elapsed.
These best days, Milton remarks, usually follow the worst days, during which investors can make the mistake of selling amid the stock market panic. The best approach is to leave your investments where they are.
So, back to the research: if you had not touched your portfolio since the 1930s? A rollicking 14,962% return!
Your house is not your pension
The strong, multi-decade long bull (positive) run in the housing market has led many to base their pension provisions on the sale of their home. Declining pensions’ rates among the self-employed over the past two decades perhaps reflects this. Milton thinks this is “a big worry”, especially as “people apply the endowment effect, which is to say: because you own it, you think it’s worth more than it actually is.”
“We’ve been through one of the longest periods in history where the property market has increased year on year. It might not continue. You look to Japan in the 1980s, where the emperor’s palace was worth more than all of the real estate in California put together, and then that bubble burst.”
He also believes it’s a potentially disastrous departure from a key concept when it comes to investing responsibly: diversification. “It is the definition of all your eggs in one basket.”
He adds that with “stocks and shares, you spread [risk] around”.
Avoid premium bonds
One final top tip on financial planning from Milton is his dislike of premium bonds, available through NS&I (see here). Essentially, these are savings accounts offered by the government, within which you buy £1 bonds. The interest you then receive on the bonds is decided by a monthly prize draw, with prizes ranging from £25 up to £1m.
According to Money Saving Expert, the odds are an eye-opener: From 1 in 34,500 to win the £25 prize, to 1 in 49,476,244,476 for the £1m prize. Milton thinks this makes it barely worth it.
“It’s very clever, because it works like a lottery. The rate is just an expected prize fund, it’s not guaranteed that you’ll get a prize, it’s not guaranteed you will win anything at all. You may go the whole year without winning a single prize”.