This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Step 9: Get Advice

No man is so wise that he can afford to wholly ignore the advice of others.

James Lendall Basford

By now you should have approximately worked out where you’d like to invest your money for the long term, based on your individual preferences and risk profile.  You’ll need to consult a financial advisor to ensure that the plan best suits your individual circumstances.  Advisors sometimes have access to financial products that you can’t access as an individual, and they can guide you on tax and other issues.  Most importantly, a good advisor will be much more expert than I am.  They have actual qualifications, you see.  So get advice.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Retirement Schemes

Developed countries generally have a retirement scheme, or multiple schemes, in order to provide incentives for individual retirement saving and to reduce the burden upon the state pension system.

These vary widely by country, and include the 401(k) and IRA, both Roth and traditional versions (in the US),[i] personal pensions (the UK),[ii] the RRSP (Canada),[iii] or superannuation (Australia[iv] and New Zealand[v]).

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Timing the Market

As briefly mentioned twice earlier, it is tempting, when looking at the ups and downs of the market, to try to time the business cycle so that you buy stocks after a crash when they are cheap, and then sell them after a long bull run, when they are much more expensive.

It sounds like a great idea, doesn’t it?  Like surfing: wait for a perfect wave that is about to break, and off you go! 

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Diversifying Across Time

There is one more risk to consider and it relates to time.  Not just time in the market, which we already discussed, but also the time it takes to get in and out of the market.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

More on Diversified Funds

Remember a little while back, we were discussing how you may need a mix of bonds and shares?  Well, some of those index funds can help you to do it.  Rather than, say, putting 30% of your money into a bonds index fund and 70% into a share market index fund, you might find that there is a ‘balanced’ or ‘diversified’ fund available that already diversifies in this way for you.  Such diversified funds might also include some cash or equivalents, real estate, or other investments.

Read More

Extract from The Poor Man’s Guide to Financial Freedom.

Invest in What You Know?

There is an old piece of advice that says, ‘invest in what you know’.  For example, if you happen to be a mad keen aviation enthusiast who goes to the airport to take photos of your favorite airplanes taking off, maybe you would be better placed than the average person to know which major aviation companies to invest in.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Reversal

There is such a thing as too much diversification due to the law of diminishing returns.  If you are picking shares, two stocks are immensely better than one.  Three is better yet, but not by as much, and this pattern continues for the fourth, fifth, sixth and so on.  Once you’ve got twenty stocks, you’ve reduced your risk by about 70%, and any more stocks over and above that do little more than take up your time and effort to keep track of.  Also, with over twenty stocks your return is so diversified that it will likely mirror the index funds – so why bother?  Buy the index fund and be done with it.  Which is what I recommended anyway.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

International Diversification

As you saw in the box, there are a vast array of funds offered by Vanguard in some places.  However, you’ll only need one or two of these funds to achieve all the share market diversification you need, plus perhaps a bond index fund as discussed earlier.  Ignore all the weird and wonderful specialty funds. 

Should you diversify your shares by investing in overseas stock markets, or stick with those in your own country?  For example, take Steve, an Australian investor.  Should he invest entirely in the Australian Shares Fund (which tracks the ASX 300), or should he also have some exposure to the International Shares Fund (which tracks several major indexes for overseas stock markets)?

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Why Index Funds are Good

An index fund, sometimes called a ‘passively managed fund’, is another type of mutual fund like an actively managed fund except that instead of a hopefully clever human, an algorithm does the investing for you.  It blindly invests in the whole market, attempting to track a stock market index . . .

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Ethical investments

There are some managed funds that endeavor to match your values.  These are generally known as ‘ethical investment funds’. 

Some avoid investing in things you don’t like such as weapons, tobacco, abortion services, alcohol, gambling, carbon-emitting industries, genetically engineering crops, or whatever.  This is called ‘negative screening’.  Others actively seek out companies doing things you approve of like developing clean energy or being socially responsible.  This is called ‘positive screening.’ [i]  There are some funds that do both.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Edit: Book-exclusive content discusses what percentage of your money might go towards cash, bonds and shares depending on your personality and risk profile. What follows are concrete examples to show how that can work.

Some Sample Asset Allocation Strategies

This is for someone who has recently started working, is not risk averse and who is saving for retirement in the distant future:

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Diversifying Between Investment Classes

You need a mix of cash, bonds and shares (or their respective equivalents) in order to manage risk and to reap the benefits of each investment class.  Deciding how much to put into each is called ‘asset allocation’.  But how do you decide?

It depends on your personal circumstances and comfort with risk.  Cash is the simplest category so let’s start there. 

How Much Cash/Equivalents?

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

The Magic of Compounding

So far we’ve explained the main investment categories, and in a moment we’ll look at how much you should invest in each category, and how to go about doing so.  But before we do that, it is essential for you to understand what Einstein supposedly called ‘the eighth wonder of the world’: compounding returns.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Diversify Within Investment Classes

So far we have looked at diversifying between defensive and growth assets in order to set an appropriate level of risk.

To further spread that risk, it is essential to diversify within each category, as well.  For example, it would be madness to hold only one share.  The company might go bankrupt.  It is much safer to invest across many shares.

In this section we’ll go through each class of investments and show how to diversify within it in order to manage risk.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual to Building Liberating Wealth on a Small to Medium Budget.

Past performance is no guarantee of future performance

Here’s a common rookie investing error: you see that Acme Corp. goes up 14% in 2018.  Then it goes up another 16% in 2019.  You think, I must buy Acme shares, and quickly!  You buy . . . and then in 2020 the share price falls by 22%.  : (

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual for Building Liberating Wealth on a Low to Medium Income.

Growth Assets 3: Alternatives to Shares and Real Estate

Most people trying to build wealth content themselves with simply investing in shares, or in shares plus their own home.  A few purchase an investment property.  Such conventional options are fine.

However, there are alternatives.  Here I list a few for the more adventurous or unconventional investor.  Like enlightenment, there are different paths to financial freedom.  If the Roman Catholicism of shares and real estate is not for you, perhaps these Hare Krishna options might be of interest.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual for Building Liberating Wealth on a Low to Medium Income.

REITs

There is a way to invest only a small portion of your capital in property instead of buying a whole house.  This is through a fund that pools investor money and uses it to invest in many properties.  Such a fund is usually called a real estate investment trust (REIT, pronounced ‘reet’).  Through this vehicle, you can put exactly as much or as little of your wealth into property as you want, with plenty left over for investing in shares and bonds in order to better diversify your holdings. 

In addition, these REITs can invest in a variety of types of properties, i.e. mortgages, commercial office space, or retail, and they can invest across many locations, thus significantly reducing the risk should any one investment go bad.  For some investors, this can be a good way of getting into property without having all the hassle of owning an actual house.

Read More

This is an extract from The Poor Man’s Guide to Financial Freedom: A Realistic, 10-Step Manual for Building Liberating Wealth on a Low to Medium Income.

An Investment Property

You might want to buy a property in order to charge others rent to live there rather than live in it yourself.  In addition to the rent, which will perhaps increase over time, you’ll hopefully profit from capital gain when you eventually sell the property for a higher price.  This is called an investment property.

In many countries it offers generous tax concessions.  However, you should not be buying an investment property just for the tax advantage – it must be a sound asset to begin with.

Read More