Posts in "Investing"

Net worth and building wealth

I’ve kept track of my net worth for a few years now. It’s an old habit from when I cared about building wealth over mostly everything else.

Even though my priorities have changed, I still think knowing and tracking your net worth is important. Money isn’t the most important thing there is, but it does give you freedom — and that is important.

If you are in debt or have little savings, you will certainly have fewer options available to you. It becomes more difficult to do things like take time off work, change your career, help someone, start a business or live your life how you want to as you grow older.

Building wealth pretty much comes down to three things.

  • Income
  • Being frugal (spending less than you earn)
  • Saving / investing as much as you can.

The earlier you start, the better. If you start early enough and have a frugal lifestyle, it’s quite possible to retire in your 30’s or 40’s. Most people underestimate how compound interest allows small and regular savings to grow in the long-term. Play about with this compound interest calculator to see what I mean.

You can find a bunch of people who are doing this and are transparent about the numbers. 1500 days (retired already) and thinksaveretire (retiring this year) are two examples. A common theme amongst them is their frugality, high savings percentage and a long term view to investing.

Calculating your net worth

Calculating your net worth is quite simple. There are many ways to do it and I tend to keep things simple.

I have 4 main buckets — property, investments, cash and assets.

Property is equity in house(s). This can be a bit tricky to know exactly, due to house price fluctuations. I just make a conservative guess and tend to update it every few years based on house prices in the area.

Investments is anything which generates interest and you are unlikely to sell anytime soon. They will likely to fluctuate up and down. Stocks, funds, bonds etc.

Cash is anything in the current account.

Assets is anything you own that can turned into a reasonable amount of cash — say, anything over £5K. A car is a good example. I just use a conservative guess and update it every year or so. Again, these might go up or down (most assets tend to depreciate).

Tracking your net worth

I take a monthly snapshot of each of the above. Only the investment / cash buckets change on a monthly basis as explained above. The total gives me my net worth at that time.

You could do it less frequently than monthly. It only takes me 5 mins to do, so I just do it it monthly.

If you’ve never done this, I would encourage you to have a go at it. I think you’ll find it insightful to do.

Some personal reflection

For me, it highlighted the level at which my recent low income and over-spending was eroding my net-worth. It pushed me to set some budgets and cut back on silly things like eating out and impulse purchases. It also highlighted the need to focus on fixing the lack of income.

I knew where my problems were before I started to track my net worth more closely. But, looking at the actual numbers really drove things home for me.


Stocks vs. index investing

I just read Twitter Inc and LinkedIn Corp Won’t Survive and it reminded me why I prefer index investing over individual companies.

The article makes two key points.

  • Twitter and LinkedIn won’t survive
  • It’s only a matter of time before a very dangerous domino effect comes into play

Taking the first, I think it does a pretty decent job of summarising the woe’s of Twitter and Linkedin. They both have growth and product issues, combined with scaringly large headcounts. Facebook looks fantastically robust in contrast.

I have no idea if they will survive or not, but they are both in deep trouble and their stock price is taking a hammering (both have shed more than 60% of their value in the last year – see graph below).

Stocks vs. index investing - TWTR & LNKD stock price over past 12 months

TWTR & LNKD stock price over past 12 months

Taking the second, I agree, there will be other fatalities. No doubt, there are other tech companies out there with similiar problems and overvalued positions.

That said, this isn’t new. Every year this happens to many companies. And in some years this happens to a larger number of companies as part of an overall market trend / correction. It’s incredibly hard to predict. Many try. Most fail.

But at the same time, we also see new companies going public and their valuations will climb. They replace some of what is lost by the declining companies, in some cases adding more. The market is self-cleansing in that way.

And that’s where the value of index investing comes in.  You’re not trying to predict winners and losers. You own a % of every company in the index and you take the highs and lows of each. You won’t experience a 10 bagger, but you will experience slow and consistent growth over the long-term.

Take a look at Twitters and LinkedIn’s stock price over the last 12 months, when compared with the S&P 500.

Stocks vs. index investing - TWTR & LNKD stock price compared to the S&P 500 over past 12 months

TWTR & LNKD stock price compared to the S&P 500 over past 12 months

Yes, the S&P 500 also declined, but at a sixth of the rate compared to Twitter and LinkedIn.

They key to investing in indexes is taking a long term view. Evidence shows that the market always goes up in the long term and this graph shows it nicely:

Stocks vs. index investing - History of S&P 500

History of S&P 500

My investment strategy is index investing, two specifically – The FTSE All Share and S&P500. I feel it gives the best probability of return and I love the passive nature of it. I don’t need to think about or keep an eye on anything. I just contribute to it regularly like I would a savings account and get on with life.

Investing, simply

I realised the best and simplest way to invest recently. As with most things, it’s been a journey of learning and mistakes. I wanted to share those, along with where I have ended up.

I started getting interested in investing towards the end of 2014.

My knowledge was limited. I knew roughly what the stock market was, but not how it worked. My only experience in building wealth was to save as hard as I could and leave it in bank accounts.

My friend Barry was always pestering me to invest it for higher returns. I resisted for a while because I’m risk-adverse. One day I finally gave in and decided to see if I could get my savings to work harder.

Now that I look back, I can see my investing journey falls into 3 phases.

Phase 1 — Shiny Tech Stocks

The first thing I did was put some money into the most popular tech stocks (after all, that’s what I know). Google, Facebook, Twitter, Arm, Apple and Tesla. I used Hargreaves Lansdown as the investment platform.

It started off well and soon my money was up a few percent. Nice. That’s about what you get from the bank — but for the entire year. I could be onto a winner here.

I was soon to learn how volatile technology stocks are. A few weeks later, I was down on a few of them. My portfolio was down a few percent. Damn, I was losing money.

I hadn’t quite learned that you needed to invest with a long-term view yet, hence my concern.

It was around late December 2014 that I stumbled across The Naked Trader. It kicked off the next phase of my investing journey.

Phase 2- A Stock Picking Strategy

I read The Naked Trader book and starting reading the archives on his site. I was getting excited. He talked in plain english and his approach to investing was clear and simple. He was transparent about his own investing. I liked that. He was also critical of things and people he felt were bad ways to invest, which was refreshing.

I went on a Naked Trader Seminar in late December and it was excellent. I got a much better understanding of how the market worked and how shares were bought and sold. I also liked his investing strategy. I was excited to get started.

The strategy was to invest in small and mid cap companies on the UK stock market, with a mid to long-term view (3 months +). Companies with strong fundamentals (good earnings to market cap ratio, history of dividends rising, good last few reports, holding cash or with an appropriate amount of debt etc.). Companies which looked to be doing well and expected to continue doing well. Companies which had a low risk of going bust.

I sold my technology shares and started investing in small / mid cap UK companies.

For each share I bought, I set a target price (where I wanted it to at least get to, usually +30%). I also set a stop (where you will sell if it drops, usually -10%).

The idea is that you would only need a couple out of every 10 to be winners. It would offset the loss from the others — and then some.

I was disciplined about selling at the stop (celebrating small losses was emphasised on the Naked Trader course). It was set to automatically trigger to ensure my emotions wouldn’t cause me to make a decision to keep it.

I stuck with this strategy for about 9 months (through to September 2015). I learned some great stuff. The importance of having an investment strategy. How to find, evaluate and pick companies. The costs involved in investing. Tracking my performance. The need to have discipline.

August 2015 was a rough month for the market. It was getting hammered and being irrational. My stop losses started to kick in and many of my stocks were sold. Many of the stocks sold didn’t even have any negative news around them — in fact quite the opposite!

Around this period, I took some time out to evaluate my performance compared to the market. I was slightly ahead due to some early winners (30–40% gains), which was good news. But earlier in the year I was down, and it wouldn’t have taken much to pull me down again.

One thing, kept bugging me. The time and energy I spent picking and monitoring stocks, didn’t feel worth it — to only be slightly ahead of the market.

If I’m honest, I started to get a sense of this around June. I tend to have an obsessive personality, so I would find myself checking movements many times a day. I knew it wasn’t necessary, but did it anyway.

I started to investigate passive forms of investing. I actually experimented with a FTSE all-share index tracker and a couple of funds earlier in the year (Woodford Equity Income and Woodford Patient Capital). So, I began looking at this type of stuff as a primary investment strategy.

This all come together in November 2015. My entire investing approach changed, marking phase 3.

Phase 3 — Index Investing

A seed was planted for index investing earlier in the year, when I came across these two articles:

Buffett’s $1m bet pays off as index tracker beats hedge funds

Warren Buffett’s advice to LeBron James

Surprisingly, Warren Buffett’s most common investment advice is to invest primarily in an inexpensive S&P 500 index fund. He’s convinced it will make you more money than managed funds or picking stocks yourself.

An index fund seeks to follow the performance of a particular index (FTSE 100, S&P 500 etc.). It does that by buying shares in the same weight that the index holds them.

If you want to learn more about indices and how tracker funds work, check out An inside look at indexing.

Tracker funds aren’t a 100% match to the indices, but they get close, as you can see below:

trackers

The more I started to read, two things kept jumping out.

  • The evidence is clear that index trackers beat the majority of managed funds over the long term.

The below graph makes it clear how fee’s impact your returns:

fees

As I started to become more interested in index funds, I was drawn towards two great sites — 1500days and thinksaveretire.

These people have a clear goal of retiring early, and they document it every step of the way. It’s not complicated. Live frugal. Save as much as you can. Invest in index funds.

I was inspired and three things clicked for me.

  • Investing in index funds, works over the long-term (see their net worth progress).
  • I too, wanted to retire early like these folks.
  • I was being rubbish when it came to my own income, spending and saving.

Where I’ve ended up

The last year has been an interesting journey on the path to being a smart investor. I feel good about where I’ve ended up.

I’ve been reminded that living frugally and saving aggressively is the cornerstone of building wealth. It needs to be a lifestyle. I’ve strayed from this in the last couple of years and intend to get back to it.

I’ve also learned that investing in index funds with a long term view gives you the best chance of returns. The passive nature of it also suits my personality.

As a result, I’m doubling down on indexes. I’ve topped up my FTSE All Share Index tracker and invested quite a bit of my savings in a S&P 500 index tracker.

I’m going to keep the Woodford Equity Income Fund and the Woodford Patient Capital Trust for now. I have less in these two funds than the indexes anyway.

The Equity Income fund is up 6.6 % since I invested in it (Apr 8, 2015). Compare that to the FTSE All Share Index being down 7.18% and you can see why I’m not going to mess about with it.

The Woodford Patient fund has been all over the place since it launched in April. It was up 20% at one point, but it’s now back to about it’s launch price.

I like the strategy of the Patient fund. It focuses on early-stage and early-growth companies together with blue-chip. Woodford has a good track record as an investor too. Also, the fee’s are unconventional and mostly only kick in when a profit of 10% has been achieved. I’ll leave it for a year and see how it compares to the market — and make a call then.

All my future savings will go into FTSE & S&P 500 indexes, with a long-term view.

Note: Whilst not stock market related, I think having a mix of stocks and property is sensible. It helps to balance exposure. I’d like to get a few rentals up and running at some point.

A thank you: I want to thank Barry for being patient whilst I peppered him with investing questions. He’s been a big influence on my learning and shifting my appetite for risk.

The last year has been an interesting journey on the path to being a smart investor. I feel good about where I’ve ended up.

I’ve been reminded that living frugally and saving aggressively is the cornerstone of building wealth. It needs to be a lifestyle. I’ve strayed from this in the last couple of years and intend to get back to it.

I’ve also learned that investing in index funds with a long term view gives you the best chance of returns. The passive nature of it also suits my personality.

As a result, I’m doubling down on indexes. I’ve topped up my FTSE All Share Index tracker and invested quite a bit of my savings in a S&P 500 index tracker.

I’m going to keep the Woodford Equity Income Fund and the Woodford Patient Capital Trust for now. I have less in these two funds than the indexes anyway.

The Equity Income fund is up 6.6 % since I invested in it (Apr 8, 2015). Compare that to the FTSE All Share Index being down 7.18% and you can see why I’m not going to mess about with it.

The Woodford Patient fund has been all over the place since it launched in April. It was up 20% at one point, but it’s now back to about it’s launch price.

I like the strategy of the Patient fund. It focuses on early-stage and early-growth companies together with blue-chip. Woodford has a good track record as an investor too. Also, the fee’s are unconventional and mostly only kick in when a profit of 10% has been achieved. I’ll leave it for a year and see how it compares to the market — and make a call then.

All my future savings will go into FTSE & S&P 500 indexes, with a long-term view.

Note: Whilst not stock market related, I think having a mix of stocks and property is sensible. It helps to balance exposure. I’d like to get a few rentals up and running at some point.

A thank you: I want to thank Barry for being patient whilst I peppered him with investing questions. He’s been a big influence on my learning and shifting my appetite for risk.