There are many factors to consider when you start investing – such as what to invest in and how much it will cost. But what many people might not realize is that one of the most important considerations is your age.
How old you are determines how long you have to invest, and that can help decide how much investment risk you should take.
Ryan Hughes of pension provider AJ Bell says: ‘The rule of thumb is that the longer timeframe you have the more risk you can afford to take.
‘But, of course, you should never take more risk than you are comfortable with. There is no point investing in a way that will give you sleepless nights.’
Beginning as young as possible can give you a head start. For many people, the investment journey may begin as a child. Parents and grandparents can squirrel away up to £4,128 a year tax-free for children through a Junior Isa.
Not only will starting early give the investment pot longer to grow, it can also get youngsters into a good savings habit for later life. Grandparents who invest £50 a month into a Junior Isa from a child’s birth could see the investment grow to more than £17,500 by age 18 if it grew at 5 per cent a year.
The younger you are, the more risk you can afford to take – for if there is a stock market crash there is more time for your money to recover.
Hughes says of savers starting in their 20s: ‘Investing for retirement could involve someone investing for 40 years, so higher-risk investments such as emerging markets and technology stocks could be appropriate.’
He suggests Fidelity Index World as a core investment choice for a young person’s portfolio. The fund is a cheap way to invest in stock markets worldwide and has returned 47 per cent over the past three years.
He also likes fund Invesco Perpetual Asian which focuses on companies based in China, South Korea and Hong Kong, such as electronics firm Samsung and internet specialist Baidu. It has returned 68 per cent over three years.
A racier choice is Polar Capital Technology fund, which aims to tap into key technology trends. It invests in internet giants such as Amazon and Facebook, plus lesser-known outfits with growth potential such as semiconductor maker Advanced Micro Devices.
The fund has returned 100 per cent over three years.
Rob Morgan, investment analyst at Charles Stanley, likes Franklin UK Smaller Companies fund. He says: ‘Investors sometimes overlook smaller companies. But they tend to be more dynamic and quick to react to growth opportunities.’
The fund, which has returned 45 per cent over three years, aims to find fast-growing companies.
The manager likes software companies and support services firms such as Clipper Logistics and shipping company Clarkson.
Mid-life Money Management
When you reach your 40s, it is time to start taking a more conservative approach.
As you get closer to retirement you may want to start being more cautious and reducing the proportion of your portfolio which is equity-based.
Michael Martin of investment house Seven Investment Management likes Troy Trojan fund as an ‘all-weather option’.
The fund, which has returned 22 per cent over three years, invests in a mix of company shares, government bonds and gold. This should mean the fund offers steady growth regardless of what the economy is doing.
He also likes Fundsmith Equity fund, run by veteran City investor Terry Smith. His strategy is to invest in companies which are so successful you never need to sell the shares.
The fund favors firms with strong brands such as Pepsico and Microsoft – with two-thirds of its money in US firms. It has returned 87 per cent in the past three years.
Another favorite is Lindsell Train Global Equity fund which invests in ‘boring’ firms renowned for paying a good income.
An increasing number of people keep their money invested even after they stop working. But investment choices should be cautious and focus on paying an income. Hughes says: ‘Generating income is vital. A good quality equity income fund can fulfill this purpose.
He likes Evenlode Income fund, which currently yields 3.4 per cent. The fund invests in firms such as Johnson & Johnson and AstraZeneca, which consistently grow their dividends.
Another favorite is Newton Global Income which invests in dividend-paying firm across the globe. It has a focus on larger businesses such as Microsoft and Unilever and currently yields 3.2 per cent.
A fixed income fund is a sensible choice for income. These invest in government and company bonds. Henderson Fixed Interest Monthly Income invests in the debt of companies including Barclays and Nationwide Building Society.
One-Stop Shop Choices
For many investors, the idea of picking their own investment funds can be daunting. There are now some 2,500 funds available through fund supermarkets such as Fidelity and Hargreaves Lansdown.
Deciding which ones are right can prove challenging. Multi-asset funds are a good one-stop solution.
Charles Stanley’s Morgan says: ‘Multi-asset funds invest across different areas, mixing shares and bonds as well as alternative assets such as property. The result is a diverse portfolio in a single fund, which is helpful for those looking for a low-maintenance investment choice.’
He likes Investec Diversified Income fund as an ‘uncomplicated, conservatively-run’ choice.
Another strategy is to pick a multi-manager fund. These invest in other funds using their expertise to find the best mixture of fund managers to generate returns.
Seven’s Martin likes Jupiter Merlin Balanced which invests in funds such as Woodford Equity Income and Fundsmith Equity.
Sometimes, people who aspire to be business owners have this idea that they’ll pitch their idea, get millions of dollars in funding and start spending money like pro athletes. But, if they’re anything like the average American, they'll have an average $1,000 in savings (if that).
They’ll also have $17,000 to $137,000 in debt. If these numbers describe you, then borrowing money, applying for a loan, relying on credit cards and finding an investor may not be your best move. Instead, you should bootstrap your business.
My co-founder Dan Foley and I bootstrapped Tailored Ink back in August 2015. We spent a combined $1,000 to get it off the ground and kept our costs low. Flash-forward to today, two years later and we’re swiftly closing in on the $1 million mark. We still haven’t maxed-out our credit cards or applied for a business loan.
Want to know how we did it? Here are some financial habits we learned on our way to becoming successful business owners.
1. Spend within your means.
When I was making $40,000 a year, back in 2012, I was eating frozen TV dinners every single night. Aside from my desktop computer, which cost only $300, there was no furniture in my apartment to speak of. I even slept in a $25 inflatable bed.
Most of my friends and colleagues who had tons of college debt and were making about the same as me were literally pissing money. When they ran out of cash, they would max-out their credit cards.
Despite everything you may have seen on TV, this is not how to behave if you want to become successful. You’ll never accumulate wealth if you spend it as soon as you get it. Debt and loans do not equal wealth.
How do you keep yourself disciplined and spend less money in a credit-dependent and debt-ridden culture? By practicing delayed gratification. It’s the key to financial success. You need to believe that your short-term sacrifices will result in long-term gain. And they will.
2. Save way more than you spend.
With that in mind, you should aim to save as much as possible. Some people will tell you the exact opposite, as in, “Don’t worry about saving until you’re 30.” These are the same people who'll work until they’re 65 and wonder why their savings accounts are so small.
There are plenty of secrets to growing money, but there’s no secret at all to saving it. You just need to tuck in your belt and control your spending. Many financial advisors recommend saving at least 10 percent of income per year, but that’s not enough if you want to be rich one day.
Saving as a business owner is even trickier because you'll have other people to think about. Let’s say you make $10,000 a month at your new business. That sounds pretty great -- but after you pay 20 to 40 percent of that revenue for tax, 25 percent for business expenses and 25 percent for living expenses. . . There won't be a whole lot left.
If you’re running a B2B business, you'll also have accounts receivable to think about. Not all of your clients will pay you on time, if at all.
Dan and I save way more than we spend and put most of what we make back into the business. That way, we can afford to pay all our vendors before we pay ourselves. We keep a two-month runway in our business bank account at all times.
3. Always pay off your debts (or don’t borrow at all).
America has a serious credit problem. We’re brainwashed into believing that borrowing huge sums of money on a regular basis is smart. That’s why we do just that for college, cars, houses and even businesses. It’s why Americans had nearly $1 trillion in credit card debt back in 2015.
If you really stop and think about it, though, this is insane.
Warren Buffett has some pretty strong opinions about debt and loans. “You don’t really need leverage in this world much," he said. "If you’re smart, you’re going to make a lot of money without borrowing.” Buffett indicated that he was especially leery of credit cards. “Interest rates are very high on credit cards," he said. "If I borrowed money at 18 percent or 20 percent, I’d be broke.”
So, just as an example, let’s say you charged $5,000 to your credit card with an APR of 15 percent, and you paid the minimum 2 percent each month. After 14.3 years, you’d have paid out an additional $5,614.44 -- more than you borrowed.
4. Don’t just leave your money in the bank.
Speaking of savings accounts, they’re pretty much worthless. The interest rates at nearly all banks are so low that they’re insulting. Yet most people continue to think that leaving money in the bank is the safest thing they can do.
But you have other, better options. Nearly all banks and brokerages give you similar insurance -- just through different providers. Banks give you insurance for up to $250,000 in cash from the FDIC, while brokerages have the same coverage through SIPC.
In other words, as long as you have less than $250,000, your savings are just as safe in a brokerage as they are in a bank. You can trade stocks, bonds and funds without worrying that someone will steal your money. And if you follow Warren Buffett’s low-risk advice to invest in different index funds, you can earn upwards of 5 percent to 10 percent per year. The S&P 500 Index, for example, returned an average of 11.69 percent per year in the year’s from1973 to 2016. Compare that to 1 percent, which is the highest interest rate generous banks offer.
What’s in your wallet?
Bootstrapping a business isn’t that hard. You just need a basic understanding of how wealth accumulation works, and accept that your money-spending habits may not currently be aligned with success. That’s the hard part.
But if you dream of owning your own successful business one day or becoming a millionaire before you retire, you’re going to have done some soul searching. Are you willing to delay your gratification and make some sacrifices in the near future so you can reap the rewards down the road? Will that sacrifice be worth it to you?